Share portfolios in the early years of financial capitalism: London, 1690–1730

The dramatic expansion of public and private financial markets in the aftermath of the Glorious Revolution has received extensive attention. Despite this, little is known about how ordinary individual investors managed risk within this framework. Using a newly constructed dataset of share ownership for those joint‐stock companies listed in the financial press of the day, we reconstruct individual portfolio holdings for investors in these companies. We examine individual portfolio holdings first for the decade after the Glorious Revolution and then for the years around the South Sea Bubble. Despite a fivefold increase in the number of unique individuals in the market between the 1690s and the 1720s, we find that in each period roughly 80 per cent of those active in the equity market held shares in only one company, even though many shareholders had the capacity or wealth to diversify share portfolios. These outcomes suggest diversification against idiosyncratic liquidity risk. Overall, however, there is limited evidence that individuals were using their financial portfolios to protect against diversifiable shocks. For many, we argue, company‐specific voting and firm governance rules drove market activity.     

A 1735 Danish tract on economic policy

Abstract

About 1720 nearly all Western European countries experienced a monetary expansion which manifested itself most strongly in John Law's banking in France and the English ‘South Sea Bubble’. The same trend was in evidence in the Danish Monarchy; during the last years of the Northern War bank notes (‘kurantsedler’) equivalent to about one million rix-dollars were issued to meet the substantial military expenses.     

Royal African Company Share Prices during the South Sea Bubble

Price bubbles provide a unique opportunity to test whether investors act rationally and have sufficient knowledge of the economic environment in which they trade. We focus our attention on the 1720 South Sea bubble episode as experienced by a company not involved in governmental debt financing—the Royal African Company. Following the example of the South Sea Company, the Royal African Company lent its funds to equityholders at a preferential rate. Recognizing this benefit along with the announced dividends explains a large portion of the bubble. Furthermore, the unexplained residual does not behave like an exploding bubble, casting doubt that speculative excess motivated market participants in 1720. Our findings are indeed consistent with investor rationality, and the unexplained residual suggests that we are missing information that was available to the British financial market in 1720.     

The Netherlands Bank's narrow monetary policy

Summary In his article Mr. Timmerman describes the way the Netherlands Bank conducts its so-called narrow monetary policy,i.e. the policy pursued in the money and foreign exchange markets. The developments during the period October 1979–July 1981 serve as example of how movements in Dutch money market rates are dominated by exogenous factors. The author concludes that in a small open economy which maintains a stable exchange rate there is no room for an independent money market policy and that the hectic developments in the international money and foreign exchange markets have made illusory what until very recently was regarded as the most important objective of the narrow monetary policy,viz. an orderly money market. P.C. Timmerman was Deputy Director of De Nederlandsche Bank N.V. and is now Managing Director of De Bank van de Nederlandse Antillen. A similar article by the author appeared inZoeklicht op beleid, liber amicorum in honour of Professor G.A. Kessler.     

The effects of Bank of Japan’s liquidity provision on the year-end premium

The premium on interbank money market rates arises over year-end periods as a result of the Japanese business practice of periodic settlement. This paper examines to what extent the Bank of Japan’s liquidity provision reduced the year-end premium in Japan. We find that the funds-supplying operations over the year-end and the fiscal year-end of 2008 had the largest effects during the period from 2006 to 2008, reflecting the fact that the Bank of Japan significantly expanded liquidity provision in response to the decrease in market liquidity under the financial turmoil.     

Monetization and growth in colonial New England, 1703–1749

We examine econometrically the real effects of paper money's introduction into colonial New England over the 1703–1749 period. Departing from earlier analyses that focus primarily on the depreciation of paper money in the region, we show that expansion of the money stock promoted growth in modern sector activity and not the other way around. We also find that bills emitted for seigniorage purposes had a positive effect on the modern sector, while bills issued through loan banks did not.     

Book Reviews

Book reviewed in this article:
ALLY, R. Gold and Empire. The Bank Of England and South African Gold Producers 1880–1926 J.S. Jones SOHO, T. Japan and Africa .
SONO, T. From the East: Lessons from Taiwan for South Africa D J J. Botha.
ALLY, R. Gold and Empire . The Bank Of England and South African Gold Producers 1880–1926.     

Barriers to Skills Development in a Local Construction Labour Market

The literature on the construction industry suggests that the structure of labour markets in that industry sets up barriers to skills development. It is often suggested that 'employer engagement', leading to increased 'buy-in' into skills development, and investment by employers is the way to overcome these barriers. We present an example from a local labour market in South East England, with reference to an intervention in training ('Constructing Futures') that has brought private and public sector actors together. This example shows that employer engagement on its own is not sufficient to overcome the barriers created by the labour market structure. We suggest some essential measures to allow more workers to enter the industry and gain skills and reduce the skill shortages endemic to the industry in South East England.     

An Analysis of the Structure of Interest Rates in Taiwan: An Application of the Vector ARIMA Model

The structure of interest rates in Taiwan is analysed through the vector ARIMA approach using monthly and quarterly data from 1978 to 1989. These rates are the regulated bank interest rate and unregulated money market interest rates in the formal financial market and the kerb rate in the informal market. The results show that the adjustments in the bank interest rate follow that of the money market interest rate. Furthermore, the time lag has been shortened from one quarter in the early stages of interest rate liberalization in Taiwan to only one month in the later stages. Increases in the money market interest rate might be followed by an increase in the kerb market interest rate because of partial market segmentation. In periods when there is excess supply of funds in the banking sector, an increase in the bank rate might be followed by a decrease of the kerb rate. The interest rates structure of Taiwan is relevant to developing countries which have an informal financial sector.     

On the Relation between Money and Derivatives and its Application to the International Monetary Market

The paper deals with the problem of defining money in a system with derivatives. We conclude that derivatives have to be included in the definition of money, and support our conclusions with an econometric test on the New York Stock Exchange (NYSE) and Chicago Board of Trade indexes. We focus on the direct relationship between derivatives' supply and the interest rate, the analytical basis of speculative money demand introduced by Keynes and the foundation of the Fratianni-Savona model to single out the international monetary base. Consequently, monetary aggregates measured by international institutions, such as the Bank for International Settlements, underestimate the actual offshore market size. Derivatives are the primary instruments used by speculators. There is money, mainly in reserve currencies, that is not controlled and that may cause systemic instability (e.g., the recent Asian crisis).     

Bagehot for beginners: the making of lender‐of‐last‐resort operations in the mid‐nineteenth century1

In this article we develop new tools to survey the development of lending‐of‐last‐resort operations in the mid‐nineteenth century. One finding is that free lending and extensive liquidity support against good collateral developed gradually after 1847, and was already a fact of life before Bagehot published Lombard Street. Another is that the extension of the Bank of England's lender‐of‐last‐resort function went along with a reduction of its exposure to default risks, in contrast with accounts that have associated lending of last resort with moral hazard. Finally, we provide a new interpretation of the ‘high rates’ advocated by Bagehot. We suggest they were meant to prevent banks from free‐riding on the safety offered by the central bank, and were aimed at forcing them to keep lending during crises so as to maintain a critical degree of liquidity in the money market.     

‘Stop‐go’ policy and the restriction of postwar British house‐building

From the mid‐1950s to the early 1980s the Treasury and the Bank of England successfully advocated a policy of restricting both private and public sector house‐building, as a key but covert instrument of their wider ‘stop‐go’ macroeconomic policy framework. While the intensity of restrictions varied over the economic cycle, private house‐building was restricted (through limiting mortgage availability) for almost all this period. This was achieved by keeping building society interest rates low relative to other interest rates and thus starving the building society movement of mortgage funds. Mortgage restriction was never publicly discussed and sometimes operated alongside ambitious housing targets and well‐publicized policy initiatives to boost housing demand. This article outlines the evolution of house‐building restriction, together with its impacts on the housing sector and the wider economy. We review the evolution of the policy framework and its consequences, compare the level and stability of British house‐building during this period—historically and relative to other countries—and undertake time‐series econometric analysis of its impacts on both house‐building and house prices. Finally, implications for debates regarding stop‐go policy, Britain's housing problem, and the distributional consequences of government macroeconomic policy are discussed.     

Financial repression, money growth, and seignorage: The Polish experience

Financial Repression, Money Growth and Seignorage: The Polish Experience. — A small analytical framework is developed to analyze the relation between reserve requirements, base money growth and seignorage revenues. From the analysis, the authors can derive of steady-state seignorage revenues as a function of the rate of money growth and the intensity of financial repression. The framework is applied to the case of Poland that has undertaken a rapid transition to a market economy and implemented a substantial financial sector reform. The process of financial sector reform in Poland is discussed and estimates of the currency demand and deposit demand functions are undertaken to derive the seignorage Laffer curve.     

Unresolved questions in monetary theory: A critical review

Summary The basic questions of monetary theory remain unanswered. There is little agreement on a definition of money or what assets serve as money, much less on the nature of the private and social costs and benefits of a money economy. Controversy over these questions is reviewed critically. It is concluded that the extensive literature on these matters is not in fact very illuminating. Some new avenues of enquiry are suggested. Generalisation of Clower's exchange matrix suggests that money is only one of a hierarchy of budget restraints, and that money's contribution to efficient price-setting goes beyond its role as numeraire. Finally, questions of control of the money supply are considered.She wishes to thank the participants in the Economic Anthropology Seminar on Means of Payment at University College London for their comments and suggestions, especially Mary Douglas (UCL), Gerald Cohen (UCL), Morris Perlman (LSE) and Charles Goodhart (Bank of England). The comments of Yoram Barzel (University of Washington), Thomas Rymes (Carleton University), and members of the Money Study Group are also gratefully acknowledged. Resposibility for the outcome is entirely the author's.     

The impact of shadow banking on the implementation of Chinese monetary policy

This paper empirically analyses the relationship between the shadow banking system and implementation of monetary policy in China using the VECM methodology. We show that an increase in the size of shadow banking sector increases the independence of bank lending from the policies of the People Bank of China. We also find that Shadow Banking works in an asymmetric fashion in that it amplifies increases in the money supply but weakens the effects of restrictive interest rate-based monetary policy decisions.     

Access to Finance,Financial Development and Firm Ability to Export: Experience from Asia–Pacific Countries

With particular reference to Asia–Pacific countries, the present study examines how access to finance and financial development affects firms’ ability to enter export markets. Using firm‐level data from the World Bank Enterprises Survey, we found that access to finance plays a significant role in improving firms’ ability to export. In addition, development of the financial sector fosters export market entry. Among the financial development indicators, reach of the banking sector variable is most prominent. The present study suggests that improvements in access to finance and financial development (increases in the reach of the banking sector) enable firms operating away from capital or major cities to enter export markets easily. The present study supports policy intervention to strengthen access to the financial sector, which would encourage firms to export, and to facilitate export market entry for remotely located firms.     

South Carolina indigo,European textiles,and the British Atlantic economy in the eighteenth century

Europe's indigo imports grew rapidly from the 1720s, but the mid‐century wars (1739–48, 1756–63) had a devastating effect on the European textile industries and hence on the indigo trade. Britain's indigo market, however, boomed in wartime on the bases of prize indigo captured from France and Spain and of indigo imported from South Carolina. The rise of South Carolina's trade from the mid‐1740s was not caused, as the historiography claims, by its monopoly of the British market—such a monopoly never existed—but because the depression in South Carolina's major staple, rice, compelled a remodelling of the South Carolina plantation system, which produced an elastic supply of indigo. Carolina indigo was blighted by a poor reputation, not, as is usually argued, because British merchants maligned unfairly its quality, but because Carolina planters failed to achieve consistent production standards. Carolina indigo nevertheless succeeded in displacing French and Spanish indigo in the British and in some continental markets, reflecting the demand for cheap dyestuffs from manufacturers of low‐cost textiles, the fastest‐growing sectors of the European textile industries at the onset of industrialization.     

The emergence of a private clientele for banks in the early eighteenth century: Hoare's Bank and some women customers1

The records of Hoare's Bank and the correspondence of six of its women customers show how these women started to use the new banking services both for transferring money and for trading in the stock market. It is clear that alongside their use of the new facilities, older systems of money transfer remained important for customers. Much of the business of the bank and its customers, including their ventures into the stock market, took place within groups of people united by kinship, religion, and politics.