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Financial History part
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Summary and notes for the lectures of the Financial history part 2016/2017 Also available together with the Financial intermediation part.
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Financial History HCDr. F. Braggion
Exam -> Slides, Book, Papers.
- not remembering the years.
Introduction
Since 1750 -> Industrial Revolution.
Basics of Macroeconomics
• IS LM
https://nl.wikipedia.org/wiki/IS-LM-model
• What is Money? M1,M2, Money multiplier
TRANSLATE
Moderne definities van de geld hoeveelheid.
- M1: een nauwe definitie van geld, die direct liquiditeit kan verschaffen. Dit bevat:
1 Currency; alle munten en biljetten in de circulatie (dus niet in handen van
banken/overheid)
2 Girale tegoeden bij banken (die direct opvraagbaar zijn)
3 Traveler’s cheques in handen van het publiek (deze categorie is verwaarloosbaar)
M2: een ruimer geld begrip omdat ook activa op korte termijn en zonder veel kosten/koersverlies in
M1 kan worden omgezet zoals termijndeposito’s, aandelen e.d.
Money market mutual funds: fondsen die investeren in effecten op hele korte termijn zoals
obligaties.
Credit cards en Debit Cards worden niet in de definities opgenomen omdat deze gelinkt zijn aan de
spaartegoeden e.d. en omdat ze zelf geen waarde vertegewoordigen.
Hoe scheppen banken geld?
Eerst een paar definities:
Reserves: tegoeden die een bank aanhoud in kas/bank en dus niet belegd, wanneer deze fysiek word
aangehouden word dit Vault Cash genoemd.
Required reserves: reserves die een bank verplicht moet aanhouden t.o.v. de tegoeden. Hieraan is
een ook het Required reserves ratio gebonden (rr, bijv. 10%). Dit houd in dat de banken 10% van de
uitgeleende tegoeden moet aanhouden als reserve. Wanneer je dit gaat bekijken met T-accounts (zie
boek) zullen we vanzelf uitkomen op de multiplier.
Hierlangs zien we de formules die we moeten
gebruiken als we naar de balans e.d. kijken.
De Deposit-multiplier = 1/rr =>
Dus de toenamen van de deposits bij een RR
van 10% en reserves van 1000 = 1/0.10 *
1000 = 10.000
Doordat banken in de praktijk excess
reserves aanhouden komt de geldscheppingsmultiplier, volgens empirisch onderzoek, in normale
tijden uit op ca. 2.5
Hiermee kunnen we ook het Fractional reserve banking system uitleggen. Dit is een systeem waarbij
,de algemene banken minder dan 100% van de tegoeden aanhoud als reserve wat dus heel normaal
is.
Lecture/Chapter 1: An overview of financial history, institutions and the first industrial revolution
Some countries escape the Malthusian Trap at the Industrial
Revolution. -> Europe USA etc. Other countries are still in
the Malthusian trap (line downwards).
The Malthusian World
• The growth of GDP per capita was approximately
0.1% per year
• Each society has a birth rate, determined by
customs regulating fertility, but increasing with material livings standards (CHINA)
• Death rate in each society declines as living standard improves.
Every time you get richer -> make kids so that you will have an
‘insurance’ that someone takes care of you. In graph -> lower income
because the same wealth has to be divided by more people.
Figure 2.5 For example, you invent the wheel -> more efficient -> more
income. Birth rates grows, death rate decreases so the population is
growing. The growing population will lead back to the equilibrium.
Escaping the Maltusian Trap
Technology
o Improves the returns from education. New technologies are more complex so more
education is needed to make them work but education is expensive. Families prefer
to have fewer children but better educated. (If you master the technology, you can
make more money)
Summary: With complex technology a rise in income does not produce a rise in
population
Institutions (legislation, courts, government, schools etc.)
o Better legal protection -> credit market flourishes (lower risk of being expropriated/
lower risk on a robbery) because the courts are working -> less need of ‘clan
protection’ so the family size can be small.
o Better institutions will also lead to better schooling and more technology (marginal
returns from education are higher)
Finance
o Reallocates value through time
o Reallocates capital
o Reallocates risk
The Warka Vase -> Ring 1: animals etc Ring 2: normal people who create wealth with animals and
plants. Also naked -> submission to the (sun)god and priests. Ring 3: The priests and God who take
wealth from the normal people. -> Society with a hierarchy (bottom – middle – top)
,Babylon
Theory 1: bringing every product to the temple and the temple divides for the households
Theory 2 (Slide): paying compulsory tributes to the temple and it generates also wealth from the own
fields.
Time Value of Money (15)
-> borrowing & Interest rate --> financial transactions for time value of money
-> Reallocation of Capital from samas and ur-kalkal
-> reallocation of Risk. The transportation was costly so did trading.
China -> invent a medium of exchange: shells.
-> portable (light), countable ( amount #), constant value (less inflation), not perishable
Venice
- Born as a republic/ died as a republic
Several attempts to put away the current doges and replace it but mainly to change the
structure (republic for example in a monarchy) but it never worked.
- Gained importance as maritime power (throughout the middle ages)
Later also because they were in the middle between the big parts of Italy -> mediating.
Venice gets rich by (international) trading -> mastered the art of ships etc.
Rich families constrained the power of the Doge, collectively)
The Doge has to be elected by the people -> rich people choose. Many were merchants.
Rules
1. The election of the Doge was to respected in full: a Doge would no longer be allowed to
appoint his successor
2. Doges were required consult with a two-member dogal court of judges and abide by the
court’s decisions.
The Great Council
1172 introduction of a limited franchise elected parliament (TGC) and constrained the power
of the Doge further
The Doge had to publicly an oath of office (sign a contract which states what he can and what
he can’t do)
Now the Doge has to consult with six-member dogal in stead of the two people.
Dogal dynasties
The colors are families (curve above father/son
or brother, below son in law or nephew). What
do you have to observe? As a result of time the
elections start to work out (white) meaning
that there are no families anymore who rule
Venice.
The Colleganza
= basically a credit contract where a young entrepreneurs with ideas but no money would be
matched with a wealthy lender.
The sedentary merchant gives cash/wares to the traveling merchant (young entrepreneur),
who boards the ship with other merchants for an overseas destination. The traveling merchant sells
the wares and uses the proceeds to buy other wares for resale in Venice. The traveling merchant
earns money (25%) but most of the profits (75%) go to the sedentary merchant (investor), but he is
also taking the losses (if any).
, Economic and political mobility was available in the early Venice -> From slave to highest social and
political circles (and sedentary merchant) = Zaccaria Stagnario.
Vertical axis: cumulative share of the Great Council
seats.
Horizontal: Families ordered by share (of seats)
Last ‘jump’ in red curve: The old families are losing
power to the new families (big jump in the
cumulative share)
Begin 1300: The Serrata
Old families -> by 30% support they were in
the council (Council of Forty -> ruling families, blue
line)
Newcomers: they had to overcome significant
obstacles to membership -> retain power for the old families.
Nobiles: a man who was or could be a member of (great) council
In 1323 -> the membership in the Great Council was made a hereditary position.
Grandfather + Father in Great council? -> you’ll be in the council
The state started to make the convoys privately owned and only nobles were allowed to participate
in the auction for the galleys for the duration of the trip. -> Not that easy anymore (almost not
possible) to grow from a poor guy to one of the greatest merchants.
Marriage graphs…
The wealth distribution in Venice became more and more skewed towards few rich families who
controlled the usual routes of international trade. This lead to a lack of inventive and leadership
characteristics which were needed to face major challenges:
Vasco da gama’s trade route
Advance of the ottoman empire
Finance and the Industrial Revolution in Britain
Elizabeth I dies -> cousin James VI of Scotland becomes King -> Unite England, Scotland and Ireland.
Opposite of catholics.
Anglican -> hierarchical (England + Wales)
Presbyterians -> Scotland
Tensions with Parliament by James. -> Disagreements about money. The crown was almost
bankrupted. This had various reasons: lavish lifestyle, wars and so wanted to introduce taxes. House
of commons doesn’t accept. Son of James = Charles started with introducing asking money from the
local magistrates. In September 1626 he started with Forced Loans, everybody who refused to ‘lend’
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