This chapter shows how developments in military technology and strategy since the 1600s joined the political ambitions of states and merchants’ commercial interests to create European rules in Asia, Africa, and Latin America. Why did warfare in early modern times produce this outcome? Wars and empires had existed before. The European warfare outside Europe, the chapter suggests, could exploit more resources than the other major powers in Eurasia could, leading to decisive shifts in the balance of power. At the same time, trade entailed violence, whether we consider the Atlantic slave trade or the impact of European wars upon the actions of the Indian Ocean merchant firms. A final section asks how empires shaped economic change in the world; and shows that the emergence of empires had lasting effects on commercialization, though direct effects on living standards until 1870 were ambiguous.

One of the striking changes accompanying – if not helping to cause – economic development is the dramatic increase in financial transactions among firms and individuals, sometimes directly between borrowers and lenders, sometimes involving third parties (financial intermediaries). Over time these third parties played an increasingly important role. In part it is because the type of intermediaries who appeared early on (brokers, banks, stock markets) grew more numerous; and in part it is because of the introduction of totally new institutions (legal institutions and informal rules of behavior) and totally new organizations (savings and loan associations, investment trusts, and central banks). In most societies this expansion of financial intermediation fueled higher rates of savings and investment, more rapid growth of the capital stock, and a higher rate of economic growth.

The big question here is how financial intermediaries facilitate investment. Lance Davis has long maintained that intermediation acts both on supply, the magnitude of investment funds, and demand, the choice of projects these funds will support. In the early stages of growth, the key issue lies in mobilizing the available savings rather than increasing its amount. Mobilization occurs when savers increase the relative size of their financial holdings. The decision to do so depends on financial institutions that provide savers with information and diminish the risk they bear. Such a task is not easy, for savers appear to be creatures of habit.

Introduction

In early nineteenth-century Paris, notaries and bankers competed for the business of financial intermediation. They did so in an environment full of uncertainty and risk, for between 1808 and 1855, 143 bankers failed, and 26 notaries declared bankruptcy (Table 3.1). On average, nearly 12 percent of all banking houses and 3 percent of notarial businesses (études) went belly up in each five-year period between 1815 and 1855 – large figures in financial circles.

Surprisingly, it was the bankers who emerged victorious from this competition even though they were the ones who failed more often. Here, we study the notaries they vanquished, in order to learn more about the interaction between competition, asymmetric information, and financial regulation. To explain the initial institutional evolution of notaries and bankers, we stress the importance of clients' learning, at least up to 1843. Thereafter, we examine how government intervention eliminated notarial bankruptcies and produced a fundamentally different equilibrium.

Our interest in how financial intermediaries and clients interacted is inspired by Lance Davis's research on the role of competition and government regulation in financial markets. Davis, it is true, works on different topics, comparing distinct markets or analyzing financial flows from one location to another. Yet he, too, stresses clients' learning and savers' heterogeneity (in his words, “rubes and sophisticates”), and his approach has a direct echo in our model with two types of clients.

This volume contains papers first presented at a conference, “In Data Veritas: Institutions and Growth in Economic History,” held in honor of Lance Davis at the California Institute of Technology, November 6–8, 1998. In addition to the presenters, also attending, as formal or informal discussants, were Karen Clay, Robert Cull, Price Fishback, Albert Fishlow, Stephen Haber, John James, Shawn Kantor, Zorina Khan, Margaret Levenstein, Rebecca Menes, Clayne Pope, and John Wallis. The Introduction and the Afterword were written by the editors at a later date. We wish to thank Frank Smith from Cambridge University Press and the two anonymous referees for the Press for very helpful suggestions.

We wish to acknowledge the administrative help of Susan G. Davis and the financial help of the Division of the Humanities and Social Sciences, California Institute of Technology, in the conference arrangements. In preparing the final manuscript we were aided by the Department of Economics, University of Rochester; the Department of Economics, UCLA; and the Division of the Humanities and Social Sciences, California Institute of Technology. In the process of publication, we benefited from the editorial work of Michie Shaw of TechBooks, the copyediting of Carol Sirkus, and the preparation of the index by Kathleen Paparchontis. But most of all we gained from the scholarship and enthusiasm of Lance Davis.