Taxation and Wealth Inequality in the German Territories of the Holy Roman Empire 1350-1800

by Victoria Gierok (Nuffield College, Oxford)

This blog is part of our EHS Annual Conference 2020 Blog Series.


Nuremberg chronicles – Kingdoms of the Holy Roman Empire of the German Nation. Available at Wikimedia Commons.

Since the French economist, Thomas Piketty, published Capital in the 21st Century in 2014, it has become clear that we need to understand the development of wealth and income inequality in the long run. While Piketty traces inequality over the last 200 years, other economic historians have recently begun to explore inequality in the more distant past,[1] and they report striking similarities of increasing economic inequality from as early as 1450.

However, one major European region has been largely absent from the debate: Central Europe — the German cities and territories of the Holy Roman Empire. How did wealth inequality develop there? And what role did taxation play?

The Holy Roman Empire was vast, but its borders fluctuated greatly over time. As a first step to facilitating analysis, I  focus on cities in the German-speaking regions.  Urban wealth taxation developed early in many of the great cities, such as Cologne and Lübeck. By the fourteenth century, wealth taxes were common in many cities. They are an excellent source for getting a glimpse at wealth inequality (Caption 1).


Caption 1. Excerpt from the wealth tax registers of Lübeck (1774-84).

Source: Archiv der Hansestadt Lübeck. Archival reference number: 03.04-05 01.02 Johannis-Quartier: 035 Schoßbuch Johannis-Quartier 1774-1784


Three questions need to be clarified when using wealth tax registers as sources:

  • Who was being taxed?
  • What was being taxed?
  • How were they taxed?


The first question was also crucial to contemporaries because the nobility and clergy adamantly defended their privileges which excluded them from taxation. It was Citizens and city-dwellers without citizenship who mainly bore the brunt of wealth taxation.


Figure 1. Taxpayers in a sample of 17 cities in the German Territories of the Holy Roman Empire.

Note: In all cities, citizens were subject to wealth taxation, whereas city-dwellers were fully taxed in only about half of them.
Source: Data derived from multiple sources. For further information, please contact the author.


The cities’ tax codes reveal a level of sophistication that might be surprising. Not only did they tax real estate, cash and inventories, but many of them also taxed financial assets such as loans and perpetuities (Figure 2).


Figure 2. Taxable wealth in 19 cities in the German Territories of the Holy Roman Empire.

Note: In all cities, real estate was taxed, whereas financial assets were taxed only in 13 of them.
Source: Data derived from multiple sources. For further information, please contact the author.


Wealth taxation was always proportional. Many cities established wealth thresholds below which citizens were exempt from taxation, and basic provisions such as grain, clothing and armour were also often exempt. Taxpayers were asked to estimate their own wealth and to pay the correct amount of taxes to the city’s tax collectors. To prevent fraud, taxpayers had to swear under oath (Caption 2).


Caption 2. Scene from the Volkacher Salbuch (1500-1504) shows the mayor on the left, two tax collectors at a table and a taxpayer delivering his tax payment while swearing his oath.

Source: Image: Pausch, Alfons & Jutta Pausch, Kleine Weltgeschichte der Steuerobrigkeit, 1989, Köln: Otto Schmidt KG, p.75


Taking the above limitations seriously, one can use tax registers to trace long-run wealth inequality in cities across the Holy Roman Empire (Figure 3).


Figure 3. Gini Coefficients showing Wealth Inequality in the Urban Middle Ages.

Source: Guido Alfani, G.,  Gierok, V., and Schaff, F.,  “Economic Inequality in Preindustrial Germany, ca. 1300 – 1850”.  Stone Center Working Paper Series, February 2020, no. 03.


Two main trends emerge: First, most cities experienced declining wealth inequality in the aftermath of the Black Death around 1350. The only exception was Rostock, an active trading city in the North. Second, from around 1500, inequality was rising in most cities until the onset of the Thirty Years War (1618-1648). This war, in which large armies marauded through German lands bringing along plague and other diseases, as well as the shift in trade from the Mediterranean to the Atlantic, might be the reason for the decline seen in this period. This sets the German lands apart from the development of inequality in other European regions, such as Italy and the Netherlands, in which inequality continued to rise throughout the early modern period.



[1] Milanovic, B., Lindert, P.H., and  Williamson, J.,  ‘Pre-Industrial Inequality’, Economic Journal 121, no. 551 (2011): 255-272;  Guido, A. ‘Economic Inequality in Northwestern Italy: A Long-Term View’, Journal of Economic History 75, no. 4 (2015): 1058-1096; Guido, A.,  and Ammannati, F.,  ‘Long-term trends in economic inequality: the case of the Florentine state, c.1300-1800’, Economic History Review 70, 4 (2017): 1072-1102; Wouter, R.,  ‘Economic Inequality and Growth before the Industrial Revolution: The Case of the Low Countries’,  European Review of Economic History 20, no. 1 (2016): 1-22;  Reis, J.,  ‘Deviant Behavior? Inequality in Portugal 1565-1770’,  Cliometrica 11, no. 3  (2017): 297-319; Malinowski, M.,  and  van Zanden J.L., ‘Income and Its Distribution in Preindustrial Poland’, Cliometrica 11, no. 3 (2017): 375-404.



Victoria Gierok:





The South Sea Bubble 300 Years On

by William Quinn (Queen’s University, Belfast)

A special issue on the Tricentenary of the South Sea Bubble was published on The Economic History Review as open access, and it is available at this link

The South Sea Bubble, a Scene in 'Change Alley in 1720 1847, exhibited 1847 by Edward Matthew Ward 1816-1879
Edward Matthew Ward (1847) The South Sea Bubble, a Scene in ‘Change Alley in 1720. Available at Tate Gallery

In 1720, the British Parliament approved a proposal from the South Sea Company to manage the government’s outstanding debt. The Company agreed to issue shares, some of which would be bought using government annuities rather than cash. The Company would then pay the government a reduced rate of interest on these annuities. The government’s debt burden would be reduced, and in exchange, the Company believed it had gained the opportunity to establish itself as a competitor to the Bank of England (Kleer, 2012).

Superficially, the scheme didn’t make much sense. How would the public be convinced to exchange lucrative government annuities for equity in a company whose main asset was a reduced rate of interest on those annuities? The trick was to lure annuity holders with the promise of capital gains on South Sea shares. Consequently,  the Company’s directors, with the implicit support of the government, engineered a bubble, primarily by creating a liquid secondary market for their shares, then extending huge amounts of credit to investors to flood the market with cash (Dickson, 1967). This strategy was too successful:  the scale of the bubble subsequently  provoked a backlash that ruined the South Sea directors (Kleer, 2015).

Picture 1ss
Figure 1. South Sea Company Share Price (£) and Subscriptions, 1719-20. Source: European State Finance Database

Almost as interesting as the scheme itself is how the memory of this event evolved.  A century later, the scheme was recounted as a sorry episode in the nation’s history, an economic disaster never to be repeated (Anderson, 1801). In the mid-nineteenth century it was remembered as an outbreak of collective madness, a cautionary tale for ordinary people on the dangers of being caught up in a speculative frenzy (Mackay, 1852). More recently, the Bubble  has been used as a case study to assess the efficiency of financial markets (Dale et al., 2005, 2007; Shea, 2007).

But, how should it be remembered? None of the available data suggests that 1720 was in any way an economic disaster, which is unsurprising, since participation in the scheme was much too low to have had systemic economic effects (Hoppit, 2002). Others have suggested that the Bubble Act, which accompanied the bubble, hamstrung British finance for the next century. But Harris (1994, 1997) has shown that much of what the Bubble Act outlawed had already been illegal, and as a result, it was almost never invoked.

Remembering 1720 as a sudden outbreak of madness would let the government off the hook: the bubble did not emerge spontaneously, but was deliberately created (Dickson, 1967). The level of political involvement in the market also makes it an unsuitable test case for the efficient markets hypothesis, and in any case, the structure of stock markets in 1720 was so radically different from today that they are unlikely to tell us much about the efficiency of modern markets.

Perhaps, then, the most significant feature of the South Sea scheme was its success. Prior to 1720, Britain’s debt burden was an existential threat, as it kept interest rates high, making it very expensive to fund warfare. The South Sea conversion scheme significantly reduced this burden. In France, the unwinding of the Mississippi scheme led to the reinstatement of  debt at its pre-1720 level (Velde, 2006). But in the aftermath of the South Sea scheme, the British government managed to sustain the improvement in its debt position, largely by redirecting the anger of ruined investors towards the scapegoated South Sea directors (Quinn and Turner, 2020). This allowed it to borrow at much lower interest rates, giving the country a major advantage in subsequent wars. After 300 years, is it time to start remembering the South Sea Bubble as a net positive for Britain?


To contact the author:



Anderson, A. ‘An extract from The Origin of Commerce (1801)’ in R.B. Emmett (ed.), Great Bubbles Volume 3, London: Pickering and Chatto, 2000.

Dale, R.S., Johnson, J.E.V., and Tang, L. ‘Financial markets can go mad: Evidence of irrational behaviour during the South Sea Bubble’, Economic History Review58, 233-71, 2005.

Dale, R.S., Johnson, J.E.V., and Tang, L. ‘Pitfalls in the quest for South Sea rationality’, Economic History Review, 60, 766-772, 2007.

Dickson, P.G.M. The Financial Revolution in England: A Study in the Development of Public Credit, 1688-1756. London: Macmillan, 1967.

Harris, R. ‘The Bubble Act: Its passage and its effects on business organization’, Journal of Economic History54, 610-27, 1994.

Harris, R. ‘Political economy, interest groups, legal institution, and the repeal of the Bubble Act in 1825’, Economic History Review, 50, 675-96, 1997.

Hoppit, J. ‘The myths of the South Sea Bubble’, Transactions of the Royal Historical Society, 12, 141-65, 2002.

Kleer, R. ‘“The folly of particulars”: The political economy of the South Sea Bubble’, Financial History Review19, 175-97, 2012.

Kleer, R. A. ‘Riding a wave: The Company’s role in the South Sea Bubble’, Economic History Review68, 264-85, 2015.

Mackay, C. Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, London: Robson, Levey and Franklin, 2nd edition, 1852.

Quinn, W. and Turner, J.D. Boom and Bust: A Global History of Financial Bubbles, Cambridge: Cambridge University Press, 2020.

Shea, G. S. ‘Financial market analysis can go mad (in the search for irrational behaviour during the South Sea Bubble)’, Economic History Review60, 742-65, 2007.

Velde, F. ‘John Law’s System and Public Finance in 18th c. France.’ Federal Reserve Bank of Chicago, 2006.


How JP Morgan Picked Winners and Losers in the Panic of 1907: The Importance of Individuals over Institutions

by Jon Moen (University of Mississippi) & Mary Rodgers (SUNY, Oswego).

This blog is part of our EHS 2020 Annual Conference Blog Series.


Moen 1
A cartoon on the cover of Puck Magazine, from 1910, titled: ‘The Central Bank – Why should Uncle Sam establish one, when Uncle Pierpont is already on the job?’. Available at Wikimedia Commons.


We study J. P. Morgan’s decision making during the Panic of 1907 and find insights for understanding the outcomes of current financial crises.  Morgan relied as much on his personal experience as on formal institutions like the New York Clearing House, when deciding how to combat the Panic. Our main conclusion is that lenders may rely on their past experience during a crisis rather than on institutional and legal arrangements in formulating a response to a financial crisis. The existence of sophisticated and powerful institutions like the Bank of England or the Federal Reserve System may not guarantee optimal policy responses if leaders make their decisions on the basis of personal experience rather than well-established guidelines.  This will result in decisions yielding sub-par outcomes for society compared to those made if formal procedures and data-based decisions had been proffered.

Morgan’s influence in arresting the Panic of 1907 is widely acknowledged. In the absence of a formal lender of last resort in the United States, he personally determined which financial institutions to save and which to let fail in New York. Morgan had two sources of information about the distressed firms: (1) analysis done by six committees of financial experts he assigned to estimate firms’ solvency and (2) decades of personal experience working with those same institutions and their leaders in his investment banking underwriting syndicates. Morgan’s decisions to provide or withhold aid to the teetering institutions appears to track more closely with his prior syndicate experience with each banker, rather than with the recommendations made by committees’ analysis of available data. Crucially, he chose to let the Knickerbocker Trust fail despite one committee’s estimate it was solvent and another’s that it had too little time to make a strong recommendation. Morgan had had a very bad business experience with the Knickerbocker and its president,  Charles Barney, but he had had positive experiences with all the other firms requesting aid. Had the Knickerbocker been aided, the panic might have been avoided all together.

The lesson we draw for present day policy is that the individuals responsible for crisis resolution will bring to the table policies based on personal experience that will influence the crisis resolution in ways that may not have been expected a priori. Their policies might not be consistent with the general well-being of the financial markets involved, as may have been the case with Morgan letting Knickerbocker fail.  A recent example that echoes the experience of Morgan in 1907 can be seen in the leadership of Ben Bernanke, Timothy Geithner and Henry Paulson during the financial crisis in 2008.  They had a formal lender of last resort, the Federal Reserve System, to guide them in responding to the crisis in 2008.  While they may have had the well-being of financial markets more in the forefront of their decision making from the start, controversy still surrounds the failure of Lehman Brothers and the lack of support to provide them with a lifeline from the Federal Reserve.  The latter could have provided aid, and this reveals that the individuals making the decisions, and not the mere existence of a lender of last resort institution and the analysis such an institution will muster, can greatly affect the course of a financial crisis.  Reliance on personal experience at the expense of institutional arrangements is clearly not limited only to the responses made to financial crises.  The coronavirus epidemic is one such example worth examining with this framework.


Jon Moen –

Are university endowments really long-term investors?

by David Chambers, Charikleia Kaffe & Elroy Dimson (Cambridge Judge Business School)

This blog is part of our EHS 2020 Annual Conference Blog Series.



Flags of the Ivy League
Flags of the Ivy League fly at Columbia’s Wien Stadium. Available at Wikimedia Commons.


Endowments are investment funds aiming to meet the needs of their beneficiaries over multiple generations and adhering to the principle of intergenerational equity. University endowments such as Harvard, Yale and Princeton, in particular, have been at the forefront of developments in long-horizon investing over the last three decades.

But little is known about how these funds invested before the recent past. While scholars have previously examined the history of insurance companies and investment trusts, very little historical analysis has been undertaken of such important and innovative long-horizon investors. This is despite the tremendous influence of the so-called ‘US endowment model’ of long-horizon investing – attributed to Yale University and its chief investment officer, David Swensen – on other investors.

Our study exploits a new long-run hand-collected data set of the investments belonging to the 12 wealthiest US university endowments from the early twentieth century up to the present: Brown University, Columbia University, Cornell University, Dartmouth College, Harvard University, Princeton University, the University of Pennsylvania, Yale University, the Massachusetts Institute of Technology, the University of Chicago, Johns Hopkins University and Stanford University.

All are large private doctoral institutions that were among the wealthiest university endowments in the early decades of the twentieth century and which made sufficient disclosures about how their funds were invested. From the latter, we estimate the annual time series of allocations across major asset classes (stocks, bonds, real estate, alternative assets, etc.), endowment market values and investment returns.

Our study has two main findings. First, we document two major shifts in the allocation of the institutions’ portfolios from predominantly bonds to predominantly stocks beginning in the 1930s and then again from stocks to alternative assets beginning in the 1980s. Moreover, the Ivy League schools (notably, Harvard, Yale and Princeton) led the way in these asset allocation moves in both eras.

Second, we examine whether these funds invest in a manner consistent with their mission as long-term investors, namely, behaving countercyclically – selling when prices are high and buying when low. Prior studies show that pension funds and mutual funds behave procyclically during crises – buying when prices are high and selling when low.

In contrast, our analysis finds that the leading university endowments on average behave countercyclically across the six ‘worst’ financial crises during the last 120 years in the United States: 1906-1907, 1929, 1937, 1973-74, 2000 and 2008. Hence, typically, during the pre-crisis price run-up, they decrease their allocation to risky assets but increase this allocation in the post-crisis price decline.

In addition, we find that this countercyclical behaviour became more pronounced in the two most recent crises – the Dot-Com Bubble and the 2008 Global Financial Crisis.

UK investment trust portfolio strategies before the first world war

by Janette Rutterford and Dimitris P. Sotiropoulos (The Open University Business School)

The full article from this blog is forthcoming in the Economic History Review

Mary Evans Picture Library

UK investment trusts (the British name for closed-end funds) were at the forefront of financial innovation in the global era before World War I. Soon after the increase in investment choice facilitated by Companies Acts in the 1850s and 1860s – which allowed investors limited liability – investment trusts emerged to invest in a diverse range of securities across the globe, thereby offering asset management services to individual investors. They rapidly became a low-cost financial vehicle for so-called “averaging” of risk across a portfolio of marketable securities without having to sacrifice return. UK investment trusts were the first genuine historical paradigm of a sophisticated asset management industry.

Formed as trusts from the the late 1860s, by the 1880s, the vast majority of UK investment trusts had acquired limited liability company status and issued shares and bonds traded in London and elsewhere. They used the proceeds to construct global investment portfolios made up of a multitude of different securities whose yields were higher than could be achieved by investing solely in British securities, an approach subsequently termed the ‘geographical diversification of risk’.

A recent study of ours examines UK investment trust portfolio strategies between 1886 and 1914, for those investment  trusts  that disclosed their portfolios.  Our dataset comprises 30 different investment trust companies, 115 firm portfolio observations, and 32,708 portfolio holdings, sampled every five years prior to WWI. Our results reveal a sophisticated approach to asset management by these investment trusts. The average trust in our sample had a portfolio with a nominal value of £1.7 million – equivalent to around £1.7bn today – invested in an average of 284 different securities. Their size and the large number of holdings are both evidence that asset management before WWI was a serious business.

Figure 1. Investment trust regional allocation (% of portfolio nominal value). Source: Sotiropoulos, D. P., Rutterford, J., and C. Keber, ‘UK investment trust portfolio strategies before the First World War’, Economic History Review, forthcoming.

Investment trusts evolved a unique asset allocation strategy: globally diversified, skewed in favour of preferred regions, sectors and security types, and with numerous holdings. Figure 1 shows the flow of investment from Europe to the emerging North and Latin American markets over the period, although the box plots reveal significant differences between individual investment trust portfolios. The preference for overseas investments is clear: on average, domestic investment never exceeded 26 percent of portfolio value. Railways was the preferred sector, averaging 40 percent of portfolio value throughout the period. Government and municipal securities fell out of favour from a high of 40 percent in 1886 to a low of sic percent of portfolio value by 1914. Investment trusts switched instead to the Utilities and the Industrial, Commercial and Agriculture sectors which, combined, made up 48 percent of portfolio value by 1914.

Figure 2. Investment trust allocation by security type (% of portfolio nominal value). Source: as Figure 1.

Figure 2 shows the types of securities held in investment trust portfolios. Fixed-interest securities dominated before WWI, though there was a growing interest in ordinary and preferred shares over time. Perhaps surprisingly, an increasing number of investment trusts were willing to embrace the ‘cult of equity’, far earlier than, say, insurance companies.

We find that investment trust directors adopted a mixture of a buy-and-hold investment and active portfolio management strategies. The scale of holdings of a wide variety of different types of securities required efficient administration. The average portfolio holding represented only 0.35 percent of portfolio value, while 75 percent of holdings had individual weights of less than 0.43 percent of portfolio value. Although not concentrated, these portfolios were skewed. The top 10 percent of holdings per portfolio represented on average 35.7 percent of total portfolio value, and the top 25 percent of holdings represented 60.0 percent.

Investment trust directors did not radically reorganize their portfolios on an annual basis; neither did they stick rigidly to the same securities over time. They were not passive investors.  Annual turnover was in excess of 10 percent (measured as the lower of sales and purchases to nominal portfolio value). Nor were they sheep. There was a wide variety of focus between different UK investment trusts; each tended to have its own specific investment areas of interest, and there was considerable cross-sectional variation with respect to diversification strategies, even though joint directorships were common.

Was this approach good for the investor? We compared the returns and risk-adjusted returns of three unweighted samples of companies: investment trusts, banks and ‘other’ financial firms and found that investing in investment trust shares surpassed the other alternatives, whether risk-adjusted or not. Our results offer evidence that the specific goal of investment trusts – the global distribution of risk – was certainly beneficial to their investors in the period up to WWI.

This early foray into fund management by UK investment trusts was deemed a success, but UK investment trusts only represented around one percent  of total London Stock Exchange capitalization by 1914. It is an interesting open question as to why it took decades for the asset management industry to take-off. A focus on different episodes in the history of investment trusts can help shed more light on the – under-researched – evolution of the asset management industry. This will allow economic historians,  fund managers, and policy-makers to draw lessons from how history affects the evolutionary path of modern financial practices.


To contact the authors:

Janette Rutterford,

Dimitris P. Sotiropoulos,

The Great Depression as a saving glut

by Victor Degorce (EHESS & European Business School) & Eric Monnet (EHESS, Paris School of economics & CEPR).

This blog is part of our EHS 2020 Annual Conference Blog Series.


Crowd at New York’s American Union Bank during a bank run early in the Great Depression. Available at Wikimedia Commons.

Ben Bernanke, former Chair of the Federal Reserve, the central bank of the United States, once said ‘Understanding the Great Depression is the Holy Grail of macroeconomics’. Although much has been written on this topic, giving rise to much of modern macroeconomics and monetary theory, there remain several areas of unresolved controversy. In particular, the mechanisms by which banking distress led to a fall in economic activity are still disputed.

Our work provides a new explanation based on a comparison of the financial systems of 20 countries in the 1930s: banking panics led to a transfer of bank deposits to non-bank institutions that collected savings but did not lend (or lent less) to the economy. As a result, intermediation between savings and investment was disrupted, and the economy suffered from an excess of unproductive savings, despite a negative wealth effect caused by creditor losses and falling real wages.

This conclusion speaks directly to the current debate on excess savings after the Great Recession (from 2008 to today), the rise in the price of certain assets (housing, public debt) and the lack of investment.

An essential – but often overlooked – feature of the banking systems before the Second World War was the competition between unregulated commercial banks and savings institutions. The latter took very different forms in different countries, but in most cases they were backed by governments and subject to regulation that limited the composition of their assets.

Although the United States is the country where banking panics were most studied, it was an exception. US banks had been regulated since the nineteenth century and alternative forms of savings (postal savings in this case) were limited in scope.

By contrast, in Japan and most European countries, a large proportion of total savings was deposited in regulated specialised institutions. Outside the United States, central banks also accepted private deposits and competed with commercial banks in this area. There were therefore many alternatives for depositors.

Banks were generally preferred because they could offer additional payment services and loans. But in times of crisis, regulated savings institutions were a safe haven. The downside of this security was that they were obliged – often by law – to take little risk, investing in cash or government securities. As a result, they could replace banks as deposit-taking institutions, but not as lending institutions.

We prove our claim thanks to a new dataset on deposits in commercial banks, different types of savings institutions and central banks in 20 countries. We also study how the macroeconomic effect of excess savings depended on the safety of the government (since savings institutions mainly bought government securities) and on the exchange rate regime (since gold standard countries were much less likely to mobilise excess savings to finance countercyclical policies).

Our argument is not inconsistent with earlier mechanisms, such as the monetary and non-monetary effects of bank failures documented, respectively, by Milton Friedman and Anna Schwartz and by Ben Bernanke, or the paradox of thrift explained by John Maynard Keynes.

But our argument is based on a separate mechanism that can only be taken into account when the dual nature of the financial system (unregulated deposit-taking institutions versus regulated institutions) is recognised. It raises important concerns for today about the danger of competition between a highly regulated banking system and a growing shadow banking system.

Business bankruptcies: learning from historical failures

by Philip Fliers (Queen’s University Belfast), Chris Colvin (Queen’s University Belfast), and Abe de Jong (Monash University).

This blog is part of our EHS 2020 Annual Conference Blog Series.



The door of a bankrupt business locked with a chain and padlock. Available at Flickr.


Business bankruptcies are rare events. But when they occur, they can prove catastrophic. Employees lose their jobs, shareholders lose their savings and loyal customers lose their trusted suppliers.

Essentially, bankruptcies are ‘black swan’ events in that they come as a surprise, have a major impact and are often inappropriately rationalised after the fact with the benefit of hindsight. While they may be extreme outliers, they are also extremely costly for those affected.

Because bankruptcies are so rare, they are very hard to study. This makes it difficult to understand the causes of bankruptcies, and to develop useful early warning systems.

What are the risk factors for which shareholders should watch out when evaluating their investments, or when pension regulators audit the future sustainability of workplace pension schemes?

Our solution is to exploit the historical record. We collect a dataset of all bankruptcies of publicly listed corporations that occurred in the Netherlands over the past 100 years. And we look to see what we can learn from taking this long-run perspective.

In particular, we are interested in seeing whether these bankruptcies had common features. Are firms that are about to go out of business systematically different in terms of their financial performance, corporate financing or governance structures than those that are healthy and successful?

Our surprising result is that the features of bankrupt corporations vary considerably across the twentieth century.

During the 1920s and 1930s, small and risky firms were more likely to go bankrupt. In the wake of the Second World War, firms that did not pay dividends to their shareholders were more likely to fail. And since the 1980s, failure probabilities have been highest for over-leveraged firms.

Why does all this matter? What can we learn from our historical approach?

On first glance, it looks like we can’t learn anything; the drivers of corporate bankruptcies appear to change quite significantly across our economic past.

But we argue that this finding is itself a lesson from history.

The development of early warning failure systems needs to take account of context and allow for a healthy degree of flexibility.

What does this mean in practice?

Well, regulators and other policy-makers should not solely rely on ad hoc statistical models using recent data. Rather, they should combine these statistical approaches with common sense narrative analytics that incorporate the possibility of compensating mechanisms.

There are clearly different ways in which businesses can go bankrupt. Taking a very recent perspective ignores many alternative routes to business failure. Broadening our scope has permitted us to identify factors that can lead to business instability, but also how these factors can be mitigated.

Taxation, fiscal capacity and credible commitment in eighteenth-century China: the effects of the formalization and centralization of informal surtaxes

by Max Hao (Peking University) and Kevin Liu (The Hong Kong University of Science and Technology).


In premodern Europe, famine relief was inadequately provided until the late 19th century.  In contrast, in late imperial China, preventing starvation helped legitimate the state and played a key role in reducing internal conflicts. The Qing state operated a network of granaries and developed sophisticated procedures to report famines and supply relief. However, as shown in Figure 1, the frequency of famine relief recorded in the Qingshilu (veritable records of Qing) was much lower than the frequency of disasters under the reigns of Shunzhi (1644-1661) and Kangxi (1661-1722). In contrast, in the reign of Yongzheng (1723-1735) and in the early years of Qianlong (1736-1760), famine relief became more responsive to disasters. Why did the Qing state take on the responsibility for “nourishing the people” only after 1723?

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Figure 1: Province-level frequency of disasters, famine reliefs and tax exemptions, 1645-1722 (Four-year moving average)

To solve this puzzle, we explore the effect of a reform that formalized and centralized part of the fiscal system in premodern China: the ‘huohao turned to public reform instituted in Emperor Yongzheng’s reign (1723-1735).   ‘Huohao’ denotes all the informal surtaxes collected by county governments. Because the bulk of formal tax revenue was remitted directly to the central government, provincial and county governments retained only a limited share of this income with limited discretion over its expenditure.  Consequently,  they imposed huohao or surtaxes to finance their own expenses. However, because these informal revenues were unsanctioned and unmonitored by the central government, they were largely pocketed by officials.

The ‘huohao turned to public’ reform was an endeavor to formalize huohao in order to achieve two interconnected policy goals: to reduce corruption and enhance provincial fiscal capacity by centralizing control. First, huohao was collected at rates designated by the provincial governor and delivered to the provincial treasury. Second, 60% of the remitted funds were allocated to county magistrates and provincial governors as ‘anticorruption salaries’ to finance their regular expenses, reducing their incentive to collect informal surtaxes and seize public revenues. More importantly, 40% of the formalized houhao was assigned as public funds to finance irregular expenses at the governors’ discretion. The total annual revenue from the formalized huohao amounted to 4.5 million taels of silver, of which 1.8 million were reserved as public funds. In sum, by formalizing and centralizing informal surtaxes, the reform enhanced provincial fiscal capacity by giving provincial governors more resources and a greater incentive to spend them on public goods. The design of the reform is illustrated in Figure 2.


Picture 1


Because corruption is extremely difficult to explore empirically, we mainly focus on whether the second goal was achieved. The timing of when the reform was initiated and completed differed between provinces, but the reasons behind these variations  were largely exogenous to provincial characteristics, enabling us to use them to test the effects of reform. We test whether the huohao reform raised the frequency of famine relief in periods of disastrous weather by exploiting the different timing of the reform process across provinces. We restrict our dataset to 1710-1760, when the bulk of famine relief was financed by the provinces.

Using a prefecture-level panel dataset, we find that in times of extreme drought and floods, the frequency of famine relief increased after the reform by 1.05 times per prefecture, which was more than 100% of the standard deviation of the dependent variable relative to that under non-disastrous weather. By exploring the dynamics of the reform’s impact, we find no pre-trend, which supports the exogeneity of the reform’s timing. Our results are robust to controlling for other initiatives by the central government, such as tax exemptions, the allocation of tribute grain and central fiscal revenues, the enforcement of bureaucratic monitoring, and other concurrent fiscal reforms. We also find that famine relief effectively reduced grain prices when disasters occurred, indicating that public funds were spent on famine relief which had a beneficial impact on the population. Further, we find that the reform’s impact was greater when areas faced exceptional flooding compared to exceptional droughts, and greater in prefectures which had difficulties collecting taxes, suggesting that the reform facilitated the intertemporal and spatial redistribution of financial resources.

For this tax reform to have a sustained effect on provincial government capacity,  central government would need to resist the expropriation of these new revenues for its own use.  However, in premodern China, there were no institutional constraints on this dispossession.  After emperor Qianlong (1736-1796) succeeded to the throne, the central government began to make regular checks on the expenditure of provincial public funds, forced the inter-provincial transfers of funds, and expended them on projects previously financed by central revenues. These actions forced provincial governments to reduce their expenditure on famine relief and withhold anticorruption salaries meant for county administrators. This finding highlights that it was the lack of credible commitment that accounted for the short-lived success of this fiscal reform. Viewed from this perspective, the reform provides a valuable lesson about the role of political institutions in the Great Divergence.


To contact the authors:

Max Hao (

Kevin Liu (

A Silver Transformation: Chinese Monetary Integration in Times of Political Disintegration during 1898–1933

by Debin Ma (London School of Economics and Hitotsubashi University)  and Liuyan Zhao (Peking University)

The full paper is due to be published in The Economic History Review and is currently available on Early View.


chinese coins
Two 19th Century Chinese Cash Coins. Available at <>

Despite the political turmoil, the early 20th century witnessed  fundamental economic and industrial transformations in China.  Our research documents the most important but neglected aspect of this development:  China remained on the silver standard until 1936 while many countries remained on gold.  Nonetheless, the Chinese silver regime defies easy classification because  its silver basis was traditionally not in coinage, but in the form of privately minted ingots called sycee, denoted by a unit of account called tael.  During our study period, sycee circulated alongside standardized silver coins such as Mexican and later Chinese silver dollars. We know relatively little about the operation of the silver exchange and monetary regime within China, in contrast to the large literature on the gold standard during the same era.

We present an in-depth analysis of China’s unique silver regime by offering a systematic econometric assessment of Chinese silver market integration between 1898 and 1933.  As a result of this integration, the dollar-tael exchange rate, the  yangli, became the most important indicator of the Chinese currency market. We compile a large data set culled from contemporary publications on the yangli across nineteen cities in Northern and Central China, and offer a threshold time series methodology for measuring silver integration comparable to that of gold points.

Picture 1
Figure 1. Silver point estimates between Shanghai and Tianjin in 10-year moving windows, Jan. 1898–March 1933. Source: Ma and Zhao (per article in the Economic History Review, 2019)

We find that the silver points between Shanghai and Tianjin, the two most important financial centers in Central and Northern China, declined  steadily from the 1910s for the rest of the period (Figure 1).  Our estimates of silver points from the daily rates of nineteen cities during the 1920s and 1930s also reveal that there was no substantial difference in the level of monetary integration between the Warlord Era of the 1920s and the Nanjing decade of the 1930s. Figure 2 provides a simple linear plot of  the distance between Shanghai and the estimated silver points of those cities paired with Shanghai during the 1920s and 1930s. This Figure shows a positive relationship between silver points and the distance from Shanghai, indicating the rise of a monetary system centered on Shanghai.

Our silver point estimates are closely aligned with the actual costs of the silver trade derived from contemporary accounts. Moreover, the silver points help predict corresponding transaction volumes: the majority of large silver exports from Shanghai occurred when the  yangli spread was above the silver export points;  only limited flows occurred when it fell within the bounds of the silver points. The econometric results reveal that monetary integration between Shanghai and Tianjin improved in the 1910s—precisely during the Warlord Era of national disintegration and civil strife—and these improvements spread to other cities in Central and Northern China in the 1920s and 1930s.

Picture 2
Figure 2. Silver points and distance. Source: Ma and Zhao (per article in the Economic History Review, 2019

Our research provides a historical analysis of the causes of monetary integration, attributing a central role to China’s infrastructure and financial improvements during this period. One plausible driving force was the rise of new transport and information infrastructure, for example, the completion of the Tianjin-Nanjing Railway, and the Shanghai-Nanjing and Shanghai-Hangzhou Railways constructed between 1908 and 1916, which linked the Northern and Southern China. Compared with road or water transport, railroads offered much faster, cheaper and safer delivery, an advantage far more significant for high-value silver shipments than low-value high-bulk commodities.

Another, more important factor was monetary and financial transformation indicated by the rise of a modern banking system from the end of the 19th century. Although it was the government that issued national dollars, banking communities played a key role in defending its reputation and purity. Overtime, the ‘countable’ dollar outperformed the ‘weighable’ sycee as a medium of exchange, gaining an increasing share in China’s monetary system. This eventually paved the way for the currency reform of 1933, which abolished the sycee and the tael, establishing the dollar as the sole standard. A notable monetary transformation was the increasing popularity of banknotes. The system of Chinese bank note issuance was largely run on a model of free banking with multiple public and private banks, Chinese or foreign, issuing silver-convertible banknotes based on reputation mechanism. Thus, the increasing note issue from the 1910s provided a much more elastic currency to smooth seasonality in the money markets and enhance financial integration.


To contact the authors:

Debin Ma (

Liuyan Zhao (