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The canton of Berne as an investor on the London capital market in the 18th century

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  • Stefan Altorfer
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    Abstract

    This paper is a case study about investor behaviour of the government of Berne on capital markets in the 18th century, focussing mainly on London. Economic theory about principal-agent problems and portfolio administration will be used to analyse quantitative and qualitative data from government accounts and reports, as well as from the contemporary press. On the basis of this material, information about the decision-making process by one of the biggest investors in the London capital market of the 18th century can be analysed. With very fortunate public finances, Berne started to invest money abroad in 1710 for both political and economic reasons. When the loans to Britain and Holland were redeemed in 1719 and 1725 respectively, they were invested in shares of chartered companies on the London capital market. During the South Sea Bubble of 1720, the Canton had made enormous profits with an unintended bull strategy. These were lost soon afterwards through opportunistic behaviour of the government’s agents in London. As a reaction, financial intermediaries were excluded from the administration of the English funds until 1765. The more dramatic step, to withdraw completely from foreign capital markets, was not made, probably since the remaining capital was still worth more than the investment before the Bubble. Berne acted as a cautious investor on European capital markets, especially in London, where its assets were low-risk and low-yield securities. With a portfolio diversification through investment on the continent after 1732, it took slightly more risk, but still qualifies as a widow-and-orphan investor, for which getting constant dividend payment is more important that a speculative profit.

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    File URL: http://eprints.lse.ac.uk/22336/
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    Bibliographic Info

    Paper provided by London School of Economics and Political Science, Department of Economic History in its series Economic History Working Papers with number 22336.

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    Length: 67 pages
    Date of creation: Jul 2004
    Date of revision:
    Handle: RePEc:ehl:wpaper:22336

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    Postal: LSE, Dept. of Economic History Houghton Street London, WC2A 2AE, U.K.
    Phone: +44 (0) 20 7955 7084
    Web page: http://www.lse.ac.uk/economicHistory/
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    1. Hoffman, Philip T. & Postel-Vinay, Gilles & Rosenthal, Jean-Laurent, 2001. "Priceless Markets," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226348018, March.
    2. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    3. Neal, Larry & Quinn, Stephen, 2001. "Networks of information, markets, and institutions in the rise of London as a financial centre, 1660 1720," Financial History Review, Cambridge University Press, vol. 8(01), pages 7-26, April.
    4. Julian Hoppit, 1986. "Financial Crises in Eighteenth-century England," Economic History Review, Economic History Society, vol. 39(1), pages 39-58, 02.
    5. Neal, Larry, 2000. "How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648 1815," Financial History Review, Cambridge University Press, vol. 7(02), pages 117-140, October.
    6. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
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