Caltech Historian Awarded Grant to Study Trust in Financial Markets

PASADENA, Calif. – If the social climate of France in the 1790s could be summed up in a phrase, it would be "tumultuous times." The French Revolution was winding down; Napoleon was winding up. Hyper-inflation was occurring, money had become worthless, and many financial institutions collapsed.

It would take 60 years before France's capital markets would recover, 60 years before enough trust could build up again between lender and borrower to help the country's economy start over.

Philip Hoffman studies trust. An economic historian at the California Institute of Technology, Hoffman, a colleague from UCLA, and one from the Ecoles des Hautes Etudes in France, have been awarded a $146,694 grant from the Russell Sage Foundation entitled "Trust Supporting Institutions and Economic Growth: Local Credit Markets in France, 1740-1899."

If this sounds like some arcane, dusty research, it is, laughs Hoffman. "We spend most of our time in damp archives, pouring over hand-written ledgers that are more than 200 years old." But his research into how trust evolves and its implications on long-term financial growth has an eerie resonance with today's times, he says, "due to such events as the violation of trust due to Enron, the Arthur Anderson auditing mess, and the like."

Hoffman and his colleagues chose France because of its excellent archived material, the fact its financial institutions are representative of much of Europe, and because its history provided a "natural experiment" when the French Revolution struck.

Hoffman is interested in learning how credit markets evolve, and where trust comes from, because, he says, "at the heart of our research lies a simple fact: in every financial transaction one party entrusts his or her wealth to another party.

"During the French Revolution, the government simply printed money which resulted in hyper-inflation during the 1790s," he says. "The result was to ruin many investors and cause a collapse of the lending market in Paris." Thus, post-revolution, there was no trust between lender and borrower. How then did trust come back? he asks. Are there differences from market to market? Can it be explained by the level of wealth on the part of an institution or individual?

While the research is just beginning, Hoffman says their preliminary work suggests there are striking differences in how trust evolves, and that it can't all be explained by economic factors. "We're finding regional variations, differences between northern and southern France in how quickly trust returned," says Hoffman. "Part of it, for example, was a distrust of outsiders in some regions, which meant there was no new infusion of capital."

Hoffman says they will be able to examine and hopefully explain the long-term consequences of trust as it pertains to France. And while there is a great tie-in to what's going on in today's financial markets, "we don't, of course, know the outcome and consequences." That remains to be seen.

The Russell Sage Foundation is the principal American foundation devoted exclusively to research in the social sciences. Located in New York City, it is a research center, a funding source for studies by scholars at other academic and research institutions, and an active member of the nation's social science community. The foundation also publishes, under its own imprint, the books that derive from the work of its grantees and visiting scholars.

One of the oldest private foundations in the United States, the Russell Sage Foundation was established by Margaret Olivia Sage in 1907 for "the improvement of social and living conditions in the United States." In its early years, the foundation undertook major projects in low income housing, urban planning, social work, and labor reform. It now dedicates itself exclusively to strengthening the methods, data, and theoretical core of the social sciences as a means of improving social policies.

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