Financial history Tilburg University Jaar 3
Pre-industrial era and the first industrial revolution
Long run economic evolution
The world until 1750 looked relatively boring. The GDP per capita remained constant for
more than 2000 years, but after 1750 the industrial revolution began.
Malthusian world
The growth of GDP per capita in Britain between 1000BC and 1750AnnoDomini (After Christ)
was around 0.1% per year.
In the Malthusian world -> 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 standards improved.
A positive technology shock increases income
Extra income increases birth rate and reduces death rate
Population increases
Positive population growth is not sustainable -> the economy has to go back to a
situation where birth rate equals death rate
Malthus calls this process: positive check (a natural hold on population growth)
(plagues, wars, famine(hongersnood)) Malthusian trap
Escaping the Malthusian trap -> complex technology
Technological improvement increased returns from education
New technologies are more complex: education is needed to make them work
Education is expensive, so families prefer to have fewer children but better
education.
In the end, with complex technology a rise in income does not produce a rise in
population
Escaping the Malthusian trap -> creating institutions (legislation, courts, rule of law,
schooling)
Better legal protection
Credit market flourishes
Since we have law courts, the family does not have to be big to be protected
Better institutions correspond to better schooling and more technology!
Is there a role for finance? -> Probably!
, 1. Finance reallocates value through time
2. Finance reallocates capital
3. Finance reallocates risk
Babylon and the temple
Babylonian citizens paid compulsory tributes (tithes) to the temple. They were payable in
grain, sheep and later in monetary tithes. The temple derived also income from its own
agricultural fields, in excess of the needs of the temple itself.
Time value of money
• 13 gur of grain, interest-bearing -at the rate of 1/3 gur per gur
• Abum-kima-ilim and Nawarga-lumur have borrowed from Šamaš and Ur-Kalkal
• At harvest time in the payment-month X, they shall measure up [return] the grain
and its interest. 5 witnesses. Date: 30th of Marchesvan [Nov.].23
Reallocation of capital
Ownership is transferred from Samas and Ur-Kalkal to Abum and Nawarga.
Reallocation of risk: Dilmun Trade (handel met het oosten, Bahrein)
Ancient Mesopotamia had quite some long distance trade. These voyages were financed
both with equity and debt.
A medium of exchange was China. In the Bronze Age, china developed a monetary system
based on shells. They were portable, countable and not perishable. Shells were rare in the
Yellow river, money was scarce.
Finance and institutions: the republic of Venice 400-1797
Venice was founded around 400-500 AC. The population of the surrounding areas sought
refuge in the Islands of the Northern Adriatic Lagoon. Throughout the middle ages, it gained
importance as maritime power. The apogee (hoogtepunt) of her power was between the XIV
and XV century. It was born as a republic and died as a republic in 1797.
The beginnings – it was established as a vassal states of the Byzantine Empire. It maintained
a republic form. At the head of the Republic there was a Doge, which in many occasions
wanted to become a King. Venice was exploiting the great geographical position and the
weaknesses of the two empires, it got rich with mercantile(handel) and long distance trade.
Constitutional changes (810-1032) – international trade made a good number of families
rich. They were collectively powerful, but could not take all the power on their own. The
election of Domenico Flabanico as Doge was an important moment of Venetian history
because he was a wealthy silk merchant, most subsequent Doges over the next centuries
were also merchants involved in long-distance trade. His reign ushered in two constitutional
innovations that significantly constrained the powers of Doges.
1. The election of the doge was democratic: a doge would no longer be allowed to
appoint his successor (democracy)
2. Doges were required to consult with a two-member dogal court of judges and abide
by the court’s decision
The great council – in 1172 a limited franchise elected parliament known as the Great
Council was introduced. This Great Council further constrained the power of the Doge. The
Doge had to publicly take an oath of office. The oath listed what the Doge could not do.
,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
The long distance trades from Venezia required a large investment and involved big risks.
These problems were resolved with the colleganza. It was basically a credit contract where a
young entrepreneur with ideas but no money could be matched with wealthy lender.
There are two parties: the travelling merchant and the investor. In Venice, the sedentary
merchant gives cash or wares to the merchant who boards a ship with other merchants to
an overseas destination such as Constantinople. There, the merchant sells the wares and
uses the proceeds to buy other wares for resale in Venice. The colleganza specifies the
names of the parties, the capital contributed and how profits will be split. Once the
merchant is back in Venice, the accounts are settled and relationship is dissolved. Usually,
the sedentary merchant provides all the capital and receives 75% of the profits. The
travelling merchant receives 25%.
The Serrata (lock-out) – the provision of law opened up the Great Council
By the XIV century the great council was controlled by a group of rich families. The Serrata
consolidated the power of the rich old families within the council:
The electoral law was changed to favour incumbents
In 1323, the membership in the Great Council was made a hereditary position only
men whose fathers and grandfathers had been in the Great Council could hold seats.
Back to the economy
In 1321, instead of convoys of primarily privately owned and operated galleys, Venice moved
to a system of State owned galleys that were auctioned off to private operators. The State
chose the destinations and sailing dates of convoys of galleys and auctioned the galleys for
the duration of the trip. ‘Only nobles were allowed to participate in this auction, an exclusive
privilege that gave them control of the financial and commercial operations of the fleet.’ ->
decline ins social mobility
The decline
The wealth distribution in Venice became more skewed toward a few rich families who
controlled the routes of international trade. Venice lack the incentive and leadership to face
major challenges:
The advance of the Ottoman Empire
Vasco da Gama’s discoveries of other Trade Routes
1797: The Fall
FINANCE AND THE INDUSTRIAL REVOLUTION IN BRITAIN
At the beginning of the 17th century, in Britain there was the Legacy of the Magna Charta.
Magna Carta is an agreement about law and freedom.
Legacy of Magna Carta: The parliament has already a role. ‘No taxation without
representation.’
1607: First Settlement (nederzetting) in Virginia
, Civil war and revolution
There was a struggle between the King and the Parliament. The King wanted to introduce an
Absolutist Regime, and the parliament wanted to impose its predominance over the King.
There was also a struggle between Protestants and Catholics.
24 March 1603: Elizabeth I dies and James VI of Scotland comes to the English throne.
Elizabeth was succeeded by her cousin James VI who assumed the title of James I of England.
James’ accession meant that the three separate kingdoms of England, Scotland and Ireland
were now united under a single monarch. He was the first Stuart ruler of England.
Religious tensions
Puritans
o Purify the Church of England of Catholic practices
o Simpler services
o More democratic church with no powerful bishops
Catholics
o November 5, 1605: The Gunpowder plot uncovered, in which a Catholic group
attempted to blow up King James I.
Anglicans vs. Presbyterians:
o Bishops vs. Communities and England vs. Scotland
The tensions with parliament involved the disagreements about money. The crown was
almost bankrupted because of the Lavish Lifestyle of James I, the wars and taxes and royal
prerogatives.
Charles I (1625-1649)
Charles I came to the English throne and started to fight Spain again, and lost. After, he
started a religious war against Scotland, which costed a lot of money. Parliament agrees, but
only if they get more power, so he dissolves the parliament. So Charles started demanding
loans directly from his people and asks his subjects to ‘lovingly, freely and voluntarily’ give
him money. The vast majority refused to pay. So in September Charles levied a forced loan.
Anyone who refused was to answer to special courts. The threat effected and the King
extracted about 250.000 extra. He also lodged his soldiers in the houses of civilians all along
the South Coast of England, and the military people were immune from local law, and were
only subject to military courts.
1628: Charles recalls parliament to obtain extra funds (War with Spain (disaster) and
France). He gets them, but has to accept the ‘Petition of Rights’ --> a citizen should have
freedom from:
1. Arbitrary arrest and imprisonment (willekeurige arrestatie en gevangenisstraf)
2. Non-parliamentary taxation (‘no taxation without representation’)
3. The enforced billeting/lodging of troops
4. Martial law (Krijgswet)
Accepted it, but did not follow the rules – protests -> he dissolves the parliament and
rules without for 11 years. He got money from ship money and monopolies.
1640: Charles recalls twice the Parliament to raise funds
