Larry Neal

How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648 1815

Larry Neal , How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648–1815 The Treaty of Westphalia created the modern nation-state system of Europe and set the stage for the long-term success of financial capitalism. The new sovereign states experimented with competing monetary regimes during their wars over the next century and two-thirds while they extended and perfected the financial innovations in war finance developed during the Thirty Years War. The Dutch maintained fixed exchange rates, the French insisted on exercising monetary independence, while the English placed priority on free movement of international capital. In struggling with the trilemma of choosing among the goals of maintaining fixed exchange rates, monetary independence and free movement of capital, the governments of early modern Europe learned many valuable lessons. By the time of the Napoleonic wars, the innovations that emphasised reliance on financial markets rather than on financial institutions proved their superiority.

Integration of International Capital Markets: Quantitative Evidence from the Eighteenth to Twentieth Centuries

The integration of capital markets is usually tested with an interest rate arbitrage model even though much different financial assets must be compared. This paper compares prices of identical assets that are traded simultaneously in two or more markets. The range, average level, and time series pattern of the differences can be used to infer threshold levels, transaction cost levels, and the efficiency of arbitrage operations, respectively.Examples are given for financial crises from 1745 to 1907, using prices from the London, Amsterdam, Paris, and New York stock exchanges. These show European capital markets to be well integrated by mid-eighteenth century.

The Integration and Efficiency of the London and Amsterdam Stock Markets in the Eighteenth Century

This article explores the operation of the international capital market between Amsterdam and London in the early eighteenth century and concludes that both markets were efficient and well integrated from 1723 on.

Trust Companies and Financial Innovation, 1897–1914

Professor Neal assesses the innovative role of a key financial institution — the trust company — during the period of American economic growth after the depression of the 1890s and prior to World War I.

The evolution of the structure and performance of the London Stock Exchange in the first global financial market, 1812–1914

By 1914, the London Stock Exchange listed and traded one-third of the public capital available to investors anywhere in the world. No other exchange could match it in terms of scale and scope of securities on offer, or in terms of the number of stockbrokers available to potential customers. The reason, we argue, is that the microstructure of the London Stock Exchange was also unique. The owners of the exchange (Proprietors) left governance of the exchange to the users of the exchange (Members). Because the owners of the exchange could only increase revenue by increasing the number of users, newer members constantly sought new sources of revenue through financial innovations. The evolution of the London Stock Exchanges microstructure was path-dependent – the initial conditions for membership set the separate incentives for the owners and operators of the exchange, and these determined how they responded to successive shocks over time. Path dependency, unfortunately, eventually led to decreasing effectiveness and innovation by the members over time.

Networks of information, markets, and institutions in the rise of London as a financial centre, 1660 1720

Seventeenth century London formed a network of credit and information, necessary for the City to become a hub of international finance. Lacking a central exchange bank, London-based finance involved bankers and merchants monitoring overseas agents and enforcing international claims. Using archival sources, we show how London bankers employed merchants to channel funds around Europe. As merchants became stakeholders in the payments system, they developed incentives to monitor foreign agents and spread information of defaults. The resulting web of information flows encouraged market integration by facilitating arbitrage. Finally, the availability of instruments for formal legal enforcement assisted informal enforcement.

Women investors in early capital markets, 1720–1725

Increasingly, recent literature has identified stock markets as an important feature of economies that experience modern economic growth. The evidence is compelling both historically2 and comparatively in recent decades.3 It is clear that these secondary markets in financial assets cannot be dismissed as mere gambling facilities that divert individuals from potentially more constructive activities in the economy. These markets provide a mechanism by which original lenders can re-sell their claims on borrowers to other savers. Knowing that they can acquire liquidity whenever they require it, the original lenders are more willing to lend in the first place. Their replacements are more willing to invest as well, having witnessed the market performance in the past. As a result of these trading activities by individuals within financial markets, households and businesses gain better insurance against shocks, better risk diversification, and assets that can be used as collateral for a wide variety of additional investments in other areas.4 The consequent changes in the ways individuals and families can allocate their resources and manage risk over time increase the prospects for economic growth.

How it all began: the rise of listing requirements on the London, Berlin, Paris, and New York stock exchanges

Abstract The issue of accounting standards for foreign securities listed on a stock exchange arose gradually over the period 1825–1914 among the leading exchanges in the first global financial market—London, New York, Paris, and Berlin. Comparing their listing requirements on the eve of World War I, we find that the London and New York exchanges were most detailed, reflecting their common-law legal environments and their status as self-regulating organizations. The evolution of listing requirements in London and New York therefore influenced the development of accounting standards in those countries. By contrast, Paris and Berlin relied on validation of a security by political authorities. One result of these differences in legal and political environments was that American railroads issued the only securities to be listed on each of the four exchanges.

Financial acumen, women speculators, and the Royal African company during the South Sea bubble

Abstract Price bubbles provide a unique opportunity to study the financial acumen of shareholders. We focus on the 1720 South Sea episode as experienced by the Royal African Company whose stock was more speculative than other joint stocks. During 1720 the company had a new large stock issue. This paper examines the financial acumen of those women who traded senior and engrafted stock across 1720. We find that depending on the pricing regime, these women at worst broke even on their activities or had positive speculative gains. Our findings are consistent with a growing literature on the positive link between gender, capital gains and financial markets.

SPECTRAL AND CROSS-SPECTRAL ANALYSIS OF THE LONG-SWING HYPOTHESIS

T HE basic purpose of this paper is to show that an improved understanding of longswing mechanisms in economic-demographic interactions may be attained with cross-spectral analysis even though spectral analysis has, to date, cast only doubt on the existence of such long swings. The superiority of crossspectral analysis to simple estimation of power spectra stems from its emphasis upon examining relationships among economic and other variables (Granger, 1966). For exploration of the long-swing hypothesis, spectral analysis suffers from a further disadvantage its results are sensitive to the form of the data analyzed (levels, rates of growth, or deviations from trend), while cross-spectral analysis is not (see section II). Application of both spectral and cross-spectral analysis to economic and demographic data in Sweden, the United Kingdom, and the United States indicates (1) results of spectral analysis are generally similar across the three countries and negative with respect to the long swing hypothesis; and (2) cross-spectral analysis shows quite different long-swing mechanisms at work while giving some positive confirmation to the Easterlin model of long swings for the United States.