Published by EH.Net (November 2019)

Philip T. Hoffman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal,
Dark Matter Credit: The Development of Peer-to-Peer Lending and
Banking in France. Princeton: Princeton University Press, 2019. vii +
320 pp. $40 (hardback), ISBN: 978-0-691-18217-9.

Reviewed for EH.Net by Francesca Trivellato, Institute for Advanced
Study, Princeton.


We have come to expect superb work from the collaboration between
Gilles Postel-Vinay (professor emeritus at the Paris School of
Economics), Philip Hoffman, and Jean-Laurent Rosenthal (the latter two
both faculty at the California Institute of Technology), and their
latest book only confirms our expectations. A sequel to Priceless
Markets: The Political Economy of Credit in Paris, 1660-1870 (2000),
Dark Matter Credit pursues the same topic but expands the analysis
across all of France and through the interwar period — and once again
makes the subject relevant for all social scientists and economic
historians.

The book’s aim is to rebuff the widespread belief that “banks are
necessary for industrialization and economic growth,” and that because
banks “were slow to spread” (p. 148) in France, the nation
industrialized more slowly than Britain. By contrast, the authors
claim that “banks diffused slowly in France because of what
traditional lending intermediaries — notaries — could do” (p. 174).
They demonstrate that “financial deepening does not require the
intermediation by banks and centralization” (p. 49) and that “notaries
cannot simply be dismissed as archaic financial intermediaries who
were unable to survive when faced with competition from modern banks”
(p. 193). They conclude that “economic historians’ neglect of all the
lending that transited through notaries’ offices has led them to
misread the financial history of France” (p. 192), and offer an
alternative and persuasive history according to which until World War
I, information (not interest rates) determined the course of French
credit markets and was the notaries’ purview.

“Dark matter,” a phrase frequently uttered across the Caltech campus,
is used here to describe the vast amount of loans that have thus far
remained unobserved and unaccounted for. In the authors’ estimation,
the stock of debt arranged by notaries totaled 16% of French GDP in
1740, 23% in 1780, a peak of 27% in 1840, and 24% in 1899 (p. 3).
Overall, these numbers represent “a phenomenal achievement,
particularly for a credit market that has long remained hidden” (p.
217).

I am hard pressed to think of a book that combines “the economist’s
thirst for systematic data with the historian’s desire to tap a wide
variety of quantitative and qualitative sources” (p. 231) to an equal
degree. The core evidence comes from a massive database of loans
registered by notaries in 99 French locations (cities and towns of
different sizes) in six sampled years: 1740, 1780, 1807, 1840, 1865,
and 1899. Chapter 1 and Appendix D explain the archival records from
which this information is extracted. Additional documentation includes
supplementary notarial deeds gathered for specific years and regions
(Chapters 2, 5, and 8), court decisions published in legal periodicals
(Chapter 5), data on wholesale merchants and bankers collected from
nineteenth-century commercial directories (Chapter 6), and more.

Neither before nor after the French Revolution were private lenders or
borrowers required to turn to notaries to draw their contracts, but in
return for a small fee, notaries delivered them invaluable services:
they offered illiterate or semi-literate private parties a technology
they lacked, produced “legally binding written records of agreements,”
“certified the legality of the contracts individuals entered into” (p.
53), and facilitated those contracts’ execution. Moreover, “notaries
provided one other important service as well: they were matchmakers”
(p. 54). They knew more than anyone else about the value of
collateral, a lender’s liens on his pledge, and a borrower’s solvency.
A striking finding of this book is that notaries remained “the
informational lynchpin of the peer-to-peer lending system” (p. 107)
even after the 1840s, when the government completed the survey of
French real estate (Cadastre) and introduced a new, albeit voluntary,
lien registry service (Hypothèques). One of the reasons for the
notaries’ continued influence is that they adopted a system of
referrals that enhanced their ability to match clients (Chapter 4).

Notaries registered two main types of medium- and long-term loans:
mortgage-like annuities extended primarily on real estate property and
obligations that did not specify collateral. In the course of the
eighteenth century, obligations grew in size and duration and began to
include a pledge. Chapter 2 describes the process by which this
transition occurred as well as its spatial and stratified dimension
across the kingdom.

Chapters 3 and 5 examine the long-term institutional novelties
introduced by the Revolution and by Napoleon, and challenge the view
according to which the civil law’s presumed rigidity impeded
innovation. In the 1820s, a new credit instrument (the notarized
letter of exchange) emerged in the southern regions of the country to
meet the credit demand of peasants who were often illiterate. Neither
the Commercial nor the Civil Code mentioned this instrument, but
judges deemed it legitimate.

Chapter 6 illustrates the emergence of banks in the course of the
nineteenth century, their institutional make-up, functions, and
geographical distribution, and compares these features to the
contemporary British banking system. Chapter 7 elucidates why, with
the exception of the Crédit Foncier, the government-backed mortgage
bank, until the 1920s banks specialized in short-term commercial loans
and therefore complemented rather than replaced notaries. Chapter 8,
the last in the book, reconstructs the “silent revolution” (p. 195)
through which interest rates became the clearing mechanism of French
credit markets. Not included in loan agreements during the Old Regime
because of anti-usury laws and remarkably stable at 5% through much of
the nineteenth century, interest rates after 1899 became as variable
as we now know them to be.

Dark Matter Credit is highly recommended for anyone interested in
economic history, regardless of their disciplinary backgrounds and
areas of specialization. Its methodological contributions are manifold
and transcend the topic under investigation. The authors take the core
lesson of the New Institutional Economics to heart, but reveal the
pitfalls of its practitioners’ tendency to assume that the
institutions which matter to economic growth are state-run or central
banks. In the process, they also reveal that secure property rights
without transparent information markets have little impact, and that
more attention should be paid to information systems. Finally, they
disprove the oft-touted superiority of common law over Roman law for
the development of financial markets. Curiously, the map on p. 26 not
only shows the capillary presence of the royal administration in the
provinces of the kingdom in 1740, but also suggests that by then,
notaries were not, as generally assumed, more prevalent in the
southern regions (where Roman law had deeper roots) than in the north
(the area of customary law).

Economic historians trained in economics and political scientists with
a historical bent will find in this book a signal that their job
markets today rarely send: investment in demanding archival research
generates genuine discoveries. Traditional historians may be
intimidated by some of the statistical tests, or feel that they lack
the time and resources to undertake a project of this scale. But I
hope they will appreciate not only the book’s empirical results, but
also the authors’ decision to walk readers through testable
hypotheses, including those that are eventually discarded. Graduate
students, at the very least, will benefit greatly from familiarizing
themselves with a writing style that, in contrast to narrative
history, elucidates the process by which authors formulate causal
arguments.

Missing in the book is a sharper sociological characterization of
lenders and borrowers. In the eighteenth century, mortgage-like credit
coexisted alongside commercial credit, which was mobilized by
international merchants on the basis of their reputation and without
collateral. As noted in the conclusion, whether and how these two
markets connected remains a mystery because the volume of bills of
exchange (the quintessential instrument of commercial credit) is not
measurable. One may nonetheless ask: Who owned real estate and for
what purposes was it mortgaged? To what extent did credit circulate
across socio-economic groups? How did the economic hierarchies between
merchant-bankers, landowners, and manufacturers change across time and
space? Who gained and who lost from using notaries and banks? These
questions are peripheral to the overall inquiry in spite of the fact
that they are central to the history of modern France and the rise of
its bourgeoisie. Dark Matter Credit closes by stating that “inequality
seemed to have no effect” on credit markets and their rate of growth
(p. 233). To accept the authors’ suspicion that “high levels of wealth
inequality are inimical to mortgage markets” is not to deny that the
social profile and gender composition of lenders and borrowers can be
important attributes of these credit markets.


Francesca Trivellato is Andrew W. Mellon Professor of Early Modern
European History at the Institute for Advanced Study, Princeton. She
recently published The Promise and Peril of Credit: What a Forgotten
Legend about Jews and Finance Tells Us about the Making of European
Commercial Society (Princeton: Princeton University Press, 2019).

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