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Published by EH.NET (June 2001)

Philip T. Hoffman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal,

Priceless Markets: The Political Economy of Credit in Paris, 1660-1870.

Chicago: University of Chicago Press, 2000. xi + 350 pp. $55 (cloth), ISBN:

0-226-34801-6.

Reviewed for EH.NET by Stephen Quinn, Department of Economics, Texas Christian

University.

Hoffman, Postel-Vinay, and Rosenthal have constructed a wonderful piece of

interdisciplinary work. The heart of their study is a large sample of loan

contracts drawn by Parisian notaries. Most of the loans were long run because

the legal standing of collateral depended on notarization. Using the sample of

notary contracts, the authors measure the amount of long run lending in Paris

from 1660 to 1870. They find that such lending in Paris was in decline from

1660 to the Law affair in 1720. In contrast, the middle of the eighteenth

century enjoyed substantial growth in lending that ended with the French

Revolution. The post-Revolution era suffered slow growth until the advent of

new institutions around 1850.

The plot, however, thickens because the notaries were also intermediaries in

the lending process. To explain this, the book adds a microeconomic layer of

analysis. The seventeenth century lacked financial intermediaries that could

solve the information problems separating lenders from borrowers. The authors

attribute the eighteenth century’s rise in lending directly to successful loan

brokerage by the Parisian notaries: the notaries had the correct information

and incentives to connect supply with demand. The book’s title, Priceless

Markets, follows from the finding that client-specific information was far

more important than price (interest rates in this case) in clearing the credit

market. The microeconomic analysis then argues that the stagnation of long run

lending in the early nineteenth century followed from the breakdown of the

notarial brokerage system in Paris. Institutional changes during the French

Revolution ruined the incentives for notaries to supply effective

intermediation, so notaries were slowly displaced by banks and the Credit

Foncier.

A vulnerability of the notarial system was that many loans had fixed nominal

interest rates, so inflation or the fear of inflation was a devastating shock

to the credit environment. Sudden inflation harmed lenders and fear of

inflation choked off new lending. The two great examples were the Law affair

and the Revolution. In both cases, inflation was a result of government

finance, so the authors develop a third layer of analysis to explain the

political economy of French government finance. The book argues that inflation

was a result of constitutional struggle between the executive and the elite. A

weak executive (the Regent in the case of the Law affair and unstable

revolutionary governments between 1792 to 1796) relied on inflation finance

instead of conceding power in exchange for increased taxes. The emphasis on

constitutional struggle is in contrast to a struggle between creditors and

debtors recently emphasized by Eugene White (“The French Revolution and the

Politics of Government Finance, 1770-1815,” Journal of Economic History

55, 1995, 227-55).

The microeconomic analysis highlights the importance of institutions, so the

authors explain how French debt instruments, interest rate regulations, and

legal procedures worked in Chapter 1. Combining these elements throughout the

book, the authors make clear how different eras promoted or discouraged

financial intermediation by notaries.

Chapter 2 spells out how the data set was constructed. Given the vast amount

of notarial records, the authors focused on 10 notaries (out of the 114 that

existed) at roughly ten-year increments. Even with such sampling, the authors

recorded 437,232 contracts of which roughly one-fifth were private loans and

one-fifth were lending to the government. Extrapolation and aggregation

provided an estimate of the flow of new notarized lending and the accumulated

stock of such credit per year over a span of two centuries.

Chapter 3 charts the decline in lending from 1660 to 1715. The authors argue

that unstable public policy (currency manipulation and selective government

defaults) combined with a lack of information about collateral liens (an

asymmetric information problem) made lenders very cautious. Lending was

limited to networks of repeated, bilateral relationships within family,

profession, or neighborhood.

Chapter 4 examines the effect of the Law affair on private lending. During the

political stalemate following Louis XIV’s death in 1715, new lending and

repayments diminished because the market anticipated that the politically weak

Regent would resort to inflationary finance. Beginning in 1718, inflationary

finance did occur, and it took the form of John Law’s expansive issuance of

legal tender notes. The notarial records show that some investors bet on

continued inflation while others bet on the restoration of traditional money.

Restoration of the monetary standard did come — but not until 1721. By then,

debt repayment with paper money had given lenders to the Crown a 50 percent

loss and private lenders a 33 percent loss.

Chapter 5 moves to the next era and considers the causes of the rapid growth

in Parisian lending from 1726 to 1789. Two contributing factors were currency

stabilization and an increased demand from economic expansion. By the second

half of the century, however, the authors argue that a large portion was from

intermediation supplied by notaries. Notaries developed a system of brokerage

that used the information held by notaries to pair lenders with borrowers —

suppliers and demanders who otherwise would lack the information needed to

find each other or trust each other.

Essential to the macro argument that notaries expanded the eighteenth century

credit market are the microeconomic incentives that encouraged notaries to

work for the good of their clients, yet the incentives could appear to work

the other way. Individual notaries held client-specific information, so a

client’s threat to take his business to another notary often lacked

credibility. A traditional reputation story does not fit well, so, in Chapter

6, the authors develop a game theoretic based on referrals to explain why

notaries worked hard for their clients. Good loan brokerage, like real estate

brokerage, could require a notary to refer a client to a competitor in order

to best serve the client. Referrals gave clients an opportunity to defect, so

referrals forced notaries to provide good service so that referred clients

would not defect. A key assumption is that customers knew to leave a notary

that never arranges referrals.

Still in the Old Regime, Chapter 7 examines some of the more interesting

aspects of the golden era of notary intermediation. Most notarial customers

were wealthy; and the authors find that the notaries moved savings from

merchants, financiers, and the bourgeois to the state and nobility. Analysis

also reveals that notaries opened the credit market to women and

non-Parisians, and the authors point out that some notaries dabbled in deposit

banking and subsequently failed.

Chapter 8 introduces the inflation of the French Revolution. As with the Law

affair seven decades earlier, government finance introduced paper money.

Again, the cause of inflation finance was that the revolutionary governments

could not reduce spending because of war and could not gain authorization for

increased taxes without toppling themselves from power. Inflation was the

expedient alternative. The authors use their sample to show that many lenders

were expecting inflation as early as 1791. In 1795, accelerating inflation

took off into hyperinflation. Borrowers rushed to repay loans, lenders did not

issue new loans, and the stock of existing private debt dwindled. The authors

estimate that the inflation redistributed 1.67 billion livres (40 percent of

France’s pre-revolutionary private debt) from lenders to borrowers. The effect

on government debt was even larger.

In the era after the Revolution, notarial lending languished. One reason was

recurrent political shocks. Chapter 9 begins with the lesson that political

instability put lenders at tremendous risk. Although political instability did

not actually lead to monetary instability in the early nineteenth century, the

authors argue that lending still suffered because French governments lacked

fiscal credibility until the ascendance of Napoleon III at mid-century.

Chapter 10 explores another legacy of the Revolution called the hypotheques.

The hypotheques was an open registry of lien and real estate transactions.

Returning to their game theory from Chapter 6, the authors argue that the new

institution undermined the incentives for notaries to act in the best interest

of their clients. In Paris, the adoption of the hypotheques by large customers

meant those customers could easily defect, so notaries began to poach large

(registered) customers from each other and mistreat small customers who had

few alternatives. The decline in notarial service led customers to register,

find other sources of intermediation (such as banks), or be pushed out of the

credit market altogether.

The most prominent substitute for notary lending, Credit Foncier, is

considered in Chapter 11. Founded in 1852, the Credit Foncier was a mortgage

bank funded through bond issue. The hypotheques provided the Credit Foncier

with the needed information to serve the Paris market. As a consequence, large

customers were better able to acquire loans while small customers were

squeezed out of the credit market. The authors add that Credit Foncier’s

success was aided by its size, which allowed the mortgage bank to diversify

risk and offer larger and longer loans.

Taken altogether, Priceless Markets is a tremendous effort to integrate

two hundred years of lending data with microeconomic incentives, institutional

details, and the pressures of political economy. The result is a rich story of

financial development. Of course, the book creates more questions than it

answers. How important was long run lending for new business formation and

entrepreneurial innovation? How did the linkages between notaries work? How

did rates of Parisian capital accumulation compare to Holland or England? I

look forward to the next generation of research to answer these and the many

other questions raised by Priceless Markets.

Stephen Quinn is author of “Goldsmith-Banking: Mutual Acceptances and

Inter-Banker Clearing in Restoration London,” Explorations in Economic

History 34, (1997) and (with Larry Neal) “Markets and Institutions in the

Rise of London as a Financial Center in the Seventeenth Century,” Financial

History Review (forthcoming 2001).