Paper presented to the European social science history conference, Amsterdam (1996)
 Preliminary, comments welcome
 

At the end of the XIXth century, many economists considered that century was characterised both by an enormous increase in the social welfare and by the democratisation of wealth holding, and suggested that the invention of transferable securities was one of the main reasons for these evolutions. I would like to consider that suggestion more seriously than is usually the case. I won't examine the impact of the development of capital markets on economic growth, but I will try to focus on the links between the social distribution of income and wealth on one side, and the development of capital markets on the other side. I will concentrate on the French case, but I will also try to add a few remarks on its being quite peculiar.
I will first try to consider the global evolutions and the private behaviours that contribute to the development of capital markets and to the social spreading of securities. Then I will consider the limits of these effects and consider why in XIXth century France these evolutions were not sufficient to a more equal distribution of securities holding. I will then turn to the State intervention in that area, showing first how the State had a great role in the building of the French capital market and in the spreading of securities holding, second how this intervention affected both the functioning of this market and the later evolution of wealth holding.

Until today, many economists consider that the development of securities (as well as the abandonment of metallic coins in the benefit of bank notes and later cheques or electronic money) is clearly a sign of economic and social modernisation. But the question I would like to ask is whether the spreading of the use of securities is only the consequence of some social situation or it has some impact on that situation. In the terms of the late XIXth century economists, does the spreading of security holding mainly reflects the greatest equality in income and wealth or does it have some specific impact on their distribution.
It is clear that the transformations of the French economy during the XIXth century favour a growth of the demand as well as of the supply of securities. As concerns the demand side, the growth of the income conduces to more savings, more savers and a higher share of savings in global income, consistent both the traditional view of savings as a "luxury" good and with the rise of individualism (which incites to more precautionary saving). The relative equalisation of incomes among different social groups favours the spreading of saving habits .
This very global point is nevertheless not sufficient, since it appears that the amount of securities grows much more rapidly than other assets, representing an increasing share of total wealth (from 7% in 1850 to 39% in 1913), in contrast with lands and buildings (which decline from 60 to 43%). One may relate that growth with two major characteristics of that period: first the stability of the value of the franc, which lowers the reluctance to hold financial assets; second the growing share of urban population, which has not so many reasons to invest in land as rural people, suffers costs in getting information on land quality and prices , and appreciates the liquidity and easy handling and dividing of securities, that are convenient for small and medium-size properties which cannot require too much attention and management. Furthermore, land prices decline during the last third of the century, contributing to a change in mentalities detrimental to the demand of land as an asset for long term saving. It should be noted however that, given the quite sparse ownership of land in France from the Revolution, it is not sure that the change from a wealth composed mainly of land to a wealth including many financial assets favours more equality in wealth distribution (the declining price of land ruins a lot of small tenants). In the other direction, economic change conduces probably to more equality, since intermediate categories (skilled workers, foremen, engineers) develop at the expense of less-skilled and badly paid agricultural workers.
We can conclude that economic and social transformations of that period go in the direction of a growing share of securities in savings and then in accumulated wealth (a change reinforced by that in relative prices). This process is reinforced by the supply of securities, which develops with the growing share of bigger and more complex firms requiring outside finance. Whether because the growth of old firms requires more investment than what existing family-shareholders are able to supply, or because new entrepreneurs are not rich enough to own the firms they fund, securities are proposed first to insiders like engineers, and second to outside investors. This direct or indirect access of outsiders, non entrepreneurs and non capitalists, and even to wage-earners, to the property of shares represented undoubtedly a limited but actual social enlarging of the spreading of wealth ownership.
One can add that because they didn't want to depend from the decisions of banks, firms tried to increase the number of their shareholders, contributing to spread securities among the population: for that reason, they accepted to decrease the nominal value of the securities they issued (from 10.000 francs around 1820 to 500 most frequently from 1850, and even 100 or below at the end of the century ), or to delay the payment after subscription.
 We can conclude from this rapid overview that :
- first, economic growth and social development favour the development of capital markets, mainly by rising the demand for securities.
- second, the existence of capital markets, and of new wealth holding instruments like securities, facilitate the spreading of wealth holding, and then modifies the social stratification. But it has only a passive influence, in the sense that it only allows the development of other economic influences to determine more precisely the distribution of wealth than was previously the case.

It seems then to exist some relationships between the changes of social stratification and the development of capital markets, more precisely some reciprocal (but limited) causality and mutual reinforcement between these two transformations. Two important limitations of these effects must nevertheless be precised. First, the presentation I made considers implicitly that there is a continuity in the social stratification, and in the firms supplying securities to the market. In fact, the capital market is segmented, as well on the supply as on the demand sides. On the supply side, small firms cannot support high fixed issuing costs, so they must rely on bank credits; only bigger firms may issue securities, among a varying number of investors. The change from one category to the other is qualitative and not only quantitative. More important is the segmentation on the demand side. Small savers are reluctant to enter the market and buy share or bonds because of the high transaction, information and agency costs they face. Given the very limited regulations on compulsory information of shareholders, on balance-sheet keeping, and the absence of outside control (such as rating agencies or auditing companies), this attitude is not surprising. It is reinforced by mentalities remaining quite hostile to stock-exchange operations. Because of the resulting small number of "outside" small shareholders, the liquidity of the market for many private securities remains very limited. This conduces the bankers wanting to sell new issues to try to develop the market by speculation. But given the narrow social base of the demand for securities, this strategy is not very efficient, since the relatively frequent occurrence of speculative bubbles (1837, 1857, 1882) reinforces the reluctance of most small savers.
We can then conclude that the spontaneous development of the market and the spreading of securities holding are necessarily limited because of both social segmentation and high transaction and agency costs. Then, even if the growth of incomes and savings, and the increasing share of urban population rise the demand for securities, and the new size of firms rise the supply, a broadening of the holding of securities is unlikely to occur because of insufficient regulation.
 

In front of these limits to the growth of the market, two strategies are possible for a State intervention. The first one consists mainly in strictly regulating the information and fairness of Stock exchange operations; the other consists in a direct intervention of the State creating financial intermediaries which could deepen the market. The solution chosen in France is the second one (when it seems to be the first one in Great Britain and perhaps in the U.S.). One point must be clear: the purpose of the State's intervention is clearly not to better the functioning of the capital market in order to help private firms, but only to create a sufficient demand (both in volume and stability) to permanently find owners of its own issues. Since the volume of these issues is much larger than that of private firms, it has to make efforts to broaden the market. The fact that this broadening will later be beneficial to other issuers is only a consequence.
From the very beginning of the century, the French State organises the development of the capital market, deliberately choosing a broadening of the social basis of the securities holders as the best solution to its financial needs. Actually, the State at the same time changes radically and extends the policy it had developed in the previous century. Until the Revolution, the State used the social and geographical segmentation of the financial market to maximise its monopoly power and sell adequate securities at the highest price in each segment. This aspect is abandoned, since the State chooses now a large and unique market like in England. But continuity prevails in the desire to collect savings from all social classes.
Pursuing that objective, the State does not only try to adapt its supply to the demand and stimulate the demand by decreasing the nominal value of its securities ; more importantly, it uses its legal power to restrict to itself the right to issue "rentes" (perpetuals) and lottery loans, and to give to its own securities a number of privileges: they cannot be distrained, they are imprescriptible, they pay no tax, they are compulsory investment for funds belonging to legally incapable persons, and they can be used as guarantee for borrowing at the Bank of France at low rate (perhaps more importantly, all these privileges allow the rentes to be rapidly accepted as guarantee by private lenders on a better basis than land).
These characteristics allow the State to issue with success the important loans necessary for the departure of the allies after the Napoleonic wars, and provide a permanent demand for its securities along the century. But progressively, this monopoly and these privileges are probably not so important as the regularity of its payments and the equilibrium of its finances. During a period in which private securities are quite risky investments, this progressive attainment of a "no-risk" reputation is the best way to attract new savers. In fact, it seems to me that the mentality of middle-class securities holders of the XIXth century cannot be explained using the mean-variance instrument familiar to finance theory: most people are very risk-averse in the sense they could not accept to lose the fixed stream of revenues they expect (so that they accept the lower interest rate and even the quite high volatility of rentes quoted prices along the century to be secured from that danger); on the other hand, they like risk in the sense that they accept a lower interest rate in order to participate in a lottery. This behaviour is understandable knowing that many holders saved in order to finance their retirement, and so needed more a regular income than a capital, and that lotteries gave a chance of becoming rich but no risk of serious loss.
These various reasons could explain why the States rentes were able to broaden the population of holders of securities much more than private stocks or bonds. But this is only part of the story. The most important part is the creation of a complete network of financial intermediaries devoted to the interest of the Treasury and to the sale of its securities. From the Ancien Régime treasurers in charge of the collecting of taxes existed (from the Revolution, a treasurer exists in each of France's 90 "départements"). These treasurers were already frequently bankers of the State and also private bankers. But from the fall of Napoleon, they are much more than previously in charge of the sale of State securities and of the payment of coupons. In 1819, a new system of registration of rentes subscription is created at the "département" level (under the responsibility of the treasurers), simplifying greatly all operations for the holders. The Bank of France is also asked to pay the coupons. At the end of the century, including all local treasurers and Bank of France network, the rente holder (the "rentier") will find 6000 pay-desks at its disposal, something important in order to broaden the population of holders in a country of very disseminated population like France.
Outside this network, the State benefits from the creation of the savings-banks during the Restauration: after a short period of freedom, these banks are progressively (from 1829 to 1837) legally constrained to entrust the State-owned Caisse des dépôts et consignations with the investment of all their deposits. And the Caisse des dépôts will have to invest most of these rapidly growing amounts in rentes, thus broadening indirectly the population investing in securities. Actually, this broadening will appear more effective in 1848 when the Revolution makes it impossible for a number of savings-bank to reimburse their depositors (the price of the rente has fallen, so the Caisse des dépôts cannot pay without enormous losses). The government decides to convert the savings accounts into direct rentes holding. This event could have destroyed the credibility of the savings-banks and even of the rentes, but luckily, the rapid stabilisation of the political situation and the improvement of the economic situation allowed the price of the rentes to rise and all the new forced holders to make a substantial profit. Endly, this episode then reinforced the acceptance of the rentes and contributed to broaden its social basis.
So we can see that the State, using and probably reinforcing the old anti-banks mentality of many French people, was able to create a large financial system devoted to its interests, which deepened the population of securities holders. It was also coherent with that mentality for the State to maintain during most of the century a position very antagonistic to private bankers and speculators, trying rapidly (partially successfully) to evade from bank supervision and to issue its loans directly in the public (which it succeeded from the Second Empire), prohibiting future operations and maintaining the monopoly of the agents de change (the brokers on the French official stock market) who were public officials. Concerning these last two points (futures and monopoly) this official position was in so complete contradiction with the efficient functioning of the Paris market that it was almost constantly violated with the implicit consent of the State, which proves that its reputation of anti-speculator was the main objective of these prohibitions.
The building by the State of a market devoted to its interests is probably efficient at a larger scale: it contributes to suppress the segmentation of the market, to diminish hoarding, and so to rise both the supply of capital and the efficiency of its allocation. Private firms gain also from this broadening of the market: most of the fixed costs of the functioning of a large market, with a great financial community including a lot of specialists, are financed by operations on the rente, which dominate the Paris market during all the century. The number of people more or less concerned by the functioning of the market becomes then so high that they alone broaden the demand for private securities (one estimate considers that almost 100.000 persons worked at least some time for agents de change from 1860 to 1914, without including those working for coulissiers, i.e. bankers implied in the stock-exchange, all these people considering probably themselves as sufficiently informed and conversant with finances to buy these securities). Furthermore, a number of small investors who would never had aquired directly private securities become more confident after a few years owning rentes.

I think then that we need to consider the role of the State in the development of the capital market, not only because the important financial needs of the State made it a big issuer, but also because of its active contribution to the development of the institutions of the market, a development that maybe would have taken a quite different path would the State have been absent or inactive. Then, it seems that the role of the State is important in order to understand the great rise in the number of securities holders, and the resulting broadening of their social position, which occur during the XIXth century.
Since I concentrate in this presentation on problems and arguments, I won't enter data problems, which are quite complex. Two words only on this. In fact, most data on securities holding for the XIXth century are from rentes registration or from inheritance tax registrations. The problem for rente is that one person could own rentes with several registrations, for example if they were buyed at different times; furthermore the existence from 1831 of bearer rentes makes it impossible to count the holders. The problems for inheritance data are first that they only give precise informations on rich holders and rentes (because it was frequently easy to defraud for small holders owning a few bearer securities, and because other securities than rentes were so scattered that getting statistically significant data on them would require an enormous work).
Anycase, as well inheritance data collected under the direction of Adeline Daumard and the published data on rentes (in the Compte général de l'administration des finances ) show an enormous broadening of the holding of securities during the century. Concording old and recent evaluations give some 150.000 holders of rentes around 1825, around 400.000 around 1850, 700.000 before 1870, and at least 1,5 million at the end of the century. From inheritance data, we can find that number of holders of private securities was much less, but also rapidly growing, and that private securities were held even in relatively low social backgrounds (former servants or factory skilled workers).

One might then consider the french case as showing that a dynamic economic growth and a coherent and active State policy can success both in developing the capital market and in deepening its social basis, allowing more modest people to quit local dangerous networks and hoarding and to access to the marvellous world of savings. But the action of the State in building the market and the financial network I described had also a number of drawbacks.
First, the network of official treasurers was probably efficient in developing a public for State issues, but was only in rare occasions oriented towards private issues. Second, the development of the State network and issues contributed to maintain or increase an ideology oriented against private entrepreneurship and risk-taking. This was especially reinforced by the State guarantee accorded to the great railroads companies and to institutions like the Crédit foncier (a big issuer of bonds specialized in mortgage loans).  Both elements suggest that some strong indirect crowding-out of private issues might have been the price paid for the development of the public financial network.
Furthermore, the low risk ideology of owners of State issues conducted them to be accustomed to manage very little their portfolios, which resulted in a limited liquidity of the market, damagable for all investors in private securities. Data on rentes transactions show that in 1850 (a year of important transactions) the total of the transactions was inferior to the amount of rentes outstanding (and many transactions were undertaken by banks and big holders owning only a small share of the total amount).
Another important disadvantage of the State built system is the power it gives to the rentiers as voters. The importance of the rentiers as an interest group leads to a macroeconomic policy potentially damaging for the country: very strict monetary policy, taxation penalizing productive forces and favouring the unproductive rentes, which leads to savings (which comes mostly either from profits or from securities income) mainly in the hands of rentiers who are uninformed and incompetent in the choice of the most efficient investments . Actually, both during the Restauration and Monarchie de Juillet (from 1815 to 1848), the rich holders of rentes are the only electors, and they frequently privilege their private interests, being very reluctant to conversions which would better the State's budget at the expense of their income. The tax privilege of the rente is also maintained, although it is becoming an important share of private wealth. The Second Republic and the Second Empire are probably less dominated by rentiers interests (the rentes becomes subject to the inheritance tax in 1850, and the policies of Napoléon III are more favourable to industrialists than to rentiers), but the Third Republic broadens the vote exactly when the population of rentes holders broadens thanks to the big issues of 1872-73. When the tax on security income is created in 1872, the rente remains exempted , and even the left-wing radical party insists on the defence of the "small" rentiers.
Then, the broadening of rentes holding thanks to the State intervention does not have only beneficial effects on the level of savings and on its allocation. It creates a new division between rentes holders (mainly rich by inheritance and/or old people) and more productive groups, a division understandable in political economy but potentially damaging for economic growth. If, as I argued at the beginning of this presentation, economic growth is an important force favouring both the development of capital markets and a more equal distribution of income and wealth, we have here a strong contradiction between different effects.
Furthermore, if it helps some middle-class savers to access to a stable and profitable form of saving, and then contributes in some sense to a more equal distribution of wealth, we must remember two important caracteristics of the evolution of wealth distribution in the XIXth century which go in the opposite direction: first, during all the century, about 70% of the population is poor enough to die without anything to bequeath; so the equalization of wealth is limited to a small fraction of the population. Second, if the number of rentes owners is rising rapidly, and the distribution of the rentes is more equal amont them at the end of the century than at the beginning, the share of the very richest people (the top 1 to 3%) in total wealth seems to be rising, at least in Paris and some other important towns.

All these arguments imposes to reconsider the argument invoked by right-wing politicians and economists of that period, following which the broader social distribution of rentes and more generally of securities holding which paralleled the development of capital markets was the first step toward a progressive disappearance of social inequality. The same arguments impose also to discuss both the economic and social efficiency of the growth of the public debt and of the resulting creation of the State financial network.

I tried to present and analyse in the french XIXth century context some of the arguments linking capital markets and social stratification. The main conclusions are:
- that very different paths to well-developped capital markets were clearly used in different countries. The french case is sufficiently original to be considered.
- I showed different effects of the State created or developed capital market; so it is impossible to conclude whether it was endly favourable or not both for economic growth and for a more equal distribution of income and wealth. Much more empirical  studies and a global model are needed in order to achieve a better conclusion.