• Compile a bankruptcy rate in France, 1820-1913

(1)

Financial crises, Business cycles, and Bankruptcies in the Very

Long Run: France during the 19th Century

Vincent Bignon

(2)

Goal

• Compile a bankruptcy rate in France, 1820-1913

• Study its short-term fluctuations

• Link them with the varying policy of the

central bank during crises

(3)

Roadmap

• Computing the bankruptcy rate: the stock of firms (and what type of legal statute)

• Extracting the short-term evolutions

• Compares them with other business fluctuations indicators

• Looks at 19th century financial crises in France

• Links the pattern with the changes in the

LLR policy of the Banque de France

(4)

Hunting the primary numbers

• Bankruptcy numbers for each year

– Taken in the Comptes de la justice civile et commerciale (1840-1913) and archives

• Number of firms that may file for bankruptcy

– Excluded the agriculture and (sometimes) Professions libérales

– Use a fiscal source: la Patente tax

(revolutionary tax on each business selling

something on the market) except farmers and some professions libérales

(5)

Adjusting the series # of firms for legal changes

• Generate spurious fluctuations of the BR

– Tax evasion and the 1841 census

– Changes in geographic borders: 1860 (Savoie), 1870 (Alsace)

– Fiscal reforms: 1844, 1850, 1858, 1862, 1868

• Fiscal reforms modified the population liable to tax’s payment:

– Commissioned workers – Professions libérales

• Corrections were implemented

(6)

What types of firms?

• legal framework: 1807 code de Commerce

• Individual private firms (unlimited liabilities)

• Partnerships

– ordinary partnership (société en nom collectif): at least 2 individuals liable on personal wealth

– limited partnership (société en commandite simple):

general partner(s) – manage with unlimited liability – and special partner(s) – limited liability

– Joint-stock companies, i.e. limited partnership with shares. Liability of partners identical to limited

partnerships but shares are tradable

– Public company (société anonyme): liabilities limited to capital contribution. Before 1867, required gvt

agreement

(7)

Share of companies in the total # of firms

0%

2%

4%

6%

8%

10%

12%

20 30 40 50 60 70 80 90 00 10

Partnership

Public companies (limited liabilities)

(8)

Share of the limited liabilities companies in the total # of firms

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1825 1850 1875 1900

(9)

French bankruptcy rate

.1%

.2%

.3%

.4%

.5%

.6%

.7%

20 30 40 50 60 70 80 90 00 10

(10)

Long-run vs. short-run fluctuations of the bankruptcy rate

• Liquidity dry-ups:

– likely impacted the BR in the short run (chain of default)

(11)

Long-run vs. short-run fluctuations of the bankruptcy rate

• Liquidity dry-ups:

– But they likely do not have a long-run impact

(12)

Long-run vs. short-run fluctuations of the bankruptcy rate

• Liquidity dry-ups:

• Similar to the impact of monetary policy on

GDP

(13)

Long-run vs. short-run fluctuations of the bankruptcy rate

• Liquidity dry-ups:

– likely impacted the BR in the short run (chains of defaults)

• Similar to monetary policy impact on GDP

• Key question is whether of more

refinancing during crises impacts on the moral hazard (and then on long-run

evolution):

(14)

Long-run vs. short-run fluctuations of the bankruptcy rate

• Liquidity dry-ups:

– likely impacted the BR in the short run (chains of defaults)

• Similar to the impact of monetary policy

• Key question is whether of more

refinancing during crises impacts on the moral hazard (and then on long-run

evolution): will show this is unlikely to have

occured

(15)

Long-run vs. short-run fluctuations of the bankruptcy rate

• Liquidity dry-ups:

• Similar to the impact of monetary policy

• Key question is whether of more refinancing

during crises impacts on the moral hazard (and then on long-run evolution): will show unlikely

⇒ Use of filtering method to separate short-run from long-run components

(16)

Vanishing fluctuations of the BR

-40 -30 -20 -10 0 10 20 30 40

20 30 40 50 60 70 80 90 00 10

Cyclical component computed with HP filter, Lambda set to 6.5

Deviation of the cyclical component of the bankruptcy rate to its trend (HP filter)

(17)

-.8 -.6 -.4 -.2 .0 .2 .4 .6

20 30 40 50 60 70 80 90 00 10

Deviation from trend of the bankruptcy rate (HP 100) Deviation from trend of the bankruptcy rate (HP 6.5) Growth rate of the bankruptcy rate

Vanishing fluctuations of the BR

(18)

.00 .01 .02 .03 .04 .05 .06 .07

20 30 40 50 60 70 80 90 00 10

Moving variance (10 yrs) of the deviation of the BR (in %) to its trend

Moving variance of the deviation of

the bankruptcy rate (10 yrs)

(19)

Removing the outliers (+ 2 st. dev)

.00 .01 .02 .03 .04 .05 .06 .07

20 30 40 50 60 70 80 90 00 10

Moving variance of the deviation of the BR (in %) to its trend

Moving variance of the dev of the BR (in %) to its trend ('31, '33-4, '47 amd 70-1 excl)

(20)

-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4 .5

20 30 40 50 60 70 80 90 00 10

Deviation to the log trend of IP (base 1)

Deviation to the log trend of the BR (in % plus 1)

IP and BR Deviations compared

(21)

0.0 0.2 0.4 0.6 0.8 1.0 1.2

20 30 40 50 60 70 80 90 00 10

Industrial production (base 1 in 1906-12) Bankruptcy rate in %

Evolution IP index and BR

(22)

-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4 .5

20 30 40 50 60 70 80 90 00 10

Deviation of the BR (in %) to its trend Deviation of the wheat price to its trend

Deviations of BR vs wheat price

(23)

.00 .01 .02 .03 .04 .05 .06 .07 .08 .09

20 30 40 50 60 70 80 90 00 10

Moving variance (10 yrs) of the dev of the BR (in %) to its trend (outliers excl.) Moving variance (10 yrs) of the deviation of the BR (in %) to its trend

Moving variance (10 yrs) of the deviation of wheat price to its trend

Comparing it with the wheat price

(24)

.00 .01 .02 .03 .04 .05 .06 .07

20 30 40 50 60 70 80 90 00 10

Moving variance (10 yrs) of the dev of the IP (base 1) to its log trend Moving variance (10 yrs) of the deviation of the BR (in %) to its trend

Moving variance (10 yrs) of the dev of the BR (in %) to its trend (outliers excl.)

Moving variance IP vs. BR

(25)

What about financial crises?

• Extract financial crises using

– Stock prices index (Arbulu, 2006)

– 3 months interest rate (offshore –London – before 1870) and onshore after)

– CB liquidity ratio: banknote to metallic reserves – CB refinancing ratio: discount to metallic

reserves

• Shows that crisis occurred regularly

• Indicators give broadly the same crises’

years

(26)

Deviations of the BR and crises

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

20 30 40 50 60 70 80 90 00 10

Deviations (in %) of bankruptcy rate to its trend Deviations of the bankruptcy rate (HP filtered)

to its trend and Juglar's criterion of crisis

(27)

Central bank refinancing

• Main instrument: bills of exchanges

(28)

Central bank refinancing

• Main instrument: bills of exchanges

• 19th c. changes of monetary policy stance

(29)

Central bank refinancing

• Main instrument: bills of exchanges

• 19th c. changes of monetary policy stance

• Two constraints were removed

(30)

Central bank refinancing

• Main instrument: bills of exchanges

• 19th c. changes of monetary policy stance:

Two constraints were removed

– From a policy of rationing during crises (up to the 1850s) to a policy of rediscounting at will (Bignon, Flandreau and Ugolini, 2010) :

increase of metallic reserve

(31)

Central bank refinancing

• Main instrument: bills of exchanges

• 19th c. changes of monetary policy stance:

Two constraints were removed

– From a policy of rationing during crises (up to the 1850s) to a policy of rediscounting at will (Bignon, Flandreau and Ugolini, 2010)

• increase of metallic reserves

(32)

Central bank refinancing

• Main instrument: bills of exchanges

• 19th c. changes of monetary policy stance:

Two constraints were removed

– From a policy of rationing during crises (up to the 1850s) to a policy of rediscounting at will:

• increase of metallic reserve

– Change in monetary policy implementation with the development of a network of

branches

• decentralized refinancing with tight bills’ screening

(33)

-4,000 -2,000 0 2,000 4,000

0 4,000 8,000 12,000 16,000 20,000 24,000 28,000

20 30 40 50 60 70 80 90 00 10

Total of discounts and advances Trend (HP filter, lambda=6.5) Cycle

Evolution CB refinancing (discounts

and advances)

(34)

0 1,000 2,000 3,000 4,000 5,000

20 30 40 50 60 70 80 90 00 10

C.B. gold and silver reserves (millions of francs)

Metallic reserves in the vaults of

the central bank

(35)

-.6 -.4 -.2 .0 .2 .4 .6 .8

20 30 40 50 60 70 80 90 00 10

Deviation from trend of the total of discounts and advances

Deviation of CB refinancing

(36)

Central bank’s branching development

0 50 100 150 200 250

1836 1844 1852 1860 1868 1876 1884 1892 1900 1908

(37)

0%

2%

4%

6%

8%

10%

12%

20 30 40 50 60 70 80 90 00 10

Protested bills in the Banque de France's balance sheet Protested bills in the French economy

Moral hazard and protested bills

(38)

0 100 200 300 400

500 1,000 1,500 2,000 2,500 3,000 3,500

20 30 40 50 60 70 80 90 00 10

Bankrupted financial intermediaries

# of banks

Financial intermediary bankruptcies

(39)

Bankruptcy rate of financial intermediaries

Bankruptcy rate financial intermediaries

19.24%

22.21%

4.55%

2.01%

4.49%

7.15%

7.79%

0%

5%

10%

15%

20%

25%

1833 1838 1843 1848 1853 1858 1863 1868 1873 1878 1883 1888 1893 1898

(40)

Conclusion

• Century-long increase of the BR

• Fluctuations became smoother over time

• They peaked during crises

• Financial crises did not disappear

• But the monetary policy of LLR changed

– Reserves increases allowing more refinancing – Expanding network decentralized both

screening and refinancing with very limited risk for the central bank

(41)

Corrections to patentes series (1)

• No corrections for the changes of geographic borders

• Fiscal evasion: for any t < 1842

( ) ^⎟⎟ _⎠ ^⎞

⎜⎜ ⎝

⎛

= +

−1841 1841 1820

' 1842

1 * x

x x x

y

_t _t

(42)

Corrections to patentes series (2)

⎪⎪

⎩

⎪⎪

⎨

⎧

≤

⎟⎟ <

⎠

⎜⎜ ⎞

⎝

⎛ −

=

⎟⎟ ≤

⎠

⎜⎜ ⎞

⎝

⎛ −

=

≤

⎪⎪

⎩

⎪⎪

⎨

⎧

≤

⎟⎟ <

⎠

⎜⎜ ⎞

⎝

⎛ −

=

⎟⎟ ≤

⎠

⎜⎜ ⎞

⎝

⎛ −

=

≤

⎪⎪

⎩

⎪⎪

⎨

⎧

≤

⎟⎟ <

⎠

⎜⎜ ⎞

⎝

⎛ −

=

⎟⎟ ≤

⎠

⎜⎜ ⎞

⎝

⎛ −

=

≤

1862 1858

if 000

, 1 100

1858 if

000

, 1 100

1862 any t

For

1858 1844

if 000

, 1 120

1844 if

000

, 1 120

1858 any t

For

1844 1842

if 000

, 1 68

1842 if

000

, 1 68

1844 any t

For

1862

"

1862 '

"

1858 '

"

1858

"

'

"

1844

"

1844 '

"

x t x

y

x t y

y

x t x

y

x t y

y

x t x

y

x t y

y

t t

(43)

.000000 .000004 .000008 .000012 .000016 .000020 .000024 .000028 .000032

20 30 40 50 60 70 80 90 00 10

Real GDP

.0000 .0001 .0002 .0003 .0004 .0005 .0006

20 30 40 50 60 70 80 90 00 10

Index of industrial production

.00 00 1 .00 00 2 .00 00 3 .00 00 4 .00 00 5 .00 00 6 .00 00 7

20 30 40 50 60 70 80 90 00 10

Index of industrial prices

.000 .002 .004 .006 .008 .010

20 30 40 50 60 70 80 90 00 10

Wheat prices

(44)

Regression Dev. BR on lagged Dev. wheat

0.000344 Prob(F-statistic)

1.514417 Durbin-Watson stat

6.843690 F-statistic

-1.269272 Hannan-Quinn criter.

63.13338 Log likelihood

-1.202972 Schwarz criterion

1.295593 Sum squared resid

-1.314075 Akaike info criterion

0.122740 S.E. of regression

0.134285 S.D. dependent var

0.164563 Adj. R-squared

-0.001419 Mean dependent var

0.192724 R-squared

0.9472 -0.066413

0.012943 -0.000860

C

0.0140 -2.508997

0.103232 -0.259010

DEV WHEAT(-3)

0.4862 0.699413

0.109554 0.076624

DEV WHEAT(-2)

0.0074 2.744666

0.103613 0.284384

DEV WHEAT(-1)

Prob.

t-Statistic Std. Error

Coefficient Variable

Included observations: 90 after adjustments Sample (adjusted): 1823 1912

Method: Least Squares

Dependent Variable: DEVTXFAILLJPERCEN

(45)

Regression Dev. BR on lagged Dev. Wheat and Dev BR

0.000229 Prob(F-statistic)

2.043533 Durbin-Watson stat

4.940200 F-statistic

-1.260281 Hannan-Quinn criter.

67.24087 Log likelihood

-1.144256 Schwarz criterion

1.182571 Sum squared resid

-1.338686 Akaike info criterion

0.119364 S.E. of regression

0.134285 S.D. dependent var

0.209881 Adjusted R-squared

-0.001419 Mean dependent var

0.263147 R-squared

0.9473 -0.066276

0.012590 -0.000834

C

0.0334 -2.163782

0.112353 -0.243108

DEVWHEAT(-3)

0.8190 0.229577

0.113548 0.026068

DEVWHEAT(-2)

0.1199 1.571571

0.110009 0.172887

DEVWHEAT(-1)

0.4957 -0.684295

0.110590 -0.075676

DEVTXFAILLJPERCEN(-3)

0.9110 -0.112062

0.117761 -0.013197

0.0108 2.608348

0.114174 0.297805

Prob.

t-Statistic Std. Error

Coefficient Variable

Included observations: 90 after adjustments Sample (adjusted): 1823 1912

Method: Least Squares

Dependent Variable: DEVTXFAILLJPERCEN

(46)

Log IP vs. log BR (+1)

.1 .2 .3 .4 .5 .6 .7 .8

20 30 40 50 60 70 80 90 00 10

Log IP base 1 (plus 1) Log BR (in % plus 1)

(47)

20%

40%

60%

80%

100%

120%

140%

20 30 40 50 60 70 80 90 00 10

Ratio of banknotes to the metallic reserves of the central bank Vertical lines are crisis' years according to Juglar's criterion

Crisis years according to liquidity

ratio of the CB

(48)

3 months interest rate in London

2%

3%

4%

5%

6%

7%

8%

9%

10%

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

20 30 40 50 60 70 80 90 00 10

3 months implicit interest rate (maximum monthly value, left axis) Ratio of discounted bills to the metallic holdings (right axis)

Vertical lines are crisis' years according to Juglar's criterion

(49)

Short-term interest rate peaks

-1%

0%

1%

2%

3%

4%

5%

20 30 40 50 60 70 80 90 00 10

Mean minus 1 standard deviation Mean plus 1 standard deviation

Short term interest rate (filtered for its decreasing trend)

(50)

-40 -30 -20 -10 0 10 20 30 40

20 30 40 50 60 70 80 90 00 10

Cyclical component computed with HP filter, Lambda set to 6.5

Deviation of the cyclical component of the bankruptcy rate to its trend (HP filter)

(51)

CB advances and discounts

75%

80%

85%

90%

95%

100%

20 30 40 50 60 70 80 90 00 10

share of the discounts in the total of advances and discounts