Scandinavian Economic History Review

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Financial intermediaries and economic

development: The Belgian case

Rodney J. Morrison

To cite this article: Rodney J. Morrison (1967) Financial intermediaries and economic
development: The Belgian case, Scandinavian Economic History Review, 15:1-2, 56-70, DOI:
10.1080/03585522.1967.10414352

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 Financial Intermediaries and
Economic Development: The Belgian Case
By RODNEY J. MORRISON*

The role of financial intermediaries in economic development has been high-

lighted, most recently, by John Gurley and Edward Shaw, who contend that
most economists consider only real variables in their analyses of economic de-
velopment while neglecting those which are strictly financial in nature.' To
remedy this neglect Gurley and Shaw have constructed a model which stresses
the developmental aspects of financial intermediaries. This paper is an applica-
tion of that model to Belgium in the 1830s. It first presents the model in skeletal
form and then briefly describes the state of the Belgian economy during the
1830's. The focal point of the paper is an analysis of the activities of the Societe
Generale de Belgique and the Banque de Belgique, the first large-scale financial
intermediaries to engage in development finance.

The Gurley-Shaw model starts by dividing the economy into spending units and
financial intermediaries. Spending units are then classified as baianced, surplus,
and deficit budget units. A balanced budget unit is one in which current ex-
penditure (including outlays for investment) equals current income. A surplus
budget unit is one in which current expenditure is less than current income. And
deficit budget units are those in which current expenditures exceed current in-
come."

* Rodney J. Morrison, Ph.D. 1965 (Economics, University of Wisconsin), now Assistant

Professor in Economics at Wellesley College (Mass.). Dr. Morrison has written on nineteenth-
century economic theory in the U.S.A. In Wisconsin he joined a project entitled 'Banking in
the Early Stages of European Civilization' as an assistant for Professor Rondo E. Cameron.
1 J. G. Gurley and E. S. Shaw, Money in a Theory of Finance, (Washington, D. C.: The
Brookings Institution, 1960), pp. 1-2.
2 J. G. Gurley and E. S. Shaw, 'Financial Aspects of Economic Development', American Eco-
nomic Review, Vol. XLV, Sept. 1955, p. 516.
 FINANCIAL INTERMEDIARIES AND ECONOMIC DEVELOPMENT 57

Gurley and Shaw then classify financial activity as internal-balanced budget

units operating on internally generated funds-or external-when spending units
are incapable of self-finance. The latter classification, external finance, includes
both direct external finance and indirect external finance. Direct external finance
occurs when deficit budget units deal directly with surplus budget units issuing
direct debt (bonds) which is acquired by the latter. Indirect external finance
takes place when financial intermediaries enter the lending process. In this in-
stance financial intermediaries gather loanable funds from surplus budget units
in exchange for their own indirect debt." (This indirect debt consists of the
liabilities and equities of financial intermediaries.) Having acquired loanable
funds, financial intermediaries then lend to deficit units in return for the direct
debt formerly acquired by surplus units.
The operational premise of the model is that the institutionalization of savings
and investment 'quickens the growth rate of debt relative to the growth rate of
income and wealth'." Thus Gurley and Shaw contend that a lack of indirect ex-
ternal finance will ultimately hinder or impede an economy's growth rate, for
then all finance must be either internal or direct, and each of these methods is
subject to constraints. In these cases of internal finance the constraint is an in-
ability to generate sufficient funds to undertake any sizeable investment projects;
and for direct external finance, it is the fact that surplus budget units must be
willing to acquire increasing amounts of undifferentiated direct debt, if deficit
budget units are to be able to acquire increasing amounts of loanable funds.
Moreover, if direct external finance is the sole or principal method available, it
follows that surplus units will demand higher returns. That is, in order to induce
surplus budget units to continue to add to their stock of illiquid direct debt, the
interest rate on that debt must rise." If it doesn't, lenders will become increasingly
reluctant to add to the illiquidity of their portfolios, portfolios which consist of
one type of financial asset, direct debt. But the consequence of rising interest rates
is that if investment is at all responsive to changes in the rate of interest, it will
be inhibited.
Thus assuming a risk aversion on the part of surplus budget units and an in-
vestment demand schedule which is somewhat elastic with respect to the rate
of interest, the essential role played by financial intermediaries is that they enable
surplus units to diversify their portfolios by offering them their own (the financial

3 Ibid., pp. 517-519.

4 Ibid., p.519.
5 Ibid., p. 525.
58 RODNEY J. MORRISON

intermediaries') indirect debt in place of the direct debt which they (the surplus
units) had formerly been accumulating. Thus by taking the direct debt of deficit
budget units, financial intermediaries, undertaking indirect external finance,
exert a downward pressure upon interest rates and enhance the borrowing and
lending of loanable funds. As Gurley and Shaw state, 'Aggregate debt increases
at a faster pace ... if an increasing portion of direct debt moves into the port-
folio of financial intermediaries'. 6
This model has two basic but crucial premises. It assumes a certain level of
development, and it assumes the existence of perfect capital markets. The im-
portance of these assumptions, and especially the latter, is that they are necessary
to assure significant ad justment to marginal changes in the rate of interest." Thus
the viability of the model rests upon the extent to which relevant economic var-
iables respond to changes in the interest rate. But clearly, in an underdeveloped
economy, there would be little such sensitivity. Therefore the general applicability
of the model to economies in an early stage of development becomes somewhat
dubious.
The denial of these two crucial assumptions does not, however, completely
vitiate the model, but it necessitates a reworking of it. This reformulation utilizes
a concept of economic dualism in which an economy is divided into two sectors,
one traditional and the other transitional. In the traditional sector most firms
are owner-managed and internally or self-financed. There is little financial inter-
mediation or innovation and little secular change in per capita income. In the
transitional sector, however, there are signs of an increasing per capita real
income and firms and entrepreneurs are favourably disposed towards innova-
tion."
Financial markets in the traditional sector are highly personalized as surplus
budget units lend only to those firms and individuals with whom they have had
prior dealings. In this case changes in the interest rate have little or no effect
towards increasing savings or reallocating loanable funds. In the transitional
sector, however, there are financial intermediaries which are able to mobilize

6 Ibid., p. 526.
7 R. L. Bennett, The Financial Sector and Economic Development, (Baltimore: The Johns
Hopkins Press, 1965), pp. 1-2, 35.
s The combination of the concepts of economic dualism and financial intermediation is
drawn from R. L. Bennett's excellent study which is cited above. See R. L. Bennett, op, cit.,
pp. 22-24. For a more general application of the Gurley-Shaw model, see D. J. Ott, 'The Finan-
cial Development of Japan, 1878-1958', Journal of Political Economy, Vol. LXIX, April, 1961.
 FINANCIAL INTERMEDIARIES AND ECONOMIC DEVELOPMENT 59

and allocate loanable funds to innovative firms. By doing so, they perform the
function known as 'innovative finance'. 9
Financial intermediaries in the transitional sector are also capable of taking
a more forceful role in the development process. They do this by actively parti-
cipating in firms either by aiding them in their planning or by actually super-
vising their operations.
In order to finance their innovations entrepreneurs, in the Schumpetarian
model, require large amounts of loanable funds for lengthy periods of time. And
in the reformulated version of the Gurley-Shaw model, this is precisely the role
which financial intermediaries fulfill. For while direct or internal finance con-
tinues in the traditional sector, in the transitional sector financial intermedaries
stand ready to serve innovative firms or entrepreneurs in need of loanable funds.
When market conditions and the technical capabilities of the transitional sector
have developed sufficiently and entrepreneurs are eager to expand, they will
generally require additional funds. If they are forced to rely upon direct or in-
ternal finance, in a very substantive sense, a financial bottleneck will have been
encountered. Thus financial as well as technological innovation is required if
development is to continue. And the innovation on the financial side is the de-
velopment of indirect external finance." By providing this form of finance, finan-
cial intermediaries play a key allocative role in the development process. Thus
while the framework is that of Gurley-Shaw, with its stress upon the role of
financial intermediaries, the crucial consideration is no longer responses to mar-
ginal changes in interest rates but improvements in financial institutions and
their techniques of operation.

II

The Belgian economic growth of the 1830s represents the first successful con-
tinental manifestation of the industrial revolution that had already begun in Great
Britain. Indicative of this growth was the increased output of Belgian coal and
iron and the technological change which took place in metallurgy and agricul-
ture." A specific example of the beginnings of industrial development in this

9 R. L. Bennett, op. cit., pp. 24-28.

10 uu., pp. 33-36.
11 M. Chevalier, Essais de Politique Industrielle, (Paris: Charles Gosselin, 1843), pp.326-
327. The technological change in agriculture was the introduction of the sugar beet, whereas
in metallurgy, it was the use of coke. Approximately 26 per cent of the Belgian blast furnaces
in operation in this period were of the more efficient coke-burning variety. By comparison,
60 RODNEY J. MORRISON

period is the vertically and horizontally integrated Seraing establishment of the

British immigrant, William Cockerill. At Seraing the production of steam engines,
locomotives, and machinery for the textile industry was carried out from the
initial stage of mining to the final stage of marketing." In a related industry,
armaments, output (in current prices) rose from 5.3 million francs in 1834 to
7 million francs in 1837. And in addition to these heavy industries, lighter metal-
lic industries such as surgical instruments, cutlery, stoves, and copperware also
exhibited signs of marked growth."
Overemphasis upon those industries which were basically metallurgical in
nature points towards a 'leading sector' thesis, but there are also indications of
substantial growth in industries quite different in character. Based upon a long
tradition of accomplishment, the textile industry also participated in this upsurge
with linen production, for example, increasing from 105,000 units in 1835 to
145,000 units in 1838. 14 And in an industry almost entirely transformative in
nature, sugar refining, imports of raw sugar rose from 9.9 million kilograms in
1834 to 16.8 million kilograms in 1838, while the export of refined sugar for the
same period increased from 2.9 million kilograms to 8.1 million kilograms."
With respect to the economy's infrastructure, the Belgian government, which
can be considered as a deficit budget unit, undertook the development of the
country's rail system. Starting with an initial borrowing of 18 million francs in
1833, the government put 241 kilometers of railroad line into operation in the
period running from 1835 to 1838. Also indicative of railroad growth is the in-
crease in Belgian rolling stock which grew from 51 units in 1835 to 256 units
in 1838.1 6
Rostow's 'take-off' notwithstanding, there are definite signs pointing towards
industrialization and economic development in Belgium in the 1820s.17 Of
added interest is the fact that there are several features of this period which

only 5 per cent of the French blast furnaces for the comparable period used coke. Also, the
Belgian economy made much greater use of steam power. See X. Heuschling, Essai Statistique
Generale de la Belgique, (Bruxelles: Vandermaelon, 1841), pp. 102, passim.
12 X. Heuschling, op, cit., pp. 91-95.
13 Ibid.
14 Ibid.
15 Ibid.

16E. Perrot, 'Des Chemins de Fer Belges', Bulletin de la Commission Centrale de Statistique,

(Bruxelles, 1844), pp. 27,44-49; J. Renkin, 'Les Chemins de Fer de l'Etat Belge', Revue Eco-
nomique Iniernationale, Nov. 1904, pp. 600-602.
17 Rostow's 'tentative, approximate take-off date' for Belgium is 1833-1860. See W. W. Ro-

stow, The Stages of Economic Growth, (Cambridge: Cambridge University Press, 1961), p. 38.
 FINANCIAL INTERMEDIARIES AND ECONOMIC DEVELOPMENT 61

distinguish the development of the Belgian economy from that of Great Britain.
These characteristics are an extensive utilization of the corporate form of business
and the central role of financial intermediaries in the process of industrial de-
velopment.
The corporate form of enterprise was not a Belgian discovery, but the multi-
plication of the societe anonyme which featured limited liability had never been
undertaken to the extent to which it was in Belgium in the 1830s. The rapid
spread of this institution was made possible by the government's favorable atti-
tude towards incorporation, as evidenced by the ease with which corporate
charters were obtained. IS The act of October 16, 1830 which proclaimed the
'liberty of association' was in sharp contrast to the restrictive policy of Dutch
officials in the period prior to 1830, and it was also in sharp contrast to the
attitude prevalent in Great Britain, where the corporate form of business was
not encouraged until the 1850s.u
The response of the business community to this 'liberty of association' is seen
in the proliferation of the societe anonyme. Starting with the formation of four
corporations in 1833, by 1839 approximately 150 societes anonymes had been
organized in metallurgy, coal mining, textiles, banking and finance, and sugar
refining."
These societes anonymes were not confronted with any legal impediments, but
they were subject to financial constraints which might be categorized as being
in one or more of the following areas: (1) the need for initial investment, (2)
working capital, and (3) funds for modernization and expansion. Significantly,
it was here that the Belgian economy made a contribution to the theory of
economic development by producing an innovation in financial techniques, the
developmental role played by two financial intermediaries, the Societe Generale
de Belgique and the Banque de Belgique.

18 R. Durviaux, La Banque Mixte, (Bruxelles: Bruyant, 1947), pp. 33-34.

19 For a discussion of Belgian and Dutch economic relations, see C. Graux, 'La Belgique et
le Projet D'Entente Economique Avec le Hollande', Revue Economique Internationale, Feb.
1906, pp. 219-263.
20 L. Frere, Etude Historique des Socieies Anonymes Belges, (Bruxelles, 1938), pp.16-41,
125. For an interpretation of the effects of a reluctance rather than a predisposition to move
away from the family-dominated form of enterprise, see D. S. Landes, 'French Entrepreneurship
and Industrial Growth in the Nineteenth Century'. Journal of Economic History, Vol. IX,
May, 1949.
62 RODNEY J. MORRISON

III
The Societe Generale de Belgique was founded in 1822 while Belgium was still
under Dutch control. The original proposal for its organization was made by a
Brussels banker, F. Opdenberg, who had hoped to start a commercial bank. Upon
application to the crown, however, his idea was quickly seized by the king, Wil-
liam I, and modified so that it (the new bank) would be a source of financial
aid to the state and the crown, and contribute to the economic development of
the country." According to its statutes, the Societe Generale was authorized to
contribute to the progress, development, and prosperity of agriculture, manu-
facturing, and commerce. The means whereby the bank was to accomplish these
ends encompassed almost every known banking function. The Societe Generale
was empowered to accept and create deposits, issue banknotes, discount commer-
cial paper, make advances on securities, deal in bills of exchange, securities,
specie, merchandise, and rental property."
The capitalization of the Societe Generale was set at 50 million florins, 20
million in royal lands leased by the king and 60,000 shares of stock issued at a
price of 500 florins per share. When the subscription was made, however, only
31,2260 shares were sold, William I taking some 25,800, paying for the bulk of
them with treasury debt. Thus the Societe Generale began its operations with a
capitalization of approximately 16 million florins from the sale of stock and 20
million florins worth of leased royal lands. But only 3.5 million florins of this
total was in specie."
For the first decade of its existence the bank operated in a very conservative
manner. This was due to the highly illiquid nature of its capital structure (the
major portion of its capitalization was still in leased royal lands), the fact that
it was the fiscal agent of the state, and the lack of opportunity of exercising any
substantial promotional activity due to the Dutch government's highly restrictive
attitude towards incorporation by Belgian firms," This period of relatively con-
servative banking practices ceased, however, shortly after the revolution of 1830.
In the period following independence, the Societe Generale began to operate

21 B. S. Chlepner, La Banque en Belgique, (Bruxelles: M. Lamartin, 1926), pp.37-42.

22 Statuts de la Societe Anonyme A Former A Bruxelles En Execution de l'Arette Royal de
28 Aout, 1822, No. 118, pp. 19-25.
23 B. S. Chlepner, op, cit., pp. 47-50.
24 J. St. Lewinski, L'Evolution I ndustrielle de la Belgique, (Bruxelles: Mise et Thron, 1911),
pp. 125-127; B. S. Chlepner, Le Marcli« Financier Belge Depuis Cent Ans, (Bruxelles: Librairie
Falk Fils, Georges Van Campenhoot, Suecesseur, 1930), passim.
 FINANCIAL INTERMEDIARIES AND ECONOMIC DEVELOPMENT 63

as a legitimate financial intermediary actively engaged in the fostering of indu-

strial development. Utilizing a multiplicity of financial techniques, it organized
societes anonymes in various sectors of the Belgian economy. The first of these
techniques was a policy whereby it would transform enterprises which were family
firms into societes anonymes by underwriting the security issues of the firms. In
return the Societe Generale would place some of its men on the board of directors
of the newly formed societe anonyme and retain a portion of its stock. A second
device was the use of current accounts. This financial tool was a means whereby
favoured firms and entrepreneurs were allowed to draw upon these accounts in
much the same fashion that modern corporations have established lines of credit
in today's financial institutions."
A third means of promoting industrialization was the caisse d'epargne. The
Societe Generale experienced surprising success with this, as savings deposits in-
creased from approximately 19 million francs in 1835 to 46 million in 1838. It
was primarily by means of the caisse d'epargne that the Societe Generale was
able to mobilize savings and allocate them to those borrowers which it deemed to
have the greatest profit potential. 26
The Societe Generale's overall success in these pursuits was manifested in the
public's attitude towards the bank. It was soon accused of being pro-Dutch by
elements in the traditional sector, a powerful monopoly, and the ruler (in the
transitional sector) of an industrial community which resembled a feudal
society."
Antipathy towards the Societe Generale was not limited to private individuals,
as the government also began to view it with some disfavour. While the basic
philosophy of the 1840s would be one of economic liberalism, in the 1830s the
government still operated in a paternalistic fashion granting subsidies, enacting
tariffs, and building railroads. It comes as no surprise, then, that the government
felt no compunction in aiding in the organization of a rival to the Societe Gene-
rale. It was in this spirit that the Banque de Belgique was founded in 1835, and
little attempt was made to disguise the fact that this bank was established to
oppose the monopoly of the Societe Generale. Under the direction of its founder,
M. Charles de Brouckere, the Banque de Belgique, with a capitalization of 20

25 R. Durviaux, op. cii., p. 39.

26 B. S. Chlepner, op. cit., pp. 68-74, 94-98.
27 S. B. Clough, A History of the Flemish Movement in Belgium, (New York: R. Smith,
1930), pp. 157-163; G. DeGreef, Le Credit Commerciale et la Banque Nationale de Belgique,
(BruxelIes: Moyolez et Audiarte, 1899), pp. 200-203; M. Chevalier, op, cit., pp. 9-12.
64 RODNEY J. MORRISON

million francs and governmental approval, was authorized to perform every

function granted the Societe Generale in its charter."
The Banque de Belgique immediately started upon an active financial pro-
gramme closely paralleling that of the Societe Generate's. This programme found
each intermediary organizing subsidiary banks to aid them in their normal bank-
ing operations and to aid them as they organized new societes anonymes or re-
vamped what had formerly been family firms. They both then organized what
would be termed today as 'investment trusts' to raise additional capital, to enable
their stockholders to diversify their portfolios, and basically to take the stock of
societes anonymes which the parent organization was underwriting.
In 1835, operating in the first phase of its programme, the organization of sub-
sidiary banks, the Societe Cenerale founded the Banque Fonciere with a capital
stock of 25 million francs. The Banque de Belgique followed suit by founding La
Caisse Hypothecaire de Bruxelles with a capitalization of 12 million francs and
La Caisse des Proprietaires with a capitalization of 3 million francs. In the second
phase of its programme the Societe Generale founded two investment trusts, La
Societe Nationale pour Entreprises Industrielles et Commerciales capitalized at
15 million francs and La Societe de Commerce de Bruxelles capitalized at 10
million francs. In 1836 the Banque de Belgique founded its investment trusts.
These were Les Societes des Actions Reunies capitalized at 40 million francs and
La Societe D'Industrie Luxembourgeoise capitalized at 1 million francs. The
Societe Generale then proposed the largest of these financial intermediaries, La
Societe Des Capitalistes Reunis Dans Un But De Mutualite Industrielle capita-
lized at 50 million francs."
Having developed the necessary techniques, the Societe Generale and the
Banque de Belgique began to finance entrepreneurs in the transitional sector
and to aid innovative firms in their search for funds. These activities spread
through almost every sector of the Belgian economy, as the Societe Generale and
the Banque de Belgique entered mining, metallurgy, canals, textiles, sugar re-
fining, urban renewal (public baths), and the chemical industry. In this period
the Societe Generale participated directly in the creation of 31 industrial societes
anon ymes with a capitalization of approximately 100 million francs, and the

28 B. S. Chlepner, Cent Ans D'Histoire Sociale en Belgique, (Bruxelles: Institut de Sociologie

Solvay, 1956), pp. 30-37; R. Durviaux, op, cit., p. 35.

29 L. Frere, op. cit., pp. 16--40. Only 18 million francs' worth of the stock of La Societe des
Capitalistes Reunis was actually issued. Most of this stock buying was done on a credit basis
with small margin requirements and additional loans secured by the stock itself.
 FINANCIAL INTERMEDIARIES AND ECONOMIC DEVELOPMENT 65

Banque de Belgique accounted for 24 industrial societes anonymes with a total

capitalization of 54 million francs."

IV
Unfortunately this development did not continue unabated, for on December 17,
1838 the Banque de Belgique suspended payment, and in the subsequent panic,
the expansion of the 1830s came to an abrupt halt. After having played a central
role in this expansion, the Societe Generale and the Banque de Belgique were
soon accused of having caused the collapse by engendering a rash of speculative
activity. The downturn was also attributed to overproduction, underconsump-
tion, and a general lack of confidence due to a recurrence of political difficulties
with the Dutch. With specific reference to the Banque de Belgique, commen-
tators of the day held that its failure was due either to its excessive speculative
activities or an immobilization caused by the long-term nature of its operations.
An additional reason preferred is very similar to that given when any note is-
suing bank fails-an excessive issue of bank notes."
A more precise answer to this question can be derived from the analysis made
by the director and founder of the Banque de Belgique, Charles de Brouckere,
Discussing his bank's difficulties at a special stockholders' meeting held in Fe-
bruary of 1839, de Brouckere mentioned the political difficulties as having had
some influence, but he also gave a far more cogent reason for the suspension.
The Banque de Belgique had been forced to suspend payment not because of
speculation or an overissue of bank notes, but due to the fact that its sole com-
petitor and rival, the Societe Generale, had perpetrated a run on it."
This run had its basis in the relationship which had existed between the two
banks. While they had been rivals from the very inception of the Banque de
Belgique, indeed the latter had been organized to offset the former, since they
both issued notes, an exchange agreement had been worked out between them.

30 L. Frere, op, cii., p. 41. The Banque de Belgique had been founded to offset the monopoly
position of the Society Generale. When it appeared that the monopoly had merely been re-
placed with a duopoly, the government quickly dismissed a proposal for a third large bank for
fear that the original two would combine to crush any competitor.. See .P. Kauch, La Banque
Nationals de Belgique, (Bruxelles, 1950), p. 17.
31 See L. Geschesne, Histoire Economique et Sociale de la Belgique, (Liege: Wykmans, 1932),
pp.389-402; P. Kauch, op, cit., p. 16; G. DeGreef, op, cit., p. 194; and C. Juglar, Des Crises
Commerciales, (Paris: Guillman et Cie., 1889), p. 347.
32 Archives Generales Du Royaume, Banque de Belgique, Assemblee Generale Extraordinaire,
Bruxelles: Feb. 28, 1839. (Hereafter referred to as AGR No. 170).

5 Scand. Econ. Rist. Rev.

66 RODNEY J. MORRISON

This agreement stipulated that whenever one bank accumulated approximately

one million francs of its counterpart's notes, notice would be given and that one
million francs would be exchanged for a like amount of the others' notes. In
view of the fact that both banks operated on fractional reserves and specie was
particularly scarce (neither bank had a significant portion of its capital or re-
serves in that commodity), this agreement appeared to be eminently reasonable.
The practice soon evolved quite efficiently to the point where a bank would
present one million francs for redemption in its own notes and hold any amount
in excess of one million for the next redemption date. A demand for redemption
was made known on or about the first and the fifteenth of each month and the
actual exchange was made shortly thereafter. 33 U ntil December of 1838 neither
bank had demanded any amount in excess of one million either in specie or in its
own notes. The normal operation of this practice is exhibited in Table 1.

Table 1
Exchange Practices"

Dates of exchange Notes of the Banque Amount exchanged

made between de Belgique held by by the Banque
Oct. and Dec. 1838 the Societe Generale de Belgique

Sept. 6, 1838 1,460,000 francs 1,000,000 francs

Sept. 18, 1838 1,125,000 francs 1,000,000 francs
Oct. 4, 1838 1,100,000 francs 1,000,000 francs
Oct. 20, 1838 1,150,000 francs 1,000,000 francs
Nov. 4, 1838 1,300,000 francs 1,000,000 francs
Dec. 4, 1838 1,835,000 francs 1,000,000 francs

+ Source: Archives Generales du Royaume, Banque de Belgique, Assernblee Generale Extra-

ordinaire, Bruxelles: Feb. 28, 1839.

It is evident from the table that the Societe Generale appeared to live up to its
part of the agreement. If often possessed notes of the Banque de Belgique in ex-
cess of one million francs, but for the dates listed above, it did not demand re-
demption of the excess amount. But another fact stands out. Contrary to its
usual practice, the Societe Generale did not present any notes for redemption
in mid-November. But it did give notice in early December, and on December 4
another one million francs were presented for redemption. In his analysis of the
situation, de Brouckere set the stage for his explanation of the bank's suspension.

33 AGR No. 170.

 FINANCIAL INTERMEDIARIES AND ECONOMIC DEVELOPMENT 67

He pointed out that after the exchange of December 4 the Banque de Belgique
had 2,952,000 francs worth of notes in circulation. He also stated that the average
note circulation for the period 1835-1838 had never exceeded 4 million francs.
And he also made it clear that he believed that there had never been a time
when the note circulation of the Banque de Belgique had been excessive. In
fact, he contended, the Banque de Belgique had experienced some difficulty in
getting notes into general circulation because of the Belgian populace's earlier
misfortune with French assignats." This constraint had actually hindered the
bank in its discount operations which should have been a major source of its
profits. Thus in de Brouckere's eyes, contrary to the allegation of excessive note
issue, his bank actually had problems in getting notes into circulation.
The next development in the trials of the Banque de Belgique occurred in
mid-December. On December 10 the Societe Generale notified the Banque de
Belgique that it intended to present 1,200,000 worth of notes for redemption at
the next exchange." The timing of the request was normal, but the demand for
a redemption of an amount in excess of one million francs was highly unusual.
At this time the Banque de Belgique possessed only 1,125,000 francs of its
rival's notes. Given this situation, the Banque de Belgique attempted to stall un-
til it could accumulate an amount sufficient to cover this unusual demand. But
the Societe Generale was adamant, and finally, on December 12, the Banque de
Belgique was able to make the exchange by cleaning out its cash account and
paying the balance in specie.
De Brouckere and his compatriots at the Banque de Belgique were now well
aware of what was underway, and they took positive action to obtain the re-
sources needed to meet what they now considered to be an inevitable demand
for additional note redemption. Assessing the situation, they estimated that the
Societe Generale had held approximately 1,370,000 francs worth of their notes
on the tenth of the month. After the exchange of 1,200,000 francs on the twelfth,
they assumed that the next request would be in the environs of 170,000 to 200,000
francs." To obtain the funds to meet this demand, they pursued a number of
avenues.
M. Davignon, an officer of the bank, was sent up to Paris to secure whatever
resources he could. Funds which had been sent to Paris to meet interest charges
falling due at the end of the year were recalled. A payment due the Banque de

34 B. S. Chlepner, La Banque en Belgique, p. 28.

35 AGR No. 170.
36 AGR No. 170.

5*
68 RODNEY J. MORRISON

Belgique from La Societe de Zinc de la Vieille Montagne was expected momen-

tarily, and 125,000 francs were expected from this company's Liege office. In
addition, de Brouckere petitioned the government for aid. And in an attempt at
moral suasion, they made a point of letting Brussels know of the bank's reserve
strength. On the basis of these resources, the officers of the Banque de Belgique
believed that they would be able to meet the inroads being made by the Societe
Generale."
The final phase of the bank's difficulties began on December 15. The employee
of the Societe Generale who appeared that day at the Banque de Belgique with a
quantity of notes for redemption was hardly unexpected. But his demand for an
exchange of 300,000 francs was such a surprise that rather than a stall, he met a
flat refusal. Rumours immediately sprang up throughout Brussels that the Banque
de Belgique was going under. However, the arrival of funds from Liege on the
sixteenth and the still-hoped-for aid from the government helped to quiet the
situation somewhat and prevented a general panic."
But after having gone to the trouble of initiating this run, the Societe Generale
was not an organization which would allow this opportunity to slip away. So on
the same day, the sixteenth, an agent of the Societe Generale appeared at the
Banque de Belgique with 462,000 francs worth of its notes and demanded re-
demption. This final demand, coupled with the government's refusal to intervene,
spelled the end for the Banque de Belgique. On the seventeenth of December it
suspended payment and closed its doors.
Commenting upon these events, Charles de Brouckere tendered the rather
guarded opinion that he thought that the Societe Generale had not received these
large quantities of his bank's notes in the normal course of its operations but had
gone out of its way to acquire them. A quick glance at the disposition of the notes
of the Banque de Belgique appears to support his conclusion.
The total note circulation of the Banque de Belgique for the first seventeen
days of December was 3,913,000 francs. Of this amount the Societe Generale
presented some 2,662,000 for redemption, or approximately 68 per cent of the
total note circulation of the Banque de Belgique had been acquired by its rival.
And not only had these notes been accumulated, but breaking with the estab-
lished exchange practice, the Societe Generale had demanded a redemption in
excess of the agreed upon amount. This was most clearly a classic example of a
carefully planned bank run.
37 AGR No. 170.
38 AGR No. 170.
 FINANCIAL INTERMEDIARIES AND ECONOMIC DEVELOPMENT 69
In addition to the run, however, de Brouckere pointed to another factor
which had contributed to the Banque de Belgique's suspension. This was its
highly illiquid state. The bank's heavy commitment to mortgages, advances on
stock, and industrial loans taken in conjunction with such short-term liabilities as
its notes, the caisses d' epargnes, and the current accounts (e.g. the Societe des
Mines et Fonderies de Zinc de la Vieille Montagne had an account of some
3,500,000 francs), had placed the bank in very immobile position. As de
Brouckere put it:

'The loans made to industry and those made on corporate stock are the most striking causes
of the prolonged discomfort of the bank. Here, gentlemen, is revealed in its entirety the cause
of the embarrassment of the bank. The administration had engaged the capital in a manner in
which it could not be mobilized promptly'. He continued referring to the impossibility of con-
ducting extensive discount operations. '... these loans, nevertheless, were one of the conditions
of life ... it was both impossible to apply 20 million francs in an advantageous manner in
operations of liquid banking and to avoid danger'.39

v
In applying the Gurley-Shaw model to Belgium in the decade of the 1830s, one
of its basic assumptions had to be relaxed, that of perfect capital markets. In all
other respects the experience of the period appears to fit the specifications of the
revised model: the existence of a traditional and a transitional sector, techno-
logical change, a disposition towards innovation, and an increase in real output
in the transitional sector. Added to these factors was the willingness of Belgian
industrialists to adopt the corporate form of business enterprise. This incorpora-
tion enabled them to acquire financial resources much more easily than had they
continued to operate as private balanced or deficit budget units dependent solely
upon internal or direct finance. But in addition to these factors, the Belgian ex-
pansion of the 1830s had another variable which no earlier period of growth
had possessed and which few would have immediately thereafter, financial inter-
mediaries heavily committed to the financing of innovative firms and entre-
preneurs."

39 AGR No. 170.

4>0 For a comprehensive treatment of the operation of a financial intermediary (the Credit
Mobilier) in a later period, see R. E. Cameron, France and the Economic Development of Eu-
rope, 1800-1914, (Princeton, New Jersey: Princeton University Press, 1961). For a summary
of financial intermediaries and industrialization which includes the Belgian example, see R. E.
Cameron, 'Banking in the Early Stages of Industrialization', Scand. Econ. Hist, Rev., Vol. XI,
No.2.
70 RODNEY J. MORRISON

But even though these attributes of the Gurley-Shaw model were present, it is
the lack of agreement with the crucial assumption of perfect capital markets
which provides an answer to the failure of the Belgian expansion to continue un-
interrupted. It is obvious that these intermediaries did not cause the economic
development in the period under consideration but rather they facilitated it. For
their role was subject to such structural elements as the level of technology, the
availability of resources, and favourable market conditions. But it is just as ob-
vious that given the long-term nature of their assets and the short-term nature of
their liabilities, it was only a matter of time before each of these intermediaries
would find itself in a highly illiquid position-the run on the Banque de Belgique
serving only to precipitate the onset of the crisis. Thus while they may enable
surplus budget units to diversify their portfolios, financial intermediaries engag-
ing in 'innovative finance' are also subject to the demands of the market. There-
fore, they too must have a means of diversifying their portfolios.
The pure Gurley-Shaw model required perfect capital markets to assure an
adequate response of real and monetary economic variables to incremental
changes in the interest rate. But the Belgian experience of the 1830s points to
another aspect of this assumption of perfection. This is the requirement that there
be either a 'lender of last resort' or sufficient financial development so that fi-
nancial intermediaries can carry out 'mixed' banking operations without becom-
ing totally immobilized. The case of the Societe Generale and the Banque de
Belgique is an excellent example of the contributions which financial inter-
mediaries can make to economic development. For when the level of income
and technological development has reached a certain stage, financial bottlenecks
may develop, and this is precisely when financial intermediaries may become
crucial to the development process. But the Belgian case also indicates that a
financial theory of sustained growth is applicable only when the all-important
assumption of perfect capital markets or a reasonable approximation thereof is
fulfilled.