61st Annual Meeting
Finance and Economic Modernization
September 14-16, 2001
Philadelphia, Pennsylvania
ABSTRACTS
Alphabetical List of Authors
Session 2A. The Cultural Framework for Markets
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Financing Trans-Saharan Trade in Nineteenth Century Western Africa" Ghislaine Lydon (UCLA) |
| Abstract: Trans-Saharan trade in nineteenth century western Africa was made possible through a vibrant, flexible and highly personalized financial market. Access to credit --the lifeline of commercial enterprise--was facilitated by the organization of commercial coalitions in which partners trusteed one another and banked on their respective creditworthiness to promote their long-distance trading operations. Islamic law provided an institutional framework for the organization and regulation of commerce. |
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Medieval Economic Ethics in Indian America" Marie Duggan (Keene) |
| Abstract: Despite the reputation of Spanish Catholicism as the antithesis of modernity, mendicant friars were the economic decision-makers in one of the key processes of modernization: the assimilation of indigenous Americans into Spain’s Latin American empire. Archival account books from one late Spanish colony (California) reveal the logic of the mission as a self-financing institution of colonial social control. The priests allocated their tiny budget from Madrid in accordance with medieval conceptions of virtue: they gave away what they had. This process of giving created alliances with Indian communities that resulted in baptism and re-allocation of their labor from nomadic Indian to sedentary Spanish economy. The communities that accepted baptism became the labor force that provided goods worth far more than the initial government subsidy. Indian labor then became the font of further generosity by the Franciscans to Indian communities hitherto outside Spanish control. |
Session 2B. Crises in History
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The 1906 San Francisco Earthquake and the Panic of 1907" Kerry Odell (Scripps) and Marc Weidenmeir (Claremont) |
| Abstract: Can distant, localized shocks result in global financial crisis? The question is a pressing one for many contemporary financiers as recent earthquakes in Japan and Taiwan have illustrated. History tells us that, indeed, events far removed from one's own country can have devastating effects. In April 1906, an earthquake and fire destroyed much of the city of San Francisco. British fire insurance companies, who had been heavily involved in writing policies for San Francisco, faced millions of pounds worth of claims. As those claims were settled in autumn 1906, the outflow of capital threatened the fixed exchange rate on the pound sterling. In defense of the pound the Bank of England nearly doubled its discount rate and refused to rediscount American trade bills. The resulting contraction pushed the United States into a recession and set the stage for the Panic of 1907. |
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An Early Example of Contagion among Emerging Capital Markets" Gail Triner (Rutgers) |
| Abstract: This paper assesses the role of international capital in the Brazilian financial crisis of 1891 (the Encilhamento). It looks for the impact of the Argentine default in 1890 (the Baring Crisis) on Brazilian access to capital markets. The history of bond yield fluctuations in London for Brazilian and Argentine debt, exchange rates, data on investment flows and archival and journalistic accounts reveal a close congruence between the Argentine and Brazilian crises. Heightened reaction of international markets, if not outright contagion, carried the effects of the Argentine experience to Brazil because the open capital and money markets of the period easily transmitted crisis from one economy to another and because fundamental conditions in both economies rendered them similarly vulnerable to fluctuations in capital flows. The paper raises this case as a precedent for the spread of financial crises that emerging markets faced at the end of the twentieth century. |
Session 2C. Early U.S. Financial Evolution
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The Antebellum Midwest, 1830-1860" Jane Knodell (Vermont) |
| Abstract: One aspect of financial deepening is the development of non-bank financial intermediaries. In the U.S., this is often associated with the so-called institutionalization of savings in the early twentieth century. This paper will show that these kinds of financial firms, such as insurance companies and savings banks, had an important presence much earlier in U.S. economic history. Financial centers in the antebellum Midwest were populated with a variety of financial firms, particularly after state legislatures adopted restrictive laws against note-issuing banks. The paper will paint a portrait of the financial sectors of Cincinnati, Chicago, and St. Louis between 1830 and 1860, including the number and size of different kinds of financial firms in operation (including state-chartered banks), and the array of payments, saving, and financing instruments they supplied. The paper will also discuss the role these "domestic" financial institutions played in midwestern economic development in relation to the central role played by "foreign" capital during this period. |
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Some Lessons from U.S. Monetary History" Warren Weber (Minneapolis Fed and Minnesota), Arthur J. Rolnick (Minneapolis Fed), and Bruce D. Smith (Texas, Austin) |
| Abstract: Before 1789, the individual colonies that were ultimately to make up the United States were free to issue their own currencies, and all of them did. The U.S. constitution, adopted in 1789, took this power away from the states. Thus, it might appear that the Constitution left the federal government, which minted gold and silver coins, as the sole potential creator of currency in the new country. owever, this did not, in fact, turn out to be the case. Although the Constitution took away the power of states to issue money, it left them with the power to charter and regulate banks. All of the states ultimately utilized this power, and some went as far as wholly or partially owning banks. In addition, the federal government chartered the (First) Bank of the United States from 1791-1811 and the (Second) Bank of the United States from 1816-1836. Virtually all of these entities issued notes, which circulated as currency. Thus, by the early 1800s there were far more entities issuing currency in the United States than there had ever been prior to 1789. The regulation of these currency issuers varied from state-to-state and from time-to-time. We have argued elsewhere (Rolnick, Smith, and Weber, 1993) that the intention of the framers of the Constitution was to make the U.S. a monetary union or a common currency area. If this is correct, then initial attempt to do so was a pronounced failure. For the most part, the notes issued by all of these banks circulated against each other and against specie at discounts or premia that varied across time and space. Why did the initial attempt to make the United States a common currency area fail? Our answer is that the regulation of these banks was flawed. In our view, the achievement of a uniform currency with private currency issuers requires that holders of currency can costlessly redeem it at par in terms of outside money on demand. The basic idea is that when a currency can be costlessly redeemed at par for outside money on demand, it becomes a perfect substitute for outside money and will, therefore, trade at a fixed exchange rate with that currency. When all private currencies are subject to the same requirement, they will all trade at a fixed rate with that currency and, as a result, at par with each other. At no time in the early U.S. experience did bank regulation provide adequately for par redemption on demand that was costless to the holders of bank notes. As a result, the U.S. did not have a uniform currency during the early part of its history. This paper illustrates how important uniform regulation that provides for the costless redemption of currencies at par on demand is for a common currency with private issuers to exist. Although such a situation never existed in the United States prior to the passage of the National Bank Act in 1863, what we show is that the size and regional variability of bank note discounts were smaller the closer this criterion was to being met. Specifically, the paper examines two episodes. The first is the period in which the Second Bank was actively redeeming state bank notes and the period immediately after its demise. The second is the experience of New England when the Suffolk Banking System, a system for net clearing of bank notes, was in existence from the 1830s to the 1850s. This System eliminated much of the cost to a bank of redeeming the notes of other banks. If our view is correct, the notes of the banks participating in this system should have behaved more like a common currency than did bank notes in other parts of the country at the same time. |
Session 3A. The Big Picture I
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Peter Temin (MIT) |
| Abstract: I argue that the economy of the early Roman Empire was primarily a market economy. The parts of this economy located far from each other were not tied together as tightly as markets often are today, but they still functioned as part of a comprehensive Mediterranean market. There are two reasons why this conclusion is important. First, it brings the description of the Roman economy as a whole into accord with the fragmentary evidence we have about individual market transactions. Second, this synthetic view provides a platform on which to investigate further questions about the origins and eventual demise of the Roman economy and about conditions for the formation and preservation of markets in general. |
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Maristella Botticini (Boston University) and Zvi Eckstein (Tel Aviv) |
| Abstract: This paper studies one of the most remarkable examples of successful economic performance in which religion, education, and human capital accumulation seems to have played a critical role: the economic history of the Jews. The main question we aim to address is to what extent a human capital model of occupational choice can explain the trends in Jewish population and their observed residential and occupational distribution. We present a model in which the conversion of Jews to other religions and their occupational choice is affected by the larger emphasis that Jewish religion placed on children's education starting from the first century of the Christian era. The model predicts that as the importance of children's education grows, a faster conversion of Jewish farmers to non-Jewish religions should occur; moreover, a higher proportion of Jews will work as merchants in cities. Preliminary historical evidence provides support to these predictions. |
Session 3B. Medieval Affairs
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Meir Kohn (Dartmouth) |
| Abstract: Economic relationships in the pre-industrial economy - especially share-cropping and putting out- have generally been understood as employment relationships. They have been interpreted either in Marxist terms of power and class struggle or, more recently, in terms of principal-agent problems. However, our understanding of these relationships can be enhanced by seeing them not as arrangements for the supply of labor, but rather as arrangements for the supply of financing. Doing so enables us to bring to bear insights from corporate finance, especially those concerning issues of ownership and control. |
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Responses to Impediments from Church and State in Western Europe, 1200-1600" John Munro (Toronto) |
| Abstract: The basic theme
is that impediments provided by both Church (usury doctrine above all)
and State (medieval bullionist policies, monopoly on the coinage, etc.)
provided the necessary challenges whose response came in the form of our
modern financial institutions, especially in the form of bills of exchange
and rentes (i.e. heritable annuities). On must begin by citing the unhappy
experiences of Florence and other Italian city-states in basing their public
finances on a dead-end road: the prestanzas or forced loans, and the usury
controversies that ensued from them. The alternative solution, found elsewhere,
and the one that would govern European public finance up to the nineteenth
century, was to finance state activities by the sale of rentes, which were
not loans, and thus not usurious; they were instead the purchase/sale of
an income stream, without any stipulated repayment. Though there was little
of any dispute about the legality of rentes, two papal bulls subsequently,
in the fifteenth century, confirmed that they were in no way usurious.
But the true efficacy and efficiency of modern public finance also rests
upon the legal protection of creditors who purchase such financial claims,
i.e. income-bearing rentes, in secondary markets; and public finance also
depends upon satisfactory instruments to permit low risk and low cost international
remittances. The solution to both problems lay in the development
of the negotiable bill of exchange, surprisingly achieving its first precocious
success in 'backward' England: as response to not only the usury doctrine
(providing a mechanism to 'disguise' interest payments in the exchange
date) but more importantly to circumvent almost universal bans of the export
and international transmission of precious metals. Another barrier that
faced merchants in England was a virtual prohibition against deposit and
transfer banking; but English merchants did circumvent this barrier by
developing a system of payments using transferable bills. Unfortunately
Common Law courts would not recognize the rights of third parties (bearers)
in such bills, nor would continental courts, for that matter. The
English contribution of such major significance, from a London law-merchant
court ruling in 1437, was to provide such legal guarantees to allow the
bearers in such bills at least equal rights in claiming payment or seizing
assets from defaulting debtors. From that precedent, first civic law merchant
courts in the Low Countries and the Estates General of the Habsburg Low
Countries (1537-1541) provided Europe's first national legislation to ensure
the full legal requirements of true negotiability, for both commercial
bills and government financial paper, especially for the rentes, for which
the Antwerp bourse was now providing Europe's chief secondary market in
both public and private financial bills.
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Session 3C. The Gold Standard
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The Emergence of the Classical Gold Standard, 1870-1913" Christopher Meissner (University of Cambridge) |
| Abstract: It is rarely recognized that the classical gold standard only gradually became an international monetary regime, and to date, there has been no cross-country econometric analysis of the issue. I use duration analysis to show that network externalities explain the pattern of diffusion of the gold standard. Countries adopted the gold standard sooner when they had a large share of trade with other gold countries relative to GDP. More developed countries with sound financial systems and the institutional capabilities to maintain a convertible currency adopted sooner. I find no evidence that exchange rate volatility or concerns about deflation mattered for the timing of adoption. The paper is relevant to research on why countries join currency unions today, and how monetary regimes and transaction costs affect trade. |
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Lessons from the Gold Standard, 1880-1914" Concepcion Garcia-Iglesias (Pompeu Fabra) |
| Abstract: I analyze time-varying risk premia in long-term government securities during the classical gold standard period 1880-1914. I employ a quasi-capital asset pricing model (CAPM) to analyze the time path of systematic risk for a cross section of six countries that adhered to the gold standard to varying degrees. The empirical results show that systematic risk was higher and more variable for the countries that shadowed the gold standard. The results are consistent with recent research that the gold standard was a signal of financial rectitude, "a good housekeeping seal of approval" (Bordo and Rockoff, 1996). Peripheral countries have benefited by participating in a monetary union as opposed to countries that pursue independent monetary policies. Countries adhered to the gold standard because they were able to obtain access to international markets at a lower price. In addition, there was a convergence of systematic risk for those countries that belonged to a certain monetary union. I also analyze the impact of the international crisis of 1890, or any other perceived financial crisis. Evidence indicates that there was a 'flight to quality' during the 1890's crisis. Countries that did not adhere to the gold standard generally experienced a larger increase in risk during the crisis period. Finally, the results indicate an overall decrease in the volatility of systematic risk during the early 1900s. I interpret this as evidence of a 'market wide' effect on the international regime. |
Session 4A. The Great Depression
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Lee Ohanian (UCLA) |
| Abstract: There are 2 striking aspects of the recovery from the Great Depression. The recovery was weak, and wages and prices in several sectors were well above trend. These data contrast sharply with neoclassical econonic theory, which predicts a strong recovery with low wages. This paper argues that New Deal cartelization policies were an important contributing factor to the weak recovery. The paper develops a model of the bargaining process between labor and firms that occurred with these policies, and embed that bargaining model into an otherwise standard equilibrium business cycle model. The model predicts that about 60% of the weak recovery was due to these New Deal policies that ironically had been adopted to foster economic recovery. |
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Charles Calomiris (Columbia) and Joe Mason (Drexel) |
| Abstract: This paper uses data disaggregated by state to investigate the extent to which banking distress acted as a source of shock to real activity or as a propagator of shocks originating elsewhere. We first investigate links between bank distress and commercial distress, using a quarterly panel VAR model with data defined at the state level, and find that commercial distress causes, but is not caused by, bank distress. Links between bank distress and state-level income growth are greater, and there is some evidence that contractions in the supply of bank lending produced by bank distress were an important contributor to economic decline in the early 1930s. |
Session 4B. Macro History
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British Style Stabilization Policies after World War One" Pierre Cyrille Hautcoeur (Orleans) and Mike Bordo (Rutgers) |
| Abstract: In this paper we consider the costs and the benefits of the French and British strategies and the potential benefits of an earlier French stabilization. We construct two counterfactual scenarios for France. In the first case, France would have followed the British strategy and would have decided to return to the original parity by following a deflationary policy beginning in 1919 (the year when both the franc and the domestic price level were at their most favorable positions for such a strategy). In a second experiment, France would have succeeded in its 1924 attempt at stabilizing at a depreciated (but much higher than the actual 1926 one) level. |
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Forrest Capie (City) and Geoffrey Wood (City) |
| Abstract: There are two periods of deflation in British economic history that particularly merit attention. One is a long period running from 1873 to 1896. The other is short but more severe in the years 1929 to 1932. This paper aims to investigate what produced these falling prices and whether the price falls are an important part of the explanation for the economic performance at the time. We also consider whether recent supply-based explanations of the 1929-32 experience add much of use to more traditional views. The approach in the main part of the paper will be to develop Keynes and Fisher models of debt deflation. They will be made operational by use of asset price data in combination with time series models. It will then be considered whether the data in either period behaved in a way which might be considered consistent with either the Keynes or Fisher models. |
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The Austro-Hungarian Case, 1896 - 1914" Marc Flandreau (University of Lille, OFCE, and CEPR) and John Komlos (Munich) |
| Abstract: We have collected monthly data on the spot and forward exchange rates between the German mark and Austrian Florin between 1880 and 1914. We explore what the effect of going on a gold standard was on market efficiency. We find that market efficiency as measured by the relationship between forward premia and realized rates improved greatly as the florin moved from a system of floating exchange rate (before 1896) to a system of 'target zone' (afterwards). The stabilization of the florin had the natural effect of reducing the volatility of the florin exchange rate with respect to the mark. More fundamentally, though, it had the effect of improving the quality of the link between forward rates and actual variations. At the turn of the century, the forward premium on the Austro-Hungarian currency became an unbiased predictor of actual exchange rate changes, and even more so as time passed. This is especially remarkable in view of the difficulty that researchers have had to reconcile the efficient market hypothesis with data on modern foreign exchange markets. |
Session 4C. Colonial Experiences
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Colonial Cash Cow or Drug Policy Triumph?" Siddharth Chandra (Pittsburgh) |
| Abstract: The causes and nature of the decline between 1914 and 1940 of the Opium Regie in the Netherlands Indies are examined. Contrary to the gist of some recent scholarship, it is argued that conscious government policy had little if anything to do with the decline of opium consumption. The fall in opium consumption was driven by two economic events whose origins were entirely external to the Opium Regie. These were the inflation of 1919-1922 and the Great Depression of 1929-1935. Using the rational addiction framework, characterization of the responses of opium consumers to changes in the price of opium and to changes in income is provided. Contrary to recent scholarship using similar data, which suggests that opium was "not very addictive," the characterization shows the addictive nature of opium. |
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Contract Enforcement in Overseas Enterprises" Santhi Hejeebu (Iowa, Departments of Economics and History) |
| Abstract: Long-distance trade depends crucially on the enforcement of long-distance contracts, those in which principals are significantly removed from agents. The European trading companies of the eighteenth century were acutely aware of the importance of motivating and monitoring the behavior of their agents stationed overseas. The problem of contract enforcement in the English East India Company, the largest of the English chartered companies, is explored through (1) textual analysis of the actual contracts and (2) a quantitative analysis of the broader conditions of employment. These broader terms include private trade, job security and promotion, bonding, communication, and mortality. The mechanisms most crucial to contract enforcement are sometimes neither in the letter of the contract nor within the control of the corporate directors. |
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Brazilian Tobacco, Indigenous Consumer Demand and Cross-Cultural Exchange in the Hudson's Bay Company's Fur Trade, 1750-1800" Linda Wimmer (Southwest) |
| Abstract: From the 1680s Brazilian tobacco played a prominent role in the Hudson's Bay Company fur trade. Cree traders rejected Virginia tobacco, insisting instead on the Brazilian variety introduced earlier by rival French traders. Indigenous consumer preferences forced the Company to buy this commodity despite its expense its inconvenience to obtain and transport, and its direct competition with varieties produced within England's won empire. Brazilian tobacco's integration in the fur trade challenges interpretations that assume European dominance and indigenous dependence. Using Hudson's Bay Company records, my paper explores the use of this item in cross-cultural trade from 1750 to 1800. English factors used Brazilian tobacco to obtain furs, subsistence goods, services of guides and hunters, to attract new trading partners to the post, and to give as gifts preceding trade. Its use in such exchanges made Brazilian tobacco not only to the fur trade, but also to establishing its context. |
Session 5A. The Big Picture II
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Jeffrey Williamson (Harvard) and Kevin O'Rourke (Trinity) |
| Abstract: This paper documents the size and timing of the world inter-continental trade boom following the great voyages in the 1490s of Columbus, da Gama and their followers. Indeed, a trade boom followed over the subsequent three centuries. But what was its cause? The conventional wisdom in the world history literature offers globalization as the answer: it alleges that declining trade barriers, falling transport costs and overseas “discovery” explains the boom. In contrast, this paper reports the evidence that confirms unambiguously that there was no commodity price convergence between continents, something that would have emerged had globalization been a force that mattered. Thus, the trade boom must have been caused by some combination of European import demand and foreign export supply from Asia and the Americas. Furthermore, the behavior of the relative price of foreign importables in European cities should tell us which mattered most and when. We offer detailed evidence on the relative prices of such importables in European markets over the five centuries 1350-1850. We then offer a model which is used to decompose the sources of the trade boom 1500-1800. |
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Alan Taylor (Davis), Antoni Esteveordal (IDB), and Brian Frantz (USAID) |
| Abstract: An expanding and controversial contemporary literature examines the role of common currencies as a cause of trade expansion. Using the same augmented-gravity-model approach, we examine the role of the gold standard in the global trade boom from 1870 to 1914 and the global trade collapse from 1914 to 1939. We compare the quantitative effects of this kind of "monetary union" with the effects of tariffs and transport costs. The results do not always square with the conventional wisdom of the time as seen in political debates. In the nineteenth century national policy debates focused on tariff instruments and, for the most part, took the gold standard for granted as the default monetary arrangement. Yet the results show that the gold standard was an order of magnitude more important than tariff policy as a trade creating force in that era. In the 1920s, the reverse obtained -- policy debates revolved around the rise and fall of the reconstructed gold standard, but the results suggest that the slowdown in trade growth had more to do with the rise of protectionism. In the 1930s, the situation changed again -- being off gold was now almost taken for granted, and debates swung back more to the tariff wars, whilst the results show that it was the final and complete collapse of the gold standard that drove trade volumes to implode so dramatically. We speculate as to what these curious contradictions imply for the validity of the gravity model approach, the logic of public policy debates at the time, the traditional historical approach that treats trade and finance outcomes as disjoint, and the role of commercial and monetary policy co-operation in the postwar trade recovery. |
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Greg Clark (Davis) |
| Abstract: When was the decisive break from the pre-industrial world of slow technological advance and stagnant living standards to the modern world of constant technological progress and steadily improving living standards? Most historians have assigned the dawn of the modern world to England in 1770. There has followed a long debate about the cause of the Industrial Revolution where, for example, the Financial Revolution of the 1720s has been promoted as a key cause. Here I argue that all attempts to conclusively link the Industrial Revolution to some precipitating factor have been inconclusive for a simple reason. There was no significant break in 1770 from the earlier world. That break only occurred later in the nineteenth century. Instead the Industrial Revolution was the last of a series of localized growth spurts stretching back to the Middle Ages, as in the Netherlands from 1500 to 1650, and northern Italy in the fourteenth century. Accidents of demand, demography, trade, and geography made this spurt seem different than what had come before - but it was really more of the same. Indeed the decline in English interest rates that preceded the Industrial Revolution can be also be explained by population growth. |
Session 5B. The Role of Equity Markets
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Evidence from the Pricing of Seats on the Exchange" Eugene White (Rutgers), Larry Neal (Illinois), and Lance Davis (Caltech) |
| Abstract: The 1990s witnessed
the creation and explosive growth of stock exchanges in emerging markets
and their transformation in the developed world. While the microstructures
of established contemporary markets have been studied intensively, it is
not clear how market rules evolve and perform over long periods of time.
Most studies have focused on individual aspects of stock exchange rules---trading
systems, listing requirements, access to the market, price disclosure,
and settlement---over short periods of time. In this paper, we examine
the long-term evolution of the microstructure of the New York Stock Exchange
using data on the prices of seats on the exchange to determine what were
the key changes over the last 120 years.
The seats on an exchange are capital assets whose prices reflect stockbrokers' expected future profits from the special access offered to them by a seat on the exchange. As such they are affected by the volume of activity and the decree of competition both on the exchange and of the exchange with the rest of the equity market. Thus, the volume and level of stock prices, technology and the rules that govern trading on the exchange influence seat prices. In this study we use a new data from the archives of the NYSE on every seat traded from 1879 to the present. Previous studies (Schwert, 1977; Golbe, 1984; and Keim and Madhavan, 1997) were limited to the last several decades. We have also compiled a chronology of the rules of the exchange from the published NYSE constitutions and governing committees' minutes. Beginning our analysis of how changes in microstructure are reflected in seat prices, we use the simple framework of Cutler, Poterba and Summers (1989) to first see if major changes in the NYSE rules produce noticeable changes in seat prices. Secondly, we examine the largest changes in seat prices to determine if they indicate some change that we missed in our narrative. We examine the time series properties and calculate betas for the data to find out how changes in the rules affected the return and riskiness of seats. Next we model the expected price of a seat as a function of expected changes in the volume and prices of shares and inflation. We then test for shifts in regime and measure the positive and negative effects of rule changes on seat prices. |
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in Nineteenth Century Japan and the USA" Masayoshi Tsurumi (Hosei and Virginia) |
| Abstract: This paper composes the capital structure of private industrial corporations in the U.S. and Japan in latter half of the nineteen century. Based on this data analysis, we will discuss characteristics and role of financial development in the early stage of successful industrialization. This paper uses mainly the handbook series of annual report of industrial corporations compiled by rating agency companies. We analyze capital structures in various Japanese industries in 1900 listing a rating agency manual for data. For the U.S., we use "Poor's Manual of Railroads, "Poor's Handbook of Investment Securities "in 1880s and "Annual Reports of the Major American Companies" based on the Baker collection for data. We compare capital structures of the U.S. and Japan by sector, capital size, age, number of stockholders etc. in the latter half of the nineteenth century. The first result is that many of large companies of leading industrial sectors raised almost all of the capital from the stock market. The second one is that banks supported early industrialization in Japan, by providing loans to small, new venture enterprises. |
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Economic Growth in Post-War Europe" Hans-Joachim Voth (Cambridge and UPF,Barcelona) |
| Abstract: For most of the postwar period, Europe’s capital markets remained largely closed to international capital flows. This paper explores the costs of this policy. Using the familiar event-study methodology, we examine the extent to which restrictions of current and capital account convertibility affected stock returns. We find that the delayed introduction of full currency convertibility increased the cost of capital. Also, a string of measures designed to reduce capital mobility before the ultimate collapse of the Bretton Woods System had considerable negative effects. As one of the first studies of capital controls we are able to document that the overall impact on growth was consistently negative. These findings demonstrate that the introduction of capital controls can impose significant costs. |
Session 5C. Finance and Development
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Stephen Haber (Stanford) and Kenneth Sokoloff (UCLA) |
| Abstract: Economic historians
have long argued that the specific features of the laws that govern financial
markets and banks exert a powerful effect on the size and structure of
banking systems and financial markets. They have also argued that
the resulting financial systems have a powerful effect on the growth of
the real economy. Most of the work on this subject, however, has
focused on developed economies. This is unfortunate in that the best
natural laboratories for the study of legal barriers to entry in banking
and securities markets are to be found in the underdeveloped world.
This paper therefore analyzes the specific features of the institutions
that governed financial systems across the Americas during the nineteenth
and early twentieth centuries. Our paper has two goals. First,
we provide a systematic analysis of the institutions that governed entry
into banking and the institutions that governed the formation of limited
liability joint stock companies. We have retrieved a complete set
of the financial and banking laws for a broad array of countries, covering
the period roughly 1820-1930. These countries include: Mexico, Brazil,
Argentina, Guatemala, Bolivia, Peru, Chile, Uruguay, Venezuela, and the
United States. Second, we analyze the size and structure of the resulting
banking systems and financial markets in light of what we know about the
legal system.
Our hypotheses are twofold. First, federal systems produced lower barriers to entry because of competition among states. That is, states ratcheted their requirements to found a bank or Joint Stock Company downwards in order to attract businesses from rival states. Conversely, Latin American countries that were politically centralized tended to erect high barriers to entry. Essentially, central governments traded access to credit from the banks, in exchange for which the bankers were promised that they would not have to compete. Second, extremely concentrated banking systems tended to be associated with small and underdeveloped financial markets. In theory, banks and financial markets are substitutes for one another. As a practical matter, however, the inability of most entrepreneurs to mobilize working capital from the banks made it almost impossible for them to successfully sell equity to investors from outside the founding group. |
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Mexico's Early Industrialization, 1878-1913" Noel Maurer (ITAM) and Tridib Sharma |
| Abstract: Most explanations for the prevalence of groups multi-company firms with a common source of finance are based on hypothesised increasing returns to scale or missing formal capital markets. These explanations, however, fail to fit the empirical evidence for Mexico during its initial industrialisation, although industrial growth was concentrated in grouped firms. We propose a simpler explanation. In the absence of secure property rights, collateral cannot be credibly offered. This is coupled with the fact that several kinds of idiosyncratic shocks are privately observed by the firm. Thus lending on the basis of past history, or reputation, entails that creditors punish firms for non-payment along the equilibrium path. In such circumstances, firms have incentives to group together in order to insure each other against unpredictable idiosyncratic shocks, assuming that such shocks are not perfectly correlated and monitoring costs are low. We then present empirical evidence to support our hypothesis. |
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The Rio de Janeiro Stock Exchange and the Industrialization of Brazil, 1889-1930" Aldo Musacchio (Stanford) |
| Abstract: This paper analyzes the relationship between finance and modernization by studying the effects of the institutions that created the stock exchange in Rio de Janeiro, Brazil. The main question addressed is: What was the role of the Rio de Janeiro Stock Exchange in Brazil's industrialization? My hypothesis is that the new institutional framework that regulated financial markets after 1889 in Brazil enabled entrepreneurs and State governments to use new financial instruments to finance the bulk of infrastructure and manufacturing ventures during the period 1889-1930. To test my hypothesis I used disaggregated data for all the securities traded in the Rio de Janeiro Stock Exchange. I show that the role of the stock exchange in the process of industrialization was of primary importance. First, many large investment projects were financed issuing debentures, second State governments participated actively by selling debt to finance infrastructure projects, and third, those governments swapped debentures for government bonds in order to subsidize risky projects in their States. My findings contrast with those of other authors who have underestimated the importance of the Rio de Janeiro Stock Exchange in Brazil's industrialization like Triner (1994) and Levy (1977). |
Session 7A. The Role of Banking Systems
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Australian Evidence on Portfolio Diversification and Branch Specialization, 1860-1930" Andrew Seltzer (Royal Holloway) |
| Abstract: This paper examines the consequences of branch banking for the Australian economy. There is little evidence to show that branching increased the stability of Australian banking. In 1893 Australia suffered the worst panic ever in a branch banking country. During the crisis, more extensively branched banks were more likely to suspend payments. However, it is shown that branching increased the provision of banking services to rural areas. This occurred because branch banks could reallocate capital from urban to rural regions at low cost, whereas unit banks typically conducted all of their business locally. Using data from the Union bank of Australia, I show that advances were typically considerably greater than deposits at rural branches tended to issue, whereas the reverse was true for urban branches. Finally, I show that virtually all rural branches would not have been viable had they been constrained by the deposits they could raise locally. |
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International Patterns in Historical Perspective" Caroline Fohlin (Caltech) |
| Abstract: This paper inquires into the underlying causes of financial system structure and development. The study first shows that few banking systems fit the extreme paradigms of universal-relationship or specialized-arms length banking, but that banking system structure has remained remarkably stable over the last 150 years. Economic factors relate relatively strongly to financial system development, market orientation, and banking structure before World War I and in the present day. Political structure relates significantly to market orientation but not to banking system design or legal tradition. Finally, legal tradition appears associated with both banking specialization and market orientation, but this relationship may result primarily from historical ties to England. Moreover, legal orientation exerted little impact on financial institution growth at the turn of the twentieth century or on real economic growth rates over the past century and a half. |
|
Reputation as Collateral in 19th Century English Provincial Banking" Francesco Galassi and Lucy Newton (Warwick) |
| Abstract: Banks are information
machines that function by selling savers a package of services and charging
them a share of the price by the end users (borrowers) of the commodity
savers wish to sell. The services banks sell are, in this perspective,
screening and monitoring of the borrowers and their projects, as well as
risk spreading via diversification. If banks sell information, it is interesting
to understand how they gather it and assess it. From the banks' marginal
condition, knowing rates and collateral posted, we can use the internal
records and board minutes of two English industrial banks from 1850 to
1885 to quantify the probability of default estimated by their directors
for some 200 borrowers. We can then relate the expectations of the directors
to a set of borrower specific characteristics to evaluate the relative
importance of tangible (buildings, machinery, stocks) and intangible (reputation)
assets in allowing applicants access to credit.
|
Session 7B. The Textile Industry
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James Bessen (Research in Innovation) |
| Abstract: Were ordinary factory
workers unskilled and was technology "de-skilling" during the Industrial
Revolution? I measure foregone output to estimate the human capital investments
in mule spinners and power loom tenders in antebellum Lowell. These investments
rivaled those of craft apprentices, suggesting a different view of industrial
technology. Accounting for skill, multi-factor productivity growth was
negligible, contrary to previous findings. From 1834-55, firms made increasing
investments in skill, allowing workers to tend more machines and generating
rapid growth of per-capita output. This growing investment was motivated
partly by changing factor prices and more by a changing labor supply. Calculations
show that firm policy and social conditions, including literacy, influenced
the investment in factory skills. When skills are considered, technological
change at Lowell appears as a broad social process, dependent as much on
innovation in institutions as on invention of machines.
|
|
Michael Huberman (Montreal) |
| Abstract: Labor seldom hires capital. Using case studies of business organizations in the Lancashire textile industry, 1870-1914, I document the particular and peculiar conditions under which employee ownership did work. In the wake of changes to company law, Oldham firms introduced profit sharing. As elsewhere, employee participation led to high rates of productivity growth. In Bolton, workers did not take to profit sharing and the town's industry suffered. The problem to be explained is why these two towns - only fifteen miles apart - could have such different types of business organizations. I reject explanations based on human capital factors and product-market opportunities. I argue that profit- sharing was successful in Oldham because it was compatible with the empathy the town's workers demonstrated for one another. This empathy overrode the free-rider problems of profit sharing. In Bolton, workers were indifferent to the well being of their co-workers and profit sharing consequently failed. |
|
Be Explained by Higher Rates of Worker Turnover?" Tim Leunig (LSE) |
| Abstract: In earlier work I showed that - surprisingly - Britain had higher labour productivity than America in cotton spinning c. 1900. This paper provides a quantitative rationale for that finding. We know that job tenures are shorter in the US than in Britain. If workers learned on the job, shorter job tenures in the US would imply lower average labour productivity than in the UK. To test the effect of experience on productivity, I have collected 14,000 weekly wage records for American ring spinners. Each record gives the individual worker's hours, output and earnings for that week. Individuals' learning over time proves to be substantial, and sufficient to explain about two-fifths of the aggregate productivity differential. Learning continues for over 100 weeks, suggesting the literature is wrong in its characterisation of female ring spinners as unskilled. |
|
David Flynn (Indiana) |
| Abstract: The economic history
literature understates credit's role in the economy of colonial New England
and book credit itself is mischaracterized. Using a data set I built
from more than 50 merchant account books with over 9,000 purchases and
more than 4,000 payments, I estimate certain vital characteristics of book
credit. Perkins (1988) and Martin (1939) place the average amount of time
a debt lasted, its term, at three to nine months or one year. Neither
cites extensive account records to support their estimate. I construct
life tables and use other event history techniques to measure average term
length for complete debt repayment. My estimate, fourteen months,
is longer than either Perkins or Martin. The account books, new estimates
of term length, along with the size and volume of credit purchases show
the New England economy to be highly sophisticated in the use of credit.
|
|
The Role of Monetary Mismanagement in Stirring Revolutionary Discontent" Ron Michener (Virginia) |
| Abstract: While the American colonists frequently complained about monetary shortages, recent scholarship has tended to dismiss these complaints. In New York, during the depression that gripped the colony in the 1760s, these complaints were especially prominent. This paper argues that New York's difficulties during this decade were consistent with the predictions of an open-economy IS-LM model. A detailed recounting of the narrative history establishes that these complaints, in this instance at least were quite plausible. |
|
Balance Sheet Deterioration and "Debtor" Angst in Colonial America" Robert Wright (Virginia) |
| Abstract: American colonists easily evaded usury laws; so, despite some claims to the contrary, market forces largely determined interest rates, though quotations are difficult to find. Although data is limited, it is very clear that unstable macroeconomic and monetary conditions caused considerable interest rate volatility. Because of the illiquid nature of colonial assets, and a high level of information asymmetry, interest rate risk for colonial firms was particularly severe. Higher interest rates caused colonial balance sheets to deteriorate, resulting in increased numbers of "debtors," i.e. individuals or firms with negative net worth. Colonists, therefore, were willing to pay a relatively high price for liquid assets like government debt and ground rents. To the extent that imperial policies caused, exacerbated, or prevented colonial reactions to unstable macroeconomic and monetary conditions, colonists' distrust of London was amply justified. |
Session 8B. The Changing Aspects of Land
in the U.S.
|
Evidence on the 'Agricultural Ladder' " Lee Alston (Illinois) and Joe Ferrie (Northwestern) |
| Abstract: Mobility up the farm job ladder came to be seen as a problem in the United States in the early decades of the twentieth century. In this study we will use the census manuscript schedules from the 1920 Census of Agriculture for McLean County, Illinois (a typical corn-belt county) along with data from 1938 from a survey of farmers in Jefferson County Arkansas (a typical cotton-belt county) to explore the dynamics of the agricultural ladder. We develop hypotheses to explain the extent of movement up and down the agricultural ladder and why it changes over time, and across space. Our preliminary examination of the data from 1938 indicates that farmers fared worse (in terms of job mobility) in the 1920s than the 1930s. Consistent with expectations, the 1910s proved to be years of general ascent up the agricultural ladder. |
|
The Role of the Federal Housing Administration during the Great Depression" Price Fishback (Arizona) and Shawn Kantor (Arizona) |
| Abstract: The primary institutions governing the modern housing finance system emanated from the New Deal, especially the National Housing Act of 1934. There is significant debate today regarding the usefulness of the integrated public and private means of financing housing in the United States. While we intend to make no judgments about the current mortgage finance system, the goal of this paper is to investigate the effects of the New Deal’s spending and housing programs. Using a recently-uncovered data set that describes over 30 federal New Deal spending, loan, and mortgage insurance programs across all U.S. counties from 1933 to 1939, we empirically examine the New Deal’s impact on housing and rental values and homeownership rates from 1930 to 1940. In the process of estimating the impact of the New Deal, we develop an econometric model that controls for the endogeneity of New Deal activity and for the spatial correlation among neighboring housing markets. |
|
in American Wheat Production, 1800-1940" Alan Olmstead (Davis) and Paul Rhode (North Carolina) |
| Abstract: Contrary to what is generally believed, there was significant biological innovation in American wheat production before the biological revolution of the 1930s and 1940s. These innovations took two related forms. First, there were wholesale changes in wheat varieties that facilitated the spread of grain cultivation to the Great Plains and Pacific Coast. The new varieties, including all the hard red spring wheats and all the hard red winter wheats later grown, increased yields by about one-third over what would have occurred in their counterfactual absence. Second, farmers had to adapt varieties and methods to offset the growing threat of pests and diseases. Our estimates suggest that these efforts increased yields by about 40 percent. Formally accounting for these biological innovations leads to a substantial revision in the Parker and Klein estimates of the sources of labor productivity growth in American wheat culture. |
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