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Notes Financial history and Intermediation
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Financial historyLecture 1. Pre-Industrial Era and the first Industrial Revolution
Long run economic evolution:
- The world until 1750 looked relatively “boring” place
- Boring: GDP per capita remained fairly constant for more than 2000 years
o The growth of GDP per capita in Britain between 1000BC and 1750AD was
approximately 0.1% per year
- Something happened after 1750: the Industrial Revolutionà in Western Europa and
the US, you see a sharp increase in GDP per capita (the Great Divergence: part of the
world experienced sustained economic growth, whereas other part of the world
lagged behind)
Malthusian World (the part of the world between 1000 BC and 1750 AD):
- Each society has a birth rate, determined by customs regulating fertility, but
increasing with material living standards
- The death rate in each society declines as living standard improve (When GDP per
capita increases, less people die)
Anything that makes this economy richer is increasing
population, by lowering the death rate and increasing the
birth rate. Bringing back income per capita to equilibrium
level y*, where population is constant, because death rate is
equal to birth rate (see figure 2.1)
Any technologic improvement in a Malthusian World,
produces only a temporally increase in GDP per capita. Which
in the long translates in larger population (birth rate > death
rate), which brings the GDP per capita to the pre-
technological improvement level(see figure 2.5).
Malthusian world:
- A positive technology shock increases income
- Extra income increases birth rate and reduces death
rates
- Population increases
- Positive population growth is not sustainable- the
economy has to go back to a situation where birth rate
equals death rateà Malthus calls this process
“Positive Check”. According to Malthus, a positive
check is any event or circumstance that shortens the
human life span. The primary examples of this are war,
plague and famine.
Escaping the Malthusian trap (2 explanations):
- Technology
o Technological improvement increased returns from education
, o New technologies are more complex: education is needed to make them
work
o Education is expensive. Families prefer to have fewer children but better
educated
o With complex technology a rise in income does not produce a rise in
population
- Institutions (legislation, courts, rule of law, quality of the government, schooling
o Better legal protection (in every dimension: individual vs. individual,
individual vs. government)
o Credit market flourishes (the risk of being expropriated gets lower)
o Since courts are working, there is less need of “clan protection”… family size
can be small
o Better institutions correspond also to better schooling and more technology…
marginal returns from education are higher
Finance is about 3 things:
- Reallocates value through time
- Reallocates capital
- Reallocates risk
The Warka Vase (Uruk, 3200-3000 BC):
- There are 3 layers of drawings
o First layer: calves, sheeps and goatsà which represents all the riches of the
land of Babylon
o Second layer: the people of Babylon carrying the riches from land (jars, beer,
fruits, wine etc.)
o Third layer: a goddess (which is represented by the priest) which receives
from the commoner of Babylon all the riches of the land of Babylon.
Babylon and the temple
- Babylonian citizens paid compulsory tributes (tithes) to the temple
o They were payable in grain, oxen, and sheep; later monetary tithes were not
unusual, and they appeared in connection with the tithes due from the
members of the royal household
- The temple derived income from its own agricultural fields, in excess of the needs of
the temple itself
Time value of money:
- What you see in the picture is a loan contract where a subject lends 13 gur of grain,
which was bearing an interest of 1/3 gur per gur
, - Abam-kimi-ilim and Nawargalumur have borrowed from Samas and
Ur-Kalkalà reallocation of capital between: Samas and Ur-Kalkal (the
lenders)
- At harvest time in the payment-month, they shall measure up (return)
the grain and its interest. 5 witnesses. Data: 30th of Marchesvan (nov).
23
Reallocation of Risk: Dilmun Trade
- Ancient Mesopotamia had quite some long-distance trade. These
voyages were financed both with equity and debt.
Medium of Exchange: China
- Bronze age- China developed already a monetary system based on shells
- Shells were portable, countable, not perishable
- Shells were rare in the Yellow river… money was scarceà by keeping the number of
shells relatively limited because we have scarce, you may contribute in a way or
another to price stability to at least avoid excess of inflation
Finance and institutions: The Republic of Venice, 400-1797
- Venice was founded around 400-500 AD
- Population of the surrounding areas sought refuge in the Island of the Northern
Adriatic Lagoon from Barbarian invasions, especially from the Huns (Empire of Attila
the Hun)
- Throughout the middle ages, it gained importance as maritime power
- The apogee of her power was between XIV and XV century
- Venice was born as a Republic and dies as a Republic (in 1797)
The beginnings:
- Venice was established in the beginning as a vassal states of the Byzantine Empire,
the rulers of Venice were ruling formally on behalf of Eastern Roman Emperum
- Maintained a Republican Form
- At the head of the “Republic” there was a Doge, which in many occasions wanted to
become a King
- Exploiting the great geographical positions and the weaknesses of the two empires,
Venice gets rich with mercantile (trade/commerce) and long distance trade
fundamentally providing ships to connect the eastern part of the empire with the
former west part of the empire
Constitutional changes (810-1032)
- International Trade made a good number of families rich
o They were not individually powerful, but they were collectively powerful
enough to significantly constrain the power of the Doge
- The election of Domenico Flabanico as Doge was an important moment in Venetian
history
o He was a wealthy silk merchant, and most subsequent Doges over the next
many centuries were also merchants involved in long-distance trade
, - Further, his reign ushered in two constitutional innovations that significantly
constrained the powers of Doges
o The election of the Doge was to be respected in full: A Doge would no longer
be allowed to appoint his successor
o Doges were required to consult with a two-member Dodge court of judges
and abide by the court’s decisions (the Dodge cannot run by himself)
The Great council
- In 1172, there was the introduction of a limited franchise elected parliament knows
as the Great Council
o Which further constrained the power of the Doge
- The dodge had to publicly an oath of office (eed afleggen)
o The oath explicitly listed what the Doge could not do, for example,
expropriate state poverty or preside over cases against himself
- In all important decisions the Doge was required to consult with a six-member dogal
council that was elected by and accountable to the Great Council
- By 1192 the doge could do almost nothing without approval of the council
From politics to finance: the Colleganza
- Long distance trades required a large investment… and involved big risks
- These problems were resolved with the Colleganza… basically a credit contract
where a young entrepreneur with ideas but no money could be matched with
wealthy lender, this is nice, because it allows for social mobility
- The colleganza is a contract, there are two parties: the traveling merchant and the
investor (or sedentary merchant)
- In Venice, the sedentary merchant gives cash or wares to the traveling merchant,
who then boards a ship with other merchants for an overseas destination, say
Constantinople
- In Constantinople, the traveling merchant sells the wares and uses the proceeds to
buy another wares for resale in Venice.
- A colleganza specifies the name of the two parties, the capital contributed by the
sedentary investor and states how profits will be split
- Once the traveling merchant brings the wares back to Venice, the accounts of the
voyage are settled and the relationship is dissolved
- Usually, the sedentary merchant provides all the capital and receives 75% of the
profits. He also takes the losses (if any)à so he is bearing the risks, but also gets a
higher return
- The traveling merchant contributes no capital and receives 25% of the profits
Colleganze: a case study
- The live of Zaccaria Stagnario provides an example of the economic and social
mobility in early Venice
- His grandfather Dobramiro was a Croatian slave who was freed when his Venetian
owner died. His father, Pancrazio, was a helmsman
- In 1199, Zaccaria travelled in coleganze to Constantinople and this experience paid
of handsomely
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