Weber & Stock Exchange (Boerse/Bourse)
by Sam Whimster
The fundamental contradiction driving the Bourse inquiry and the controversy over the bourse was the social-political need to protect the public and the private investor (almost 2 million of them) and the aim of ensuring the functional capability of the economy. A liberal, open trading economy had moved to the joint stock company issuing shares, and a stock exchange was required for trading in shares (Effekten oder Wertpapiere). Max Weber, as pointed out by Mommsen in die deutsche Politik, placed the value of national state in international geopolitics as the highest priority. To this end it must have strong banks, a functioning stock exchange, and the capacity to deal in futures for grain prices. This last desideratum accorded German grain prices with that of international price (at Chicago).
The German stock exchanges had no bar on membership and were more or less unregulated. This compared with London Stock Exchange where membership was a closed shop, it was self regulating and enforced a rigorous honour code – members could be black-balled for not honouring contracts and stock exchange firms could get «hammered» for their mistakes.
The German Boersen were using the same advanced financial instruments as London but without the discipline. Share ramping was common, up and down – cornering the market in a share (Ecke), verbal contracts were not always honoured – no word is my bond. This last problem occurred in the options market. A commission to buy shares at one date, on account, and sell them at end of settling up period (around a month). This gave leverage to speculate and «to short» or drive up price, so either way, taking a profit on the difference in price (Differenzgeschaeft). If the speculation went wrong the dealer was ruined, and frequently reneged on the verbal contract. Price manipulation through rumour, ramping share prices, misinformation etc. was rife. Also, IPOs – launching a company and emitting shares to public was tainted by insufficient information. This led in respect to a share offering of a Tuscan railway to the famous Lucca-Pistoia-Aktienstreit, which went to the high court. Alongside the legal side was the question of whether Differenzgeschaeft was Spielgeschaeft and gambling debts were not justiciable.
Should there be state laws to enforce contracts? Should there be a register to record all deals?
All this unfortunately all too familiar for us, since the rise of casino capitalism since the 1980s and the lack of self-discipline and effective legal regulation of financial institutions.
The political background to these debates were vicious and driven by the agrarians, the most successful interest and lobbying group in Germany at that time (1890s). The agrarians owned large cereal producing farms in eastern Germany (East of the Elbe) but were unable to compete with imported grain from the Ukraine or the United States. So, through their influence and direct holding of government posts (as Junkers) they forced through tariffs on grains. Consistent with this policy was to prevent all forms of free trade, and this included stock exchanges, and most certainly futures markets which ironed out international differences in the price of grain. The agrarians went as far as promoting the need for a closed, autarkic economy, an idea that even Chancellor Hohenlohe supported in 1894.
The agrarians, in their extensive media campaigns, used moral arguments of making money out of money, which appealed to both Lutheran and Catholic confessions, and they exploited anti-semitism in respect to leading Jewish owned brokerage firms. There was no shortage of stock exchange scandals to pursue this campaign.
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Max Weber’s position itself is pretty straightforward. He argued:
1) lecturing the working class (in Die Hilfe) that an unimpeded bourse improves their standard of living. Wolfgang J. Mommsen links this to Weber’s support for capitalistic imperialism (MW and German Politics, pp. 72-81). How far Mommsen’s argument can be extended beyond 1897 is open to question.
2) Asserting economic liberalism of the middle class to trade on world markets and against the «financial repression» (as it is now quaintly called) of the agrarians. For Guenther Roth this evidences Weber’s bourgeois cosmopolinanism. Weber’s liberalism embraces open commodity markets and constitutional democracy.
3) The stock exchange is not a club for ethical culture. Lutheran and Catholic morality and the widespread distaste/revulsion on making money from money (usury) was the dominant conviction. Viz. in Thomas Mann, the incipient downfall of Familie Buddenbrooks stems from corruption in the Hamburg bourse.
4) Weber argued that stock exchanges should only be open to the plutocracy. They could afford to lose money and if they went bankrupt that was their fault. It did not require moralistic state regulation.
What is not straightforward is how Weber got sucked into this maelstrom of politics, law, economic policy and public opinion. Knut Borchardt rightly complained this whole phase of Weber’s life has been ignored by scholars. Unsurprisingly, because the topic is so esoteric and specialist – and not to say opaque. Returning to the topic now, over a decade after the global financial crisis of 2008, one feels guilty for not taking more notice. Knut Borchart’s Einleitung is exemplary in laying out the issues – technical , legal, politic/Politik, moral, geopolitical – about which we should have been more informed prior to 2008. See Knut Borchardt, Börsenwesen. Schriften und Reden 1893-1898 for MWG I/5 (in 2! volumes). Borchardt gave a very illuminating lecture on this to the Bavarian Academy of Sciences, which Keith Tribe translated for Max Weber Studies 2.2 (2002).
When, and including the politics of the predominantly east Prussian agrarians, the stock exchange issue was one of the major if not the most important debates of the 1890s. Assuming that Max Weber was called in just to give an expert opinion on the stock exchange, fails to do justice to what he was involved in.
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Following Knut Borchardt, the governmental background to Weber’s writings on the Bourse is follows – but note the complexity of government bodies involved.
1891 A Bourse Commission is set up – by Chancellor Caprivi in his role as Minister President of Prussia (as Chancellor he was making open trade treaties) – to investigate the German bourses across imperial Germany and make proposals for reform. This was in response to the issues I’ve already set out above. The initative came out of Dept of Trade in the Prussian government, and was approved by the Reichstag in November 1891.
The inquiry was taken forward by interior ministry of the Reich under leadership of the capable Heinrich von Boetticher. Chair appointed and representative form the Laender states appointed. The Commission goes into session April 1892 till November 1893. 115 expert opinions canvassed.
Early 1894 reform proposals put to the Bundesrat and the Reichstag. Leads to massive political debate by the interested parties and interest groups as well as public opinion. Caprivi against agrarians, and making grain treaties with Russian and Rumania, but he falls – to court intrigue – to the decrepit Hohenlohe who becomes chancellor in October 1864.
With publication of Enquete (5000 pages of documents) Weber produces his article for die Hilfe (Naumann’s popular press journal) and articles journal of gesammte Handelsrecht (500 pages).
March to May 1895 a standoff between Reich ministry of interior and Prussian proposal put to Bundesrat. Draft bill agreed to go to Reichstag. 5 main clauses:
1) A state commissioner to aid the Boersenaufsicht
2) A stock exchange committee should provide expert information to the Bundesrat
3) Stock exchange honour court should become an occupational trade chamber
4) the validity of future contracts and names of dealers should be entered on a stock exchange register
5) In futures options for products, the seller should be in default immediately when non-contractual goods are tendered, even if the fulfilment period has not yet expired. (Whatever that means!)
This does not amount to much – even if one could understand it – and was considered the least necessary to get the support of the agrarians.
January 1896, first reading of the Boersengesetzentwurf. Bill went to a Reichstag committee (where agrarians a minority). Committe put teeth into bill but allowed option trading in cereals. This last point became centre of debate in third reading in Reichstag. Point 4 above went through on majority vote, with grain futures allowed in Boersen. Emperor signed June 1896, to come into law Ist January 1897.
November 1896, Bundesrat decides it will set up a provisional Boersen committee to advise it on the implementation of the new law. Real intention was to convene an expert knowledgeable committee, not subject to interest group pleading, and an ability to intervene in future politics of stock exchange. 15 members put forward by Boersen, 11 from Laender state, 4 directly appointed by Bundesrat. Weber one of 4 direct appointees along with economist Lexis.
A sub-committee formed to report on trade in shares on the Boersen, Max Weber one of 7 members. Weber is attacked in the press by agrarians as having been hand picked by Boetticher because of his known views, (in die Hilfe). Weber supported by liberal press.
In April 1897 Weber was taken off the committee in place of representatives of trade and industry.
The stock exchange law was in part superseded by the new Buergerliches Gesetzbuch which ruled that options trading fell outside the law. The existing Boersengesetz was boycotted by the Berlin Boerse, and the register was also boycotted by most investors and dealers – hence who was trading could never be publicly known.
Chancellor von Buelow in 1907 brought in a clarifiying law that made futures trading legal, as talisman of the new anti-agrarian anti-Kaiser bloc in Parliament. Borchardt writes that the new law reflected Weber’s proposals more or less directly.
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Some further talking points:
Weber’s laissez aller position is/was definitely a minority view. The Federal German Goverment only re-introduced futures trading in 1989. This brings us to present day comparisons and reflections. The Bretton Woods settlement of 1944 started to disintegate in the 1970s and freedom of capital movement and commodities (Washington consensus with EU in strong support) became the new orthodoxy. This returns us to open trading world Weber supported (except on Germany’s eastern frontiers).
To give an example. Weber shows no mercy for traders who go bankrupt. But in the 1980s derivative traders offset risk by diversifying it through collateral debt obligations held by the major banks and investors. These debt obligations were, in turn, insured by insurance companies. For Weber, this would represent an undermining of the market principle and trader responsibility. In the great financial crisis 2008 not only were the banks bailed out, but also the great insurance companies, specifically AIG, which was insolvent on account of its contracts with investment banks. The state itself (US Treasury) became the re-insurer.
In making this point, we are taken back to Weber’s work on medieval trading companies and his tutelage by Levin Goldschmidt. Trade law, and the treatment of risk and financial failure, belongs to a semi-autonomous Handelsrecht – and not to positive state law. Borchardt brings out this argument in his lecture.
Borchardt is sceptical about Weber’s prowess as an economist, where in 1894 he had no lecturing experience. But it is an interesting argument to say that through his stock exchange studies he had a first hand acquaintance with the nature of business credit, and a continuity to the medieval trading companies in Genova and Venice.
Borchardt alludes to the money-like nature of trading contracts in futures – not their legal status which in law is very hard to enforce but as credit notes (MWS ibid p.144 n19). A futures option in today’s terminology is a «derivative» – it is derivative of the actual buying and selling of wheat after the harvesting. As such it is a debt obligation, usually netted out, but nevertheless a debt obligation. In this it was similar in form to a bill of exchange, which was very much the subject matter of his PhD on medieval trading companies. Both perform as credit notes – though with different time and redemption limits.
In his 1919 Munich lectures on universal economic and social history, Weber demostrates the – historic – step from bills of exchange to the birth of modern banking.
The part of the medieval banker in payments consisted in accepting the bill; the banker of today discounts it, that is, he pays it, with the deduction of the discount with the view of cashing it later and thus invests his operating capital in bills. The institution which first consistently carried on such an exchange is the Bank of England (Weber, General Economic History,1927, p. 263).
The institution of the Bank of England was secured by the new king William III, who in his invasion of England was backed by City of London merchants (Puritan zealots). The king granted the BoE a charter that allowed the Bank to issue bills of exchange, soon to become its monopoly. The City merchants became shareholders, they lent to the Crown and Parliament underwrote the revenue for the enormous debts racked up as England established geopolitical supremacy across the globe through wars. English war expenditure for the Augsburg League (1688-1697) was over £49 million of which a third was borrowed; in the Seven Years War (1756-83) the figures were over £160 million of which over 37% was borrowed. Britain gained massively from the treaties following the War of Spanish Succession in its control of new colonial territories. British supremacy as the leading commercial power and centre of the world economy, which it had achieved by the end of the century, was based on debt. The economist Peter Jay summarizes this conjunctural history as follows:
The State played the key role by introducing a series of institutional reforms, largely modelled on the Dutch financial system, that provided the financial foundations on which Britain simultaneously waged European wars, built a world-wide empire and expanded its economy. The key measures were the institution of a national debt that was the responsibility of parliament rather than the monarch, the development of an effective tax system, the establishment in 1694 of the Bank of England and the emergence of an organised market for public as well as private securities (Road to Riches, 2009, 198).
Geoff Ingham is the author who established the primacy of finance capital in the development of modern rational capitalism. See his «Money, Credit and Finance in Capitalism» (in Oxford Handbook of Max Weber, 2019) which places Max Weber’s contribution, and also shows how China failed to develop credit money (as opposed to coinage).
This brings us to Weber’s relation to Joseph Schumpeter. Putting to one side their respective positions on the Puritan entrepreneur and Schumpeter’s creative entrepreneur, what they have in common is a credit theory of money. Credit money enabled British colonial ascendancy, for Weber; for Schumpeter it made possible new technologies and obviated the financial cost of «creative destruction».
Joseph Schumpeter used up considerable intellectual energy in arguing this point with his fellow economists. Conventional banking theory – to this day – holds that banks lend out the savings of depositors to borrowers, acting as an intermediary institution. Schumpeter, in direct contrast argued:
It is much more realistic to say that the banks create ‘credit’, that is, that they create deposits in their act of lending, than to say that they lend the deposits that have been entrusted to them (Schumpeter 1954: 1114).
Schumpeter in his 1934 Theory of Economic Development argued that the entrepreneur and his crucial role in economic breakthroughs and innovation is largely dependent on bank credit. As Pixley notes «credit-money is created ‘without limit'» (Pixley and Flam, Mobile Capital, 2018, 17).
Writing on «Banking and Dealings in Money in the Pre-capitalist Age» Weber in his Economic History lectures discusses how loans were made available to merchants in Babylonian banking. Payments were reckoned in silver shekels but the coinage was insufficient to make those payments. Therefore, «the professional banker made loans on a small scale against pledges or personal security» (Weber 1927, 255). Weber then draws one of his many bifurcation moments in civilizational history, here banking. «…where coined money was in use the banking business developed out of coinage, but in Babylon it developed out of money, that is to say, credit dealings» (255-6).
One wonders about precedence, and the mutual influence of Weber and Schumpeter in the Grundriss der Sozialökonomik.
That said, intellectually armed with the concept of credit money, we can point to a number of bifurcation moments in civilizational history:
1. The fight against the closing of the German economy, and its consequences, in the 1890s.
2. The rise of the Mediterranean seabord economy and its bifurcation from the inland economy (Binnenland). This also marks out ancient Rome, and its turning point, inwards, under Empire.
3. Britain’s successful break out into the world economy, using the financial techniques developed in Amsterdam.
4. China’s «great divergence» from occidental seaboard trading economy due to its failure to develop credit money.
5. The undecided bifurcation in American banking and finance, where Binnenland populism continuously challenges the interests and legitimacy of seaboard Eastern (New York) banks.
6. The ongoing downfall of western economies post 2008 due to unlimited credit money.