Financing steady disbursements with a credit line and an option for long-term funded debt: an asiento of Philip II

Philip II of Spain

Philip II ruled the first global empire with the limited state resources of the early modern age. As for any state before Waterloo, expenditures were mostly military. The celebrated silver and gold from the Americas were no more than 20 percent of his revenues, and a bit less in the first half of his reign. The fleet, a convoy, brought the precious metals once a year in the early Fall but the quantity was highly variable and unpredictable. The most stable part of the revenues (about a third) was raised through sales taxes that were controlled by the main cities of Castile. The rest was collected by scattered sources, tax farming, ad hoc contributions of the Church, etc... And in this state building period, there was no administration for the collection, monitoring and enforcement of taxation. In order to bridge the gap between expenditures, at designated locations and timings, and these erratic and scattered sources, Philip II used financial contracts, asientos.

In a new EHES working paper, Carlos Álvarez-Nogal and Christophe Chamley analyze a contract that provides a splendid illustration of this matching between regular expenditures, erratic revenues from the fleet and scattered but stable local revenues. The contract also provides an example of smooth conversion of short-term debt into long-term funded debt, long before the debt refinancings in England.

The asiento, a financial contract used
by Philip II

The method of investigation of Álvarez-Nogal and Chamley is grounded on a careful and thorough examination of all the documents that are available in the archives of Simancas, which were set by Philip II himself. These archives contain extraordinary details in the contract (14 pages), in the attachments (47 pages) next to the contract, with the reports of the monitoring royal accountants, and, in a different part of the archives, in the audits that were done years later by the Chamber of Accounts (more than 350 pages). From the archives a new and logical structure of the contract emerges that completely contradicts the data reporting and cash-flow method by Drelichman and Voth (2011) about the same contract.

The Maluenda brothers were successful merchants from Burgos who used their network in trade to develop financial activities. On July 13, 1595, they signed an asiento that committed them to deliver twelve monthly disbursements, of 27,000 ducats each (the first was doubled), in Lisbon. (For simplicity, all the numbers are rounded here. The exact numbers are reported in the paper). The total was therefore 350,000  ducats which is in the upper range of asientos for that period. To put this amount in perspective, a total of 5 million ducats of asientos for a given year would be high, the revenues of the Crown, net of Americas' income, were about 10 million ducats,  and GDP per capita in Castile was probably not lower than 2  ducats per month.

The financing of the disbursements (350,000 ducats) was divided in three parts. First, the Crown made an immediate cash payment for the disbursements until August:  75,000 ducats was paid from the royal coffers in Madrid which the bankers had to deliver in Lisbon as soon as possible. This transfer may have been used for urgent or start-up costs.

The credit part of the contract was therefore only for 275,000 ducats. This part operated like a credit line today with a monthly interest of one percent. The contract identified sources of revenues on which it had first claim. The Crown had much flexibility for the use of these sources of revenues and for the timing of the repayments. Whatever the choices of the Crown, a central and repeatedly emphasized principle of the contract was that an interest of one percent had to be charged on the balance due in each month. The rich documentation shows that this principle was strictly applied.
The repayment of the principal of the credit was divided in two tranches, which can be called here Tranche A for 100,000 ducats, and Tranche B for 175,000 ducats. (In addition, interests would have to be paid). Tranche A paid for, roughly, the rest of the monthly disbursements in Lisbon until the end of the year 1595, while Tranche B paid for the disbursements of the following year, until June. The contract devotes much space to the explicit connection between tranche and disbursements.
Each tranche had a first claim on the incom

Lisbon in the early modern period

e of the fleet of its year, the fleet of 1595 for Tranche A, and the fleet of 1596 for Tranche B. However, and this is the most interesting part of the contract, the Maluendas could also collect Tranche B by the sale of long-term funded debt instruments on behalf of the Crown, and they could choose the source of funding. These were to be taken from a menu: annuities on one head, to be chosen by the banker, at 14%, on two heads at 12%, perpetuals at 7% or 6%, and claims on the Casa de Contratación that managed the Crown's revenues from the Americas. Such were the terms of the asiento in the archives. The application of the contract is described in minute details by its attachments and by the final report of the Chamber of Accounts (Contaduria Mayor de Cuentas).

The Maluenda brothers exercised the option soon after the signature of the contract and, not surprisingly, in the menu of instruments, they selected almost exclusively the annuities on two heads. The sales proceeded briskly and were recorded, following a contractual requirement, in trimestral reports, with the names of the buyers, amounts of each annuity and dates of sale. (All this data is in the attachments).

The asiento illustrates the remarkable flexibility of the credit line with a monthly fixed interest rate. The fast sales of the annuities, even before the bankers had made any disbursement on Tranche B (about 105,000 of ducats sold at the end of 1595, before the disbursement of Tranche B), had freed the fleet of 1596 from the claims of Tranche B. It was therefore decided to shift 40,000 ducats in Tranche A from the fleet of 1595 to the fleet of 1596. The payments from the fleet of 1595 were staggered, beginning in December 1595. The attachments to the contract report the careful computations of the royal accountants about the interest on the balance due, prorated for the exact days of payment by the Crown. It is remarkable that for Tranche B, the cumulated sales of annuities exceeded at any time the cumulated disbursements to the Crown!

In November 1596, Philip II stopped the payment on all asientos, for the third time. On Tranche A, 40,000 ducats was still due. They were eventually paid by the Crown.

The method of Álvarez-Nogal and Chamley, to extract from the archives all available information and to focus on one contract, can be compared with the "coding" procedure of all asientos by Drelichman and Voth (2011), as presented in a study that received a prize. In that study, they take the same asiento as a standard bearer for their method which produces tables of "agreed upon cash-flows" from which they compute their own measure of a rate of return. Their method is not historical and in their data reporting, they do not respect the archival evidence in the contract, from page 3 on. The "coding" misses the elegant and logical structure that has been described here, and it turns the contract on its head since the payments depended on the interest, one percent per month, that is specified in the contract and precisely observed in its execution. They inexplicably dismiss the most interesting option for the long-term funded debt (which had already been described in the literature). Ignoring the attachments, they claim instead ("we know with certainty") that Tranche B had not been paid by the payment stop of November 1596, and that it was subject to a debt reduction, when actually, it had entirely been paid, in advance, by selling annuities. In fact, the Chamber of Accounts found in 1606 that for the entire asiento, the Maluenda brothers had been overpaid 4000 ducats.

This blog post was written by Carlos Álvarez-Nogal,  Associate Professor of Economic History at Universidad Carlos III de Madrid and Christophe Chamley, Professor of Economics at Boston Universtiy.

The working paper can be downloaded here:
http://www.ehes.org/EHES_79.pdf

Inequality and poverty in a developing economy: Evidence from regional data (Spain, 1860-1930)

New EHES Working paper by Francisco J. Beltrán Tapia and Julio Martínez-Galarraga

Societies that enter on the path of ‘modern economic growth’ undergo profound transformations. Although most of the changes that accompany this process favour the achievement of higher living standards in the long run, it can also generate some social tensions, especially during the first stages. One of the outcomes associated with growing incomes is the increase in inequality, as stated by Simon Kuznets in his classical work, where he argues that the forces unbounded by economic growth and structural change could initially lead to an upswing of income disparities. Only in more advanced stages of the development process, this trend would be reversed, thus creating the conditions for a more equal distribution of income. Yet, the existence of a U-inverted shape relationship between economic growth and inequality still remains an open debate. While some research provides evidence in favour of the Kuznets’ curve, other work finds conflicting results, so this issue is far from being settled. An important drawback of these studies is that they are mainly focused on the period after World War II due to data availability. However, economic historians have recently made significant efforts to achieve a better understanding of the long-term evolution of inequality.

Following their lead, our article analyses the evolution of inequality and poverty in Spanish regions between 1860 and 1930. This study presents a series of advantages compared to the existing literature. First, the period of analysis corresponds to the early stages of economic growth, which is the centre of Kuznets’ theory. Second, distributional policies were almost non-existing at that time, thus allowing us to focus on the role of economic forces. Third, most international studies employ country-level information, so regional differences are overlooked. This is particularly important in the case of Spain, a country that hides sharp regional disparities, especially in the timing and intensity of industrialisation. Lastly, by focusing on just one country, we reduce the problems that different legal and political regimes impose in cross-country comparisons. Our data also come from the same statistical agencies and thus avoids problems of comparability between different economies, especially acute when comparing data originated in developed and developing countries, or the troublesome conversions of incomes across countries using the purchasing power parity.

In the absence of household surveys or social tables, our inequality measure for each Spanish province is the Williamson Index (WI), an indirect indicator of inequality defined as the ratio between the average income per worker and the wage of unskilled workers. The WI thus compares the bottom of the distribution to the average income. The figure below plots each province’s WI against their level of real income per capita in 1860, 1900 and 1930. Economic growth does not appear to be beneficial for inequality, at least during the early stages of economic growth: the Williamson index increased as incomes grew, a relationship which weakened over time as the Spanish economy developed.

To better assess the distinctive impact of growing incomes on inequality levels, we estimate the determinants of inequality using a panel data set (1860, 1900, 1910, 1920 and 1930) that includes other potential factors influencing this process. The results seem to confirm the presence of the Kuznets curve. However, although growing incomes did not directly contribute to reducing inequality, at least during the early stages of modern economic growth, other processes associated with economic growth significantly improved the situation of the bottom part of the population. In this sense, the population shift from rural areas to urban and industrial centres, the demographic transition and the spread of literacy, among other factors, all partly counterbalanced the initial negative impact of economic growth and helped building a more equal society.

Focusing now on the link with poverty, the literature usually agrees that economic growth is pro-poor. However, recent research promoted by the World Bank stresses that, although growing incomes usually translate into poverty reduction, that relationship is mediated by the presence of inequality. Hence, this strand of literature recognises the importance of both growth and distribution in determining poverty levels. Once again, the links between economic growth, inequality and poverty reduction remain subject to an open debate. Although the lack of information on commodity prices prevents us from being able to compute a subsistence basket for each Spanish province, following Milanovic, Lindert and Williamson (2011), we construct a poverty ratio that compares the unskilled wage to a subsistence wage computed in reference to a fixed subsistence line of 300 $PPP per capita at 1990 prices. Our indicator assesses how far the subsistence wage stands from the earnings of the bottom part of the population. If we plot our poverty measure for each province against the level of real income in 1860, 1900 and 1930, we find that higher incomes per capita were clearly related to lower poverty levels, thus depicting a more positive image of economic development than in the case of inequality. This positive association however almost vanishes as the country developed.

We then carry out a more systematic analysis of the relationship of economic growth and inequality with poverty levels, considering also other variables that might have a direct link with poverty levels. Economic development seems to have opened up new opportunities to wider layers of the population and reduced the poverty ratio, although this positive relationship weakened as incomes per capita grew. Our results also show that inequality and poverty went clearly hand in hand.

To sum up, this article provides two main contributions. We offer new evidence of the evolution of inequality and poverty in Spanish provinces between 1860 and 1930, a period which usually lacks information on these issues and has thus impeded to follow their evolution, as well as a proper assessment of the relationship between these variables and economic development. In this regard, this paper also attempts to assess the causes behind the evolution of these indicators. While growing incomes appear to have fostered inequality (although at a decreasing rate), other processes associated with economic development, such as the rural exodus to urban and industrial centres, the demographic transition and the spread of literacy helped improving the living standards of the lower classes. In addition, the analysis also shows that reducing inequality also contributed to the reduction of poverty levels, so a combination of growth and distribution policies would be doubly beneficial for reducing poverty. Interestingly, the other processes associated with economic growth mentioned above also helped reducing poverty via their effect on inequality. Therefore, the potential of economic growth to improve the lot of the bottom part of the population becomes conditional on its ability to expand the opportunities available to increasingly wider segments of the population.

This blog post was written by Julio Martínez-Galarraga and Francisco J. Beltrán Tapia. 

Francisco J. Beltrán Tapia is 
Junior Research Fellow in Economics, 
Magdalene College, 
University of Cambridge

Julio Martínez-Galarraga is
associate professor at Universitat de València

The working paper is downloadable here: 

http://www.ehes.org/EHES_78.pdf

National income and its distribution in preindustrial Poland in a global perspective.

This blog post was written by Mikolaj
Malinowski, doctoral candidate at
Utrecht University

Why are some people and countries rich whereas other remain poor? What affects the relationship between average per capita income and income inequality? These questions have always been at heart of economics and economic history. According to Kuznets, due to differences in productivity, income inequality in the agricultural sector should be relatively low whereas inequality in the urban sector/industry should be higher. Therefore, at the initial stages of economic growth, progressing urbanisation - the motor of growth - should result in an increase in income inequality in a country. Van Zanden demonstrated empirically that the urban sector has been richer and more unequal already in preindustrial Western Europe. But what about Eastern Europe? Was there indeed a Little Divergence within preindustrial Europe - was per capita income levels in preindustrial Eastern Europe lower than in the western part of the Continent? And, if so, was income inequality in the region lower than in the West?

In their new EHES working paper, Mikołaj Malinowski and Jan Luiten van Zanden of Utrecht University investigate if Kuznets’s reasoning can be also applied to explain economic history of preindustrial Eastern Europe and Poland in particular. Early modern Poland makes an interesting case due to its reliance on the demesne economy based on serfdom. The authors develop the idea that extractive institutions could have resulted in high levels of income inequality despite low productivity/mean income. Malinowski and Van Zanden ask if income inequality in the Polish agricultural sector in the 16th century was indeed lower than in the urban sector, or was it higher due to coercive agricultural class structures. In order to answer this question, the authors construct a social table of the Voivodeship of Cracow – the historical centre of the country – around 1578 and measure Gini income inequality in various sectors of the Polish economy. The authors place their findings in an international context within the framework of the inequality possibility frontier developed by Milanovic and collaborators.

Malinowski and Van Zanden demonstrate that, despite serfdom, income in poor and primarily agricultural Poland was distributed more equally than in more developed/urbanised Holland. Their findings suggest that, due to high inequality in the agricultural sector under serfdom, in the case of preindustrial Poland, urbanisation (movement of labour to a sector with less institutional coercion) could have mitigated rather than increased the inequality of the distribution of incomes. Their findings indicate that a demesne economy based on serfdom might have been very ‘successful’ at extracting surplus from the peasants in general as well as creating inequality between the tenant farmers and the agricultural workers. The level of income inequality in the countryside was at the maximum level determined by the inequality possibility frontier.

In more detail, income inequality in the countryside was primarily attributed to the elite. When the elite is excluded from the estimates of inequality in the agricultural sector, the Gini coefficient decreases drastically from 57 to 30 – a level of income inequality (though not mean income) similar to that observed by Van Zanden for villages in Holland around the same time. Malinowski and Van Zanden also demonstrate - using data on both income and wealth distribution - that the city of Cracow, despite having much higher mean income, was characterised by lower inequality than the agricultural sector. Moreover, income inequality in the whole Voivodeship was smaller than income inequality in the countryside.

Scatter-plotted accounts of income and inequality in preindustrial societies.

Positioning Poland in the debate on early modern income inequality is one objective of the paper. The other is to position Poland within the Little Divergence debate. Malinowski and Van Zanden reconstruct GDP per capita in Poland between 1410 and 1910. They anchor their estimates to their own benchmark estimate for 1578 and to the benchmark proposed by Maddison for 1870. The authors use data on real wages and urbanisation to project the series backwards and forwards in time. The authors propose more reliable benchmarks for 1500, 1578, 1662, and 1776 as well as a more tentative continuous series. The results indicate a moderate growth in the economy in the 16th century, a strong contraction in the 17th century, and a stagnation in the 18th century.

Estimates of GDP per capita in 1990$PPP, 1410-1910.

Malinowski’s and Van Zanden’s inquiry into the long-term growth curve of the Polish economy confirms the conventional knowledge that Poland/Eastern Europe was a European periphery. Their figures reinforce the notion suggested by all of the previous studies of Polish per capita GDP that the county already lagged behind Western Europe in economic development at the end of the Middle Ages. The disproportion between the country and the front-runners located in the North Sea region as well as the other Western European countries widened through the period. The growth in the gap was not only a result of growth of the Western – particularly north-western – European economies, but also by the contraction of the Polish economy. After the 17th century crisis Polish real income went down to a level below that of India or Japan.

GDP per caput around the globe 1500-1870 in 1990$PPP.

This blog post was written by Mikołaj Malinowski, Doctoral candidate at Utrecht University.

The working paper can be downloaded here:
http://www.ehes.org/EHES_76.pdf

Agricultural Risk and the Spread of Religious Communities

New EHES working paper

Is the spread of religious communities related to economic risk? Historically, religious communities have often been the only source of support beyond the family. The social support provided by religious communities appears to be a type of informal mutual insurance especially valuable in historical agricultural societies exposed to much economic risk and without formal insurance mechanisms. Economic risk could therefore have contributed to the spread of today’s major religious communities, and beliefs in the spiritual rewards of mutual aid and charity, but empirical evidence is lacking.

"Stained glass window" by freedigitalphotos.net

In their new EHES working paper, Philipp Ager and Antonio Ciccone use historical census data for the United States to examine the link between economic risk and the spread of religious communities. The authors’ central conclusion is that religious communities are more widespread where populations face greater common risk.

The paper integrates two existing ideas – religious communities can sustain mutual insurance against at least some risks, and religious membership is a social activity that reduces time for other activities – into a model where agricultural output of farmers in a location is subject to idiosyncratic risk and to common, county-level rainfall risk. While idiosyncratic risk is partially insurable within a county’s religious communities, common rainfall risk is not. The authors show that when relative risk aversion is in the empirically relevant range, the value of mutual insurance against idiosyncratic risk within a county’s religious communities increases with common rainfall risk. This implies that a larger part of the population will be members of a religious community in counties with greater rainfall risk, holding expected agricultural productivity constant.

Ager and Ciccone evaluate this hypothesis by examining whether in the nineteenth century United States, churches in counties with greater rainfall risk had more total members or a greater combined seating capacity relative to population. In the United States, religious communities are widely regarded as having been the main source of social assistance, especially in agricultural regions, until the rise of government social spending at the beginning of the twentieth century. The available financial accounts of nineteenth-century churches indicate substantial expenditures on local relief and charity. There is also extensive historical evidence that local religious community members supported each other in case of need. Consistent with the historical narrative and the theoretical analysis the authors find a statistically and quantitatively significant link between membership in religious communities and rainfall risk in 1890, 1870, and 1860.

This blog post was written by Philipp Ager, Assistant Professor of Economics at the University of Southern Denmark, Odense.

The working paper can be downloaded here:
http://www.ehes.org/EHES_74.pdf

Participative Political Institutions and City Development 800–1800

New EHES working paper

Does contemporary economic development have medieval roots? 

Fabian Wahl is a PhD student
at University of Hohenheim

Numerous studies suggest that the institutional, educational and technical innovations connected with the commercial revolution in the late medieval laid the ground for the later European Industrial Revolution. 

However, the late middle ages also saw another institutional innovation, namely the emergence of participative political institutions (PPIs) in cities that have not been systematically analyzed until now. The development of these institutions marked the first turn towards more inclusive institutions since the ancient world. 

The recent EHES discussion paper by Fabian Wahl seeks to understand the consequences of this gradual shift of political institutions towards the participation of larger groups of citizens for the development of cities in the subsequent centuries. In doing so, it is the first study exploiting the remarkable heterogeneity in the participativeness of political institutions in the cities of the Holy Roman Empire in the later medieval and early modern period.

Concerning the consequences of participative political institutions for long-run city development, existing studies came to different conclusions. On the one hand, one can expect them to have a positive effect as they are associated with limited government, increased checks and balances, better fiscal and economic policy, a more credible commitment to property rights, less inequality and more civic capital. On the other hand, it is also known that, given the nature of the political system of medieval cities, those institutions could also give rise to rent-seeking, oligarchisation and conflicts within different groups of the elite. Moreover, the participative political institutions in medieval cities were closely connected with the empowerment of guilds. As there is an ongoing scholarly debate about whether the impact of guilds for economic prosperity was positive or negative one should not have a clear expectation about the effect of these institutions. Instead, it is likely that the effect of different types of participative political institutions is different and probably short-living.

The main data used for the empirical investigation of these issues originate from the “Participative Political Institutions in Pre-Modern Europe” database created by the author (Wahl 2014). This database contains information on the three most important types of participative political institutions in 104 cities in Germany, Austria, the German-speaking area of Switzerland (plus Geneva), Alsace-Lorraine and the Low Countries for every hundred year period between 800 and 1800 AD. These institutions are (i) the existence and degree of guild participation in the city council, (ii) the existence of a participative election mode of the city government and (iii) whether there was some kind of institutionalized burgher representation (e.g. a regularly meeting community assembly). As the overall effect of the universe of participative political institutions is of interest in its own right he also develops a single variable representing the overall impact of those institutions. This variable is obtained by conducting a factor analysis with the individual measures of participative political institutions. 

Furthermore, the author makes use of the comprehensive city level panel data set of Bosker et al. (2013) to supplement the data on participative political institutions. This data set also contains a variable for the existence of communal institutions in cities and hence enables to assess the effect of the participative political institutions at the extensive margin. 

To become familiar with the data, it could be instructive to have a visual view on the main data used in the study. Therefore, Figure 1 shows a map visualizing the spatial pattern of participativeness of political institutions in the sampling area. To be precise, the maps shows which city belongs to which quantile of the Participative Institutions Index (averaged over all time periods) distribution. Thus, larger circles indicate that a city belongs to a larger quantile. The highest degree of participativeness is shown by the institutions in cities located in the western (especially south western) part and middle part of Germany, while in the Low Countries, the east, south-east and north of the sampling area participativeness is not so pronounced. The area with the most participative political institutions thus approximately corresponds to the area of the highest political fragmentation, the area were the most free and imperial cities are located and were many important trade and production centers are located. 

Figure 1: Participativeness of Political Institutions of a City (Averaged over all Centuries)

The consequences of participative political institutions on city development are investigated by means of panel data regressions that allow to introduce e.g. city fixed effects to account for time-invariant heterogeneity. First, I consider the effect of each kind of PPI individually and then I present results using the single index. Separate regressions are conducted for the medieval and the early-modern period and for the Low Countries and the German-speaking area and the institutional variables are interacted with century dummies and indicating whether a certain type of participative political institution had already existed for one, two, three, four, five or six centuries in a city in a certain century to test for spatial and temporal heterogeneity in the effect of PPIs. 

From the empirical analysis, several important results emerge. When considering the effects of the different types of PPIs individually and pooled over all cities and periods, the author finds that primarily the extensive margin, i.e. the existence of communal institutions like city councils, had a robust and positively significant effect on city population. However, in the German-speaking area the existence of participative elections had positive effects on city growth. 

Regarding the notion that existing political institutions and regimes are subject to a process of degeneration and increasingly egoistic, rent-seeking policy the author finds a pattern of an increasingly negative effect the longer an institution existed, in the case of cities with guild constitutions. In addition, participative elections only had a significant positive impact in the first century of their existence and afterwards the effect became smaller and insignificant. This highlights the short-lived character of the positive impact of participative political institutions in pre-modern cities. 

When considering the Participative Institutions Index as measure of the overall impact of the different types of participative political institutions, there is only weak empirical evidence for a significant positive impact. However, the positive effect is stronger in the German-speaking area and prior to 1500 AD.

Finally, the author investigates the temporal evolution of the impact of participative political institutions from their first occurrence in 1200 AD until 1800 AD by interacting the participative political institutions index with century dummies. Figure 2 shows the resulting coefficient of the interaction term and the 95 % confidence intervals. For all observations the study detects significant positive effects in 1200 but insignificant effects in the other centuries. This implies that while these institutions contributed to the commercial revolution and the rise of cities, their impact in later centuries was limited. 

Figure 2: Temporal Evolution of the Impact of Participative Political Institutions

The blog post was written by Fabian Wahl and the working paper can be downloaded here:

http://www.ehes.org/EHES_73.pdf

A Re-interpretation of UK Corporate Law and Corporate Governance before 1914

A new EHES Working paper by James Foreman-Peck and Leslie Hannah 

Companies were the principal institution through which investment was channelled into the nineteenth and early twentieth century economy. The close cross-country correlation of company numbers and GDP around 1910 is therefore no surprise (figure 1). In the top right of the figure are the United States and other regions of recent European settlement. Just below them, and almost as intensive in companies per head of population, is one of the largest and certainly the richest of the ‘old’ countries, the United Kingdom.

Figure 1. Companies and GDP 1910/1913

Although companies created opportunities for higher productivity and income in nineteenth century Britain they also were an unprecedented chance for fraud and misappropriation of shareholders funds by unscrupulous directors. In Victorian literature dishonest companies and their officials abound  –  Charles Dicken’s Anglo-Bengalese Disinterested Loan and Life Assurance company (Martin Chuzzlewit 1844) and  Anthony Trollope’s financier Augustus Melmotte in The Way We Live Now (1875) are instances.

Satirical cartoons in periodicals pilloried crooked and predatory directors - figure 2 represents the law as the giant killer of a joint stock banker. These concerns might reflect the widespread damage that such companies wrought. But given the correlation noted in figure 1 it seems more likely that public concern gave rise to a regulatory framework that controlled such potential damage. Yet the consensus among legal and economic historians is that British law between 1844 and 1914 provided little protection to corporate shareholders. We contend that the consensus is mistaken.

Figure 2. Cartoon satirising speculation and fraud in joint stock companies, from 1858. 

Until towards the end of the nineteenth century, statutory companies accounted for the great bulk of capital quoted on UK stock exchanges. These companies were subject to the Companies Clauses Consolidation Act (CCCA) of 1845 that required substantial shareholder protection. The Act prescribed corporate governance and liability rules for all subsequent statutory incorporations in 164 model clauses. Hence the traditional view that legal compulsion played no role in nineteenth century British corporate governance is only sustainable for the companies registered under the much laxer Companies Acts. Yet we find evidence that even these companies usually voluntarily adopted governance rules that were very similar to those compelled by the CCCA for statutory companies. The professionals guiding registered companies through the process of initially offering shares to the public probably were “nudged” by the earlier legislation and the default table A of the Companies Acts. The role of law in spreading good corporate governance practices in British quoted companies therefore has been underestimated.
                 
Shareholder protection by corporate governance is now sometimes summarised by “anti-director” rights. The CCCA rules score quite highly on this index. Clause IX allowed attendance at general meetings of shareholders whose names were on the register, without the deposit of shares , scoring one on the index. In contrast to the lax Companies Acts, shareholders under the CCCA had rights to new shares if existing shares stood at a premium to par value (clause LVIII), increasing the score to two. Holders of at least one-tenth of the share capital  could requisition an extraordinary general meeting, if the directors failed to do so within 21 days of a formal request (clause LXX), increasing the score to three. Proxy votes were routinely allowed, if the nominated proxy was also a shareholder (clause LXXVI), raising the score to four. Tiered or cumulative voting rules were probably intended to protect minorities against majority oppression (raising the score to 5), though there are other interpretations.

UK statutory companies under the 1845 CCCA then generally scored four or five out of six on the anti-director rights index. This was a level not legally required in the UK registered company sector until the last quarter of the twentieth century. Moreover boards of CCCA companies wishing to modify their statutes had to obtain parliamentary approval, deterring directors from attempting prejudicial changes and giving shareholders an opportunity to lobby against them. The obligatory provisions for removing directors and calling extraordinary general meetings also made boards reluctant to introduce major strategic moves without consulting a shareholders’ meeting.

Turning to registered companies, our investigation considered changes actually made in their articles of association before applying for stock exchange official listing. These show company promoters recognised that encouraging good corporate governance brought advantages for raising capital. Articles of association of large registered companies submitted to the London Stock Exchange Listing Committee show high scores on the anti-director rights index, even though the Companies Acts did not require it. The freedom to attend meetings without prior share deposit and proxy voting were universal in our large quoted sample, and only two companies failed to provide for minority rights to call a meeting. Pre-emption rights were more varied, but the general requirement for shareholders to permit any increase in capital usually gave those without explicit pre-emption rights the power to insist on them as a condition of any issue. Thus many registered companies scored four (or, on a stricter interpretation of pre-emption rights, three) on the anti-director rights index.

In the complex Victorian commercial society an (endogenous) culture of business morality and reciprocal trust, as well as the long arm of the law both played roles in creating an efficient business environment. That they did so was among the reasons why the London Stock Exchange remained the largest in the world before 1914. Their joint effectiveness also explains why numbers of companies with ownership substantially divorced from control was comparable to those of today. Nineteenth century British ‘anti-director’ protections for shareholders were not as different from today’s as legal analysts have suggested.

This blog post was written by:

James Foreman-Peck and Leslie Hannah, both at Cardiff University

The working paper can be downloaded here: http://www.ehes.org/EHES_72.pdf

Beyond GDP: A Long-Term View on Human Wellbeing and Inequality

EHES Summer school - apply now

How much better is life today than it was in the past? And do we always need income growth to improve welfare? This summer school is devoted to exploring a new research avenue that uses broad indicators of human welfare and the standard of living to measure levels and growth of economic well-being worldwide.

During the last centuries economic growth as conventionally measured by gross domestic product per capita has shown big swings and long periods of disappointing performance. But at the same time in many countries people became on average healthier, taller, and older, and are enjoying increasing leisure time. Historical research into the human condition and level of living has revealed considerable growth trends in the general biological standard of living of world citizens. To understand this paradox of sometimes disappointing economic outcomes and favourable changes in the human condition, we need to re-examine and analyse indicators of human well-being such as economic living standards and broader human development standards.

This summer school focuses on the comparative study of income growth and will study its causal relationship with inequality, health, and leisure, which are widely seen as crucial indicators in the measurement of economic welfare.

The summer school is endorsed by the European Historical Economics Society. It is hosted by the Groningen Growth and Development Centre, a research centre affiliated with the Faculty of Economics and Business. The Summer School will last for 5 days and will include lectures of key-speakers such as Prof. Jan Luiten van Zanden (University of Utrecht) and Prof. Leandro Prados de la Escosura (Universidad Carlos III de Madrid). The afternoon sessions will be devoted to presentations and discussions of the research topics of the participants (doctoral students and postdoctoral researchers).

Dates 
28 June - 3 July 2015
Application deadline: 1 April 2015

Level 
PhD students and scholars who recently completed their doctorate

Coordinators 
Prof. Dr. Herman de Jong, University of Groningen
Dr. Joost Veenstra, University of Groningen

Fee 
€ 200 (including housing)

Apply now

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Contracts and cooperation: The relative failure of the Irish dairy industry in the late nineteenth century reconsidered

New EHES working paper

Eoin McLaughlin is a Leverhulme
 Early Career Fellow at University 
of St. Andrews

Ireland was one of the major dairying exporters on the London market in the early nineteenth century but lost its position of pre-eminence to Denmark by the close of the century. The question Henriksen, McLaughlin and Sharp seek to address is why the establishment of cooperative creameries in Ireland failed to halt the relative decline of her dairy industry. Henriksen, McLaughlin and Sharp compare the Irish experience with that of the market leader, Denmark, and shows how each adopted the cooperative organisational form, but they show that an important difference was institutional. Specifically, the two countries differed regarding the enforcement of vertically binding contracts, which are considered to be of vital importance for the successful operation of cooperatives.

Henriksen, McLaughlin and Sharp trace key court cases involving cooperatives in Ireland that were sued by their members. They find continuing uncertainty regarding the validity of these contracts up until Irish independence.

Cooperative and non-cooperative creameries in Ireland 1908

Another key difference between Denmark and Ireland was the existence of a strong proprietary sector which was strongly opposed to cooperation (map 1), this led to increased competition for scarce milk supplies in the Irish countryside. This, combined with the inability to enforce vertically binding contracts and poor social capital, ultimately led to the relative failure of the Irish dairy sector.

This blog post was written by Eoin McLaughlin, Leverhulme Early Career Fellow at University of St. Andrews
The working paper can be downloaded here: http://www.ehes.org/EHES_71.pdf

The Heavy Plough and the Agricultural Revolution in Medieval Europe.

New EHES working paper

Did the heavy plough – as suggested by Lynn White Jr. and many others – lead to economic development during the Middle Ages? This question is investigated in a new EHES working paper by Andersen, Jensen and Skovsgaard, University of Southern Denmark.

Fig 1:  (a) the old plough, the ard,
and (b) the heavy plough

During the Medieval epoch the heavy plough spread across Europe. Heavy ploughs had a number of advantages compared to the old plough known as the ard (see Figure 1). These advantages derive from the addition of the mouldboard, which was used to turn the soil. By turning the soil, high-backed ridges were created. This was useful on poorly drained clay soil, as the ridges improved drainage. Turning the soil also improved weed control on these soils, since the ard provided insufficient damage to root system. Other advantages include e.g. bringing up lower level soil in which percolating water tended to concentrate plant nutrients. Hence, by allowing for better field drainage and access to the most fertile soils, the heavy plough stimulated food production and, as a consequence, “population growth, specialization of function, urbanization, and the growth of leisure” (White 1962, p. 44).

It is widely believed that the new plough had its breakthrough around AD 1000. Andersen, Jensen and Skovsgaard use this breakthrough year and the regional distribution of clay soil in a difference-in-difference setup in order to investigate whether the heavy plough did in fact lead to increased economic development after AD 1000 in areas that stood to benefit the most from the new technology.

Fig 2: Clay soils and the establishment of towns in Denmark.

Using establishment of towns in Denmark (see Figure 2) and cities in Europe as a measure of economic activity, the paper shows that regions more suitable for the heavy plough developed more strongly after its breakthrough (see Figure 3). In the study of Denmark the heavy plough explains more than 40 % of the new towns established between AD 1000 - AD 1300. In the case of Europe it explains more than 15 % of the new cities during the same period.

Fig. 3. The effects of the heavy plough on the establishment of Danish towns for each 25 year period

Overall, the paper corroborates the hypothesis that the heavy plough mattered for economic development. This suggests that increases in agricultural productivity can be a powerful driver of development.

The blogpost was written by Christian Skovsgaard, PhD Student, Department of Business and Economics at University of Southern Denmark.

The paper can be downloaded here: http://www.ehes.org/EHES_70.pdf

Origins of Political Change—The Case of Late Medieval Guild Revolts

New EHES working paper

Fabian Wahl is a PhD
student at the University
of Hohenheim

In the last decades there has been an increasing interest in the role of institutional innovations in the late medieval and early modern period for the “Rise of the West” and the “Great Divergence” between the Western countries and the rest of the world.

Within this literature, many papers have dealt with the consequences of the changes that occurred in this period in national and regional political institutions and regimes. However, these studies rarely provide a systematic empirical analysis of the origins of these institutional innovations. Yet, uncovering the roots of participative institutions in later medieval central Europe is essential for understanding the medieval roots of the “Great Divergence” and, more broadly, the origins of political change. Furthermore, it can also be informative about the relationship between economic and political changes as the political change of this period paralleled a notable economic recovery, i.e. the “commercial revolution”.

By investigating the origins of the late medieval guild revolts the recent EHES working paper by Fabian Wahl seeks to shed light on these issues. He argues that guild revolts constituted an important trigger for the turn towards more inclusive political institutions found in the later medieval period. Craftsmen and other groups of citizens, for instance, often gaining political rights in the aftermath of a guilt revolts.

The study is based on uniquely large and systematic data on the prevalence and outcomes of guild revolts in 104 cities in Germany, Austria, the German-speaking area of Switzerland (plus Geneva), Alsace-Lorraine and the Low Countries for every hundred year period between 800 and 1800 AD.  This data are part of a larger dataset on participative political institutions in pre-modern European cities, which the author had constructed and that can potentially be used to assemble many other research questions (see Wahl 2014).

To construct this database, the author reviewed more than 100 historical sources to ensure that the created variables cover as much of the universe of participative political institutions in later medieval cities as possible. The collected data is the most comprehensive and detailed collection of information about the late medieval guild revolts that the author is aware of.  Furthermore, it is the first data set on political institutions or regime types that is systematically defined on city-level and thus makes it possible to exploit variation in political institutions between cities. Based on this data set, the working paper provides an overview of the temporal evolution and spatial distribution of successful guild revolts. The latter is depicted in Figure 1 showing in which cities a successful guild revolt occurred and which outcome it had. Cities in which the guilds gained the majority or all of the seats in the city council are red colored, cities in which the guilds gained at least some seats in the city council are shown in blue.  Finally, cities in which there were no –or no successful—revolts are grey colored.

Guild revolts in 104 cities in Germany, Austria, the German-speaking area of Switzerland (plus Geneva),
Alsace-Lorraine and the Low Countries

Among other things, one can infer from the map that there were almost no cities with guild participation in the north of Germany and the Netherlands, i.e. in core area of the Hanseatic League. This is in line with historical evidence that the Hanseatic League often successfully suppressed guild revolts and defended the ruling merchant elite in its member cities. In central Germany (primarily today's Saxony, Lower Saxony, Hesse and Franconia) there is a medium frequency of guild participation and there are only a few cities with a guild constitution (Brunswick, Goslar and Magdeburg) all of which were members of the Hanseatic league and important political, commercial or ecclesiastical centers and therefore probably predestined for the outbreak of a guild revolt. In those cities the guilds succeeded in their attempts to gain political power despite the opposition of the Hanseatic League. There are almost no cities with guild participation in Bavaria what could be due to the comparatively strong position of the Bavarian ruler and to the fact that bishops there (as e.g. in Passau) were often successful in beating the guilds.

As a next step, an empirical analysis of the origins of the guild is conducted. The results of the performed probit regressions can be summarized as follows: The typical city subject to a guild revolt had a certain degree of autonomy, was located in a large territorial state, was in an area with low urban potential and suitability for agriculture, i.e. it dominated a rural area  with  relatively low agricultural productivity. Furthermore, it did not have any pre-existing participative political institutions and was a center of the textile industry. It had many neighboring cities located at a medium and large distance (between 50 and 250km away) that also experienced guild revolts, but not many in its direct vicinity that witnessed revolts. The significance and different signs of neighborhood spillovers shows how the guild revolts were determined by strategic considerations as well as chance and risk expectations.

In conclusion, a city's urban potential, i.e. its relative position to other cities and the degree to which it dominates the region surrounding it, as well as its agricultural productivity were important. This confirms the importance of the agrarian crisis and the Black Death for the occurrence of guild revolts. Being a commercial and especially an industrial center also played a certain role for the revolts that resulted in a complete success for the guilds.  This points to the existence of a virtuous cycle of economic and political opportunities where political change endogenously emerges from preceding economic changes.

The blog post was written by Fabian Wahl, PhD student at University of Hohenheim and the working paper can be downloaded here: http://www.ehes.org/EHES_69.pdf