Convergence and Divergence of National Financial Systems

Evidence from the Gold Standards, 1871-1971

Patrice Baubeau, Anders Ogren

• Publisher: Routledge
• Year: 2015
• Edition: 1
• eBook ISBN:
  9781317315902
• Topic: Economia
• Subtopic: Teoria economica

This collection of essays aims to form a focused, original and constructive approach to examining the question of convergence and divergence in Europe.

1 ORGANIZATION OF NATIONAL FINANCIAL MARKETS AND CONVERGENCE OF PRACTICES: INSTITUTIONS AND NETWORKS OF PARISIAN BROKERS IN NINETEENTH-CENTURY PARISIAN FINANCIAL MARKETS

Patrick Verley

Contemporaries and historians have always contrasted two modes of organization of the financial market, that of London and that of Paris, as antimonic references – whereas other markets are akin to one of these models or mixes of both. The opposition criterion is the public or private character of the brokers. The London market was labelled as ‘free’, since brokers and jobbers were title merchants without connections to any official function, whereas the stockbrokers of the official French market were ministerial officials appointed by the Finance Minister. Such difference resulted from the political and economic heritage of both countries in the eighteenth and early nineteenth century, since France had been governed by an absolute monarchy which had borrowed a lot, thereby conferring a major role to State rente¹ whereas London was negotiating private securities and foreign funds. During the last quarter of the nineteenth century in France, admiration for the English model and increasing liberalism tended to question the legitimacy of the stockbrokers’ monopoly by diverting the debate towards an opposition between security brought by State-guaranteed monopoly and efficiency on the other hand: the London organization seemed to be the most favourable to business dynamism. It is this debate, leading incidentally to a large number of articles, which gave rise to the Act which recognized and reorganized the coulisse² in 1898, an Act which only half-satisfied those standing for liberalism:

Anyway, the controversy seemed to be closed for the time being and the protagonists as a whole were seemingly content with a solution which was nothing but a compromise, whereas any new debate stood little chances, one must admit, to harmonise to any extent. It left to monopoly a territory well-deserved by all the services rendered as well as those it is still providing … Freedom on the other hand was not really banished from the Stock Exchange. Freedom had become firmly established and could deploy its propelling role therein. It acquired, by the way, a guild-like organisation which was a tribute to law and order requirements, which ought to govern any financial market … There was hence certain equilibrium, for a while at least, in Paris between two contradictory conceptions regarding the organisation of the financial markets.³

The opposition between monopoly and ‘freedom’ was somehow ideological, since, in fact it concerned at most a regulation provided by law or the government on the one hand, and on the other hand a guild-like self-regulation.

Indeed, all markets had to fulfil three functions; to protect the public, to stabilize their operation and to secure the best loan issued by their governments. Since public safety was the first concern of the governments, it implied the selection of the brokers, the regulation of the forward transactions, an expertise as to the viability of the securities and hence the listing which acted as a protection barrier as well as a moral guarantee. The difference was expressed by an alternative solution between rather strict a corporate control exercised by the Managing Committee and a Numerus Clausus in London and a corporate control also exercised in Paris by the Stockbrokers Association, then by the unions of bank brokers when they were founded during the last years of the nineteenth century, a control exercised within a legally defined framework. In Berlin, the financial market was totally private and corporate until the 1896 Act set a strict framework to forward transactions. The stability of the market and the placement of public loans involved the existence of market-makers, either professional like the jobbers, or illegal operators such as the official stockbrokers who were not entitled to this type of operation but nevertheless carried them out more often than not until the 1882 Krach and the coulissiers⁴ who, up to 1898, were not recognized legally. On the other hand, the London Stock Exchange was also seeing competition from outsiders ‘outside brokers, advertising, as designated by the Stock Exchange members, with a certain condescendence, in opposition to themselves, since it was forbidden to fish for customers via newspaper adds …’⁵ Stronger regulation set in London or Berlin by the practices or the laws, more flexible monopoly in Paris by the recognition of the ‘free’ market, that of the coulisse, the efficient operation of the financial markets involved de facto convergence among seemingly quite different systems, as well as the banking models, interacting with the financial markets, were not so strongly opposed in their operating modes as believed in the past⁶ and that, more generally, the economic structures of the advanced industrial countries saw a convergence process⁷ during the second half of the nineteenth century.

Institutions and Networks

This first observation remains insufficient, since it does not take agents’ networks into account. The function fulfilled by the market institutions and the networks is identical or complementary, according to the objective sought. A firm may rely on either of them for financing, widening its goodwill and finding loans, reducing its vulnerability to conjunctural uncertainties and cash-flow problems.

The brokerage companies of the financial market form firms of a very peculiar type. For them, the aim of raising capital was not investment, which they hardly needed apart from paying for the rental of offices and purchasing very limited equipment. In fact the raised capitals guaranteed their solvency, towards clients as well as other brokers and large-scale operators, semi-professional and professional bankers, which formed a considerable portion of the clientele during the nineteenth century where the average savers market remained a small niche for a long time. The brokers wanted to diminish the vulnerability factor and to establish trusting relationships that are the very foundation of the financial community. Unlike an industrial company which manages techniques and minimizes its costs relative to the market prices, the activity of the financial brokers was first of all threatened by two interrelated risks: the insolvency of clients who had invested in forward transactions, and the insolvency of their professional partners. Both institutions and networks might at first combine to reduce such vulnerability: the professional and family networks helped raise capitals and provide a mobilizable reserve in case of danger, they helped strengthen the trusting and solidarity relationships between practitioners, but the institutions were also useful in formalizing such solidarity by rendering them compulsory, in imposing rules on the recruitments of people and the guarantees for reducing the aleatory portion and thereby increasing market visibility. Finally the objective of developing business and widening goodwill could only be met by people’s networks. The structures of financial intermediation were hence halfway between those of the activities of public legal officials, such as notaries, where the institutional rule, which was the guarantee for the clientele, was of paramount importance, and that of business companies where the role played by the networks superseded the market institutions. The specificities of the operations conducted in the Parisian market and of their evolution contribute to explain the articulation modes between institutions and networks.

The Parisian Financial Market: A Highly Institutionalized Market

The French financial market was highly institutionalized, since it had developed for managing the debt of the State which had increased rapidly during the eighteenth century and the first three quarters of the nineteenth century. Whereas the First Empire had not borrowed but financed its wars with the tributes paid by the vanquished, the loans contracted in 1816, 1817 and 1818 intended for paying the Allied the indemnity foreseen by the second Paris treaty, increased the weight of the public securities in a capital market which was still hardly up and running. Then came the loans to finance the successive wars of the Second Empire, in Crimea, Italy and Mexico, then finally the Franco–Prussian war which required a series of increasingly large loans, intended for paying the 5 billion Francs indemnity imposed by the new German Empire. The last great public issues amounted in 1881 to one billion Francs allocated to great public works for boosting the economy, then in 1883 and 1884 for 1.2 billion Francs with a view to consolidate the floating debt. This market for State debt was hence highly centralized in Paris and closely monitored by the government which considered that the rente prices, as a barometer of the State credit, indicated its capacity to issue new loans successfully. Throughout the nineteenth century, along less developed Provincial markets, oriented towards regional industries, the Parisian market remained first of all a public funds market, limited to French funds for a start, before gradually extending to foreign funds.

Table 1.1. Distribution of the French securities listed according to the issuer (rated value).⁸

This enormous weight of the State debt not only provided one of the essential macroeconomic data of the French economy in the nineteenth century, but also a reference as regards the actors’ practices, like the Parisian bankers elite (haute banque) whose ‘important’ transactions were associated with the submission of public loans, a technique which they then used to the benefit of railway companies and foreign States.

Figure 1.1. Stock value of the French public funds.⁹

In 1840, the public funds still accounted for more than 90 per cent of the capitalisation of the French securities listed in Paris; close to 50 per cent at the end of the century. Nevertheless, the market kept the same characteristics: most private securities were railway securities, which, de facto, were rather semi-public securities than private securities. The interest payment guarantee offered by the State, as of 1857, for private railway companies bonds, outside the state railway sector, increased this weight of public securities accordingly, since the saver, like the financial advisors’ handbooks,¹⁰ classed them so. This peculiarity was met by a specific type of organization, inherited from the ‘Ancien Regime’, the monopoly of a company of Royal officers, who, just like notaries, outlived the Le Chapelier Act, and became legal public officers in the nineteenth century. The system should have provided the Finance Ministers with control, seriousness and stability guarantees indispensable to public credit, whereas a free organization system, as in England, seemed more appropriate to private securities market, more affected by the economic conjuncture than by the State policy.

Even if the stockbrokers limited their activity to a strict role of public legal officers, they could ensure neither market stability by balancing supply and demand, nor support public securities on which the finance ministers relied, and they could not adapt the fixed-costs firm they headed to the activity fluctuations of a market operating with securities which are quite volatile by nature, inasmuch as due to their small diffusion they were long held by big capitalists who were interested in capital gains rather than by small capitalists who kept them in their portfolios.

The rigid organization of the market was necessarily compensated for by the development of a long illegal, free market, which, with a small degree of organization and plagued with high risks, could contribute to the stability of the whole financial market, by dampening economic fluctuations. The stockbrokers and the coulissiers, who became legal operators later under the denomination of bank brokers,¹¹ remained competing and complementary partners throughout the nineteenth century.

The activity of the official stockbrokers was limited by law to sole intermediation on securities which essentially had long remained public loans, whose tradition required a change in denomination in the State registries which only they could certify. They were entitled to buy securities only once they had received funds, and to sell securities only once they had accepted delivery thereof. Their activity, similar to notaries in the field of real estate sales, might appear harmless. Their number was limited to sixty in Paris; they were appointed by the Finance Minister, after cooptation. The recruitment rules were a guarantee of professional competence and probity, since the candidates must be over twenty-five years old, have worked in a stockbroker’s practice for four years at least, in a notary’s practice or still a banking or business company, not have been convicted, which excluded former bankrupted, destituted brokers and illegal brokers already convicted for violating the official stockbrokers’ monopoly. The Chambre Syndicale (Stock Exchange Committee) was the self-regulation authority, with the power to enforce the regulations it generated. The Common Fund, created in 1819, provisioned by various duties paid by agents, played the part of mutual insurance: it enabled lending to failing agents who could not deliver securities at term nor pay their creditors. Proving...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgements
• List of Figures
• Introduction
• Part I: The Social Mechanisms of Financial Convergence
• Part II: National Convergences and Divergences in the Long Term
• Part III: Convergence and Historical Shocks
• Part IV: Convergence and Monetary Constraint
• Notes
• Works Cited
• Index