The Rise of the Small Investor in the US and the UK, 1895 to 1970

The role of the small shareholder has been largely ignored in the literature, which has tended to concentrate on controlling shareholders and family ownership. And yet, focus on the importance of small shareholders can capture significant aspects of financial development, since the more 'confident' the minority shareholders, the easier will capital flow to firms. Pre 1970, debates and policy conflicts linked to stock exchange development concentrated on shareholder democracy and diffusion as key indicators. The number of shareholders relative to the population was seen as a critical factor in explaining not only structures in corporate finance but also political and economic preferences, market developments and overall economic development. This paper explores the so-called democratisation of investment and the factors behind it through the lens of trends in estimates of the UK and US shareholding populations between 1895 and 1970. It covers three key periods: before World War I, before and after the stock market crash of 1929, and post-World War II. It identifies three periods in the US when shareholder numbers were paramount: in the boom years of the 1920s, as part of the inquest into the 1929 Crash, and post-World War II in an attempt to boost stock market activity. In the UK, although some concern was expressed during the 1920s and 1930s at the passive nature of small investors, who held diversified portfolios with small amounts in each holding, it was the fear of nationalisation after World War II which led to more in-depth shareholder estimates

Rebalancing the Euro Area: The Costs of Internal Devaluation

This paper investigates the economic costs of rebalancing current account positions in the Euro area by means of internal devaluation. Internal devaluation relies on wage suppression the deficit countries. Based on an old Keynesian model we estimate a current account equation, a wage-Phillips curve and an Okun’s Law equation. All estimations are carried out for a panel of twelve Euro area members. From the estimation results we calculate the output costs of reducing current account deficits. Greece, Ireland, Italy, Portugal and Spain (GIIPS) had, on average, current account deficits of 8.4% of GDP in 2007. To eliminate these current account deficits, a reduction of GPD by some 47% would be necessary. In principle there are two ways that trade imbalances could be resolved: deflationary adjustment in the deficit countries or inflationary adjustment in the surplus countries. Presently, the burden of adjustment is exclusively on the deficit countries. Our results indicate that the economic costs of this adjustment to those countries are equivalent to the output loss of the Great Depression. An adjustment of the surplus countries would increase growth and it would come with higher inflation, but it would allow rebalancing without a Great Depression in parts of Europe

An Outline of a Progressive Resolution to the Euro-area Sovereign Debt Overhang: How a Five year Suspension of the Debt Burden Could Overthrow Austerity

The present study puts forward a plan for solving the sovereign debt crisis in the euro area (EA) in line with the interests of the working classes and the social majority. Our main strategy is for the European Central Bank (ECB) to acquire a significant part of the outstanding sovereign debt (at market prices) of the countries in the EA and convert it to zero-coupon bonds. No transfers will take place between individual states; taxpayers in any EA country will not be involved in the debt restructuring of any foreign eurozone country. Debt will not be forgiven: individual states will agree to buy it back from the ECB in the future when the ratio of sovereign debt to GDP has fallen to 20 percent. The sterilization costs for the ECB are manageable. This model of an unconventional monetary intervention would give progressive governments in the EA the necessary basis for developing social and welfare policies to the benefit of the working classes. It would reverse present-day policy priorities and replace the neoliberal agenda with a program of social and economic reconstruction, with the elites paying for the crisis. The perspective taken here favors social justice and coherence, having as its priority the social needs and the interests of the working majority

Individual Investors and Portfolio Diversification in Late Victorian Britain: How Diversified Were Victorian Financial Portfolios?

This article investigates Victorian investor financial portfolio strategies in England and Wales during the second half of the nineteenth century. We find that investors held on average about half of their gross wealth in the form of four or five liquid financial securities, but were reluctant to adopt fully contemporary financial advice to invest equal amounts in securities or to spread risk across the globe. They generally held under-diversified portfolios and proximity to their investments may have been an alternative to diversification as a means of risk reduction, especially for the less wealthy

Financial diversification before modern portfolio theory: UK financial advice documents in the late nineteenth and the beginning of the twentieth century

The paper offers textual evidence from a series of financial advice documents in the late nineteenth century and the early twentieth century of how UK investors perceived of and managed risk. In the world’s largest financial centre of the time, UK investors were familiar with the concept of correlation and financial advisers’ suggestions were consistent with the recommendations of modern portfolio theory in relation to portfolio selection strategies. From the 1870s, there was an increased awareness of the benefits of financial diversification - primarily putting equal amounts into a number of different securities - with much of the emphasis being on geographical rather than sectoral diversification and some discussion of avoiding highly correlated investments. Investors in the past were not so naïve as mainstream financial discussions suggest today

Financial diversification strategies before World War I: Buy-and-hold versus naïve portfolio selection

This study contributes to a growing volume of scholarship that highlights the importance of financial diversification in business history. It shows that, pre-WWI, financial advice for equal portfolio weighting, the so-called naïve diversification, then called scientific investment or geographical distribution of risk, was a sophisticated strategy for Victorian investors and not suboptimal to Markowitz optimization. Drawing upon a unique dataset of 507 individual portfolios at death, this study shows that, although Victorian investors, in particular wealthy investors, did diversify investment risk across a number of securities, they did not hold equally weighted portfolios. It explores possible reasons for the unbalanced nature of investor portfolios and dismisses socio economic factors, illiquidity, passive ‘buy the market’ and market timing strategies as possible explanatory factors. The results rather point to a strategy of naïve diversification spread over time, a ‘buy as you go and hold strategy’, buying new securities as savings allowed and holding them until death

Revisiting the 1992-93 EMS crisis in the context of international political economy

The paper revisits the sequence of events leading to the 1992-93 crisis of the European Monetary System’s Exchange Rate Mechanism in the context of International Political Economy. The paper reconsiders the crisis, emphasising the workings of monetary unions and contemporary financial markets. The lessons to be drawn could help in understanding the contemporary crisis of the Euro area

Financialization and Marx: some reflections on Bryan's, Martin's and Rafferty's argumentation

The recent theoretical works of the authors provide thorough insights into the workings of contemporary capitalism. Derivatives are the key issue involved here. They comprehend financialization as a development within, rather than a distortion of, capitalist production. They nevertheless underestimate the ability of Marx's analytical categories to capture the essence of contemporary organization of capitalism. A return to Marx is not only helpful but is also indispensable for clarification of some unformed aspects in their analysis. What is actually involved in financialization is not just the emergence of a structure enabling more effective valuation of financial assets; it is also the development of a technology of power that is superimposed on existing power relations for the purpose of organizing their functioning

Revisiting the socialist calculation debate: the role of markets and finance in Hayek's response to Lange's challenge

In the early twentieth century, a range of writers produced visions of a socialist economy whose distinguishing characteristic was an allocation of resources using a 'technical' perspective. In the 1930s, Oskar Lange took up the challenge of Ludwig von Mises' claim of the 'impossibility' of constructing a socialist economy on such an engineering basis. He readily acceded to the need for efficiency calculations to be made in value terms rather than using purely natural or engineering criteria, but claimed that these values could emerge without a market for capital goods, and without private ownership of capital. Friedrich Hayek replied stressing the dynamic aspects of competition in the context of the capital market; the latter is to be seen as a discovery procedure wherein production possibilities must not be taken for granted. Thus, socialist calculation is impossible because of the absence of those markets for capital and risk that evaluate the success or failure of different investment decisions under capitalism. Appraising this debate, we emerge with two findings. First, Lange's contribution was based on a one-sided, static conception of the capitalist economy, and therefore of the construction of a socialist alternative. Second, the Austrian approach only surreptitiously concedes the key role of finance in its defence of the dynamic properties of capitalism. And yet it is the very gyrations and instability emerging from the financial sector in capitalism that was one of the central factors motivating the search for an alternative engineering method of allocation in the first place. The latter point invites us to reconsider the place of finance in various schools of economics in mainstream thinking

The fundamental problem of the Euro zone and an alternative (Marxian) approach to European economic policy context

Despite the fact that the analysis of the contemporary crisis of the European edifice has many different aspects, this paper will limit its scope to the issue of economic policy. Mainstream discussions focus on the problem of moral hazard. They become critical of financial markets and question markets’ efficiency: since markets are unable to impose discipline on sovereign finances in the Euro zone, only an ad hoc political treatment can deal with the emerging systemic dangers. Hence, new supervisory institutions must be invented to correct markets’ mispricing. Surprisingly enough, the spirit of this reasoning converges with many radical approaches. This paper attempts to challenge this implicit consensus from a Marxian point of view. In contemporary developed capitalist economies financial markets play a crucial role in the organization of capitalist power, even in the presence of instability. This has been the big lesson from the history of Euro Area so far. In the absence of radical political changes in the social correlations of power, this will also be the case in the future