Published by EH.Net (November 2019)

Philip T. Hoffman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal, Dark Matter Credit: The Development of Peer-to-Peer Lending and Banking in France. Princeton: Princeton University Press, 2019. vii + 320 pp. $40 (hardback), ISBN: 978-0-691-18217-9.

Reviewed for EH.Net by Francesca Trivellato, Institute for Advanced Study, Princeton.

We have come to expect superb work from the collaboration between Gilles Postel-Vinay (professor emeritus at the Paris School of Economics), Philip Hoffman, and Jean-Laurent Rosenthal (the latter two both faculty at the California Institute of Technology), and their latest book only confirms our expectations. A sequel to Priceless Markets: The Political Economy of Credit in Paris, 1660-1870 (2000), Dark Matter Credit pursues the same topic but expands the analysis across all of France and through the interwar period — and once again makes the subject relevant for all social scientists and economic historians.

The book’s aim is to rebuff the widespread belief that “banks are necessary for industrialization and economic growth,” and that because banks “were slow to spread” (p. 148) in France, the nation industrialized more slowly than Britain. By contrast, the authors claim that “banks diffused slowly in France because of what traditional lending intermediaries — notaries — could do” (p. 174). They demonstrate that “financial deepening does not require the intermediation by banks and centralization” (p. 49) and that “notaries cannot simply be dismissed as archaic financial intermediaries who were unable to survive when faced with competition from modern banks” (p. 193). They conclude that “economic historians’ neglect of all the lending that transited through notaries’ offices has led them to misread the financial history of France” (p. 192), and offer an alternative and persuasive history according to which until World War I, information (not interest rates) determined the course of French credit markets and was the notaries’ purview.

“Dark matter,” a phrase frequently uttered across the Caltech campus, is used here to describe the vast amount of loans that have thus far remained unobserved and unaccounted for. In the authors’ estimation, the stock of debt arranged by notaries totaled 16% of French GDP in 1740, 23% in 1780, a peak of 27% in 1840, and 24% in 1899 (p. 3). Overall, these numbers represent “a phenomenal achievement, particularly for a credit market that has long remained hidden” (p. 217).

I am hard pressed to think of a book that combines “the economist’s thirst for systematic data with the historian’s desire to tap a wide variety of quantitative and qualitative sources” (p. 231) to an equal degree. The core evidence comes from a massive database of loans registered by notaries in 99 French locations (cities and towns of different sizes) in six sampled years: 1740, 1780, 1807, 1840, 1865, and 1899. Chapter 1 and Appendix D explain the archival records from which this information is extracted. Additional documentation includes supplementary notarial deeds gathered for specific years and regions (Chapters 2, 5, and 8), court decisions published in legal periodicals (Chapter 5), data on wholesale merchants and bankers collected from nineteenth-century commercial directories (Chapter 6), and more.

Neither before nor after the French Revolution were private lenders or borrowers required to turn to notaries to draw their contracts, but in return for a small fee, notaries delivered them invaluable services: they offered illiterate or semi-literate private parties a technology they lacked, produced “legally binding written records of agreements,” “certified the legality of the contracts individuals entered into” (p. 53), and facilitated those contracts’ execution. Moreover, “notaries provided one other important service as well: they were matchmakers” (p. 54). They knew more than anyone else about the value of collateral, a lender’s liens on his pledge, and a borrower’s solvency. A striking finding of this book is that notaries remained “the informational lynchpin of the peer-to-peer lending system” (p. 107) even after the 1840s, when the government completed the survey of French real estate (Cadastre) and introduced a new, albeit voluntary, lien registry service (Hypothèques). One of the reasons for the notaries’ continued influence is that they adopted a system of referrals that enhanced their ability to match clients (Chapter 4).

Notaries registered two main types of medium- and long-term loans: mortgage-like annuities extended primarily on real estate property and obligations that did not specify collateral. In the course of the eighteenth century, obligations grew in size and duration and began to include a pledge. Chapter 2 describes the process by which this transition occurred as well as its spatial and stratified dimension across the kingdom.

Chapters 3 and 5 examine the long-term institutional novelties introduced by the Revolution and by Napoleon, and challenge the view according to which the civil law’s presumed rigidity impeded innovation. In the 1820s, a new credit instrument (the notarized letter of exchange) emerged in the southern regions of the country to meet the credit demand of peasants who were often illiterate. Neither the Commercial nor the Civil Code mentioned this instrument, but judges deemed it legitimate.

Chapter 6 illustrates the emergence of banks in the course of the nineteenth century, their institutional make-up, functions, and geographical distribution, and compares these features to the contemporary British banking system. Chapter 7 elucidates why, with the exception of the Crédit Foncier, the government-backed mortgage bank, until the 1920s banks specialized in short-term commercial loans and therefore complemented rather than replaced notaries. Chapter 8, the last in the book, reconstructs the “silent revolution” (p. 195) through which interest rates became the clearing mechanism of French credit markets. Not included in loan agreements during the Old Regime because of anti-usury laws and remarkably stable at 5% through much of the nineteenth century, interest rates after 1899 became as variable as we now know them to be.

Dark Matter Credit is highly recommended for anyone interested in economic history, regardless of their disciplinary backgrounds and areas of specialization. Its methodological contributions are manifold and transcend the topic under investigation. The authors take the core lesson of the New Institutional Economics to heart, but reveal the pitfalls of its practitioners’ tendency to assume that the institutions which matter to economic growth are state-run or central banks. In the process, they also reveal that secure property rights without transparent information markets have little impact, and that more attention should be paid to information systems. Finally, they disprove the oft-touted superiority of common law over Roman law for the development of financial markets. Curiously, the map on p. 26 not only shows the capillary presence of the royal administration in the provinces of the kingdom in 1740, but also suggests that by then, notaries were not, as generally assumed, more prevalent in the southern regions (where Roman law had deeper roots) than in the north (the area of customary law).

Economic historians trained in economics and political scientists with a historical bent will find in this book a signal that their job markets today rarely send: investment in demanding archival research generates genuine discoveries. Traditional historians may be intimidated by some of the statistical tests, or feel that they lack the time and resources to undertake a project of this scale. But I hope they will appreciate not only the book’s empirical results, but also the authors’ decision to walk readers through testable hypotheses, including those that are eventually discarded. Graduate students, at the very least, will benefit greatly from familiarizing themselves with a writing style that, in contrast to narrative history, elucidates the process by which authors formulate causal arguments.

Missing in the book is a sharper sociological characterization of lenders and borrowers. In the eighteenth century, mortgage-like credit coexisted alongside commercial credit, which was mobilized by international merchants on the basis of their reputation and without collateral. As noted in the conclusion, whether and how these two markets connected remains a mystery because the volume of bills of exchange (the quintessential instrument of commercial credit) is not measurable. One may nonetheless ask: Who owned real estate and for what purposes was it mortgaged? To what extent did credit circulate across socio-economic groups? How did the economic hierarchies between merchant-bankers, landowners, and manufacturers change across time and space? Who gained and who lost from using notaries and banks? These questions are peripheral to the overall inquiry in spite of the fact that they are central to the history of modern France and the rise of its bourgeoisie. Dark Matter Credit closes by stating that “inequality seemed to have no effect” on credit markets and their rate of growth (p. 233). To accept the authors’ suspicion that “high levels of wealth inequality are inimical to mortgage markets” is not to deny that the social profile and gender composition of lenders and borrowers can be important attributes of these credit markets.

Francesca Trivellato is Andrew W. Mellon Professor of Early Modern European History at the Institute for Advanced Study, Princeton. She recently published The Promise and Peril of Credit: What a Forgotten Legend about Jews and Finance Tells Us about the Making of European Commercial Society (Princeton: Princeton University Press, 2019).

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