Victorian Finance Vs. Today: What Would They Think?

Imagine bringing a sharp-witted observer from the early Victorian era, say the 1850s, into our bustling modern financial markets. It’s a fascinating thought experiment, isn't it? What would these individuals, accustomed to the financial landscape of their time, make of today's complex instruments and rapid-fire trading? Surprisingly, many aspects of our current financial world wouldn't be entirely alien to them. In fact, **early Victorians might find more common ground with modern markets than we initially expect**. For instance, the recent global embrace of negative interest rates, a concept that might seem utterly bizarre at first glance, shouldn't have been such a shock. Why didn't people just hoard cash? This very question has echoes in the past. Back in Britain during the early 1850s, Exchequer Bills effectively offered negative rates. The sheer convenience of these paper instruments meant they were valued more highly than literal stacks of gold coins. Today, similarly, the ease of electronic ledger balances holds a premium over the cumbersome task of handling physical banknotes.

This insightful parallel is just one of many revelations emerging from recent academic studies that delve into the Bank of England Archive's ledgers, cross-referencing them with historical price reports, contemporary news coverage, and other archival materials. These investigations have unearthed previously unknown statistics regarding the completeness of price reporting, turnover rates, and the activity of dealers in the Victorian era. Furthermore, these studies have illuminated the significant role the London Stock Exchange played as a crucial component of the so-called "shadow banking system" of that period. Beyond just raw data, these historical deep dives also offer valuable qualitative insights into the nature of modern finance. It’s quite striking how our fundamental financial laws and institutions today can be traced as direct descendants of those established during the Victorian era. If some of those early Victorians were to miraculously reappear in our time, they would likely recognize a vast array of modern financial instruments and services, though they would undoubtedly be astonished by elaborate creations like CDO squareds. Many of the concerns we grapple with today would also resonate deeply with them. While they didn't discuss 'climate change' as we do, they were acutely aware of and worried about natural resource depletion and the pervasive effects of globalisation. Inequality was even more stark than it is now. Periods of deflation and what we now call a "Great Savings Glut" were visible and seemed like natural occurrences. While the terms 'secular stagnation' and 'liquidity trap' hadn't yet been coined, the underlying attitudes and economic conditions they describe were widely prevalent and understood.

Familiar Fears and Unsettling Innovations

Even though the financial system of the Victorian era was considerably smaller in scale compared to today's global behemoth, public sentiment towards it wasn't drastically different. Respect was frequently tinged with a potent mix of fear and disdain. This sentiment is captured vividly in an 1850 magazine article that described the London Stock Exchange as "an institution destitute of moral principle, but at the same time omnipotent in its influence upon the moral and social condition of nations." This dual perception of immense power coupled with moral ambiguity is a sentiment that still surfaces in contemporary discussions about finance. So, what specific aspects of our modern financial landscape would truly astonish those early Victorian observers if they were to materialize today? One significant candidate would surely be our almost unquestioning acceptance of financial innovation as an inherently socially productive endeavor. We tend to celebrate new financial products and technologies as drivers of progress and efficiency, a viewpoint that might seem remarkably naive to individuals who witnessed firsthand the speculative bubbles and crashes of the 19th century. Another aspect that would likely provoke bewilderment is our profound faith in central planning and the presumed ability of policymakers to fine-tune the economy, ensuring smooth and steady growth. The Minsky Instability Hypothesis, which posits that periods of stability inherently sow the seeds of future instability, would likely be regarded as an obvious truth based on their historical experiences. What we find reflected in 19th-century records are opinions, such as those published in The Times, which noted that market crashes occurred roughly once a decade. These crashes, while painful, were seen as leading individuals to "the reflection that they are at least the wiser for it, that they will not be taken in a second time." Yet, paradoxically, the same article observed that "the next fit comes on them like the rest, and they go through all the stages of the disease with pathological accuracy." This cyclical pattern of learning and forgetting, of succumbing to irrational exuberance after experiencing painful lessons, is a timeless human trait that our Victorian counterparts would readily recognize.

The Efficient Market Hypothesis (EMH), in its strong form, would likely appear to early Victorians as not just amusing, but as a complete fantasy. They understood that a semblance of market efficiency could be achieved, but only through the relentless, diligent efforts of experienced and informed traders. Crucially, even these seasoned professionals couldn't always overcome market irrationalities and were themselves susceptible to the limitations of groupthink and herd behavior. Their understanding was rooted in the practical realities of active trading and the inherent imperfections of human judgment, rather than abstract theoretical models. They would probably find it quaint that modern finance often assumes prices fully reflect all available information without acknowledging the significant role of behavioral biases and information asymmetry that they experienced daily. The idea that markets are inherently self-correcting and always move towards an optimal equilibrium would be foreign to their experience of frequent and often dramatic market dislocations. The inherent skepticism and pragmatic approach to market dynamics, honed by firsthand experience with booms and busts, would make them question the foundational assumptions of modern efficient market theories. They might point to instances where insider knowledge, manipulation, or simply widespread panic demonstrably drove prices away from any notion of fundamental value, a phenomenon they witnessed and navigated repeatedly.

The Great Anomaly: High Equities, Low Rates

Perhaps the most profound and difficult surprise for early Victorian observers would be the contemporary combination of high equity prices and low long-term interest rates. Today's commentators often accept this scenario as natural, consistently reassuring investors that low interest rates help sustain record-high corporate profits, which in turn justify the lofty share prices. While there's certainly evidence that low interest rates can boost profits in the short run, basic economic logic suggests a different long-term relationship. Historically, and according to fundamental economic principles, interest rates and profit rates (or equity returns) should generally move in the same direction. Both bonds and equities represent different methods of funding business ventures, and their respective returns – interest and profit – essentially represent the cost of capital. While differences exist due to varying levels of risk, a strong positive correlation between the two has typically been expected. This was precisely the prevailing understanding among financiers and thinkers of the early Victorian era. The influential theoretician Robert Hamilton wrote about this relationship in the 1810s, and James Morrison, one of the era's wealthiest merchant bankers, articulated similar views in the 1840s. Many others shared this perspective. If these individuals were to suddenly reappear today, they would undoubtedly be astounded by the current market dynamic. They might ponder why, if figures like Lloyd Blankfein were indeed engaging in "God's work" by leading Goldman Sachs, they weren't aggressively mobilizing the vast amounts of low-cost capital readily available to compete away the extravagantly high equity returns? They would likely question the sustainability of such a divergence. Furthermore, they would surely conjecture that once capitalism began functioning in a manner they recognized – that is, responding to fundamental economic incentives – this anomaly would eventually disappear, leading to a significant crash in either bond prices, share prices, or perhaps both, as capital sought more rational allocation.

The divergence between the cost of debt (interest rates) and the expected return on equity (profits) would strike them as a fundamental mispricing of risk and capital. In their experience, arbitrage opportunities of this magnitude would be quickly exploited, bringing the markets back into alignment. The current narrative that low rates *cause* high profits and therefore justify high equity valuations would seem like a circular argument, a distortion of cause and effect. They would likely see the low rates as a symptom of something else – perhaps suppressed demand, a lack of profitable investment opportunities, or even central bank intervention distorting natural market signals. The very idea that record profits could be sustained indefinitely while the cost of borrowing remained historically low would challenge their understanding of how economies grow and capital is allocated. They might ask: If capital is so cheap, why aren't companies investing it more aggressively to generate even higher *real* returns, rather than simply inflating asset prices? The current environment, where equity markets seem detached from underlying economic growth and corporate investment, would appear unsustainable and fundamentally irrational from their perspective. They would be looking for the 'catch,' the hidden risk, or the inevitable correction that their historical experiences taught them was always present in such situations. The lack of a clear mechanism for the high equity valuations to self-correct or to be challenged by the abundance of cheap debt would be a source of significant perplexity and concern for these seasoned observers of market cycles.

In essence, while the tools and technologies have evolved dramatically, the fundamental human behaviors and market dynamics that drive financial booms and busts remain remarkably consistent. The early Victorians, armed with their historical perspective, might offer us valuable, albeit uncomfortable, insights into our own financial present. They would remind us that while innovation brings convenience, it doesn't eliminate the timeless challenges of human psychology, market volatility, and the inherent complexities of economic equilibrium. Their astonishment at our modern market conditions, particularly the equity-profit-rate nexus, serves as a potent reminder that sometimes, the most profound truths are found by looking back.

For further insights into financial history and market dynamics, you can explore resources from institutions like the Bank of England and the London Stock Exchange.