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The Crash of 1882 and the Bailout of the Paris Bourse

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Abstract

The crash of the French stock market in 1882 presented the Paris Bourse with its worst crisis of the nineteenth century. Its structure was similar in key respects to today’s futures markets, with a dominant forward market leading the Bourse to adopt a common fund to guarantee transactions and liquidity. While this mutualization of risk protects clients and brokers from idiosyncratic shocks, it is generally assumed that it also provides considerable protection against systemic shocks, as no twentieth century exchange has been forced to shut down. Using new archival data, this paper shows how a stock market crash overwhelmed the Bourse’s common fund. Only an emergency loan from the Bank of France, intermediated by the largest banks, prevented a closure of the Bourse.

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Notes

  1. Real GDP did not reach its 1882 level until 1888. (Lévy-Leboyer and Bourguignon 1990).

  2. In the pre-Federal Reserve era, the U.S. Treasury sometimes conducted central banking operations.

  3. See White (2003) for a more detailed explanation of the exchange’s evolution from the ancien régime through the Napoleonic era.

  4. This definition led to a long struggle between the Bourse and the Coulisse over which securities the former had exclusive trading rights.

  5. The curb brokers were not prohibited from making a market, although they were legally obliged to notify their clients when they traded on their own account as a counterparty.

  6. The Bourse was later made subject to public regulation (article 90, Code de Commerce, October 7, 1890). Yet, it remained largely self-governed.

  7. See also, Walter (2001) for additional details.

  8. At the end of the day, the highest and lowest of the prices were averaged to obtain the average price at which the orders au cours moyen would be executed. (Vidal 1910, pp. 34–36)

  9. The duration of these contracts was determined by settlement dates (liquidations). Settlements were semi-monthly on the fiftheenth (liquidation de quinzaine) and the last day of the month (liquidation de ultimo), or the following day if it was a holiday. The exceptions were the French rentes, shares of Crédit Foncier, and railroads which were only settled at the end of the month (Vidal, pp. 70–71). The number of days for clearing varied, depending on whether the transaction occurred in the cash or forward market and whether it was a registered security (titre nominantif), which bore the name of the owner, or a bearer security (titre au porteur), where the holder was presumed to be the owner (Vidal 1910).

  10. Similarly, before the New Deal imposed margin requirements in the United States, margin was set at the discretion of the broker.

  11. See Courtois (1892).

  12. The bourse of the ancien régime had maintained a small fund to pay for collective expenses, but it had not common fund. In the nineteenth century European coffee and grain markets were the first futures markets to create liquidation funds (caisses de liquidation) to guarantee full payment to the injured parties by collecting from the defaulter and drawing from a members’ mutual fund (Emery 1896). Diffusion of was slow. In the U.S. the Minneapolis Grain Exchange was the first to employ this system in 1891. It only adopted by the Chicago Board of Trade in 1925 (Moser 1998).

  13. See the Assemblées Générales Rapports 1852, p. 80 where the founding of the caisse commune is discussed at the time it was reorganized on June 17, 1852.

  14. Figure 1 and Table 1 begin after the disruptions of the Franco-Prussian War of 1870–1871.

  15. Volume was not recorded.

  16. In addition, there was some occasional revenue from fees from the reception of a new agent de change, interest on loans from the common fun, income from the securities and property owned by the Compagnie, and seat fees levied on others attending the Bourse. (Poiteux, n.d., pp. 83–85)

  17. This rebate was distributed twice yearly after the liquidations of May 31 and November 30. There was an additional 10,498 francs in the Common Fund, representing assets to be recovered.

  18. Compagnie des agents de change, Filiation des Charges d’Agents de Changes près la Bourse de Paris (Paris: November 1961).

  19. Assemblées Générales, Rapport de la Commission de Comptabilité de la Caisse Commune, December 20, 1875.

  20. Saint-Evron was probably forced out of business by this and other losses, as he gave up his office on July 15, 1875.

  21. For American futures exchanges, Edwards (1984) noted that there was a trend away from unlimited liability for the members of the clearing house fund.

  22. Compagnie des agents de change, Assemblées Générales, Rapport la Commission de Comptabilité de la Caisse Commune, December 18, 1876. When it was announced that the former broker. Augustin-Jean-Baptiste-Félix Pestel who had sold his office to Jumel and was thus probably one of his silent partners had made the final payment of 75,000 francs on his debts it was met with loud applause.

  23. Expenditures rose by about 300,000 francs in 1880 due to 94,729 francs of work on a building, and other higher expenses.

  24. See Bouvier (1960, pp. 47ff) for a description of the various stock issues and their pricing.

  25. See Bouvier, (1960, p. 120). Mahou became deeply involved and failed in the crash (Archives de la Bourse, dossier Mahou).

  26. After the long period of depressed seat prices following the crash, the Ministry of Finance took over the market and set a price of 1.5 million francs.

  27. Although he had engaged in fraud, Bontoux’s enterprises were grounded in the development of the Balkan railroads; in bankruptcy, his enterprises eventually paid out over 80% of their liabilities After the crash, the Comptoir d’Escompte de Paris picked up the pieces, and the Vienna-Constantinople line via Belgrade opened in 1888. (Bouvier, 1960, 104, 229). In March 1883, the Cour d’Appel de Paris condemned Bontoux to 5 years in prison for fraud. While on appeal, Bontoux fled France. (Bouvier, 1960, 214–218). Bontoux claimed that the Jewish and Freemason bankers wanted to see him fail. His defenders claimed that he was a victim of a “syndicat à la baisse” a bear pool run by the Jewish bankers, Crédit Lyonnais, and the Banque de Paris et des Pays-Bas. The press on the right took up Bontoux’s claim that Jewish finance and freemasons in the government had conspired to bring down Union Générale. This idea gained wide currency. See Zola, L’Argent (1890) and Ferguson (1999, pp. 262–263).

  28. The financial community denounced investors who walked away from their contracts; and on February 8, 1882, the Paris Chambre de Commerce passed a resolution calling for the government to change the law (Vidal 1910, pp. 211–214).

  29. Given his free market principles, Finance Minister Say (1886) went to great lengths to justify his actions. By March, the Treasury was able to cut its funding of reports by half, finally ending this operation in July 1882.

  30. Unlike private insurers, the Bourse could not exclude systemic shocks by setting some limit on the common fund’s guarantee because falling prices might provoke a more rapid collapse when the market approached the limit.

  31. Compte rendu (1882). The bankers consortium contributed the 80 million francs accordingly: the Rothschilds 10 million and 2 million each from Heine, Gunzburg, Stern, Hensels, Camonds Vernes, Cohen, De Machy et Silliere, Gillet, Hottinguer, Marnard, and Mallet frères. One million francs was provided each by Hannadex, Péreire frères, Mirabad, and Donon, Alberti. Five million were provided by Crédit Foncier, the Comptoir d’Escompte, the Banque de Paris et des Pays Bas, Société Générale, Crédit Lyonnais, and the Banque d’Escompte; 3 million from the Société de Crédit, 2.5 million from the Société de Depots et Comptes Courants, and 1 million each from the Banque Hypothecaire, Crédit Mobilier, Crédit Moblier Espagnol, the Banque Ottomane, the Banque Franco-Egyptienne, Crédit General Francais, and the Banque de Constantinople. The curb market in Paris was also provided with aid from the leading banks of approximately 20 million in advances to the leading firms. According to Bouvier (1960), a total of 175 million francs was required in Paris (including the loans to the brokers of the Bourse and the Coulisse) in order to finance the reports.

  32. Compte rendu (1882).

  33. The price of a Lyon broker’s office fell from 800,000 to 60,000 francs The stockbrokers of Nice were caught in the panic and their parquet was suppressed by decree in 1889.

  34. The competitor of the Bourse de Paris, the Coulisse had counterparty risk from its use of forward contracts but no common fund. Its absence may be explained by the fact that the Coulisse in this period had no real corporate entity and the legality of its activity in the market was frequently contested, making it difficult for the coulissiers to organize a fund and monitor one another.

  35. Jarrow and Yu (2001) model the pricing of counterparty risk for securities using a double poisson process with jump terms to capture the inter-firm linkages. They find that in the limit, as firms hold well-diversified credit risk portfolios, the counterparty risk part of their default intensities (the likelihood of default per unit of time) declines and disappears.

  36. Two of his partners were Isacc and Eugène Péreire who contributed 333,750 and 445,000 francs, in addition to a M. Guastalla who provided 445, 000.

  37. The agreement indicated that a certain Madame Waille would continue to receive interest on the rentes for her lifetime (Dossier Sucède).

  38. Chambre syndicale, Séances, vol. 26, October 13, 1882.

  39. One agent appears to have borrowed 500,000 francs from a private source to pay this sum and continue with business. Many others appear to have renegotiated their contracts with unhappy partners.

  40. Compte rendu 1884, p. 1.

  41. Compte rendu 1883.

  42. Compte rendu, 1885.

  43. The 18 million franc loan was “added” to the bonds of the brokers, so that instead of being recorded as 6 million, they had nominally 24 million in 1883, though accounting shifted the figures to the secondary reserve in 1884, showing 15 million (Compte rendu, 1884).

  44. The broker Vuaflart appears to have defaulted. “L’affaire Vuaflart,” Chambre syndicale, Séances, vol. 27, p. 94ff.

  45. The relatively modest building reserve of 200,000 francs was depleted in 1894 and 1895.

  46. Bulletin de Statistique et de législation comparée du Ministère des Finances (January 1898) as reported by Vidal (1910), p. 233.

  47. According to Arbulu’s index (1998), the maximum decline for the Bourse’s stocks was 1.2% over the period October 1895 to March 1896.

  48. The only intervening crisis arose from the failure of the Comptoir d’Escompte in 1888. The Banque de France raised the discount rate and acted as a lender of last resort.

  49. For details, see Boissière (1908) and Vidal (1910).

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Acknowledgment

For helpful comments and assistance, I would like to thank Roger Klein, Kim Oosterlinck, Paul Lagneau-Ymonet, Angelo Riva, Hugh Rockoff, Pierre Sicsic and participants in the 2004 European Historical Economics Society meetings and the 2005 NBER Summer Institute.

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  1. Department of Economics, Rutgers University and NBER, New Brunswick, NJ, 08901, USA

    Eugene N. White

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White, E.N. The Crash of 1882 and the Bailout of the Paris Bourse. Cliometrica 1, 115–144 (2007). https://doi.org/10.1007/s11698-007-0008-2

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