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