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The Integration and Efficiency of the London and Amsterdam Stock Markets in the Eighteenth Century

Published online by Cambridge University Press:  03 March 2009

Larry Neal
Larry Neal
Affiliation:
The author is Professor of Economics at the University of Illinois, Urbana, IL 61820.
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Abstract

This article explores the operation of the international capital market between Amsterdam and London in the early eighteenth century and concludes that both markets were efficient and well integrated from 1723 on.

Type
Articles
Information
The Journal of Economic History , Volume 47 , Issue 1 , March 1987 , pp. 97 - 115
Copyright
Copyright © The Economic History Association 1987

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References

1 We know this from the Amsrerdamsche Courant, which began giving prices of English shares on the Amsterdam Beurs in its issue of August 9, 1723. We know also, however, that trade in the shares of the Dutch East and West India Companies was active from their foundation in the seventeenth century, even though the Courant only began reporting their prices in its issue of July 14, 1723. So trade in English shares probably occurred earlier as well.Google Scholar

2 Carter, Alice Clare, The English Public Debt in the Eighteenth Century (London, 1968), p. 5.Google Scholar

3 On England, see Davies, K. G., “Joint Stock Investment in the Later Seventeenth Century,” Economic History Review, 2nd series, 4 (1952), pp. 283–301.CrossRefGoogle Scholar On Holland, see the introduction by Kellenbenz, Hermann in the Kress Library's edition of Joseph de Ia vega, Confusion de Confusiones, “Portions Descriptive of the Amsterdam Stock Exchange Selected and Translated by Professor Hermann Kellenbenz” (Cambridge, Mass., 1957), p. xiii.Google Scholar

4 Van Dillen gives a few of the more noteworthy examples of the Jewish financial investors. Moses Machado went with the king to England in 1688 and became his prime contractor for the campaign in Ireland; Joseph de Medina had a large contract as military supplier in 1713, while Sir Solomon de Medina was the greatest army contractor of his day, financing in particular the campaigns of the Duke of Marlborough. See Van Dillen, J. G., “De economische positie en beteknis der Joden in de Republiek en in de Nederlandse koloniale wereld,” in Brugmans, H. and Frank, A., eds., Geschiednis der Joden in Nederland [Amsterdam, 1940], p. 584.Google ScholarFurther, our earliest description of the operation of the Amsterdam stock exchange, Vega's, Josef Penso de IaConfusion de Confusiones, appears to be a highly florid elaboration of an earlier technical manual that he had prepared on the various techniques and regulations employed in the Effectenbeurs. The purpose of this manual most likely was to inform his countrymen who had gone to London and who wished to participate in the speculation that was beginning there. (Hermann Kellenbenz, introduction to Josef de Ia Vega, Confusion de Confusiones, p. xiv.)Google Scholar

5 For details, see Neal, Larry, “Efficient Markets in the Eighteenth Century? The Amsterdam and London Stock Exchanges”, in Atack, Jeremy, ed., Proceedings of the Business History Conference (Urbana, 1692).Google Scholar

6 The first regular publication of stock prices on the London Stock Exchange appears to have been John Houghton's Collection for Improvement of Husbandry and Trade, which began publication March 30, 1692 (OS.), and each week provided the Wednesday prices for the shares of eight chartered corporations until it ceased publication in June; when it resumed in January 20, 1692/1693 it continued to give Wednesday prices. With the issue of January 22, 1696/1697 it changed format and the dates were no longer for the preceding Wednesday of that week, but rather for a preceding Tuesday or Friday. This makes it appear that they were merely copied from Castaing's definitive Course of the Exchange, which began publication erratically in 1697 and then continuously from the beginning of 1698 on Tuesdays and Fridays.Google Scholar

7 McCusker, John J., Money and Exchange in Europe and America, 1600–1775: A Handbook (Chapel Hill, 1978), p. 31.CrossRefGoogle Scholar A full history of the publications can be found in Neal, Larry, “The Rise of a Financial Press in Western Europe, 1677–1796” (unpublished manuscript, Univ. of Illinois, 1985). In 1811, when the Course was published by Wetenhall, it became the official price list of the London Stock Exchange.Google Scholar

8 van Dillen, J. G., “Effectenkoersen aan de Amsterdamsche beurs 1723–1794”, Economischhistorisch Jaarboek, 17 (1931), pp. 1–34.Google Scholar

9 The agio was the percentage premium commanded by bank money, or schellingen banco, over circulating coin, when bank money fell to a discount, as it did in late 1794, the agio was called disagio.Google Scholar

10 Vries, Johannes de, Een Eeuw vol Effecren, Historische schers van de Vereniging voor de Effecrenhandel en de Amsterdamse Effectenbeurs, 1876–1976 (Amsterdam, 1976), p. 19.Google Scholar

11 This exercise was complicated by two features: 1) the Dutch had been on the Gregorian calendar since the middle/end of December 1582, while the British did not shift until September 2/13, 1752; and 2) the Amsterdam market traded Sunday through Friday while the London market traded Monday through Saturday. To deal with the first feature, I counted back eleven days to find the corresponding London quotes before September 13, 1752; the second feature was dealt with by matching the Saturday quote in London to a Sunday quote in Amsterdam whenever one appeared.Google Scholar

12 From Keller, Helen R., The Dictionary of Dates (New York, 1934), I chose 10 19, 1739, as the start of the first war period (War of Jenkins Ear) and 10 1748 as the end (Treaty of Aix-la-Chapelle). The Seven Years' War began in August 1756, while for financial purposes in the capitals it ended with the Treaty of Paris signed February 10, 1763. I took March 13, 1778, as the effective date of hostilities in Europe ansing from the American War for Independence, since this was when the Treaty of Alliance of France and the United States was communicated to England. The war ends with the Preliminary Treaty, signed in Paris on November 30, 1782.Google Scholar

13 Clapham, John, The Bank of England, A History (London, 1945), vol. 1, pp. 278–89.Google Scholar

14 Wilson, Charles, “Dutch Investment in Britain in the 17th–19th Centuries” in Credit Communal de Belgique, Collection Histoire Pro Civitate, no. 58, “La Dette publique aux XVIIIe et XIXe siècles” (Brussels, 1980), p. 201.Google Scholar

15 Dickson, P.G.M., The Financial Revolution in England: A Study in the Development of the Public Credit, 1688–1756 (London, 1967), pp. 312, 321.Google Scholar

16 van Dillen, J. G., “Effectenkoersen aan de Amsterdamsche beurs 1723–1794”, Economischhistorisch Jaarboek, 17 (1931), pp. 311–12.Google Scholar

17 Carter, Alice Clare, “The Dutch and the English Public Debt in 1777,” Economica, 20 (05 1953), pp. 159–61.CrossRefGoogle Scholar

18 Crafts, N.F.R., “British Economic Growth, 1700–1813: A Review of the Evidence”, Economic History Review, 36 (05 1983), p. 197,CrossRefGoogle Scholar put exports as a proportion of national income for Great Britain between 8 and 12 percent during the eighteenth century and not over 15 percent until 1801 Tranter, Neil, “The labour supply, 1780–1860”, in McCloskey, D. N. and Floud, R., eds., The Economic History of Britain since 1700 (London, 1981), vol. I, p. 211, puts the maximum share offoreign immigrants, mainly Irish, in the labor force at much lower levels.Google Scholar

19 Quantity data are available as well because the Bank of England was responsible for recording transfers of ownership in “government stock,” which included shares of the Bank itself, and of the East India Company, annuities, and Consols. In principle, the records could be used to link foreign movements of capital to sustained rises or falls in the market price of British company shares but the records are overwhelming in volume. To date only Alice Carter has used the records and then for only a three-month period at the beginning of 1755. See Carter, Alice Clare, “Transfer of Certain Public Debt Stocks in the London Money Market from 1 January to 31 March 1755,” Bulletin of the Institute of Historical Research, 28 (11 1955), p. 203. I am currently examining the transfers of Bank of England stock for the year 1720.Google Scholar

20 This is a test of “weak form” efficiency, as contrasted with “strong” or “semi-strong” forms. The stronger forms require the market to respond accurately to movements in the fundamental determinants of the asset's price or even to anticipate them. These tests are not performed here since I do not have data on fundamentals comparable to the price data I am using. See, however, Mirowski, Philip, “What Do Markets Do? Efficiency Tests of the 18th Century London Stock Market”, Explorations in Economic History, 25 (01 1987).Google Scholar Both the “B-J” and “H-R” methods are strictly mechanical procedures that estimate the autocorrelation coefficients and the partial correlation coefficients for up to 10 lags over the time series. The “B-J,” or standard Box-Jenkins method, determines which of these coefficients are significantly different from zero and then the investigator selects the most plausible model. (Box, George G. P. and Jenkins, Gwilym, Time Series Analysis: Forecasting and Control, [San Francisco, 1976].)Google Scholar The “H-R” method is a recursive process in which each autoregressive process up to order 10 is estimated and then the residuals of each estimate are used to calculate variances. The process minimizes the expression:

where k is the order of autoregressive process and n is the number of observations. Then, using ordinary least squares regressions, ARMA models are estimated up to order (p, 5) where p is the order of AR model selected above. Finally, the residuals of the estimated ARMA models are used to calculate sample variances and (p, q) selected which minimizes:

where q is the order of moving average process. See Hannan, E. J. and Rissanen, J., “Recursive estimation of mixed autoregressive-moving average order,” Biometrika, 69 (04 1982), pp. 81–94;CrossRefGoogle Scholar “Correction,” 70 (Apr 1983), p. 303. Cf. Hannan, E. J. and Kavalieris, L., “A method for autoregressive-moving average estimation,” Biometrika, 72 (08 1984), pp. 273–80. The tests are repeated for the various peacetime and wartime periods.CrossRefGoogle Scholar

21 Time-series purists will object that any irregularity in the timing of the observations violates the assumptions of the statistical technique and so the irregular appearance of the Courant rules it out for time-series analysis. Given the frequency of religious holidays in the eighteenth century even in Protestant Amsterdam and London, however, a case can be made that the irregularities in its appearance reflect precisely irregularities in trading activity on the Effectenbeurs. It is the market activity, after all, that is the underlying process, not the appearance of the newspaper.Google Scholar

22 Postlethwayt, Malachy, “Stock-Jobbing,” in The Universal Dictionary of Trade and Commerce, 2 vols. (4th edn., London, 1774, repr. 1971).Google Scholar

23 Mortimer, Thomas, Every Man His Own Broker: Or a Guide to Exchange Alley (3rd edn., London, 1761).Google Scholar

24 Dickson Financial Revolution, p. 508, quotes a letter by an Amsterdam broker to a Haarlem merchant in 1735 that states “… in London only cash purchases and sales can be made.”Google Scholar

25 Cope, S. R., “The Stock Exchange Revisited: A New Look at the Market in Securities in London in the Eighteenth Century,” Economica, 45 (02 1978), p. 18.CrossRefGoogle Scholar On this point it is interesting that Houghton followed the same practice in his early listings of stock but clearly stated that the companies whose names were printed in “Great Letters” were those that had charters, while those that had asterisks in front of them were patent monopolies.Houghton, John, A Collection for Improvement of Husbandry and Trade, 9 vols. (London, 1692–1703; republished 1969). The list of stocks in no. 106 (Fri., Aug. 10, 1694) has note: “Great Letters by Charter, (*) by Patent.”Google Scholar

26 Pinto, Isaac de, Traite de Ia Circulation et du Credit (Amsterdam, 1771), p. 305.Google Scholar

27 Vega, Josef de la, Confusion, introd. by H. Kellenbenz, p. xviii.Google Scholar

28 Van Dillen, “Effectenkoersen aan de Amsterdamsche beurs,” p. 13.Google Scholar

29 Bachelier, Louis le, “Theory of Speculation,” trans. in Cootner, Paul, ed., The Random Character of Stock Market Prices (Cambridge, Mass., 1964).Google Scholar

30 The Amsterdam on London exchange rate was given in Dutch schellingen and penningen banco per English pound. Each Dutch schelling contained 12 penningen.Google Scholar

31 Dickson, Financial Revolution, p. 335. This quotes a preprinted form on which the items shown in italics were entered by hand.Google Scholar

32 Dickson, Financial Revolution. Calculated from tables 47 and 48, pp. 312–13 for 1723–1724 and from tables 50 and 51, p. 321 and p. 324, for 1750.Google Scholar

33 I checked the ten most dubious numbers in van Dillen against xerox copies of the Amsterdamsche Courant I obtained from the New York Public Library. Only three, those for East India stock on November 16, 1733 and April 3, 1789, and that for South Sea stock on November 25, 1793, proved to be Van Dillen's mistake in transcribing.Google Scholar

34 Carter, Alice, “Dutch Foreign Investment, 1738–1800,” Economica,20 (11 1953), pp. 322–40;CrossRefGoogle Scholar“Dutch Foreign Investment, 1738–1800, in the Light of the Amsterdam ‘Collateral Succesion’ Inventories,” Tijdschrift voor Geschiednis, 66 (1953), pp. 27–38;Google Scholar“The Huguenot Contribution to the Early Years of the Funded Debt, 1694–1714,” Proceedings of the Huguenot Society of London, 19 (1955), pp. 21–31Google Scholar and “Financial Activities of the Huguenots in London and Amsterdam in the mid-Eighteenth Century,” Proceedings of the Huguenot Society of London, 19 (1955), pp. 313–33.Google Scholar All these are reprinted and summarized in her book, Getting, Spending and Investing in Early Modern Times (Assen, 1975).Google ScholarCf. Wilson, Charles, Anglo-Dutch Commerce and Finance in the Eighteenth Century (Cambridge, 1941),Google Scholarand his “Dutch Investment in Eighteenth Century England,” Economic History Review, 2nd ser. 12 (Apr. 1960), pp. 434–39. Van Dillen's works have been cited earlier.Google Scholar

35 Marx, Karl, Capital (London, 1970), vol. 1, chap. 31, pp. 754–56.Google Scholar

36 I should mention two works. Parsons, Brian, “The Behavior of Prices on the London Stock Market in the Early Eighteenth Century” (Ph.D. dissertation, University of Chicago, 1974) concentrates on the daily course of prices during the South Sea Bubble and finds the market operated efficiently, although he finds unexplained differences in the price quotes from different sources.Google ScholarMirowski, Philip, “The Rise (and Retreat) of a Market: English Joint Stock Shares in the Eighteenth Century,” this JOURNAL, 41 (09 1981), pp. 559–77, compares internal accounts of profitability for several joint stock companies with the pricing of their equity on the stock market. He finds increasing discrepancies in the latter part of the century.Google Scholar

37 Eagly, Robert and Smith, V. Kerry, “Domestic and International Integration of the London Money Market, 1731–1789,” this JOURNAL, 36 (03 1976), p. 210.Google Scholar