How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648–1815

Abstract

Larry Neal, How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648–1815The Treaty of Westphalia created the modern nation-state system of Europe and set the stage for the long-term success of financial capitalism. The new sovereign states experimented with competing monetary regimes during their wars over the next century and two-thirds while they extended and perfected the financial innovations in war finance developed during the Thirty Years War. The Dutch maintained fixed exchange rates, the French insisted on exercising monetary independence, while the English placed priority on free movement of international capital. In struggling with the trilemma of choosing among the goals of maintaining fixed exchange rates, monetary independence and free movement of capital, the governments of early modern Europe learned many valuable lessons. By the time of the Napoleonic wars, the innovations that emphasised reliance on financial markets rather than on financial institutions proved their superiority.

Money Markets and Exchange Rates in Preindustrial Europe

“…Figure 2 demonstrates the highly integrated money market between London and Amsterdam in the mid-18th century. These results are consistent with our knowledge of London and/or Amsterdam securities market integration in the 18th century (Neal 1990(Neal , 2000Vam Malle 2007, Koudijs 2011). While integration for the cases of London and/or Amsterdam is well known, more research is needed to improve our knowledge on money market integration for other European centers.…”

Calculating profit: A historical perspective on the development of capitalism

“…For such an outcome to be possible, it would be necessary for fictitious stock market capital to be realisable through the expansion of the credit system, or in other words the unity of commercial and bank capital through the medium of the stock market. Such unity, as Marx suggests, was embryonic in 1694, and pushed backwards by restrictions of market development following the bubble collapse of 1721 (Neal, 2000). The inclusion of industrial activities in required rate of return calculations necessitated the further unity of industrial capital with bank and capitalist property relations emerge and develop from the internal contradictions of existing property relations (Dobb, 1946).…”

1. Transferring Technical Knowledge and Innovating in Europe, c.1200 – c.1800

“…Bottlenecks to technical transfer were relaxed over time by falling information and transport costs, which can be proxied reasonably accurately by trends in urbanisation, and in financial and other market integration (Bairoch, Batou and Chèvre 1988;Epstein 2001;Neal 2000;Persson 1999 This model fits well with the evidence that pre-modern regional technological leadership followed commercial leadership, with a certain lag (Davids 1995).…”