Reviewed by Christopher J. Napier
The London School of Economics and Political Science
The use of econometric techniques to address problems in economic history has been a feature of the last thirty years [McCloskey, 1987]. Yet there are still few studies that examine the emerging capital markets of the eighteenth and early nine-teenth centuries by applying the statistical procedures that are so familiar in the case of recent research in finance. Larry Neal’s book is a good indication of the hurdles that have to be crossed in order to carry out worthwhile historical finance research of a quantitative nature. The first of these is the assembly of raw data. Only a small number of securities and foreign currencies (rarely more than 20) were traded on the London, Paris and Amsterdam markets at any time in the eighteenth century. But Neal could not simply run a computer tape to find the prices of these securities. He had to locate contemporary price lists, assess their reliability, and then ensure that the daily price data were input into a computer file. Given the need to process what must have been over half a million pieces of raw data, it is not surprising that it took Neal a decade to assemble his security prices, before he could begin to test them.
The second problem that Neal had to overcome was the possible distortion of his data by institutional factors. One of the great dangers of quantitative historical research is that a fascination with manipulating the numbers can easily overshadow the many institutional nuances that set the context within which the numbers arise. A great strength of Neal’s book is that he is very aware that he must consider carefully the structural similarities and differences between the main European capital markets, and the changes in these markets over time. Apparently minor factors in the set up of markets prove crucial: for example, that stock transactions in London were for spot delivery while in Amsterdam they were for settlement on one of the quarterly dates during which transfer books were open, makes it necessary for Neal to allow for the discount implicit in security prices in Amsterdam because of the later settlement of trades.
Neal adopts a topical approach in his book, much of which has been published already in the form of journal articles. The main topics considered are: how integrated were the various capital markets, and did the degree of integration differ in times of war and peace; how did financial information diffuse through European capital markets; how did the great financial “bubbles” of the early eighteenth century, involving John Law’s Banque Royale in France and the South Sea Company in England, happen; and the extent to which the transfer of wealth by emigres from the French Revolution fuelled the British Industrial Revolution at the end of the eighteenth century. Because of his quantitative approach, Neal is able to demonstrate convincingly how the South Sea Bubble was the culmination of a long period of speculation, and how market volatility became much reduced after the bubble burst. He suggests that the price movements at the outset of the South Sea Bubble can be explained as a “rational bubble” [Blanchard and Watson, 1982], while those just before the bubble burst could not be so explained.
It is perhaps unfair to criticize quantitative historical re-search for simply providing statistical confirmation for gener-ally accepted history, but Neal’s book does on occasion leave the impression that the application of quantitative methods has added very little to our understanding. Where Neal’s conclusions are new, they are often only weakly supported by the data.
For example, Neal suggests that “… because the international capital markets of the time were larger and better organized than previously thought . . . capital movements from the Continent to Britain explain succinctly why the British Industrial Revolution took place during that period [1790-1820]” [p. 181]. His evidence for this is largely anecdotal, and Neal has to acknowledge that the main statistics he uses in this context are “unreliable figures, to say the least” [p. 221].
The contribution of Neal’s book for most readers will be the detailed description of the institutional structure of the London, Paris and Amsterdam capital markets during the eighteenth and early nineteenth centuries. One point that Neal stresses is the emphasis placed by investors on dividends paid by companies such as the English and Dutch East India Companies. Simple models of share valuation in terms of capitalizing dividend streams perform better as predictors of share prices than the more complex calculations (derived from internal accounting records) of researchers such as Mirowski [1981]. Neal, therefore, confirms the significance of dividends as the central indicator of investment performance to the stock market, a significance that, at least in Britain, persisted until after the Second World War (and, it sometimes seems, is still with us).
References
Blanchard, O. J. and M. W. Watson, “Bubbles, Rational Expectations, and Financial Markets”, in P. Wachtel, (ed.), Crises in the Economic and Financial Structure, Lexington, MA: Lexington Books (1982): 295-315.
McCloskey, D. N., Econometric History, London: Macmillan (1987).
Mirowski, P., “The Rise (and Retreat) of a Market: English Joint Stock Shares in the Eighteenth Century”, Journal of Economic History (September 1981): 559-577.
