The Long View on Epidemics, Disease and Public Health: Research from Economic History, Part A

This piece is the result of a collaboration between the Economic History Review, the Journal of Economic History, Explorations in Economic History and the European Review of Economic History. More details and special thanks below.

 

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Exhibit depicting a miniature from a 14th century Belgium manuscript at the Diaspora Museum, Tel Aviv. Available at Wikimedia Commons.

As the world grapples with a pandemic, informed views based on facts and evidence have become all the more important. Economic history is a uniquely well-suited discipline to provide insights into the costs and consequences of rare events, such as pandemics, as it combines the tools of an economist with the long perspective and attention to context of historians. The editors of the main journals in economic history have thus gathered a selection of the recently-published articles on epidemics, disease and public health, generously made available by publishers to the public, free of access, so that we may continue to learn from the decisions of humans and policy makers confronting earlier episodes of widespread disease and pandemics.

Emergency_hospital_during_Influenza_epidemic,_Camp_Funston,_Kansas_-_NCP_1603
Emergency hospital during influenza epidemic, Camp Funston, Kansas. Available at Wikimedia Commons.

Generations of economic historians have studied disease and its impact on societies across history. However, as the discipline has continued to evolve with improvements in both data and methods, researchers have uncovered new evidence about episodes from the distant past, such as the Black Death, as well as more recent global pandemics, such as the Spanish Influenza of 1918. We begin with a recent overview of scholarship on the history of premodern epidemics, and group the remaining articles thematically, into two short reading lists. The first consists of research exploring the impact of diseases in the most direct sense: the patterns of mortality they produce. The second group of articles explores the longer-term consequences of diseases for people’s health later in life.

L0025221 Plague doctor
Plague doctor. Available at Wellcome Collection.

 

L0001879 Two men discovering a dead woman in the street during the gr
Two men discovering a dead woman in the street during the Great Plague of London, 1665. Available at Wellcome Collection.

 

Patterns of Mortality

Emblems_of_mortality_-_representing,_in_upwards_of_fifty_cuts,_Death_seizing_all_ranks_and_degrees_of_people_-_imitated_from_a_painting_in_the_cemetery_of_the_Dominican_church_at_Basil
Emblems of mortality: death seizing all ranks and degrees of people, 1789. Available at Wikimedia Commons.

The rich and complex body of historical work on epidemics is carefully surveyed by Guido Alfani and Tommy Murphy who provide an excellent  guide to the economic, social, and  demographic impact of plagues in human history: ‘Plague and Lethal Epidemics in the Pre-Industrial World’.  The Journal of Economic History 77, no. 1 (2017): 314–43. https://doi.org/10.1017/S0022050717000092.  The impact of epidemics varies over time and few studies have shown this so clearly as the penetrating article by Neil Cummins, Morgan Kelly and Cormac  Ó Gráda, who provide a finely-detailed map of how the plague evolved  in 16th and 17th century London to reveal who was most heavily burdened by this contagion.  ‘Living Standards and Plague in London, 1560–1665’. Economic History Review 69, no. 1 (2016): 3-34. https://dx.doi.org/10.1111/ehr.12098 .  Plagues shaped the history of nations  and, indeed, global history, but we must not assume that the impact of  plagues was as devastating as we might assume: in a classic piece of historical detective work, Ann  Carlos and Frank Lewis show that mortality among native Americans in the Hudson Bay area  was much lower than historians had suggested: ‘Smallpox and Native American Mortality: The 1780s Epidemic in the Hudson Bay Region’.  Explorations in Economic History 49, no. 3 (2012): 277-90. https://doi.org/10.1016/j.eeh.2012.04.003

The effects of disease reflect a complex interaction of individual and social factors.  A paper by Karen Clay, Joshua Lewis and Edson Severnini  explains  how the combination of air pollution and influenza was particularly deadly in the 1918 epidemic, and that  cities in the US which were heavy users of coal had all-age mortality  rates that were approximately  10 per cent higher than  those with lower rates of coal use:  ‘Pollution, Infectious Disease, and Mortality: Evidence from the 1918 Spanish Influenza Pandemic’.  The Journal of Economic History 78, no. 4 (2018): 1179–1209. https://doi.org/10.1017/S002205071800058X.  A remarkable analysis of how one of the great killers, smallpox, evolved during the 18th century, is provided by Romola Davenport, Leonard Schwarz and Jeremy Boulton, who concluded that it was a change in the transmissibility of the disease itself that mattered most for its impact: “The Decline of Adult Smallpox in Eighteenth‐century London.” Economic History Review 64, no. 4 (2011): 1289-314. https://dx.doi.org/10.1111/j.1468-0289.2011.00599.x   The question of which sections of society experienced the heaviest burden of sickness during outbreaks of disease outbreaks has long troubled historians and epidemiologists. Outsiders and immigrants have often been blamed for disease outbreaks. Jonathan Pritchett and Insan Tunali show that poverty and immunisation, not immigration, explain who was infected during the Yellow Fever epidemic in 1853 New Orleans: ‘Strangers’ Disease: Determinants of Yellow Fever Mortality during the New Orleans Epidemic of 1853’. Explorations in Economic History 32, no. 4 (1995): 517. https://doi.org/10.1006/exeh.1995.1022

 

The Long Run Consequences of Disease

Nuremberg_chronicles_-_Dance_of_Death_(CCLXIIIIv)
‘Dance of Death’. Illustrations from the Nuremberg Chronicle, by Hartmann Schedel (1440-1514). Available at Wikipedia.

The way epidemics affects families is complex. John Parman wrestles wit h one of the most difficult issues – how parents respond to the harms caused by exposure to an epidemic. Parman  shows that parents chose to concentrate resources on the children who were not affected by exposure to influenza in 1918, which reinforced the differences between their children: ‘Childhood Health and Sibling Outcomes: Nurture Reinforcing Nature during the 1918 Influenza Pandemic’, Explorations in Economic History 58 (2015): 22-43. https://doi.org/10.1016/j.eeh.2015.07.002.  Martin Saavedra addresses a related question: how did exposure to disease in early childhood affect life in the long run? Using late 19th century census data from the US, Saavedra  shows that children of immigrants who were exposed to yellow fever in the womb or early infancy, did less well in later life than their peers,  because they were only able to secure lower-paid  employment: ‘Early-life Disease Exposure and Occupational Status: The Impact of Yellow Fever during the 19th Century’.  Explorations in Economic History 64, no. C (2017): 62-81.  https://doi.org/10.1016/j.eeh.2017.01.003.  One of the great advantages of historical research is its  ability to reveal how the experiences of disease over a lifetime generates cumulative harms. Javier Birchenall’s extraordinary paper shows how soldiers’ exposure to disease during the American Civil War increased the probability  they would  contract tuberculosis later in life: ‘Airborne Diseases: Tuberculosis in the Union Army’. Explorations in Economic History 48, no. 2 (2011): 325-42. https://doi.org/10.1016/j.eeh.2011.01.004

 

V0010604 A street during the plague in London with a death cart and m
“Bring Out Your Dead” A street during the Great Plague in London, 1665. Available at Wellcome Collection.

 

Patrick Wallis, Giovanni Federico & John Turner, for the Economic History Review;

Dan Bogart, Karen Clay, William Collins, for the Journal of Economic History;

Kris James Mitchener, Carola Frydman, and Marianne Wanamaker, for Explorations in Economic History;

Joan Roses, Kerstin Enflo, Christopher Meissner, for the European Review of Economic History.

 

If you wish to read further, other papers on this topic are available on the journal websites:

https://onlinelibrary.wiley.com/doi/toc/10.1111/(ISSN)1468-0289.epidemics-disease-mortality

https://www.cambridge.org/core/journals/journal-of-economic-history/free-articles-on-pandemics

https://www.journals.elsevier.com/explorations-in-economic-history/featured-articles/contagious-disease-on-economics

 

* Thanks to Leigh Shaw-Taylor, Cambridge University Press, Elsevier, Oxford University Press, and Wiley, for their advice and support.

Integration in European coal markets, 1833-1913

by John E. Murray (Rhodes College) and Javier Silvestre (University of Zaragoza, Instituto Agroalimentario de Aragón, and Grupo de Estudios ‘Población y Sociedad’)

The full article from this blog was published on The Economic History Review and it is available here

 

The availability of coal is central to debates about the causes of the Industrial Revolution and modern economic growth in Europe.  To overcome regional limitations in supply,  it has been argued that coal could have been transported. However, despite references to the import option and transport costs, the evolution of coal markets in nineteenth-century Europe has received limited attention.  Interest in the extent of markets is motivated  by their effects on economic growth and welfare ( Federico 2019;  Lampe and Sharp 2019).

The literature on market integration in nineteenth-century Europe mostly refers to grain prices, usually wheat. Our paper extends the research to coal, a key commodity. The historical literature of coal market integration is scant—in contrast to the literature for more recent times (Wårell 2006; Li et al. 2010; Papież and Śmiech 2015). Previous historical studies usually report some price differences between- and within countries, while a  few provide statistical analyses, often  applied to a narrow geographical scope.

We examine intra- and international market integration in the principal coal producing countries, Britain, Germany, France and Belgium.  Our analysis includes three, largely  non-producing, Southern European countries, Italy, Spain and Portugal—for which necessary data are available. (Other countries were considered but ultimately not included). We have created a database of (annual) European coal prices at different spatial levels.

Based on our price data,  we consider prices in the main consumer cities and producing regions and estimate specific price differentials between areas in which the coal trade was well established. As a robustness check, we estimate trends in the coefficient of variation for a large number of markets. For the international market, we estimate price differentials between proven trading markets. Given available data,  focus on Europe’ main exporter, Britain, and the main import countries –  France, Germany, and Southern Europe. To confirm findings, we estimate the coefficient of variation of prices throughout coal producing Europe.

Picture 1
Figure 1. Coalmine in the Borinage, 1879, by Vincent van Gogh.Available at <https://www.theparisreview.org/blog/2015/12/31/idle-bird-2/&gt;

To estimate market integration within coal producing countries, we utilise Federico’s (2012) proposal for testing both price convergence and efficiency—the latter referring to a quick return to equilibrium after a shock. For the international market, we again estimate convergence equations. For selected international routes, and according to the available information, we complete the analysis with an econometric model on the determinants of integration—which includes the ‘second wave’ of research in market integration (Federico 2019). Finally, to verify our findings, we apply a variance analysis to prices for the producing countries.
Our results, based on quantitative and qualitative evidence, may be summarized as follows. First, within coal-producing countries, we find evidence of price convergence. Second, markets became more ‘efficient’ over time – suggesting reductions in information costs. Nevertheless, coal prices were subject to strong fluctuations and shocks, in relation to ‘coal famines’. Compared to agricultural produce, the process of integration in coal appears to have taken longer. However, price convergence in coal tended to stabilize at the end of our period, suggesting insignificant further reduction in transports costs and the existence of product heterogeneity. Finally, our evidence indicates that cartelization in Continental Europe from the late nineteenth century had limited impact on price convergence.

Turning to the international coal market, our econometric results confirm price convergence between Britain and importing countries. Like domestic markets, the speed with which price differentials between Britain and Continental Europe were eroded declined from the 1900s. Further, market integration between Britain and Continental Europe appears to have been largely influenced by changes in transportation costs, information costs and protectionism. Extending our analysis to other countries, (with, admittedly, limited data) suggests that price convergence started later in our period. Finally, our results indicate the limited ability of cartels to restrict competition beyond their most immediate area of influence.
Overall, we observe integration in both the domestic and international coal market. Future research might consider expanding the focus to other cross-country, Continental, markets to acquire a deeper comprehension of the causes and effects of market integration.

To contact the authors:

Javier Silvestre, javisil@unizar.es

References

Federico, G., ‘How much do we know about market integration in Europe?’, Economic History Review, 65 (2012), pp. 470-97.

Federico, G., ‘Market integration’, in C. Diebolt, and M. Haupert, editors, Handbook of Cliometrics (Berlin, 2019).

Lampe, M. and Sharp, P., ‘Cliometric approaches to international trade’, in C. Diebolt, and M. Haupert, editors, Handbook of Cliometrics (Berlin, 2019).

Li, R., Joyeux, R., and Ripple, R. D., ‘International steam coal market integration’, The Energy Journal 31 (2010), pp. 181-202.

Papież, M. and Śmiech, S., ‘Dynamic steam coal market integration: Evidence from rolling cointegration analysis’, Energy Economics 51 (2015), pp. 510-20.

Wårell, L., ‘Market integration in the international coal industry: A cointegration approach’, The Energy Journal 27 (2006), pp. 99-118.

Uncertainty and the Great Slump

by Jason Lennard (London School of Economics and Lund University)

This article is due to be published in the Economic History Review and will be available on Early View later in the year.

 

Holland House library after an air raid
Holland House library after an air raid, 1940. Available at Wikimedia Commons.

A key challenge in economic history is to understand the macroeconomics of interwar Britain. This was a time of high unemployment, depressed economic activity and significant macroeconomic volatility. Economic historians have identified a number of causes, from the demise of the old staple industries to the shortening of the working week (Richardson, 1965; Broadberry, 1986).

Yet the historiography has not explored an important source of modern economic fluctuations: uncertainty (Bloom, 2009; Jurado et al., 2015; Baker et al., 2016). A fog of uncertainty may well have hung over Britain between the wars given the volume of extraordinary events. Economically, there was the return to and break from the gold standard, the fiscal aftermath of the First World War and the slide to protection. Politically, there were snap general elections in 1923 and 1931, hung parliaments following the elections of 1923 and 1929 and national governments during the 1930s.

In new research (Lennard, forthcoming EcHR), I investigated how economic policy uncertainty affected the British economy in the interwar period. As a nebulous concept, the first step was to measure uncertainty. In order to do so, I constructed an index based on the frequency of articles reporting uncertainty over economic policy in the Daily Mail, Guardian and The Times (Figure 1).

 

Figure 1. New economic policy uncertainty index for the United Kingdom, 1920-38 (average 1920-38 = 100)

Lennard 1
Source: as per original article.

 

The new index is plotted in Figure 1, which shows that there was significant variation in uncertainty in the United Kingdom between 1920 and 1938. Uncertainty spiked around recurring events in the calendar such as budget announcements and general elections but also in response to more specific factors such as the General Strike, looming inter-allied debt payments and changes in the likelihood of war.

The second step was to account for the macroeconomic effects of uncertainty. Using a vector autoregression, I found that uncertainty was associated with reduced credit (a ‘financial frictions effect’), fewer imports (a ‘magnification effect’), lost jobs, and lower economic activity. Overall, economic policy uncertainty accounted for more than 20 per cent of macroeconomic volatility.

A wealth of narrative evidence backs up the significance of uncertainty shocks. At the microeconomic level, there were regular reports of disruption to a number of industries from pianos to textiles. In the car industry, for example, Sir William Letts, chairman and managing director of Willys Overland Crossley, told shareholders at the annual general meeting that uncertainty is,  ‘crippling business and holding back activity and energy in our great industry’ (Guardian, 25 Feb. 1930, p. 6).

At the macroeconomic level, there were frequent descriptions of depressed employment and output. In 1920, for example, the Daily Mail (30 Dec. 1920, p. 4) reported that, ‘among the main causes of unemployment at the present moment […] is uncertainty in the business world’. In 1930 Sir William Morris wrote that Britain was ‘floundering in a sea of uncertainty […] the result being colossal unemployment’ (Daily Mail, 29 Aug. 1930, p. 8). In 1932 the Economist (30 Jan. 1932, p. 1) summarised that ‘business this year has been overshadowed by the economic and political uncertainty at home and abroad’.

In summary, uncertainty has been a forgotten, albeit incomplete, explanation for macroeconomic instability in interwar Britain. How uncertainty affected economies in other historical contexts is an important and open question for future research.

 

To contact the author:

Email: jason.lennard@ekh.lu.se

Twitter: @jason_lennard

 

References

Baker, S. R., Bloom, N., and Davis, S. J., ‘Measuring economic policy uncertainty’, Quarterly Journal of Economics, 131 (2016), pp. 1593–636.

Bloom, N., ‘The impact of uncertainty shocks’, Econometrica, 77 (2009), pp. 623–85.

Broadberry, S., The British economy between the wars: a macroeconomic survey (Oxford, 1986).

Jurado, K., Ludvigson, S. C., and Ng, S., ‘Measuring uncertainty’, American Economic Review, 105 (2015), pp. 1177–216.

Lennard, J., ‘Uncertainty and the Great Slump’, Economic History Review, (forthcoming).

Richardson, H. W., ‘Over-commitment in Britain before 1930’, Oxford Economic Papers, 17 (1965), pp. 237–62.

Trade in the Shadow of Power: Japanese Industrial Exports in the Interwar years

By Alejandro Ayuso Díaz and Antonio Tena Junguito (Carlos III University of Madrid)

The history of international trade provides numerous examples of trade in the ‘shadow of power’ (Findlay and O´Rourke 2007). Here we argue that Japanese empire power was as important as factor endowments, preferences, and technology, to the expansion of trade during the interwar years. Following Gardfield et al 2010, the shadow of power that we discuss is based on the use or threat of violence or conquest which depend on the military capabilities of states.

fig01
Figure 1:Japan and World Manufacturing Export Performance. Source: Japan and World comparative manufacture exports in volume (1953=100) from UN Historical Trade Statistics.

Japan was a latecomer to 20th-century industrialization, but during the interwar years, and especially in the 1930s, it was able to activate a complex and aggressive industrialization policy to accelerate the modernization of its industry. This policy consisted of import substitution and exports of manufactures to its region of influence. This newly created empire was very efficient in developing a peculiar imperial trade in the shadow of power throughout East and Southeast Asia in conjunction with a more aggressive imperial regional policy through conquest.

The trade generation capacity of the Japanese empire during the interwar years was much higher than that suggested by Mitchener and Weidenmier (2008) for the preceding period (1870-1913). However, some caution needs to be exercised in making this comparison because it might indicate issues associated with the interpretation of the relevant statistics. Japanese empire trade membership increased by more than ten times that associated with the British, German and French Empires, during this period and was twice as great as that for the US and Spanish empires. Consequently, it might be argued that our coefficients are more prominent because they are capturing stronger intra-bloc bias that emerged after the Great Depression.

Employing a granular database consisting of Japanese exports towards 117 countries over 1,135 products at six different benchmarks (1912,1915,1925,1929,1932 and 1938) we are able to demonstrate that the expansion of Japanese exports during the interwar period was facilitated by the exploitation of formal and informal imperial links which exerted a bigger influence on export determination than productivity increases.

Figure 2: Japanese total manufacturing exports by skills and region. Source: Annual Returns of the Foreign Trade of the Empire of Japan.

fig02
a) Manufacturing exports by skills
fig03
b) high skilled exports by region

 

The main characteristics of this trade expansion between 1932 and 1938 were high-skill exports directed towards Japanese colonies. Additional evidence indicates that Japan did not enjoy comparative advantage in products with limited export- market potential. Colonial infrastructure, building and urbanization were used as exclusive markets for high-skill exports and became one of the main drivers of Japanese export expansion and its modern industrialization process.

Trade blocs in the interwar years were used as instruments of imperial power to foster exports and as a substitute for productivity in encouraging industrial production. In that sense, Japan’s total exports in 1938 were between 28% and 47% higher than 1912 thanks to imperial mechanisms. The figure is much higher when we capture the imperial effect on high-skill exports (between 66% and 76% higher thanks to imperial connections). The quoted figures are based on a counterfactual comparing exports without the empire to those obtained via Imperial mechanisms.

We believe that our results demonstrate the colonial trade bias mechanism used by imperialist countries was inversely related to productivity. The implicit counterfactual hypothesis would be that without imperial intervention in the region Japan would not have expanded its high-skill exports and would not have exported such a variety of new products. In other words, Japan’s industrialisation process would have been much less pronounced.

 

References

Ayuso-Diaz, A. and Tena-Junguito, A. (2019): “Trade in the Shadow of Power: Japanese Industrial Exports in the Interwar years”. Economic History Review (forthcoming).

Findlay, R. and O’Rourke, K. (2007). Power and Plenty. Princeton, NJ: Princeton University Press.

Garfinkel, M, Skaperdas, S., and Syropoulos, C. (2012). ‘Trade in the Shadow of Power’. In Skaperdas, S., and Syropoulos, C. (eds.), Oxford Handbook on the Economics of Peace and Conflict. Oxford University Press.

Mitchener, K. J., & Weidenmier, M. (2008). Trade and empire. The Economic Journal, 118(533), 1805-1834.

Ritschl, A. & Wolf, N. (2003). “Endogeneity of Currency Areas and Trade Blocs: Evidence from the Inter-war Period,” CEPR Discussion Papers 4112.

 

To contact the authors:

Alejandro Ayuso Díaz (aayuso@clio.uc3m.es)

Antonio Tena Junguito (antonio.tena@uc3m.es)

Loans of the Revolution: How Mexico Borrowed as the State Collapsed in 1912–13

by Leonardo Weller (São Paulo School of Economics – FGV)

Read the full article on The Economic History Review – published in Augus 2018, available here

 

Mexico borrowed £6 million abroad in 1913, amidst a civil war that destroyed the state and killed over two million people. Civil wars tend to make creditors wary because of their inevitable consequences: if the borrowing government wins, it will need to spend on reconstruction, leaving it short of cash to pay their debt back; in case of defeat, the new incoming government is bound to repudiate its enemy’s debt. The Mexican loan of 1913 is unusual because the bankers in charge knew that the government was likely to lose or, at best, fight a long and bloody war. Paribas, the head of the syndicate that underwrote the loan, received first-hand reports from an agent in Mexico City, according to whom:

 ‘The political situation is (. . .) obscure because the country is still infested by rebellious bands while General Huerta is only president of the republic in a provisory character (…), and no one knows how that will end’.

Victoriano Huerta assassinated Francisco Madero, leader of the revolution who deposed the long-serving autocrat Porfirio Díaz who was in office at various times between the 1870s and 1911. The report from the Mexican agent was accurate: Huerta aimed to re-established Díaz’s stable regime, but his counter-revolution fostered an unlikely but powerful alliance between popular insurgents such as Emiliano Zapata and moderate politicians linked to Madero. Pressured by the financial toll of the war, the Huerta administration defaulted on its entire debt – including the loan take out 1913 – in 1914.   The insurgents took Mexico City and deposed the dictator, but the war continued and Mexico became a failed state. Peace only came in 1917, but the government in charge of reconstructing the country did not pay the sovereign debt.

LUCHA
Figure 1. Lucha Revolucionaria. Source: Diego Rivera, Palacio Nacional, Mexico City.

Paribas and its fellow syndicate members underwrote the 1913 loan at rather poor borrowing conditions: 6 per cent interest, 90 per cent discount, and 10 years maturity, which result in a 4 per cent risk premium (a measure of credit cost), twice higher than the premium applied to the Mexican debt already floating on the London Stock Exchange at the time. In plain language, the loan was remarkably expensive vis-à-vis market conditions. This discrepancy appears in the graph below: The solid line is the premium at which the secondary market traded old Mexican bonds, and the dot is the premium at which the banks issued the new loan in 1913.

 

Table 01. Mexican risk and reports in The Times in Mexico.

2
Sources: Calculated from Investor’s Monthly Manual, Bulletin de la Côte, The Times, 1911–14.

 

The bankers themselves considered the loan as ‘too severe a burden on the Government’, but agreed that the operation had to be arranged ‘in our favour’ because of the ‘terrible political circumstances’ in the country. In line with this dire assessment of Mexican political conditions, Paribas sold its entire share of the 1913 loan. In fact, Paribas acted solely as an underwriter to float the bonds on the international market, as opposed to underwriter and final creditor (holding a share of the bonds). The bank also liquidated all its other Mexican assets it held, including a significant share of the Banco Nacional de México. A conflict of interest explains why Paribas underwrote the 1913 loan: The new credit created confidence among the public and sustained the price of all Mexican securities, which enabled Paribas to eliminate its exposure to Mexico without realising losses. The liquidation was profitable overall: in particular, the bank sold the 1913 bonds at a 6 per cent margin.

Undoubtedly, Paribas’ gains were at the expense of others. Why, then, did bondholders agree to purchase the debt? Figure 1 suggests (and econometric tests confirm) that positive press reports influenced the market. The Times published negative news on Mexico when the revolutionaries deposed Díaz and the counter-revolutionaries assassinated Madero, in 1911 and 1913, respectively, but it subsequently altered its editorial stance by publishing good news and generally remaining going quiet on the country. Meanwhile, bondholders continued buying Mexican bonds in spite of the civil war and, as a result, Mexican risk stayed below 2 per cent, a relatively low rate.

The public read over-optimistic news, while the bankers had access to pessimistic but accurate reports from their agents in Mexico. Thus, Paribas benefited from asymmetric information, which explains why it could profit at the expenses of the final creditors.

This case study is at odds with the most recent historical literature on sovereign debt, which stresses the role of debt underwriters as gatekeepers, responsible for guiding the market. The literature asserts that bankers produced signals that separated the trustworthy borrowers from the rest. In contrast, Paribas exploited the market´s disinformation to profit from the liquidation of its Mexican businesses.

 

To contact the author:

leonardo.weller@fgv.br

@leoweller

 

Did efficient options pricing lead or follow the development of the Black Scholes Merton model? Evidence from the interwar London Metals Exchange

by David Chambers and Rasheed Saleuddin (Judge Business School, University of Cambridge)

This research is due to be published in the Economic History Review and is currently available on Early View

 

In early 1998 a nervous options trader was asked to fill an order from one of the world’s largest global investors. The fund’s manager, believing that Canadian short term rates would fall in the very near future, wanted to buy the option – but not the obligation – to buy two year bonds for the next two weeks at a ‘strike’ price of 103 per cent of par when they were actually trading at 102. If rates fell enough upon the option’s expiry in two weeks, the bond would trade above 103, and the hedge fund would pocket the difference between the actual price and the strike of 102.

The average volume in options on these bonds for the week was probably a few hundred million dollars of par value, but this client was looking for options on $2 billion. It would be impossible for the trader to find the exact matching trade in the market from another client, and he would have to ‘manufacture’ the options himself. How, then, to calculate the price?

The framework for this analysis was largely developed by Fisher Black, Myron Scholes and Robert Merton, as published in 1972 (Black and Scholes 1972, Merton 1973). But one crucial input into the so-called Black-Scholes-Merton (BSM) model was difficult to estimate: expected future volatility (as measured by standard deviation of returns) of the underlying bond over the next two weeks. The trader looked first to the recent past: What had the two-week volatility been over the past few months? The trader also knew that unemployment numbers were due out in three days and that some uncertainty always surrounds such a release. In the end, the trader used the BSM model and a volatility input of slightly higher than the past two weeks’ observations to account for the uncertainty in unemployment and the large size of the trade. Upon execution, the trader then used the BSM model to calculate the amount of the underlying bond to sell short to hedge some of the risks to the original trade. That trader was one of the co-authors of an article — ‘Commodities option pricing efficiency before Black, Scholes and Merton’ — recently published in the Review. In this study, the authors David Chambers and Rasheed Saleuddin examine a commodity futures options market for the interwar period to determine how traders might have made markets in options before the advent of modern models.

It is often thought that market prices conform to newly-implemented models rather than obeying some natural laws of markets before such laws are revealed to observers. It has been suggested that equity options, specifically, were ‘performative’ in that they converged to BSM-efficient levels shortly after the dissemination of this model in the early 1970s (MacKenzie and Millo 2003). On the other hand, some claim that it was the advent of liquid exchange trading around the same time that led to BSM efficiency (Kairys and Valerio 1997).

Evidence of efficient pricing before the 1970s is sparse and mixed. There are very few data sets with which to test efficiency, and the few that have been used are far from ideal. Two papers (Kairys and Valerio 1997, Mixon 2009) use one-sided indicative advertised levels targeted to retail investors, without any indication that these were prices upon which investors traded. Another paper uses primarily warrant data, yet the prices of warrants, even in modern times, are often far from BSM efficient, for well-understood reasons (Veld 2003). In any event, these studies find that, on average, prices were far from BSM efficient levels. There is little attempt in this early literature to determine if prices were dependent on the most important BSM model parameter –observed volatility.

This study uses a new data set: prices at which the economist John Maynard Keynes traded options on tin and copper futures traded on the interwar London Metals Exchange. In turns out that Keynes traded at levels that were – on average – as efficient as modern markets. Additionally, the traded prices appear to have varied systematically with the key input to the model, observed volatility (Figure 1), with 99% significance and very high R2.

Untitled
Figure 1. Scatter Diagram of Implied Volatility vs. Historic Volatility of 3-month options on Tin and Copper futures, 1921-31. Source: Chambers and Saleuddin (2019)

How was it possible that Keynes’ traders and brokers were able to match BSM efficient prices so closely? There is some suggestion that options traders in the 19th and early 20th centuries well understood options theory. Indeed, Anne Murphy (2009) had identified a perhaps surprising degree of sophistication and activity among the options traders in 17th century London. Certainly, by the turn of the previous century, options traders had a strong grasp of many of the fundamentals of options trading and pricing (Higgins 1907). Yet current understanding of the influence of volatility of the underlying asset was still in its infancy and several contemporary breakthroughs in theory were not disseminated widely. Finance scholarship hints at one possible explanation: For options such as those traded by Keynes, the relationship between the key BSM valuation parameter, volatility, and option price are quite straightforward to estimate (Brenner and Subrahmanyam 1988). It may have been the case that market participants were intuitively taking into account BSM without an understanding of the model itself. This conclusion is, of course, pure speculation – but perhaps therein lies its fascination?

To contact the authors:

David Chambers:
d.chambers@jbs.cam.uc.uk

Rasheed Saleuddin,
Rks66@me.com
@r_sale.

It is only cheating if you get caught – Creative accounting at the Bank of England in the 1960s

by Alain Naef (Postdoctoral fellow at the University of California, Berkeley)

This research was presented at the EHS conference in Keele in 2018 and is available as a working paper here. It is also available as an updated 2019 version here.

 

Naef 3
The Bank of England. Available at Wikimedia Commons.

The 1960s were a period of crisis for the pound. Britain was on a fixed exchange rate system and needed to defend its currency with intervention on the foreign exchange market. To avoid a crisis, the Bank of England resorted to ‘window dressing’ the published reserve figures.

In the 1960s, the Bank came under pressure from two sides: first, publication of the Radcliffe report (https://en.wikipedia.org/wiki/Radcliffe_report) forced publication of more transparent accounts. Second, with removal of capital controls in 1958, the Bank came under attack from international speculators (Schenk 2010). These contradictory pressures put the Bank in an awkward position. It needed to publish its reserve position (holdings of dollars and gold ) but it recognised that doing so could trigger a run on sterling, thereby creating a self-fulfilling currency crisis (see Krugman: http://www.nber.org/chapters/c11032.pdf).

For a long time, the Bank had a reputation for the obscurity of its accounts and its lack of transparency. Andy Haldane (Chief Economist at the Bank) recognised, for ‘most of [it’s] history, opacity has been deeply ingrained in central banks’ psyche’.

(https://www.bankofengland.co.uk/speech/2017/a-little-more-conversation-a-little-less-action). One Federal Reserve (Fed) memo noted that the Bank of England took ‘a certain pride in pointing out that hardly anything can be inferred by outsiders from their balance sheet’, another that ‘it seems clear that the Bank of England is being pushed – by much public criticism – into giving out more information.’ However, the Bank did eventually publish reserve figures at a quarterly, and then monthly, frequency (Figure 1).

Transparency about the reserves created a risk for a currency crisis so in late 1966 the Bank developed a strategy for reporting levels that would not cause a crisis (Capie 2010). Figure 1 illustrates how ‘window dressing’ worked. The solid line reports the convertible reserves as published in the Quarterly Bulletin of the Bank of England. This information was available to market participants. The stacked columns show the actual daily dollar reserves. Spikes appear at monthly intervals, indicating the short-term borrowing that was used to ensure the reserves level was high enough on reporting days.

 

Figure 1. Published EEA convertible currency reserves vs. actual dollar reserves held at the EEA, 1962-1971.

Naef 1

 

The Bank borrowed dollars shortly before the reserve reporting day by drawing on swap lines (similar to the Fed in 2007 https://voxeu.org/article/central-bank-swap-lines). Swap drawings could be used overnight. Table 1 illustrates how window dressing worked using data from the EEA ledgers available at the archives of the Bank. As an example, on Friday, 31 May 1968, the Bank borrowed over £450 million – an increase in reserves of 171%. The swap operation was reversed the next working day, and on Tuesday the reserves level was back to where it was before reporting. The details of these operations emphasise how swap networks were short-term instruments to manipulate published figures.

 

Table 1. Daily entry in the EEA ledger showing how window dressing worked

Naef 2

 

The Bank of England’s window dressing was done in collaboration with the Fed. Both discussed reserve figures before the Bank published them. During most of the 1960s, the Bank and the Fed were in contact daily about exchange rate matters. Records of these phone conversations are parsimonious at the Bank but the Fed kept daily records (Archives of the Fed in New York, references 617031 and 617015).

During the 1960s, collaboration between the two central banks intensified. The Bank consulted the Fed on the exact wording of the reserve publication (Naef, 2019) and the Fed communicated on the swap position with the Bank, to ensure consonance between the public statements. Indeed, the Fed sent excerpts of minutes to the Bank to allow excision of anything mentioning window dressing (Archives of the Fed in New York, reference 107320). Thus, in December 1971, before publishing the minutes of the Federal Open Market Committee (FOMC) for 1966, Charles Coombs (a leading figure at the Fed) consulted Richard Hallet (Chief Cashier at the Bank):

‘You will recall that when you visited us in December 1969, we invited you to look over selected excerpts from the 1966 FOMC minutes involving certain delicate points that we thought you might wish to have deleted from the published version. We have subsequently deleted all of the passages which you found troublesome. Recently, we have made a final review of the minutes and have turned up one other passage that I am not certain you had an opportunity to go over. I am enclosing a copy of the excerpt, with possible deletions bracketed in red ink.’

Source: Letter from Coombs to Hallet, New York Federal Reserve Bank archives, 1 December 1971, Box 107320.)

 

Coombs suggested deleting passages where some FOMC members criticised window dressing, while other members suggested the Bank would get better results ‘if they reported their reserve position accurately than if they attempted to conceal their true reserve position’ (https://fraser.stlouisfed.org/scribd/?item_id=22913&filepath=/docs/historical/FOMC/meetingdocuments/19660628Minutesv.pdf). However, MacLaury (FOMC), stressed that there was a risk of ‘setting off a cycle of speculation against sterling’ if the Bank published a loss of $200 million, which was ‘large for a single month’ in comparison with what was published the previous month.

The history of the Bank’s window dressing is a reminder of the difficulties central banks face in managing reserves, a situation similar to how investors today closely monitor the reserves of the People’s Bank of China.

 

 

To contact the author: alain.naef@berkeley.edu

 

References:

Capie, Forrest. 2010. The Bank of England: 1950s to 1979. Cambridge: Cambridge University Press.

Naef, Alain. 2019. “Dirty Float or Clean Intervention?  The Bank of England in the Foreign Exchange Market.” Lund Papers in Economic History. General Issues, no. 2019:199. http://lup.lub.lu.se/record/dfe46e60-6dfb-4380-8354-e7b699ed8ef9.

Schenk, Catherine. 2010. The Decline of Sterling: Managing the Retreat of an International Currency, 1945–1992. Cambridge University Press.

A Policy of Credit Disruption: The Punjab Land Alienation Act of 1900

by Latika Chaudhary (Naval Postgraduate School) and Anand V. Swamy (Williams College)

This research is due to be published in the Economic History Review and is currently available on Early View.

 

Agriculture_in_Punjab_India
Farming, farms, crops, agriculture in North India. Available at Wikimedia Commons.

In the late 19th century the British-Indian government (the Raj) became preoccupied with default on debt and the consequent transfer of land in rural India. In many regions Raj officials made the following argument: British rule had created or clarified individual property rights in land, which had for the first time made land available as collateral for debt. Consequently, peasants could now borrow up to the full value of their land. The Raj had also replaced informal village-based forms of dispute resolution with a formal legal system operating outside the village, which favored the lender over the borrower. Peasants were spendthrift and naïve, and unable to negotiate the new formal courts created by British rule, whereas lenders were predatory and legally savvy. Borrowers were frequently defaulting, and land was rapidly passing from long-standing resident peasants to professional moneylenders who were often either immigrant, of another religion, or sometimes both.  This would lead to social unrest and threaten British rule. To preserve British rule it was essential that one of the links in the chain be broken, even if this meant abandoning cherished notions of sanctity of property and contract.

The Punjab Land Alienation Act (PLAA) of 1900 was the most ambitious policy intervention motivated by this thinking. It sought to prevent professional moneylenders from acquiring the property of traditional landowners. To this end it banned, except under some conditions, the permanent transfer of land from an owner belonging to an ‘agricultural tribe’ to a buyer or creditor who was not from this tribe. Moreover, a lender who was not from an agricultural tribe could no longer seize the land of a defaulting debtor who was from an agricultural tribe.

The PLAA made direct restrictions on the transfer of land a respectable part of the policy apparatus of the Raj and its influence persists to the present-day. There is a substantial literature on the emergence of the PLAA, yet there is no econometric work on two basic questions regarding its impact. First, did the PLAA reduce the availability of mortgage-backed credit? Or were borrowers and lenders able to use various devices to evade the Act, thereby neutralizing it?  Second, if less credit was available, what were the effects on agricultural outcomes and productivity? We use panel data methods to address these questions, for the first time, so far as we know.

Our work provides evidence regarding an unusual policy experiment that is relevant to a hypothesis of broad interest. It is often argued that ‘clean titling’ of assets can facilitate their use as collateral, increasing access to credit, leading to more investment and faster growth. Informed by this hypothesis, many studies estimate the effects of titling on credit and other outcomes, but they usually pertain to making assets more usable as collateral. The PLAA went in the opposite direction – it reduced the “collateralizability” of land which should have  reduced investment and growth, based on the argument we have described. We investigate whether it did.

To identify the effects of the PLAA, we assembled a panel dataset on 25 districts in Punjab from 1890 to 1910. Our dataset contains information on mortgages and sales of land, economic outcomes, such as acreage and ownership of cattle, and control variables like rainfall and population. Because the PLAA targeted professional moneylenders, it should have reduced mortgage-backed credit more in places where they were bigger players in the credit market. Hence, we interact a measure of the importance of the professional, that is, non-agricultural, moneylenders in the mortgage market with an indicator variable for the introduction of the PLAA, which takes the value of  1 from 1900 onward. As expected, we find that  that the PLAA contracted credit more in places where professional moneylenders played a larger role – compared to  districts with no professional moneylenders.  The PLAA reduced mortgage-backed credit by 48 percentage points more at the 25th percentile of our measure of moneylender-importance and by 61 percentage points more at the 75th percentile.

However, this decrease of mortgage-backed credit in professional moneylender-dominated areas did not lead to lower acreage or less ownership of cattle. In short, the PLAA affected credit markets as we might expect without undermining agricultural productivity. Because we have panel data, we are able to account for potential confounding factors such as time-invariant unobserved differences across districts (using district fixed effects), common district-specific shocks (using year effects) and the possibility that districts were trending differently independent of the PLAA (using district-specific time trends).

British officials provided a plausible explanation for the non-impact of PLAA on agricultural production: lenders had merely become more judicious – they were still willing to lend for productive activity, but not for ‘extravagant’ expenditures, such as social ceremonies.  There may be a general lesson here:  policies that make it harder for lenders to recover money may have the beneficial effect of encouraging due diligence.

 

 

To contact the authors:

lhartman@nps.edu

aswamy@williams.edu

Falling Behind and Catching up: India’s Transition from a Colonial Economy

by Bishnupriya Gupta (University of Warwick and CAGE)

The full paper of this blog post was published by The Economic History Review and it is available here 

152473-004-E0D19F36
Official of the East India Company riding in an Indian procession, watercolour on paper, c. 1825–30; in the Victoria and Albert Museum, London. Available at <https://www.britannica.com/topic/East-India-Company/media/1/176643/162308&gt;

There has been much discussion in recent years about India’s growth failure in the first 30 years after independence in 1947. India became a highly-regulated economy and withdrew from the global market. This led to inefficiency and low growth. The architect of Indian planning –Jawaharlal Nehru, the first prime minister, did not put India on an East Asian path. As a contrast, the last decade of the 20th century has seen a reintegration into the global economy and today India is one of the fastest growing economies.

Any analysis of Indian growth and development that starts in 1947, is deeply flawed. It ignores the history of development and the impact of colonization. This paper takes a long run view of India’s economic development and argues that the Indian economy stagnated under colonial rule and a reversal came with independence. Although a slow growth in comparison to East Asia, the Nehruvian legacy put India on a growth path.

Tharoor (2017) in his book Inglorious Empire argues that Britain’s industrial revolution was built on the destruction of Indian textile industries and British rule turned India from an exporter of agricultural goods.  A different view on colonial rule comes from Niall Ferguson in his book Empire: How Britain Made the Modern World. Ferguson claimed that even if the British rule did not increase Indian incomes, things might have been much worse under a restored Mughal regime in 1857. The British build the railways and connected India to the rest of the world.

Neither of these views are based on statistical evidence. Data on GDP per capita (Figure 1), shows that there was a slow decline and stagnation over a long period. Evidence on wages and per capita GDP show a prosperous economy in 1600 under the Mughal Emperor Akbar. Living standards began to decline from the middle of the 17th century, before colonization, continued as the East India Company gained territorial control in 1757. It is important to note that the decline coincided with increased integration with international markets and the rising trade in textiles to Europe. In 1857, India became a part of the global economy of the British Empire. Indian trade volume increased, but from an exporter or industrial products, India became an exporter if food and raw material. Per capita income stagnated even as trade increased, the colonial government built a railway network and British entrepreneurs owned large parts of the industrial sector. In 1947, the country was one of the poorest in the world. Figure 1 below also tells us that growth picked up after independence as India moved towards regulation and restrictions on trade and private investment.

What explains the stagnation in income prior to independence? The colonial government invested very little in the main sector, agriculture. The bulk of British investment went to the railways, but not in irrigation. The railways, initially connected the hinterland with the ports, but over time integrated markets, reducing price variability across markets. However, it did not contribute increasing agricultural productivity. Without large investment in irrigation, output per acre declined in areas that did not get canals. Industry on the other had was the fastest growing sector, but employed only 10 per cent of the work force. Stagnation of the economy under control rule had little to do with trade.

fig01
Indian GDP per capita between 1600 and 2000. Source: Aniruddha Bagchi, “Why did the Indian economy stagnate under the colonial rule?”  in Ideas for India 2013

Indian growth reversal began in independent India with regulation of trade and industry and a break with the global economy. For the first time in the 20th century, the Indian economy began to grow as the graph shows with investment in capital goods industries and agricultural infrastructure. Industrial growth and the green revolution in agriculture, moved the economy from stagnation to growth. This growth slowed down, but the economy did not stagnate as in the colonial period. Following economic reforms after the 1980s, India has entered a high growth regime. The initial increase in growth was a response to removal of restrictions on domestic private investment, well before reintegration into the global economy in the 1990s. The foundations for growth were laid in the first three decades after independence.

The institutional legacy of British rule, had long run consequences. One example is education policy that prioritized investment in secondary and tertiary education, creating a small group with higher education, but few with basic primary schooling. In 1947, less than one–fifth of the population had basic education. The higher education bias in education continued after independence and has created an advantage for the service sector. There are lessons from history to understand Indian growth after independence.

 

To contact the author: B.Gupta@warwick.ac.uk

Why did the industrial diet triumph?

by Fernando Collantes (University of Zaragoza and Instituto Agroalimentario de Aragón)

This blog is part of a larger research paper published in the Economic History Review.

 

Harvard_food_pyramid
Harvard food pyramid. Available at Wikimedia Commons.

Consumers in the Northern hemisphere are feeling increasingly uneasy about their industrial diet. Few question that during the twentieth century the industrial diet helped us solve the nutritional problems related to scarcity. But there is now growing recognition that the triumph of the industrial diet triggered new problems related to abundance, among them obesity, excessive consumerism and environmental degradation. Currently, alternatives, ranging from organic food and those bearing geographical-‘quality’ labels, struggle to transcend the industrial diet. Frequently, these alternatives face a major obstacle: their relatively high price compared to mass-produced and mass-retailed food.

The research that I have conducted examines the literature on nutritional transitions, food regimes and food history, and positions it within present-day debates on diet change in affluent societies.  I employ a case-study of the growth in mass consumption of dairy products in Spain between 1965 and 1990. In the mid-1960s, dairy consumption was very low in Spain and many suffered from calcium deficiency.  Subsequently, there was a rapid growth in consumption. Milk, especially, became an integral part of the diet for the population. Alongside mass consumption there was also mass-production and complementary technical change. In the early 1960s, most consumers only drank raw milk, but by the 1990s milk was being sterilised and pasteurised to standard specifications by an emergent national dairy industry.

In the early 1960s, the regular purchase of milk was too expensive for most households. By the early 1990s, an increase in household incomes, complemented by (alleged) price reductions generated by dairy industrialization, facilitated rapid milk consumption. A further factor aiding consumption was changing consumer preferences. Previously, consumers perceptions of milk were affected by recurrent episodes of poisoning and fraud. The process of dairy industrialization ensured a greater supply of ‘safe’ milk and this encouraged consumers to use their increased real incomes to buy more milk. ‘Quality’ milk meant milk that was safe to consume became the main theme in the advertising campaigns employed milk processers (Figure 1).

 

Figure 1. Advertisement by La Lactaria Española in the early 1970s.

Collantes Pic
Source: Revista Española de Lechería, no. 90 (1973).

 

What are the implications of my research to contemporary debates on food quality? First the transition toward a diet richer in organic foods and foods characterised by short food-supply chains and artisan-like production, backed by geographical-quality labels has more than niche relevance. There are historical precedents (such as the one studied in this article) of large sections of the populace willing to pay premium prices for food products that in some senses are  perceived as qualitatively superior to other, more ‘conventional’ alternatives. If it happened in the past, it can happen again.  Indeed, new qualitative substitutions are already taking place. The key issue is the direction of this substitution. Will consumers use their affluence to ‘green’ their diet? Or will they use higher incomes  to purchase more highly processed foods — with possibly negative implications for  public health and environmental sustainability? This juncture between  food-system dynamics and  public policy is crucial. As Fernand Braudel argued, it is the extraordinary capacity for adaption that defines capitalism.  My research suggests that we need public policies that reorient food capitalism towards socially progressive ends.

 

To contact the author:  collantf@unizar.es