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European Financial Thought in the Early Twentieth Century
Abstract
Corporate Finance is a fashionable field in schools of Economics
throughout the World. Al-
though the main epistemological break to identify its scientific
character may be established
in the decade of the 1950s, this paper demonstrates how much
developed financial thought
there was in Europe before the First World War. Thanks to
considerable growth of interna-
tional trade, corporations, and multinationals (i.e. rising
globalization) during this phase of
European civilization, Stock Exchanges flourished in all
European countries. Philosophers,
businessmen, professors, and lawyers disseminated their
burgeoning erudition in financial
knowledge, and several authors made large contributions in books
devoted to legal features
of human economic actions, and in textbooks devoted to political
economy.
Word count: 6, 551
1. Introduction
Dealing with important issues that are related to wealth and
revenue, corporate finan-
cial literacy and knowledge may determine an individuals’
success in life, or even their sur-
vival in old age. Finance is usually considered to be a complex
science, among common
people, often driven by the perception that it consists of
unsatisfactory explanations of the
mystery and volatility of financial markets.
Corporate Finance is a scientific field today, as the need to
understand financial mar-
kets is widespread, and receives a great deal of attention. All
over the world Finance has
carved out a large space in schools of Economics and Management
in recent decades. Spe-
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2
cialized departments of Finance in most Economics and Management
schools have devel-
oped extensive scientific knowledge on financial markets.1
The history of Corporate Financial Thought is also a well
cultivated field today, led
by experts who made great efforts to identify its main
contributors. The 1950s have been
identified by many as the breakthrough moment for the birth of
the science of Finance. Mo-
tivating this paper is the aim of recalling contributors from
the late nineteenth century and
the early 1900s, before the First World War, as major cases of
literacy and erudition in
Finance, who provided much literature in this field.
Professors of Finance and scho-
larly journals in the field offer considerable scientific
advances, and financial markets’ so-
phistication benefit from ever greater financial literacy.
Section 2 will describe the sophisticated financial culture of
the early twentieth cen-
tury in Europe, revealing how accumulated expertise in domestic
production and trade, in
international commercial links, insurance contracts, currency
transactions, share trading,
bond issuance, and derivatives operations, brought the pressing
need for sophisticated finan-
cial markets. Section 3 will deal with the existence of local,
regional, and national Stock
Exchanges, which were part of a world network of financial
relationships in which London,
Paris, Berlin, Vienna, Milan, Madrid, Lisbon, and New York were
the leading global mar-
kets.2 Family financial culture and erudition in some social
circles could stimulate a scientif-
ic approach to finance, and mathematics were also applied to the
concept of stochastic
processes, by Louis Bachelier in his doctoral dissertation The
Theory of Speculation, de-
scribing stock price evolution.3
1 Miller, 1999: p. 95.
Section 3 also addresses the issues that were current in
text-
books from this time, responding to the fact that local and
regional exchanges permitted im-
2 Cassis, 2006. 3 Bachelier, 1900.
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provement in the liquidity and visibility of listed
corporations’ share and bond issues, also
promoting reduced transaction fees. Section 4 presents the
conclusions.
2. Late Nineteenth-Century Globalization and Financial
Markets
Investment strategies to manage diversified portfolios are
intimidating concepts for
most people even today, but, a vast financial elite operating
businesses in the late nineteenth
century developed practical expertise in portfolios management.4
With operations that un-
derpinned the urban centers and their role in the broad
networking system of information,
expectations, investment, and transactions, they belonged to
wealthy social circles.5 Indu-
strialization in the British Iles and on the European Continent
had brought large corporations
to the fore of economic activity, having large volumes of
commodities to consume, sell, and
export, while a number of spot and term (derivatives) contracts
were established among dis-
tant economic agents.6 Individual wealth could rarely supply
enough capital for such large
businesses, but financial institutions could provide a mechanism
for gathering capital and
rewarding private savings, whatever the amount to be made
available and involved in those
businesses.7 Banks and Stock Exchanges gathered the available
savings and could help to
channel them to useful financial applications, providing
attractive rewards to capital owners
who were interested in their services.8
4 Jones, 1994.
Shareholding positions in corporations could provide
good rewards to (small) private investors. Safety, confidence,
and low information costs
5 Foreman-Peck, 2011. 6 Hertner; Jones, 1986. 7 Cassis, 1997. 8
Bordo et alli, 2003.
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were top values to fuel this mechanism of transforming savings
into investment.9
Not only were transports and posts working efficiently thanks to
railroads and sail
and steam shipping, but also telegraphs were installed. Press
provided daily information on
Stock Exchange transactions and asset quotations. Transparency
was considered an essential
feature for advertising stocks. Stock Exchanges published daily
bulletins containing infor-
mation about the listed issues, bids and ask offers, and prices
of the executed transactions.
Specialized newspapers devoted attention to corporations
operating on all continents, even
in the most remote regions of the world. Capital gains and
dividend pay-outs were an-
nounced worldwide.
Informa-
tion costs had decreased dramatically.
10 The telegraph was a powerful instrument in decreasing
information
costs, and a world network was made available thanks to
submarine cable technology.
Throughout the last decades of the century all Stock Exchanges
were in touch with each
other, and telephones also began to offer yet another
information network.11
Dealers, accountants, brokers, bankers, and finance experts in
general, formed a
technical staff that operated according to behavioral rules
derived from codes of honor in-
tended to inspire confidence, transparency, and trust. Foreign
and domestic Treasury Bonds,
as well as corporation shares and debentures were very
attractive. Because of superior Euro-
pean technology this period led to the exploitation of business
opportunities on all other con-
tinents.
12 Mining (including precious metals), agribusiness, railroad
building, shipping,
banking and insurance, as well as trading and commerce in
general were transferred from
the European business environment context to all other
endeavors.13
9 Jones, 1996.
European investment
10 O’Rourke; Williamson, 1999. 11 Foreman-Peck, 2001. 12 Jones,
2010. 13 Jones, 2005.
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and capital moved to North, Central, and South America, as well
as to Asia and Africa (es-
pecially after the Berlin Conference of the late 1880s). In most
cases emigration accompa-
nied the transfer of savings and other flows of capital, leading
to a universal spread of Euro-
pean economic culture and international financial expertise.
Thanks to the gold-standard regime, the monetary context was
favorable to interna-
tional business, foreign direct investment (FDI), and financial
connections. Free capital
movements, including repatriation of profits and dividends, and
fixed exchange rates pro-
vided an excellent business background, minimizing transfer risk
because of minimizing
exchange-rate volatility to the gold-entrance and gold-exit
points that arbitrage could man-
age.14 This financial system broke up in August 1914, when the
Austrian empire declared
war on Serbia, and all other European nations decided to support
one side or the other in this
conflict.15 Nevertheless, before 1914, a European financial
civilization circled the planet,
from the UK to Southern Europe, Canada and the USA, from Germany
to Eastern European
regions and Russia, from continental European countries to
Malaysia and the Philippines,
and even from the UK and Belgium to Portugal, Angola, and
Mozambique.16
14 Officer, 1989.
As Keynes
(1924) says, “What an extraordinary episode in the economic
progress of man that age was
which came to an end in August 1914! (…) The inhabitant of
London could order by tele-
phone, sipping his morning tea in bed, the various products of
the whole earth, in such quan-
tity as he might see fit, and reasonably expect their early
delivery upon his doorstep; he
could at the same moment and by the same means adventure his
wealth in the natural re-
sources and new enterprises of any quarter of the world, and
share, without exertion or even
trouble, in their prospective fruits and advantages; or he could
decide to couple the security
15 Hardach, 1987. 16 Foreman-Peck, 2001(a).
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of his fortunes with the good faith of the townspeople of any
substantial municipality in
any continent that fancy or information might recommend.”17
Considerable expertise existed in creating management boards,
writing statutes for
corporations, and listing issuers on Stock Exchanges. Law and
(commercial) codes were
published in all European countries to regulate all of the many
activities and to avoid fraud
and embezzlement. Legal environments were carefully described in
abundant literature de-
voted to the subject, and the discussion of institutional
frameworks was based on knowledge
of current-day operations for capital manipulation and financial
decision-making.
18 Text-
books on law necessarily dealt with the legal aspects of Stock
Exchanges, including organi-
zational details, rules for operations, and regulations for
brokers’ activity.19
All countries had their Stock Exchanges located in the main
urban centers. The urban
network was also a financial network, made of one, two, or more
financial poles for trading
and finance. Youssef Cassis tells on the main capitals of
capital in Europe in his 2006 book
with that very title (Capitals of Capital). Local, regional, and
national-level Stock Ex-
changes fueled capital applications and the financial markets.
Powerful families and social
networks of well-known persons directed these operations.
Aristocrats, bankers, deputies,
and other politicians, as well as successful traders inspired
confidence in investors and
people in general, by sitting on the boards of corporations and
free-standing companies.
20
The institutional development of Stock Exchanges in Europe
accompanied the long-
run historical needs of economic agents. In the Middle Ages
exchange letters were trans-
acted in Paris on a bridge, the Pont-au-Change, while Lisbon
pioneered international trade
negotiations for commodity contracts and shipping in the early
sixteenth century as a result
17 Page 11. 18 Cagigal, 2009. 19 Cosack, 1905. Vivante, 1902.
Franchi, 1890. Marghieri, 1886. 20 Wilkins and Schröter,1998.
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of the Discoveries.21 Bruges is also recalled for its pioneering
open-air business and trade
meetings circa 1580.22 Even so, before the First World War
financial affairs belonged pri-
marily to the London Stock Exchange, thanks to the British
hegemony over world markets.
From the Bank of England, transactions moved to the street
Change-Alley, with the first
building - Capel Court - being made available only in 1802.
23
If the definition of a Stock Exchange includes the presence of
corporations and share
trading, the large European trade companies become the
historical benchmark to be consi-
dered.
24 British, French, and Dutch East India The seventeenth-century
Companies were top
venture-capital organizations for trade settlement connections
with India, Indonesia, and
other Asian regions. De la Vega’s book Confusion de Confusiones,
written in 1688, is a pio-
neering textbook on ethics for behavior finance.25 In this work,
prudent advising, training in
profit and loss forecasts, permanent management of assets, and
patience are the main specu-
lator’s rules, as revealed in a dialogue between a philosopher,
a merchant, and a shareholder.
The book addresses the operations of the Amsterdam Stock
Exchange and stock markets in
general. The Amsterdam Stock Exchange Association was a leading
financial center in or-
ganizing and regulating share trading in Northern continental
Europe.26 Organizational as-
pects led Paris to have two stock Exchanges in that city, the
Parquet and the Coulisse.27
21 Justino, 1994.
“The Parquet was the regulated market organized by the Compagnie
des Agents de Change
(CAC), the semi-private body of 60 official brokers (agents de
change) with a legal mono-
poly on transactions. These brokers were recruited on strict
social and wealth conditions
22In front of Van Den Bursen’s family house, the reason why
Stock Exchanges became called Bourses. Ulrich, 1906, p. 42. 23
Boudon, 1898. Stringham, 2002. 24 Poitras, 2000. 25 Cardoso, 2002.
26 Stringham, 2003 27 The Exchange moved from Rue Quincapoix, to
the Soissons palace, and to the Palais Brongniart. Bedarride,
1901.
http://en.wikipedia.org/wiki/British_East_India_Company�
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which provided high guarantees to the investors (…). By
contrast, the Coulisse was a loose-
ly organized market (with no juridical structure until 1884),
illegal de jure but de facto tole-
rated and even protected by the government. Its members (the
coulissiers) acted both as bro-
kers and jobbers”.28
Some authors also mention the Middle Age fairs as Exchanges to
negotiate interna-
tionally and operate money exchange rates, as issuing was a
manorial political privilege that
resulted in a variety of circulating currencies.
29 The expertise gained was business-
instructive and cumulative, leading to a continuous globalizing
influence of Europe on busi-
ness venture, administration practice, and capital raising
systems.30
The First World War interrupted all of this European prosperity.
It brought a bloody
conflict that lasted for four dramatic years, the consequences
of which changed the face of
the world. The large empires’ traditional hegemony faced newly
industrialized allied coun-
tries. The extension of the conflict along the lengthy battle
line, from Belgium to Southern
Europe, paralyzed all normal businesses.
31
28 Hautcoeur, Rezaee, and Riva, 2010, p. 4.
Priority was given to hostilities. Universities
closed for some periods of time, as did Stock Exchanges, and the
conditions for globaliza-
tion were disrupted. Submarine warfare put an end to Atlantic
shipping. The gold-standard
suddenly came to an end, as military expenditure in all nations
threw convertibility into dis-
array. The conflict exhausted all nations, all armies, and all
families. So balanced were the
potential fighting forces on the two sides of the conflict that
it led to a stalemate. The inter-
vention of the United States tipped the balance. The sway of the
American military forces
reflected the American economic superiority. By the end of the
conflict, Europe was a conti-
nent in ruins. Fighting had ravaged not only the battlefields
but also national economies.
29 Ulrich, 1906, p. 94, identifies 1304 as the origin of the
Exchange in Paris, 1549 in Lyon, 1554 in Toulouse, 1566 in Rouhen,
1571 in Bordeaux, and 1691 in Montpéllier. 30 Rambaud, 1884. 31
Hardach, 1987.
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Destruction, death, and annihilation were the image of the face
of Europe. Financial centers
had ceased their functions. London, Paris, Frankfurt, and all
the other Stock Exchanges had
reduced their volume of operations dramatically.32 The great
financial center was now New
York, on the other side of the Atlantic.33
Such a devastating conflict naturally brought difficult times
for reconstruction in the
1920s, a Great Depression in the 30s, and a Second World War
from 1939 to 1945, which
would wrack Europe again.
34
In such a context, the abundance of European financial
literature on Stock Exchanges
before 1914 gains a new rationality, as it corresponds to a
European civilizational heyday.
Demographic losses only mirror the break in prosperity that
the old continent suffered for so long.
3. The History of Corporate Finance, as a scientific field
According to Miller’s (1999) history of Finance, the 1950s were
the breakthrough
decade for intellectual achievement in Finance and Financial
Economics, thanks to Corpo-
rate Finance and the Asset Pricing Theory. The epistemological
watershed was very clear,
and consisted of introducing mathematical modeling
methodologies. The scientific devel-
opments achieved in the field are today universally praised and
globally recognized. Eight
economists received a Nobel Prize in Economics for their
contributions to Finance. In 1990
the Prize was awarded to three authors, Harry Markowitz, William
Sharpe, and Merton Mil-
ler. Curiously, when Markowitz concluded his Ph.D. at the
University of Chicago, Milton
Friedman opposed the dissertation on the grounds that it wasn’t
really economics. This as-
sertion in fact heralded the specialized character of Corporate
Finance, and resulted from 32 Aldcroft, 1987. 33 Michie, 1987. 34
Milward, 1987.
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considering that it was an exotic approach that was being
pursued for practical aspects re-
lated with transactions in stock markets.35
In fact, the present value of an investment was understood as
the expected value –
that is, the probability-weighted mean value – of its possible
future outcomes.
36
Seven years later, in 1997, Robert Merton and Myron Scholes were
also awarded the
Nobel Prize, for introducing option pricing and Algebraic and
Mathematical Statistics for
stock options and portfolio selection, thanks to a new method to
determine the value of de-
rivatives. Most economists believe that Fischer Black would have
also accompanied them,
but he had passed away two years before, in 1995.
For risk
assessment, the variance (squared deviations of those outcomes
around the mean) was pro-
posed as a good measure. Such an approach stresses the
importance of statistical evidence of
past experience in stock markets, as time series treatment is
crucial for these estimations. For
these reasons, Corporate Finance stimulates economic history
studies on stock markets, and
paves the way to co-operation with economists who devote their
research to economic, busi-
ness, and financial history. A good example of such co-operation
is the estimation of the
Cost of Capital, as it is based on long-term time series from
historical datasets that record
daily observed values.
Just last year, 2013, the Nobel Prize was given to distinguished
contributors in
Finance, Eugene Fama, Lars Peter Hansen, and Robert Shiller, for
their empirical analysis of
asset price.
35 Rubinstein, 2003. 36 Stabile, 2005.
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In spite of this tremendous turning point in the science of
Corporate Finance in the
second half of the twentieth century,37 it is recognized that
the Great Depression (1929-
1933) strongly stimulated thought about stock markets,
particularly in the USA. The text-
book by Benjamin Graham and David Dodd, Security Analysis,
published in 1934, is a good
example to mention, and John Burr Williams’ Theory of Investment
Value, published in
1938, is also important. Both books were very popular in the
USA, where New York was the
leading financial center of the world. The crash brought a
compelling stimulus for financial
information on stock markets or, at the very least, curiosity
about the subject.38
In Europe the scientific interest for financial markets was
largely spread throughout
all countries much earlier than the 1929 crash. The European
literature is replete with erudite
descriptions of the Stock Exchanges and stock markets, dealings
with legal aspects, discus-
sions of the effects of regulations, and international
comparisons of organizational features.
If a mathematical approach is required to define the scientific
character for contributions, we
may cite the pioneering work of Louis Bachelier (1870-1946), The
Theory of Speculation in
stock markets, from 1900, which is a seminal introduction to the
concept of stochastic
processes to mathematically describe stock price evolution.
39
37 Poitras, 2005.
He may be rightly considered
as a founding father of financial mathematics, opening the way
to the Brownian motion
model to evaluate stock options. According to Preda (2004: 351):
“Louis Bachelier appears
(…) as one member in a series of economists intensely
preoccupied with developing finan-
cial economics. This, however, does not diminish his merits:
Bachelier was a creative devel-
oper of ideas and preoccupations that other economists had
already formulated”.
38 Kindleberger, 1987. In Spain, Galvarriato, 1935 is a good
example, for its extensive influ-ence. 39 Preda, 2003.
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However, this mathematical contribution met with little success
in the French acad-
emy. It was presented as a doctoral dissertation at the
Sorbonne, in Paris, and was approved,
but without distinction. It also gained little recognition
thereafter. No teaching position was
offered to Bachelier in Paris, who found his first teaching
position only in 1909 and a per-
manent position only in 1927, in Besançon, which was a remote
university in comparison
with his alma mater.
Mathematic contributions to Economics often left their
pioneering authors in obli-
vion, and Bachelier is only one among many. Cournot’s theories
on monopoly, duopoly,
oligopoly, and perfect-competition markets are perhaps the most
well-known case. They
were made available in his book Recherches dans les Principes
Mathematiques de la Théo-
rie des Richesses, which was published in 1838, but although he
pursued an academic career
and managed to reach a rectorship position, few had come to
understand their importance by
the date of his death, in 1877.40
The dominant financial paradigm in Europe in the early twentieth
century was not
mathematical. Many books of wide practical and educational
interest on the stock markets
were available, in a cultural context in which economists had
already established the market
theory, from Smith, Ricardo, Malthus, Jean Baptiste Say, James
Mill, John Stuart Mill, and
Cairnes, to Marshall, Menger, Wieser, and Bohm-Bawerk, to quote
only the most popular
and well-known authors.
41
40 Ekelund and Herbert, 1975, p 209.
To the extent that their contributions were spread among
busi-
nessmen, intellectuals, and academicians, the understanding of
Stock Exchange operations
could be improved, as Exchanges also work as a market, which is
quite clear in Courtois
(1902), for whom trading is absolutely required for producing
and consuming. Moreover,
41 “Cairnes, Mill’s most outstanding disciple, in his comments
on the text of the fifth edition of the Principles, defended the
joint stock principle (…). Mill (…) inserted a paragraph em-bodying
Cairnes’ observations in the sixth edition”. Schwartz, 1972:
139-140.
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economic progress was identified with credit and the funding via
stock markets, because the
foundation of a limited liability corporation is based on shares
that raise the capital for the
business purposes.42
Commodities and financial asset transactions could now work in
different places as
well as in the same. But limitations on who could or could not
participate in Stock Exchange
operations became a feature of the literature. Insolvent and
bankrupt persons and all those
who had failed to fulfill stock exchange requirements were
barred from the sessions. Also
excluded were those convicted or merely accused of crimes, as
were insane persons and the
children. Unless they had their own business, women were also
refused entry in the com-
mercial codes of most countries.
This was the way to support a labor division economy.
43
Most of the authors were not aiming an academic readership
audience, and were
more interested in financial speculation on Stock Exchanges
assets and price behavior. This
is the case of Regnault (1863).
44 Financial speculation and horse-race gambling even stimu-
lated calculations for the use of probabilities. Chateaudun, who
was a private secretary of
Rotchild, became a banker, and published the Traité des valeurs
mobilières et des opéra-
tions de Bourse: Placement et speculation, (Treatise on
securities and Stock Exchange oper-
ations), for financial speculators, in 1870: “In the late 1860s,
Lefevre started a nationwide
investment company called Union Financière and published an
investment journal, the
Journal des placements financiers. In his Traité, he developed
the graphic method known as
the ‘payoff diagram’".45
42 Graziani, 1904.
According to Supino (1898) it is wrong to accuse stock markets
of
speculation, because they belong to capitalist economies and are
a necessary element of cap-
ital circulation, interest rate convergence, and price
equilibrium. Market efficiency was
43 Ulrich, 2011, p. 151-154. 44 Preda, 2004: 351. 45 Preda,
2004: 351.
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commonly assumed as a basic fact, and Supino believes in it.
46
Arbitrage is important, we say now. The activity was already
considered to be highly
important to society by Hayaux du Tilly (1901), arguing that
while trading in commodities
interests only some people, everybody must recognize that
financial assets serve everybody.
In his opinion this means that governments cannot be blind
toward Stock Exchanges, but
should keep them under the scrutiny of the central state. Such a
concept is close to regarding
Stock Exchange functions as a public good, to be preserved,
implemented, and regulated.
In his opinion stock markets
facilitate trading and exchange, so accusations against Stock
Exchanges are similar to those
against machines, factories, and new technologies.
This was not the common opinion in the early days, when
self-regulated Exchanges
arose following merchants’ and traders’ initiatives, and these
competed for their intermedia-
tion role. 47 Individuals’ associations in Britain and Northern
continental Europe freely dis-
covered the best organizational and governance principles, by
themselves without state regu-
lation. However, in the late nineteenth century and early 1900s,
voices calling for state regu-
lation became loud and quite effective. Political economy
textbooks included definitions of
Stock Exchanges as concentrated markets located in large urban
trade centers where busi-
nessmen met for negotiations and transactions involving large
amounts of capital.48 So too,
the rules for operations and penalties pertaining to brokers’
activity were meticulously de-
scribed, especially regarding unfair competition among them and
false rumors.49
In the second half of the nineteenth century Commercial Codes
had been established
in most of the European countries, including some chapters
dedicated to the regulation of
Stock Exchange operations, from listing to transactions.
Punishments were prescribed, and
46 For the abandonment of the efficient markets hypothesis,
Haugen, 1999. 47 Stringham, 2002, p. 2. 48 Colson, 10903, vol. 2.
49 Moysen, 1904.
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textbooks commented on these various issues, thereby spreading
information and financial
literacy.50
The recognition of the utility of Stock Exchanges for the
economic system comes al-
so from the need to collect small-pocket savings for government
loans in public debt. Be-
cause confidence in governments increases bonds’ prices,
Detailed regulations for Stock Exchange or brokers’ codes
sometimes also in-
cluded the opening hours, duration of the sessions, timing for
short-selling, and the schedule
for term (derivatives) transactions.
51 stock markets reflect a nation’s
vigor and credibility, it is said. As capital mobility is an
important condition for private
businesses and public credit in all countries, its efficient
provision by Stock Exchanges for
public works and collective improvements make governments also
dependent on them,
while regulating their activity, simultaneously.52
Taxes on Stock Exchange operations were (and still are) a
difficult matter. On the
one hand, it is considered that the access to stock market
services should be simple, cheap,
and attractive. On the other hand, financial operations provide
means for increasing produc-
tion, distribution, selling, and the opportunity for such
benefits should be taxed.
53
Transactions (on commodities or securities) were seen as the top
expression of alter-
native uses for capital (transfers among shareholders’ hands in
the vast world of business).
What tax-
es and at what rates might be adopted, and what effects on
financial operations may occur is
a technical discussion that already existed in the early
twentieth century.
54
50 Thaler, 1900.
In this way, Stock Exchanges were viewed as a thermometer of
economic wealth in a capi-
51 Ulrich, 1906, p. 55, quoting Piccinelli, 1897. 52 Ulrich,
1906, 65, quoting Laveleye. 53 Weil, 1902. 54 Buriat, 1903.
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16
talist society, according to Proudon’s sizeable book Manuel du
spéculateur à la Bourse.55
As a philosopher, he identified stock markets as hidden engines
of financial civilizations,
whose importance is greater than universities, theater,
conferences, courts, or the churches’
power. In his surplus-value theory, Marx describes profits and
interest as rewards for capi-
talists according to the amount of capital advanced for the
productive system.56
The investors’ perspective, however, was the dominant approach.
It was explained
that if investors preferred safe and risk-free applications the
interest rate would be lower,
while if they accepted some risk they could get much higher
rewards for the capital in-
vested.
57
A more mechanical view establishes that Stock Exchanges provoke
centripetal and
centrifugal forces, according to international competition and
organization rules for their
operations.
In the first case it was usual to obtain capital at a 3%
interest rate (or even less),
and family fathers might need to accept such a modest return,
while risk lovers could look
for higher rewards, against the possibility of suffering future
losses. Paul Lafargue (Marx’
son-in-law) came to the conclusion that risk and revenue were
highly and positively corre-
lated and expressed it in a very clear way. The mix of decisions
is considered as a normal
behavior. He is not far from the idea that risk-lovers’
investment in announced and listed
securities or projects is undertaken so that the estimated (or
expected) return may surpass (or
at least equal) the market-determined free-risk rate.
58 Law and legal codes sought to identify and clarify the
shareholders’ rights
when the established legal proceedings were followed.59
55 A 511-pages book.
Not only did they pursue this func-
tion, but it is fair to also recognize the pedagogical character
of these books in disseminating
56 Marx, 1901. 57 Lafargue, 1897. 58 Sayous, 1898. 59 Boudon,
1896.
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knowledge on financial markets, and in providing financial
literacy to users.60 They offered
real guidelines for action in describing Stock Exchange
operations and the actors in them.61
Many books may also be considered as glossaries for financial
vocabulary, as there is
a technical language made of special words and expressions in
each language.
62 These books
frequently presented considerable information on banking issues,
securities in general, and
public debt.63 They provided training in reasoning about
financial matters in a political
economy perspective. 64 The entries on Bourse at Dictionaries,
are summations.65
Ruy Ennes Ulrich (1883-1966) also wrote a textbook in Portuguese
On Stock Ex-
changes and their Operations (Da Bolsa e Suas Operações). This
was his doctoral disserta-
tion topic at the University of Coimbra Law School, in 1906. He
mentions a number of im-
portant books then available in France (36), Italy (11),
Spain,
66 Germany,67 and the UK,68 as
having refined treatments of legal matters, as well as
discussions of regulations and organi-
zational features of the Stock Exchanges.69
These authors had a wide variety of professions. From
philosophers to law practi-
tioners, from businessmen to academic professors, some of them
devoted their lives to man-
agement and worked as CEOs or executives in large corporations,
using their financial ex-
It is quite clear that Ulrich’s concept of equili-
brium stems from some fields of Physics, and comes through a
large bibliography, with a
dominant French character.
60 Chevilliard, 1904. 61 Bozerian, 1859. 62 Fontaine, 1905. 63
Ferraris, 1892. 64 Boudon, 1898. 65 Raffalovich, 1900. Vidal, 1896.
66 Carreras y Gonzalez, 1865. 67 Gründt, 1899. 68 Passos, 1905. 69
Ulrich 1906; Mata and Costa, 2013.
-
18
pertise in the management and strategic governance of large
domestic or international busi-
nesses.70
But this tide of literature was interrupted. “In London, the
world’s foremost financial
center, the week before the outbreak of the First World War saw
the breakdown of the mar-
kets, culminating with the closure for the first time ever of
the London Stock Exchange on
Friday 31 July. Outside the Bank of England a long anxious queue
waited to change bank
notes for gold sovereigns. Bankers believed that a run on the
banks was underway, threaten-
ing the collapse of the banking system – all with the nation on
the eve of war”.
71 The dec-
ades following the War were difficult times, too, in one way or
another.72 The inter-wars
period remain as a break between the two huge conflicts, while
the second half of the cen-
tury would bring reconstruction and prosperity.73
Contributions in the 1950s to Corporate
Finance and the development of this scientific field reflect
these historical conditions.
4. Conclusion
Main contributions may be quoted from French authors such as
Curtois (1902),
Fontaine (1905), Hayaux du Tilly (1901), and Guillard (1877),
from Italian books such as
Supino (1875 and 1898), Vivante (1902) and Tedeschi (1897), from
English texts such as
Passos (1905), and from the Portuguese Ulrich (1906). They all
pioneered the study of cor-
porate finance and financial markets, in offering significant
textbooks for financial markets
users. Their knowledge and the practical character of their
discussions was very rich and
70 Mata and Costa, 2013. 71 Roberts, 2013,
https://itunes.apple.com/br/book/saving-city-great-financial/id784312364?mt=11.
72 Milward, 1987. 73 Aldcroft, 1987.
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19
useful at a time when the balance of financial power was still
in the European cities and their
financial markets, although New York was beginning to gain an
important role on the other
side of the Atlantic. As forerunners in the field of Financial
Thought they all deserve to be
considered as the first wave of contributors in the history of
the field.
As in many other fields, in the History of Financial Thought,
one may point out a bi-
as toward the preference for recent important developments, and
mathematical and English-
language contributors. This should not lead us to forget the
many traditional forerunners.
Most of them were non-mathematical and non-English language
contributors. These often
overlooked authors, some of whom were well-trained economists,
paved the way in spread-
ing common and practical knowledge, to vast numbers of the
global population. Many dec-
ades before the introduction of financial economics, investment
strategy, and the study of
risk in asset investments by American experts in the 1950s and
thereafter, financial know-
ledge was based on experience, observation, and investment
decision-making processes that
were dictated by the particular needs of the time.
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