Category Archives: Europe

No man can serve two masters

Rogue Trading at Lloyds Bank International, 1974: Operational Risk in Volatile Markets

By Catherine Schenk (Glasgow)

Abstract Rogue trading has been a persistent feature of international financial markets over the past thirty years, but there is remarkably little historical treatment of this phenomenon. To begin to fill this gap, evidence from company and official archives is used to expose the anatomy of a rogue trading scandal at Lloyds Bank International in 1974. The rush to internationalize, the conflict between rules and norms, and the failure of internal and external checks all contributed to the largest single loss of any British bank to that time. The analysis highlights the dangers of inconsistent norms and rules even when personal financial gain is not the main motive for fraud, and shows the important links between operational and market risk. This scandal had an important role in alerting the Bank of England and U.K. Treasury to gaps in prudential supervision at the end of the Bretton Woods pegged exchange-rate system.

Business History Review, Volume 91 (1 – April 2017): 105-128.


Review by Adrian E. Tschoegl (The Wharton School of the University of Pennsylvania)

Since the 1974 rogue trading scandal at Lloyds’s Lugano branch we have seen more spectacular sums lost in rogue trading scandals. What Dr Catherine Schenk brings to our understanding of these recurrent events is the insight that only drawing on archives, both at Lloyds and at the Bank of England, can bring. In particular, the archives illuminate the decision processes at both institutions as the crisis unfolded. I have little to add to her thorough exposition of the detail so below I will limit myself to imprecise generalities.

Marc Colombo, the rogue trader at Lloyds Lugano, was a peripheral individual in a peripheral product line, in a peripheral location. As Schenk finds, this peripherality has two consequences, the rogue trader’s quest for respect, and the problem of supervision. Lloyds Lugano is not an anomaly. An examination of several other cases (e.g. Allied Irish, Barings, Daiwa, and Sumitomo Trading), finds the same thing (Tschoegl 2004).

In firms, respect and power come from being a revenue center. Being a cost center is the worst position, but being a profit center with a mandate to do very little is not much better. The rogue traders that have garnered the most attention, in large part because of the scale of their losses were not malevolent. They wanted to be valued. They were able to get away with their trading for long enough to do serious damage because of a lack of supervision, a lack that existed because of the traders’ peripherality.

In several cases, Colombo’s amongst them, the trader was head of essentially a one-person operation that was independent of the rest of the local organization. That meant that the trader’s immediate local supervisor had little or no experience with trading. Heads of branches in a commercial bank come from commercial banking, especially commercial lending. Commercial lending is a slow feedback environment (it may take a long time for a bad decision to manifest itself), and so uses a system of multiple approvals. Trading is a fast feedback environment. The two environments draw different personality types and have quite different procedures, with the trading environment giving traders a great deal of autonomy within set parameters, an issue Schenk addresses and that we will discuss shortly.

Commonly, traders will report to a remote head of trading and to the local branch manager, with the primary line being to the head of trading, and the secondary line being to the local branch manager. This matrix management developed to address the problem of the need to manage and coordinate centrally but also respond locally, but matrix management has its limitations too. As Mathew points out in the New Testament, “No man can serve two masters, for either he will hate the one, and love the other; or else he will hold to the one, and despise the other” (Matthew (6:24). Even short of this, the issue that can arise, as it did at Lloyds Luggano, is that the trader is remote from both managers, one because of distance (and often time zone), and the other because of unfamiliarity with the product line. A number of software developments have improved the situation since 1974, but as some recent scandals have shown, they are fallible. Furthermore, the issue still remains that at some point the heads of many product lines will report to someone who rose in a different product line, which brings up the spectre of “too complex to manage”.

The issue of precautionary or governance rules, and their non-enforcement, is a clear theme in Schenk’s paper. Like the problem of supervision, this too is an issue where one can only do better or worse, but not solve. All rules have their cost. The largest may be an opportunity cost. Governance rules exist to reduce variance, but that means the price of reducing bad outcomes is the lower occurrence of good outcomes. While it is true, as one of Schenk’s interviewees points out, that one does not hear of successful rogue traders being fired, that does not mean that firms do not respond negatively to success. I happened to be working for SBCI, an investment banking arm of Swiss Bank Corporation (SBC), at the time of SBC’s acquisition in 1992 of O’Connor Partners, a Chicago-based derivatives trading house. I had the opportunity to speak with O’Conner’s head of training when O’Connor stationed a team of traders at SBCI in Tokyo. He said that the firm examined too large wins as intently as they examined too large losses: in either case an unexpectedly large outcome meant that either the firm had mis-modelled the trade, or the trader had gone outside their limits. Furthermore, what they looked for in traders was the ability to walk away from a losing bet.

But even small costs can be a problem for a small operation. When I started to work for Security Pacific National Bank in 1976, my supervisor explained my employment benefits to me. I was authorized two weeks of paid leave per annum. When I asked if I could split up the time he replied that Federal Reserve regulations required that the two weeks be continuous so that someone would have to fill in for the absent employee. Even though most of the major rogue trading scandals arose and collapsed within a calendar year, the shadow of the future might well have discouraged the traders, or led them to reveal the problem earlier. Still, for a one-person operation, management might (and in some rogue trading scandals did), take the position that finding someone to fill in and bring them in on temporary duty was unnecessarily cumbersome and expensive. After all, the trader to be replaced was a dedicated, conscientious employee, witness his willingness to forego any vacation.

Lastly, there is the issue of Chesterton’s Paradox (Chesterton 1929). When a rule has been in place for some time, there may be no one who remembers why it is there. Reformers will point out that the rule or practice is inconvenient or costly, and that it has never in living memory had any visible effect. But as Chesterton puts it, “This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable.”

Finally, an issue one needs to keep in mind in deciding how much to expend on prevention is that speculative trading is a zero-sum activity. A well-diversified shareholder who owns both the employer of the rogue trader and the employers of their counterparties suffers little loss. The losses to Lloyds Lugano were gains to, inter alia, Crédit Lyonnais.

There is leakage. Some of the gainers are privately held hedge funds and the like. Traders at the counterparties receive bonuses not for skill but merely for taking the opposite side of the incompetent rogue trader’s orders. Lastly, shareholders of the rogue traders firm suffer deadweight losses of bankruptcy when the firm, such as Barings, goes bankrupt. Still, as Krawiec (2000) points out, for regulators the social benefit of preventing losses to rogue traders may not exceed the cost. To the degree that costs matter to managers, but not shareholders, managers should bear the costs via reduced salaries.


Chesterton, G. K. (1929) ‘’The Thing: Why I Am A Catholic’’, Ch. IV: “The Drift From Domesticity”.

Krawiec, K.D. (2000): “Accounting for Greed: Unraveling the Rogue Trader Mystery”, Oregon Law Review 79 (2):301-339.

Tschoegl, A.E. (2004) “The Key to Risk Management: Management”. In Michael Frenkel, Ulrich Hommel and Markus Rudolf, eds. Risk Management: Challenge and Opportunity (Springer-Verlag), 2nd Edition;

Blame it on the Jews? Economic Incentives and Persecutions during the Black Death

Negative Shocks and Mass Persecutions: Evidence from the Black Death

by Remi Jedwab (George Washington University), Noel D. Johnson (George Mason University) and Mark Koyama (George Mason University)

ABSTRACT- In this paper we study the Black Death persecutions (1347-1352) against Jews in order to shed light on the factors determining when a minority group will face persecution. We develop a theoretical framework which predicts that negative shocks increase the likelihood that minorities are scapegoated and persecuted. By contrast, as the shocks become more severe, persecution probability may actually decrease if there are economic complementarities between the majority and minority groups. We compile city-level data on Black Death mortality and Jewish persecution. At an aggregate level we find that scapegoating led to an increase in the baseline probability of a persecution. However, at the city-level, locations which experienced higher plague mortality rates were less likely to engage in persecutions. Furthermore, persecutions were more likely in cities with a history of antisemitism (consistent with scapegoating) and less likely in cities where Jews played an important economic role (consistent with inter-group complementarities).


Distributed by NEP-HIS on 2017‒04‒02

Review by Anna Missiaia  (Lund University)

Both history and the current world provide several examples of ethnic and religious minorities becoming the target of persecutions by the majority. Especially after the Holocaust, a growing number of scholars from different fields have inquired into the causes of these persecutions. In particular, the question is whether the chance of persecution against minorities is directly related to negative shocks such as harvest failures, economic depressions or plague. This paper by Jedwab, Johnson and Koyama addresses this question by looking at the persecutions against Jews during the Black Death (1347-1352) in Europe. The authors adopt a theoretical framework in which the negative shock represented by the Black Death has two possible effects on the probability of persecutions: on the one hand, the scapegoating effect leads to attributing the responsibility of the plague to the Jews, decreasing the preference for diversity in society and therefore leading to persecutions. On the other hand, if the minority represents some value to the majority (for instance because of money lending or because of high-skill jobs in which they cannot be easily replaced), the incentive to persecute decreases, with the complementarity effect prevailing. The two effects compete and the decision to persecute Jewish communities depends on the comparison between the utility that the majority derives from persecution and the economic benefit that the minority provides if left untouched.

The authors compile a dataset for 124 locations containing plague mortality rates from Christakos et al. (2005) and information on Jewish persecutions mainly from Encyclopedia Judaica. The aim is to test the effect of mortality caused by the Black Death on the probability of persecution of the local Jewish community. To assure the reader on the soundness of their identification strategy, the authors collect an impressive number of geographical and institutional controls to capture the effect of several other elements that could trigger persecutions. The paper of course cannot take into account all potential sources of bias but the authors thoughtfully address several potential problems using anecdotal and scientific evidence, proposing some convincing arguments to defend their choices. For instance, they spell out in detail the characteristics of the contagion proving that its pattern was largely determined by chance. The virulence of the plague was also unaffected by human behavior (by both Jews and non-Jews), ruling out the possibility of some causality running from the presence of Jews to the intensity of the plague.  The instruments for mortality are also quite convincing:  the two IV proposed are distance from Messina (a Sicilian port city where the first contagion was recorded) and month of the first infection. If it is true that the geographical origin and pattern of propagation of the Black Death were random, the instruments appear exogenous.

Figure 1: Pogrom of Strasbourg (1349) by Emile Schweitzer

Unsurprisingly, the authors find that the period 1347-1352 has indeed seen an unpreceded (and unrepeated until WWII) wave of persecutions against Jewish communities in Europe (Figure 2).

Figure 2: Total Number of Jewish Persecutions in 1100-1600.

What is far more surprising is that there is indeed a general increase in the baseline level (basically, on the intercept) but this effect does not grow stronger as mortality rates are higher. In the model, the constant is 0.831 which indicates a high risk of being persecuted on average but the effect of mortality of the persecution probability is negative and quite substantial (minus 0.34 standard deviations for one standard deviation increases in mortality). The shock appears to have a counter-veiling effect, as cities with the highest mortality were less likely to persecute Jews. In essence, in cities where Jews have a strong economic role, the complementarity effect prevailed. The take home message is therefore that persecutions have a general ideological origin but economic incentives can at least reduce violence against minorities.

This paper is nested into a very large literature on the origins and determinants of persecutions. On the Jewish case, a recent paper by Voigtländer and Voth (2012) has shown that the location of the persecutions during the Black Death in Germany is a strong predictor of the location of episodes of violence against Jews in the 1920s. This paper fills a gap by looking at the determinants of the medieval persecutions in first place. This work is also well connected to the body of research looking at the economic aspects of Jewish history, to which Botticini and Eckstein (2012) provided a seminal contribution. On a more general note, this paper represents a call for the inclusion of a microeconomic perspective when studying how persecutions of minorities arise.


Botticini, Maristella and Zvi Eckstein, The Chosen Few. Princeton, NJ: Princeton University Press, 2012.

Christakos, George, Richardo A. Olea, Marc L. Serre, Hwa-Lung Yu, and Lin-Lin Wang, Interdisciplinary Public Health Reasoning and Epidemic Modelling: The Case of Black Death, Berlin: Springer, 2005.

Voigtländer, Nico and Hans-Joachim Voth, “Persecution Perpetuated: The Medieval Origins of Anti-Semitic Violence in Nazi Germany,” Quarterly Journal of Economics, 2012, 127 (3), 1–54.

A Gift From Europe to the World: Globalization, Capitalist Expansionism and Professional Bicycle Road Racing

The History of Professional Road Cycling

by Jean-François Mignot


Why did cycling become professional as early as the late nineteenth century, while other sports (such as rugby) and other sport events (such as the Olympic Games) remained amateur until the 1980s? Why are the organizers of the most important bicycle races private companies, while in other sports such as soccer the main event organizer is a nonprofit organization? To what extent have bicycle races changed since the late nineteenth century? And how does cycling reflect long-term economic changes? The history of professional road cycling helps answer these questions and understand many related phenomena. This chapter provides a long-term, historical perspective on (1) professional road cycling’s economic agents, i.e., the public, race organizers, team sponsors and riders, and the relationships amongst them; (2) cycling’s governing body, the International Cycling Union; and (3) professional cycling’s final product, i.e., the show of bicycle races. More precisely, the chapter mostly focuses on the history of male professional road cycling in Western Europe since the late nineteenth century. It is founded on both an analysis of quantitative time series on the Grand Tours (and, to some extent, the classics) and a review of the existing literature on the history of professional cycling, whether economic history, institutional history, cultural history, or sport history.


Distributed by NEP-HIS on 2016-10-02

Revised by: Stefano Tijerina, Ph.D.

The professionalization and commercialization of sports illustrates the forces of capitalism in action, as its culture and institutional structures transition from the local to the global in response to the demands of the market and the increasing interdependence among multiple private and public stakeholders. In his brief history of professional road cycling Jean-François Mignot demonstrates how the sport is transformed throughout the twentieth century as it transitioned from amateur to professional. Mignot argues that the professionalization of this sport anticipated many other international sports because the forces of capitalism pressured the athletes to abandon their amateur status early on in order to secure an income.[1] His research reveals the early infiltration of the private sector within the culture of cycling in Europe, the institutional transformation of the sport, the market’s impact on the institutional structure of bicycle racing, and its integration into the global system. Ultimately, his historic analysis allows the possibility of drawing parallels with the processes of transformation experienced by other goods, commodities, and services that adapted to the inevitable pressures of the expansion of capitalism.


Jean-François Mignot’s research shows that the idea of organizing road race competitions around the commonly used bicycle emerged from the desire of newspapers across Europe to sell more newspapers through this new and creative marketing scheme. Newspapers in France, Belgium, Spain, and Italy began organizing races on public roads in the late 1800s to show the public that human and bicycles could cover vast distances across flat and mountainous terrain. As indicated by Mignot, early races of 25 to 70 hours in duration covering 250 to 400 kilometers became epic sporting events of duration and perseverance among extraordinary European athletes.[2] The media’s construct of these epic figures created the thirst for road cycling, but it was the fact that the spectator standing on the side of the road was only able to watch the spectacle for a few seconds and depended on the print media to recreate the rest of the race, that pushed newspapers into the sponsorship business. It was this interdependent relation between spectator, athlete, and newspapers that inspired the print media industry to organize these road races, hoping that races would become magnets for advertisement sales. As indicated by Mignot, “cycling fans demanded more information” and “pictures of the race,” and the race organizing newspapers were interested in supplying the demand by covering the races in detailed form as they watched circulations increase.[3]

The one-day races or “Classics” and the three-week “Grand Tours” became the backbone of professional road racing in Europe. By the 1930s newspapers had monopolized the sponsorship of the events, while fans filled the roadways accompanied by publicity caravans “that distributed product samples to spectators.”[4] Meanwhile bicycle and tire companies became the sponsors of teams, as individual riders were replaced by teams that worked on behalf of the stars that made up the top cycling teams in Europe.[5]


In the early stages of professionalization, cycling stars did not receive any wages and were therefore forced to secure their income through race earnings. The increase in the popularity of the sport was followed by the increase in riders’ income.[6] The interdependent relations necessary for the expansion of capitalism slowly developed; increasing sales motivated the newspapers to improve the quality of the spectacle by increase the race winnings, forcing the sponsors to offer better wages in order to recruit and maintain the loyalty of the top cyclists, ultimately attracting more fan-base that in turn attracted other secondary sponsors that turned the caravans into marketing spectacles as well. This became even more lucrative as other means of communication joined in, particularly radio and later on television.

Jean-François Mignot points out at the first three decades of the Cold War was a period of crisis for the sport in Europe, emphasizing that urbanization and the increasing sales of motorcycles forced bicycle manufacturers to decrease their team sponsorship funding and ultimately sending the salaries of professional riders in a downward spiral.[7] This, argued Mignot, forced the professional rider to seek sponsorships outside of the bicycle world.[8] The stars and their teams began to tap the “extra-sportif” market for sponsorship and this market segment was quick to capitalize on the opportunity.[9]

Jean-François Mignot points out that sponsoring newspapers and bicycle companies interested in protecting their own profit margins opposed the penetration of “extra-sportif” sponsors by trying to control the rules of the sport in order to impede their participation, but at the end the market forces prevailed.[10] This European crisis that unfolded between the 1950s and 1980s was in fact the initial era of global commercialization of the sport. Mignot’s Euro centrism impedes him from moving beyond the region’s Grand Tours and Classics, not recognizing that the “extra-sportif” sponsorships that challenged the status quo took professional cycling outside of Europe and introduced it to the rest of the world. For example, by the 1950s radio transmissions of the European races were common in distant places like Colombia where their own private sectors had replicated the European business model and established lucrative professional road races to supply the local demand for professional bicycle road racing. The first edition of the Colombian Grand Tour, La Vuelta a Colombia, was organized in 1951, and by then several local Classics like the Tunja-Bucaramanga and the Medellín-Sansón were already engrained in the Colombian cycling culture. As in the case of Europe, local newspapers like El Tiempo became interested in sponsoring the local Grand Classic as a means to increase sales and circulation, but contrary to the European distrust of “extra-sportif” sponsors, the Colombian organizers welcomed other private local sponsors including the national airline Avianca, the Bavaria brewery, Avisos Zeón and the Flota Mercante Grancolombiana.[11]

The crisis of professional bicycle road racing in Europe described by Mignot was certainly caused by a decreasing popularity of the sport and the internal struggles over the monopoly of the sponsorship and management of the sport, but it was also the market’s response to the emergence of other professional sports in Europe as well as the professional cyclist’s ability to capitalize on the globalization of the sport. It was an illustration of how, in a capitalist system, the internal saturation of a market led to the natural expansion into other global markets, as in the case of Colombia in the 1940s and 1950s.[12]


Such was the case of French Born, José Beyaerst, the 1948 Olympic road race champion who moved to Colombia after the Second World War, winning the second edition of the Vuelta a Colombia in 1952 and later on establishing a career as the coach for the Colombian national cycling team.[13] Beyaerst would make Colombia his home, developing the professionalization of the sport and becoming a key player in what would later become one of the cycling powers of the world. The expansionism of the sport would reach all corners of the world between the 1950s and the 1980s, it was a period of crisis for Europe as Mignot points out but it was a glorious time for global professional bicycle road racing.

Television was the game-changer, spearheading the resurgence of professional cycling in Europe in the 1980s. Taking advantage of the integration of Europe, race organizers capitalized on the magic of television to attract new European audiences, redesigning the stage circuits of the Grand Tours (Giro d’Italia, Vuelta a España, and the Tour de France) with the intention of tapping new urban centers that were outside of Spain, France, and Italy.[14] Television also globalized the European Grand Tours, introducing the cycling stars to the world, providing an opportunity for sponsors to reach a global audience, selling commercial air space, and as a result increasing revenues, salaries and profits for the whole sport.

Jean-François Mignot points out that the globalization of the sport also impacted the nature of cycling teams. By the 1980s the teams competing in the Grand Tours were no longer made up of Spanish, Italian, and French riders; their nationalities diversified and so did their sponsors.[15] Although Mignot highlights the fact that by 1986 the American Greg LeMond had won the Tour de France, Colombia’s Lucho Herrera had conquered the Vuelta a España (1987), the Russian Evgueni Berzin the Giro d’Italia (1994), and the Australian Cadel Evans the Tour de France (2011), he does not point out that these foreign cyclists also brought with them new local sponsors that then began to compete with European sponsors.[16] Mignot avoids talking about the American Lance Armstrong, leaving a large gap in the history of the globalization of the sport, considering that the American rider won seven consecutive Tour de France championships (1999-2005) before the US Anti-Doping Agency and the Union Cycliste Internationale stripped him from his titles after a doping scandal. Although LeMond popularized cycling racing in the United States it was Armstrong that converted it into a multi-billion dollar industry bringing in American brands such as RadioShack and Motorola into the world of cycling.


Jean-François Mignot’s research illustrates how the sport expanded globally as the Western World exported the idea of the professionalization and commercialization of cycling, taking advantage of the expansion of Western culture across the world, the increasing leisure time and incomes of the global population, and the increasing communications technology that allowed viewers from across the world to connect with the live stage by stage action of the Grand Tours and the Classics. Nevertheless, his Euro centric approach impedes him from explaining how the professionalization of the sport evolved outside of Europe. Although Mignot clarified early on that his analysis centered on Europe, this approach weakened his argument regarding the globalization of the sport and its repercussion on the European construct, as foreigners began to conquer and dominate the sport as in the case of Americans Greg LeMond and Lance Armstrong, or the current stars South African born Christopher Froome and the Colombian climber Nairo Quintana. The incorporation of a broader global perspective would have allowed Mignot to test whether or not the professionalization of the sport in other markets was also spearheaded by other local newspapers or if on the contrary other media and non-media-based sponsors jumped on this business opportunity. It would have also been important to identify when professionalization took place in other markets to compare whether or not the influence of the European sport transcended the borders in a timely manner or even identifying political, economic, social, and cultural factors that delayed its expansion into other global markets. Moreover, it would have been important for Mignot to link the policies of the Union Cycliste Internationale to the globalization of the sport, as well as the escalation of global competition among bicycle manufacturers, and the global competition between scientists, technological designers, and pharmaceutical industries that centered on the legal and illegal preparation of the current athlete.

[1] Jean-François Mignot. “The History of Professional Road Cycling.” HAL,, June 5, 2016, p. 4.

[2] Ibid., 2.

[3] Ibid.

[4] Ibid., 3.

[5] Ibid.

[6] Ibid., 4.

[7] Ibid., 5.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] “Vuelta a Colombia Historia.” Ciclismo colombiano – La Vuelta a Colombia. April 25, 2007. Accessed November 21, 2016.

[12] Ibid.

[13] Kidnapping of Lucho Herrera (and José Beyaert’s Narrow Escape”. Alps&Andes, March 2000. Accessed November 21, 2016.


[14] Mignot, “The History of Professional Road Cycling,” 5.

[15] Ibid.

[16] Ibid., 6.

Debt forgiveness in the German mirror

The Economic Consequences of the 1953 London Debt Agreement

By Gregori Galofré-Vilà (Oxford), Martin McKee (London School of Hygiene and Tropical Medicine), Chris Meissner (UC Davis) and David Stuckler (Oxford)

Abstract: In 1953 the Western Allied powers implemented a radical debt-relief plan that would, in due course, eliminate half of West Germany’s external debt and create a series of favourable debt repayment conditions. The London Debt Agreement (LDA) correlated with West Germany experiencing the highest rate of economic growth recorded in Europe in the 1950s and 1960s. In this paper we examine the economic consequences of this historical episode. We use new data compiled from the monthly reports of the Deutsche Bundesbank from 1948 to the 1960s. These reports not only provide detailed statistics of the German finances, but also a narrative on the evolution of the German economy on a monthly basis. These sources also contain special issues on the LDA, highlighting contemporaries’ interest in the state of German public finances and public opinion on the debt negotiation. We find evidence that debt relief in the LDA spurred economic growth in three main ways: creating fiscal space for public investment; lowering costs of borrowing; and stabilising inflation. Using difference-in-differences regression models comparing pre- and post LDA years, we find that the LDA was associated with a substantial rise in real per capita social expenditure, in health, education, housing, and economic development, this rise being significantly over and above changes in other types of spending that include military expenditure. We further observe that benchmark yields on long-term debt, an indication of default risk, dropped substantially in West Germany when LDA negotiations began in 1951 and then stabilised at historically low rates after the LDA was ratified. The LDA coincided with new foreign borrowing and investment, which in turn helped promote economic growth. Finally, the German currency, the deutschmark, introduced in 1948, had been highly volatile until 1953, after which time we find it largely stabilised.


Distributed by NEP-HIS on 2016-09-04

Review by Natacha Postel-Vinay (LSE)

The question of debt forgiveness is one that has drawn increased attention in recent years. Some have contended that the semi-permanent restructuring of Greece’s debt has been counterproductive and that what Greece needs is at least a partial cancellation of its debt. This, it is argued, would allow both faster growth and a higher likelihood of any remaining debt repayment. Any insistence on the part of creditors for Greece to pay back the full amount through austerity measures would be self-defeating.

One problem with this view is that we know very little about whether debt forgiveness can lead to faster growth. Reinhart and Trebesch (2016) test this assumption for 45 countries between 1920-1939 and 1978-2010, and do find a positive relationship. However they leave aside a particularly striking case: that of Germany in the 1950s, which benefited from one of the most generous write-offs in history while experiencing “miracle” growth of about 8% in subsequent years. This case has attracted much attention recently given German leaders’ own insistence on Greek debt repayments (see in particular Ritschl, 2011; 2012; Guinnane, 2015).

Eichengreen and Ritschl (2009), rejecting several popular theories of the German miracle, such as a reallocation of labour from agriculture to industry or the weakening of labour market rigidities, already hypothesized that such debt relief may have been an important factor in Germany’s super-fast and sustained post-war growth. Using new data from the monthly reports of the Deutsche Bundesbank from 1948 to the 1960s, Gregori Galofré-Vilà, Martin McKee, Chris Meissner and David Stuckler (2016) attempt to formally test this assumption, and are quite successful in doing so.

By the end of WWII Germany had accumulated debt to Europe worth nearly 40% of its 1938 GDP, a substantial amount of which consisted in reparation relics from WWI. Some already argued at the time that these reparations and creditors’ stubbornness had plagued the German economy, which in the early 1930s felt constrained to implement harsh austerity measures, thus contributing to the rise of the National Socialists to power. It was partly to avoid a repeat of these events that the US designed the Marshall Plan to help the economic reconstruction of Europe post-WWII.



Marshall aid to Europe between 1948 and 1951 was less substantial than is commonly thought, but it came with strings attached which may have indirectly contributed to German growth. In particular, one of the conditions France and the UK had to fulfil in order to become recipients of Marshall aid was acceptance that Germany would not pay back any of its debt until it reimbursed its own Marshall aid. Currency reform in 1948 and the setting up of the European Payments Union facilitated this process.

Then came the London Debt Agreement, in 1953, which stipulated generous conditions for the repayment of half the amount due from Germany. Notably, it completely froze the other half, or at least until reunification, which parties to the agreement expected would take decades to occur. There was no conference in 1990 to settle the remainder.


Galofré-Vilà et al. admit not being able to directly test the hypothesis that German debt relief led to faster growth. Instead, making use of simple graphs, they look at how the 1953 London Debt Agreement (LDA) led to lower borrowing costs and lower inflation, which comes out as obvious and quite sustained on both charts.

Perhaps more importantly, they measure the extent to which the LDA freed up space for social welfare investment. For this, they make use of the fact that Marshall aid had mainly been used for infrastructure building, so that the big difference with the LDA in terms of state expenditure should have been in terms of health, education, “economic development,” and housing. Then they compare the amount of spending on these four heads to spending in ten other categories before 1953, and check whether this difference gets any larger after the LDA. Perhaps unsurprisingly, it does, and significantly so.

This way of testing the hypothesis that the LDA helped the German economy may strike some as too indirect and therefore insufficient. This is without mentioning possible minor criticisms such as the fact that housing expenditure is included in the treatment, not control group (despite the 1950 Housing Act), or that the LDA is chosen as the key event despite the importance of the Marshall Plan’s early debt relief measures.

Nevertheless testing such a hypothesis is necessarily a very difficult task, and Galofré-Vilà et al.’s empirical design can be considered quite creative. They are of course aware that this cannot be the end of the story, and they are careful to caution readers against hasty extrapolations from the post-war German case to the current Spanish or Greek situation. Some of their arguments have somewhat unclear implications (for instance, that Germany at the time represented 15% of the Western population at the time, whereas the Greek population represents only 2%).


Perhaps a stronger argument would be that Germany’s post-war debt was of a different character than Greek’s current debt: some would even call it “excusable” because it was mainly war debt; it was not (at least arguably) a result of past spending excesses. For this reason, one may at least ask whether debt forgiveness in the Greek context would have the same — almost non-existent — moral hazard effects as in the German case. Interestingly, the authors point out that German debt repayment after the LDA was linked to Germany’s economic growth and exports (so that the debt service/export revenue ratio could not exceed 3%). This sort of conditionality is strangely somewhat of a rarity among today’s sovereign debt contracts. It could be seen as a possible solution to fears of moral hazard, thereby mitigating any differences in efficiency of debt relief emanating from differences in the nature of the debt contracted.



Eichengreen, B., & Ritschl, A. (2009). Understanding West German economic growth in the 1950s. Cliometrica, 3(3), 191-219.

Guinnane, T. W. (2015). Financial vergangenheitsbewältigung: the 1953 London debt agreement. Yale University Economic Growth Center Discussion Paper, (880).

Reinhart, C. M., & Trebesch, C. (2014). A distant mirror of debt, default, and relief (No. w20577). National Bureau of Economic Research.

Ritschl, A. (2011). “Germany owes Greece a debt.” in The Guardian. Tuesday 21 June 2011.

Ritschl, A. (2012). “Germany, Greece and the Marshall Plan.” In The Economist. Friday 15 June.

Medieval History and its Relevance to Modern Business

Joint publication review with The Long Run Blog


Title: The Medieval Origins of a Culture of Cooperation and Inclusive Political Institutions

The Medieval Origins of a Culture of Cooperation and Inclusive Political Institutions


By: Carmine Guerriero (ACLE, University of Amsterdam)

Abstract: This paper evaluates the relative importance of a “culture of cooperation,” understood as the implicit reward from cooperating in prisoner’s dilemma and investment types of activities, and “inclusive political institutions,” which enable the citizenry to check the executive authority. I divide Europe into 120 km X 120 km grid cells, and I exploit exogenous variation in both institutions driven by persistent medieval history. To elaborate, I document strong first-stage relationships between present-day norms of trust and respect and the severity of consumption risk-i.e., climate volatility-over the 1000-1600 period and between present-day regional political autonomy and the factors that raised the returns on elite-citizenry investments in the Middle Ages, i.e., the terrain ruggedness and the direct access to the coast. Using this instrumental variables approach, I show that only culture has a first order effect on development, even after controlling for country fixed effects, medieval innovations, the present-day role of medieval geography, and the factors modulating the impact of institutions. Crucially, the excluded instruments have no direct impact on development, and the effect of culture holds within pairs of adjacent grid cells with different medieval climate volatility. An explanation for these results is that culture, but not a more inclusive political process, is necessary to produce public-spirited politicians and push voters to punish political malfeasance. Micro-evidence from Italian Parliament data supports this idea.


Circulated by NEP-SOC on 2016-05-14

Reviewed by Catherine Casson (University of Manchester) and Mark Casson (University of Reading)

This paper takes a long-run approach to an investigation of the importance of a ‘culture of cooperation’ and ‘inclusive political institutions’. The author defines a ‘culture of cooperation’ as the behavioural characteristics of ‘trust, respect, control and obedience’, while the term ‘inclusive political institutions’ is defined as institutions which ‘enable the citizenry to check the executive authority’.

Analysis is focused on Europe and on the agrarian economy. The author suggests that cooperation in the middle ages was particularly associated with the monastic orders of the Cistercians and Franciscans. Their houses were generally located, the author argues, in areas with unpredictable climates. The ability of the monks to farm the land in a way that put such unproductive land to productive use attracted the support and cooperation of the local community. In addition these monastic orders also introduced new financial practices, including improvements in access to credit, which also fostered local community cooperation. Inclusive political institutions, the author suggests, were especially associated with the success of long-distance trade. This created a shared goal between the elite and citizens.


The paper suggests that contemporary cultures of cooperation and inclusive political institutions are influenced by medieval ones. The medieval data used for ‘culture’ is climate data and the modern data is the 2008 European Value Study. For inclusive political institutions the medieval data is ‘the discounted number of years Cistercian and Franciscan houses were active per square km over the 1000-1600 period’ (p. 9) while the modern data is on prosecutions of members of parliament in Italy in 1948-87.

Later in the paper some more specific hypotheses are presented as controls for change over time:

  1. That Atlantic trade impacted on modern economic development
  2. That micro-credit systems introduced by the Franciscan order strengthened contemporary credit markets
  3. That monastic orders influenced religious beliefs in general, and that this influence may have had other, less defined, influences, on economic practice
  4. That distance to Wittenberg, where Protestantism began, influenced the development of a ‘culture of cooperation’
  5. Early transition to agriculture led to ‘higher inequality in gender roles’
  6. That genetic diversity in a country had a negative impact on cooperation
  7. That the suitability of soil for potato growing contributed to the development of institutions
  8. That the Black Death raised standards of living
  9. That education influenced the development of institutions and economic growth

The paper argues that the impact of the medieval culture of cooperation originating in the Cistercian and Franciscan monastic houses can be seen today. It also argues that this culture of cooperation has had a greater influence as a check on executive authority than inclusive political institutions.

Conflict, rather than cooperation, is often the term most associated with the middle ages. One of the benefits of this paper is that it highlights the presence of, and impact of, collaboration. Monastic orders are recognised in both history and economics literature for their important economic, as well as religious, impact. Their use to assess a culture of cooperation is therefore helpful, but they are perhaps a less obvious choice for an assessment of inclusive political institutions. One potential way in which the paper could be developed would be by expanding the scope to cover both urban and rural locations. Such an extension would retain the presence of monastic orders (and indeed extend it to cover urban ones) and, more significantly, allow urban political institutions to be considered. The presence of these institutions is briefly discussed on p. 12 but the issue is not developed further. Many of these town governments had as a shared goal the long-distance trade alluded to in the paper. They also offer more equivalent data to the contemporary data used as a proxy for inclusive political institutions.


Continuity and change over time is a key focus on the paper and the author shows an awareness of some key developments that occurred from the medieval to the modern period. The selection of the controls shows an engagement with recent secondary literature but does introduce additional time periods (such as the Neolithic), specific events (for example the Black Death) and general trends (for example the expansion of education). The paper could be strengthened by more clearly outlining the chronology of these events, and perhaps by narrowing the list of controls used.

Connections between contemporary and historic business have been increasingly recognised and explored in academic literature. The subject of this paper is therefore related to a growing trend to examine the medieval origins of many economic processes. Monasteries have been identified as key players in the ‘multinational enterprise’ of medieval pilgrimage and as originations of sophisticated forms of financial transactions (Bell and Dale, 2011; Bell, Brooks and Dryburgh, 2007). They were also important speculators in the property market (Baker and Holt, 2004; Bouchard, 1991; Casson and Casson, 2016).


Financial crises are a further topic that can be examined through the surviving qualitative and quantitative sources from the middle ages. In the light of the financial crisis of 2008 there has been a recognition that a long-run perspective, starting as early as the middle ages, provides the opportunity to study cycles of growth and decline. Surviving medieval records from the English government, for example, provide detailed data that can be subjected to statistical analysis, as shown in the work of Bell, Brooks and Moore (Bell, Brooks and Moore, 2014; Bell, Brooks and Moore, 2013). The importance of medieval data has also been highlighted in recent work on historic GDP (Broadberry et al, 2015).

Innovation and knowledge acquisition in the middle ages have recently been examined using both modelling approaches from economics, and historical case studies. De la Croix, Doepke and Mokyr (2016) have shown, using their combined expertise in the fields of economics and history, the important foundation that medieval guilds provided in the transmission of knowledge across Europe before the Industrial Revolution. Meanwhile Davids and de Munck’s edited collection on Innovation and Creativity in Late Medieval and Early Modern European Cities has used historical case studies to demonstrate that medieval cities saw a clear connection between the skills of their population and the overall economic performance of their city, and developed strategies that were intended to make their city economically resilient (Davids and De Munck, 2014; Casson, 2012).

Entrepreneurship can also be examined in a long-run context. Business records, letters, literary sources and government records all demonstrate that, contrary to popular belief, the origins of enterprise lie in the middle ages rather than the Industrial Revolution. Medieval entrepreneurs were involved in a range of activities, including infrastructure developments, property speculation and factory foundation (Casson and Casson, 2013a; Casson and Casson, 2013b; Landes, Mokyr and Baumol, 2012)

Overall, one of the key strengths of this paper is the contribution that it makes to this broader research agenda on the parallels between medieval and modern business.



Baker, N. and R. Holt (2004), Urban Growth and the Medieval Church: Gloucester and Worcester (Routledge, Aldershot).

Bell, A. R.Brooks, C. and Moore, T. K. (2014), ‘The credit relationship between Henry III and merchants of Douai and Ypres, 1247-70’, Economic History Review, 67 (1), 123-145. doi: 10.1111/1468-0289.12013.

Bell, A.Brooks, C. and Moore, T. (2013), ‘Medieval foreign exchange: A time series anaylsis’ in M. Casson and N. Hashimzade (eds.) Large Databases in Economic History: Research Methods and Case Studies (Routledge, Abingdon), 97-123.

Bell, A. R. and Dale, R. S. (2011), ‘The medieval pilgrimage business’, Enterprise and Society, 12 (3), 601-627. doi: 10.1093/es/khr014.

Bell, A. R., C. Brooks, C. and P. R. Dryburgh, P. R. (2007), The English Wool Market, c.1230-1327 (Cambridge University Press, Cambridge).

Broadberry, S., B. Campbell, A. Klein, M. Overton and B. van Leeuwen (2015), British Economic Growth, 1270-1870 (Cambridge: Cambridge University Press).

Bouchard, C. B. (1991), Holy Entrepreneurs: Cistercians, Knights, and Economic Exchange in Twelfth-century Burgundy (Ithaca, NY).

Casson, C. (2012), ‘Reputation and Responsibility in Medieval English Towns: Civic Concerns with the Regulation of Trade’, Urban History 39 (3), 387-408. doi:10.1017/S0963926812000193.

Casson, C. and Casson, M. (2016), ‘Location, Location, Location? Analysing Property Rents in Medieval Gloucester’ Economic History Review 69: 2 pp. 575-99 DOI:10.1111/ehr.12117.

Casson, M. and Casson C. (2013), The Entrepreneur in History: From Medieval Merchant to Modern Business Leader (Basingstoke: Palgrave Macmillan).

Casson, M. and Casson C. eds. (2013), History of Entrepreneurship: Innovation and Risk Taking, 1200-2000 (Cheltenham: Edward Elgar, 2 vols).

Davids, K. and B. de Munck, eds. (2014), Innovation and Creativity in Late Medieval and Early Modern European Cities (Ashgate: Farnham).

De la Croix, D., M. Doepke and J. Mokyr (2016), ‘Clans, Guilds, and Markets: Apprenticeship Institutions and Growth in the Pre-Industrial Economy’ NBER Working Paper No. 22131, circulated by NEP-HIS on 2016-04-16.

Landes, D. S., J. Mokyr & W. J. Baumol (2012), The Invention of Enterprise:Entrepreneurship from Ancient Mesopotamia to Modern Times (Princeton, Princeton University Press).

Wealth and Income Inequality in the Early Modern Period

Comparing Income and Wealth Inequality in Pre-Industrial Economies: Lessons from 18th-Century Spain

By Esteban A. Nicolini (Universidad Carlos III de Madrid) and Fernando Ramos Palencia (Universidad Pablo de Olavide)

Abstract: In this new working paper on preindustrial inequality, Nicolini and Ramos Palencia build upon their earlier work on income inequality in eighteenth-century Old Castile (Nicolini and Ramos Palencia 2015) by looking into one particularly important, and difficult to assess, aspect: how to reconstruct, for a given preindustrial society, estimates of both income and wealth inequality – considering that the sources, according to the place and the period, have the tendency to inform us only about one of the two. Given the amount of new information about long-term trends in preindustrial inequality, of either income or wealth, which has been made available by recent research, the authors point at what clearly constitutes one of the next steps we should take and in doing so, they also provide a useful contribution to the methodological debates which are taking place among scholars working on preindustrial inequality.


Distributed by NEP-HIS on 2016-03-29

Review by Guido Alfani


In this paper Nicolini and Ramos explore the connection between income and wealth for a large sample of communities from different Spanish provinces: Palencia, Madrid, Guadalajara and Granada. They combine information from two different sources:

1. the Catastro de Ensenada (ca. 1750), which provides information about household income, and

2. probate inventories (covering the period 1753-68), a source which has often been used to estimate wealth inequality.

These two sources are combined using nominative linkage techniques in order to take advantages of one to solve the weaknesses of the other. In particular, the almost-universal scope of the survey within the Cadastre enables Nicolini and Ramos to assess with certain precision the actual coverage of the probate inventories (which tend to be biased towards the upper part of the distribution). This allows them the resampling or weighthing of the information to improve the study of wealth inequality. It should be underlined that the Catastro de Ensenada is a truly exceptional source. It was an early attempt at introducing a universal tax on income. As the new tax was proportional and should have replaced a number of indirect provincial taxes with regressive effects, this fiscal innovation clearly moved in the direction of a more equitable system of taxation. Unfortunately, the new tax was never implemented – but at the very least, the attempt to introduce it generated a vast amount of useful information.


Nicolini and Ramos were able to reconstruct both income and wealth for 194 observations, out of the much larger sample of 6,214 households for which they only have information about income. Nicolini and Ramos then explore the connection between income and wealth, finding (as was expected) a very strong correlation. However, they go much deeper, thanks to an econometric approach in which the distortions in the sample (determined in particular by over-representation of rich households) are corrected by weighting. They obtain many interesting and potentially useful results, in particular:

  1. they estimate the average rate of return to wealth to be 2.9% p.a. – which is, generally speaking, much smaller that usually implied in the literature. For instance, the rate of return to wealth implied by Lindert in his work on the Florentine Cadastre of 1427 was 7% p.a. (see below). However, if the association between income and wealth is analyzed by considering their logarithm (which is the econometric specification preferred by Nicolini and Ramos), then the elasticity of income to wealth varies between 0.4 and 0.9 depending on the region. This means that a 10% increase in household wealth is associated to an income increase comprised in the 4-9% range. This range is consistent with empirical findings in many studies of past and present societies, all of which suggest that income inequality is lower than wealth inequality;
  2. the distribution of household income increases less steeply than the distribution of household wealth. This might be due to the fact that labour income is relatively larger in the bottom part of the distribution, or that the wealth of the bottom part of the distribution consists for a larger part of income-producing assets, while the wealth of the richest people would consist also of other assets, including (unproductive) status goods and luxuries as well as cash;
  3. the relationship between wealth and income differs depending on the sector of activity of the household head (primary vs secondary/tertiary) and on the place of residence – although somewhat surprisingly, and differently from what reported for other European regions (for example Tuscany by Alfani and Ammannati 2014), Nicolini and Ramos do not find that urban households had greater wealth than rural ones. In the study by Nicolini and Ramos urban and rural wealth were usually on par, but in the extreme case of Guadalajara urban dwellers were less wealthy than rural dwellers.


Sample of Catastro de Ensenada (Archivo Simancas)

Sample of Catastro de Ensenada (Archivo Simancas)



This paper makes many interesting and potentially important contributions to the study of inequality in the early modern period, a field which has been particularly fertile in recent years. First, it provides new information about inequality in the Iberian peninsula, integrating other recent studies (e.g. Santiago-Caballero 2011; Reis and Martins 2012). Secondly, it contributes considerably to the development of a methodology to translate in a non-arbitrary way income distributions into wealth distributions, and vice versa. This is a crucial point, which deserves some attention.

The Ensenada Cadastre is an exceptional source as it provides data on income. As a matter of fact, most other sources of the “cadastrial” kind are essentially property tax records, which always list real estate and sometimes other components of wealth – but not income. However, it has also been argued that for the preindustrial period, in most instances wealth distributions are the best proxy we have for income distributions (Lindert 2014; Alfani 2015). This being said, moving from the good-quality distributions of wealth that have recently been made available for different parts of late medieval and early modern Europe (in particular, Alfani 2015; Alfani and Ryckbosch 2015) to acceptable distributions of income is clearly a worthy pursuit.

I would differ with Nicolini and Ramos Palencia in their statement that theirs is the first attempt at studying together income and wealth distributions in the pre-industrial period. For example, Soltow and Van Zanden (1998) did so in their study of the Netherlands. However, Nicolini and Ramos do provide useful and interesting insights into how to convert wealth distributions into income distributions. Many such attempts are currently underway and there are earlier examples, like Lindert’s method to convert the distribution of wealth in the 1427 Florentine catasto into an income distribution (results used in Milanovic, Lindert and Williamson 2011).

Moreover, Nicolini and Ramos Palencia stress many potential pitfalls in procedures of this kind. This being said, there are aspects of their current reconstructions which are a bit surprising and might be the result of sampling issues, as 59% of the 194 observations relate to the province of Palencia. Is Guadalajara, where rural dwellers were wealthier than urban dwellers, an exceptional case or does this depend on the very small sample (just 12 observations) the authors have for that region? To dispel any doubts, more probate inventories should be collected, in order to improve the territorial balance within the sample and to better account, both in the estimation process and in the econometric analysis, for possible regional variations. However, this does not alter the general conclusion. The paper by Nicolini and Ramos is a very useful piece of innovative research, grounded in new archival data and packed with useful insights about how to improve our knowledge of inequality in the pre-industrial period.


Ferdinand VI (1713 – 1759), called the Learned, was King of Spain from 9 July 1746 until his death.

Ferdinand VI (1713 – 1759), called the Learned, was King of Spain from 9 July 1746 until his death.


Selected Bibliography

Alfani, G. (2015), “Economic inequality in northwestern Italy: A long-term view (fourteenth to eighteenth centuries)”, Journal of Economic History, 75 (4), 2015, pp. 1058-1096.

Alfani, G. and Ammannati, F. (2014), Economic inequality and poverty in the very long run: The case of the Florentine State (late thirteenth-early nineteenth centuries), Dondena Working Paper No. 70.

Alfani, G., Ryckbosch, W. (2015), Was there a ‘Little Convergence’ in inequality? Italy and the Low Countries compared, ca. 1500-1800, IGIER Working Paper No. 557.

Lindert, P.H. (2014), Making the most of Capital in the 21st Century, NBER Working Paper No. 20232.

Milanovic, B., Lindert, P.H. and Williamson, J.G. (2011). “Pre-Industrial Inequality”, The Economic Journal 121: 255-272.

Nicolini, E.A. and F. Ramos Palencia (2015), “Decomposing income inequality in a backward pre-industrial economy: Old Castile (Spain) in the middle of the eighteenth century”, The Economic History Review, online-first version, DOI: 10.1111/ehr.12122.

Reis, J., Martins, A. (2012), “Inequality in Early Modern Europe: The “Strange” Case of Portugal, 1550-1770”. Paper given at the conference Wellbeing and Inequality in the Long Run (Madrid, 1 June 2012).

Santiago-Caballero, C. (2011), “Income inequality in central Spain, 1690-1800”, Explorations in Economic History 48(1): 83-96.

Soltow, L. and Van Zanden, J.L. (1998), Income and Wealth Inequality in the Netherlands, 16th-20th Century. Amsterdam, Het Spinhuis.

Take the Money and Don’t Run?

Benefits of empire? Capital market integration north and south of the Alps, 1350-1800


David Chilosi (London School of Economics

Max-Stephan Schulze (London School of Economics

Oliver Volckart  (London School of Economics

ABSTRACT: This paper addresses two questions. First, when and to what extent did capital markets integrate north and south of the Alps? Second, how mobile was capital? Analysing a unique new dataset on pre-modern urban annuities, we find that northern markets were consistently better integrated than Italian markets. Long-term integration was driven by initially peripheral places in the Netherlands and Upper Germany integrating with the rest of the Holy Roman Empire where the distance and volume of inter-urban investments grew primarily in the sixteenth century. The institutions of the Empire contributed to stronger market integration north of the Alps.


Distributed by NEP-HIS on  2016‒02‒29

Review by Anna Missiaia

The work by Chilosi, Schulze and Volckart deals with a fundamental issue in European economic history, namely ascertaining the level of capital market integration in different parts of the continent at a specific moment in time. The areas of interest in this case are Italy and the territories of the Holy Roman Empire. The aim is to test whether the Italian cities, that are often considered the front runners of modern finance in the medieval times, where enjoying a greater level of financial market integration compared to the cities that were part of the Holy Roman Empire.

The paper uses an impressive collection of some 30,000 interest rate records from 103 cities located both north and south of the Alps. The time span is 1350-1800, providing a very long run picture of the starting levels and evolution of the capital markets in pre-industrial times. The authors use nominal interest rate spreads across cities to assess the level of market integration. This is a standard procedure often used with price series and goes back to the concept of the law of one price: if two markets are well integrated, price (interest rates) differentials will merely reflect transport and other trade costs such as tariffs between the two markets, leaving no space for arbitrage.


The main result of the paper is that although Italy and the Holy Roman Empire started from similar levels of interest rate spread at the beginning of the period, they had very different dynamics. Capital markets in the Holy Roman Empire experienced an accumulated reduction in spreads during the period considered while the ones in Italy experienced an increase (-6 vs. +2.55 when perpetuities are compared).

The authors make an interesting case that the divergence observed is led by long-distance integration within the Empire. They do so by separating all the possible pairs that originate the spreads into two groups: those under 200 km of distance and those above. They find that the integration in the second group increased twice as fast compared to the first. The authors place this convergence of long-distance  and short distance integration between 1500 and 1630.

The next step in the analysis is to study whether the integration was occurring between or within regions of the Empire. Using cluster analysis, the authors show that the Empire appeared as a “polycentic network” with several interconnected financial centers (such as Frankfurt, Leipzig, Nurmberg and Hamburg). These were developing in parallel in spite of the large distances between them. The evidence points to increased integration between rather than within clusters, opening the way to a fascinating discussion on the causes of this divergence between the Empire and Italy.



                                             The imperial eagle

So why did the regions north of the Alps were able to achieve greater capital market integration in spite of less favorable geographic conditions (scarce access to sea) and a lower level of financial technology? According to Chilosi, Schulze and Volckart, the key factor lays into the different institutions that the two regions developed. Local authorities in Italy restricted the participation of foreigners to the capital markets and foreign investment was more costly than local. Quite differently, within the Empire foreign investment was favoured by several means: legal systems were much more similar within the Empire and collective liability was widespread. Moreover, the local authorities competed for capital, pushing them to increase the protection of foreign investors.  The authors however are careful in stating that the Imperial institutions were the sole promoters of the integration. They are more inclined to grant them an indirect effect through the promotion of peace and the moderation of interstate rivalries. The lack of such institutions in Italy led on the other hand to much more fragmented capital markets.

This paper is very relevant for the current debate in many ways. It primarily addresses an issue that is fundamental to explain the very different economic development trajectories of two European regions that in medieval times had reversed positions, with the Italian city states forging ahead. The papers also uses a data set that is impressive both in its size and in its temporal extension, making the results very convincing from an empirical point of view. The discussion of the role of institutions in promoting exchange and therefore economic development is a classic one that goes back for instance to the work of Greif (2006) and Ogilvie (2011).


A step that would take the debate further would be to focus more on the Italian institutions, which in this paper seem to be somehow neglected compared to the imperial ones. In particular, it would be interesting to study whether all the Italian city states had institutions that were equally detrimental for capital market integration. If, for instance, northern Italian cities, having been part of the early Empire, had institutions that were more similar to the imperial ones, this could bring some insights into the different performance of the South in the 19th century and beyond. Such analysis could be useful in the debate on regional disparities in Italy and their determinants (for recent contributions see Daniele and Malanima, 2011 and Felice, 2015).


Daniele V. and P. Malanima (2011). Il divario Nord-Sud in Italia 1861-2011. Rubbettino (Soveria Mannelli).

Felice, E. (2015). Ascesa e declino. Storia economica d’Italia. Il Mulino (Bologna).

Greif, A. (2006). Institutions and the Path to the Modern Economy. Lessons from Medieval Trade. Cambridge University Press (Cambridge).

Ogilvie, S. (2011). Institutions and European Trade. Cambridge University Press (Cambridge).