The Paris Bourse before 1815

Eugene N. White and Emmanuel Thiveaud, Rutgers University

In the debate over French economic growth in the 18th and 19th century, the issue of how well France was served by her financial institutions remains a central question. Most of the debate has focused on the efficiency of the banking sector, while the primary and secondary securities markets have been given less attention. In this paper, we examine the evolution of the rules governing the Paris bourse in its formative years from 1724 to 1815.

The presence of an active, liquid secondary market will encourage potential borrowers to issue securities. Liquidity makes securities attractive because, holding risk constant, the more liquid the market, the lower the return required by investors. The microstructure of a market - the specific rules governing market participants, trading and price quotation - are crucial to its efficient operation and liquidity. We argue that the basic microstructure of the Paris bourse was adopted to address problems arising from relatively thin markets in the early 18th century. Illiquidity was a product of both the small volume of trading and the frequent defaults and manipulations by the state. By the 18th century, the basic rules determined the Paris bourse to be an agency/auction market where the market professional on the floor of the exchange - the agent de change - acted solely as agents or brokers for their customers. The agents de change had a legal monopoly as middlemen in the trading of listed securities; but as they were forbidden to trade on their own account, they could not act as market makers to stabilize prices. The Revolution brought an end to the monopoly at the bourse and free entry into brokerage was permitted in 1791. However, this experiment was short-lived and the bourse was closed in 1793. The bourse was reopened in 1797 and free entry was again permitted in a relatively unregulated market place. The character of the market had changed, however because the government had defaulted and consolidated the national debt. Whereas, before the government's debt had consisted of large number of relatively small issues; the market was now deeper with one large issue - the rentes - being traded. In 1802, the monopoly of the agents de change was re-established with virtually the same regulations that had existed before 1789.

Using daily transactions prices for government securities, we plan to examine the efficiency of the market for government securities under four separate regimes: limited entry with small issues (1770-1791), free entry and small issues (1791-1793), free entry and large issues (1797-1802) and limited entry and large issues (1802-1815).