Lessons for the euro from Italian and German monetary unification in the nineteenth century

by Roger Vicquéry (London School of Economics)

Unificazione-Monetaria-Italiana-2012
Special euro-coin issued in 2012 to celebrate the 150th anniversary of the monetary unification of Italy. From Numismatica Pacchiega, available at <https://www.numismaticapacchiega.it/5-euro-annivesario-unificazione/&gt;

Is the euro area sustainable in its current membership form? My research provides new lessons from past examples of monetary integration, looking at the monetary unification of Italy and Germany in the second half of the nineteenth century.

 

Currency areas’ optimal membership has recently been at the forefront of the policy debate, as the original choice of letting peripheral countries join the euro was widely blamed for the common currency existential crisis. Academic work on ‘optimum currency areas’ (OCA) traditionally warned against the risk of adopting a ‘one size fits all’ monetary policy for regions with differing business cycles.

Krugman (1993) even argued that monetary unification in itself might increase its own costs over time, as regions are encouraged to specialise and thus become more different to one another. But those concerns were dismissed by Frankel and Rose’s (1998) influential ‘OCA endogeneity’ theory: once regions with ex-ante diverging paths join a common currency, they will see their business cycle synchronise progressively ex-post.

My findings question the consensus view in favour of ‘OCA endogeneity’ and raise the issue of the adverse effects of monetary integration on regional inequality. I argue that the Italian monetary unification played a role in the emergence of the regional divide between Italy’s Northern and Southern regions by the turn of the twentieth century.

I find that pre-unification Italian regions experienced largely asymmetric shocks, pointing to high economic costs stemming from the 1862 Italian monetary unification. While money markets in Northern Italy were synchronised with the core of the European monetary system, Southern Italian regions tended to move together with the European periphery.

The Italian unification is an exception in this respect, as I show that other major monetary arrangements in this period, particularly the German monetary union but also the Latin Monetary Convention and the Gold Standard, occurred among regions experiencing high shock synchronisation.

Contrary to what ‘OCA endogeneity’ would imply, shock asymmetry among Italian regions actually increased following monetary unification. I estimate that pairs of Italian provinces that came to be integrated following unification became, over four decades, up to 15% more dissimilar to one another in their economic structure compared to pairs of provinces that already belonged to the same monetary union. This means that, in line with Krugman’s pessimistic take on currency areas, economic integration in itself increased the likelihood of asymmetric shocks.

In this respect, the global grain crisis of the 1880s, disproportionally affecting the agricultural South while Italy pursued a restrictive monetary policy, might have laid the foundations for the Italian ‘Southern Question’. As pointed out by Krugman, asymmetric shocks in a currency area with low transaction costs can lead to permanent loss in regional income, as prices are unable to adjust fast enough to prevent factors of production to permanently leave the affected region.

The policy implications of this research are twofold.

First, the results caution against the prevalent view that cyclical symmetry within a currency area is bound to improve by itself over time. In particular, the role of specialisation and factor mobility in driving cyclical divergence needs to be reassessed. As the euro area moves towards more integration, additional specialisation of its regions could further magnify – by increasing the likelihood of asymmetric shocks – the challenges posed by the ‘one size fits all’ policy of the European Central Bank on the periphery.

Second, the Italian experience of monetary unification underlines how the sustainability of currency areas is chiefly related to political will rather than economic costs. Despite the fact that the Italian monetary union has been sub-optimal from the start and to a large extent remained so, it has managed to survive unscathed for the last century and a half. While the OCA framework is a good predictor of currency areas’ membership and economic performance, their sustainability is likely to be a matter of political integration.

Cash Converter: The Liquidity of the Victorian Capital Market

by John Turner (Queen’s University Centre for Economic History)

Liquidity is the ease with which an asset such as a share or a bond can be converted into cash. It is important for financial systems because it enables investors to liquidate and diversify their assets at a low cost. Without liquid markets, portfolio diversification becomes very costly for the investor. As a result, firms and governments must pay a premium to induce investors to buy their bonds and shares. Liquid capital markets also spur firms and entrepreneurs to invest in long-run projects, which increases productivity and economic growth.

From an historical perspective, share liquidity in the UK played a major role in the widespread adoption of the company form in the second half of the nineteenth century. Famously, as I discuss in a recent book chapter published in the Research Handbook on the History of Corporate and Company Law, political and legal opposition to share liquidity held up the development of the company form in the UK.

However, given the economic and historical importance of liquidity, very little has been written on the liquidity of UK capital markets before 1913. Ron Alquist (2010) and Matthieu Chavaz and Marc Flandreau (2017) examine the liquidity risk and premia of various sovereign bonds which were traded on the London Stock Exchange during the late Victorian and early Edwardian eras. Along with Graeme Acheson (2008), I document the thinness of the market for bank shares in the nineteenth century, using the share trading records of a small number of banks.

In a major study, Gareth Campbell (Queen’s University Belfast), Qing Ye (Xi’an Jiaotong-Liverpool University) and I have recently attempted to understand more about the liquidity of the Victorian capital market. To this end, we have just published a paper in the Economic History Review which looks at the liquidity of the London share and bond markets from 1825 to 1870. The London capital market experienced considerable growth in this era. The liberalisation of incorporation law and Parliament’s liberalism in granting company status to railways and other public-good providers, resulted in the growth of the number of business enterprises having their shares and bonds traded on stock exchanges. In addition, from the 1850s onwards, there was an increase in the number of foreign countries and companies raising bond finance on the London market.

How do we measure the liquidity of the market for bonds and stocks in the 1825-70 era? Using end-of-month stock price data from a stockbroker list called the Course of the Exchange and end-of-month bond prices from newspaper sources, we calculate for each security, the number of months in the year where it had a zero return and divide that by the number of months it was listed in the year. Because zero returns are indicative of illiquidity (i.e., that a security has not been traded), one minus our illiquidity ratio gives us a liquidity measure for each security in our sample. We calculate the overall market liquidity for shares and bonds by taking averages. Figure 1 displays market liquidity for bonds and stocks for the period 1825-70.

fig1
Figure 01. Stock and bond liquidity on London Stock Exchange, 1825-1870. Source: Campbell, Turner and Ye (2018, p.829)

Figure 1 reveals that bond market liquidity was relatively high throughout this period but shows no strong trend over time. By way of contrast, there was a strong secular increase in stock liquidity from 1830 to 1870. This increase may have stimulated greater participation in the stock market by ordinary citizens. It may also have affected the growth and deepening of the overall stock market and resulted in higher economic growth.

We examine the cross-sectional differences in liquidity between stocks in order to understand the main determinants of stock liquidity in this era. Our main finding in this regard is that firm size and the number of issued shares were major correlates of liquidity, which suggests that larger firms and firms with a greater number of shares were more frequently traded. Our study also reveals that unusual features which were believed to impede liquidity, such as extended liability, uncalled capital or high share denominations, had little effect on stock liquidity.

We also examine whether asset illiquidity was priced by investors, resulting in higher costs of capital for firms and governments. We find little evidence that the illiquidity of stock or bonds was priced, suggesting that investors at the time did not put much emphasis on liquidity in their valuations. Indeed, this is consistent with J. B. Jefferys (1938), who argued that what mattered to investors during this era was not share liquidity, but the dividend or coupon they received.

In conclusion, the vast majority of stocks and bonds in this early capital market were illiquid. It is remarkable, however, that despite this illiquidity, the UK capital market grew substantially between 1825 and 1870. There was also an increase in investor participation, with investing becoming progressively democratised in this era.

 

To contact the author: j.turner@qub.ac.uk
Twitter: @profjohnturner

 

Bibliography:

Acheson, G.G., and Turner, J.D. “The Secondary Market for Bank Shares in Nineteenth-Century Britain.” Financial History Review 15, no. 2 (October 2008): 123–51. doi:10.1017/S0968565008000139.

Alquist, R. “How Important Is Liquidity Risk for Sovereign Bond Risk Premia? Evidence from the London Stock Exchange.” Journal of International Economics 82, no. 2 (November 1, 2010): 219–29. doi:10.1016/j.jinteco.2010.07.007.

Campbell, G., Turner, J.D., and Ye, Q. “The Liquidity of the London Capital Markets, 1825–70†.” The Economic History Review 71, no. 3 (August 1, 2018): 823–52. doi:10.1111/ehr.12530.

Chavaz, M., and Flandreau, M. “‘High & Dry’: The Liquidity and Credit of Colonial and Foreign Government Debt and the London Stock Exchange (1880–1910).” The Journal of Economic History 77, no. 3 (September 2017): 653–91. doi:10.1017/S0022050717000730.

Jefferys, J.B. Trends in Business Organisation in Great Britain Since 1856: With Special Reference to the Financial Structure of Companies, the Mechanism of Investment and the Relations Between the Shareholder and the Company. University of London, 1938.

Wages of sin: slavery and the banks, 1830-50

by Aaron Graham (University College London)

 

jon-bull
From the cartoon ‘Slave Emancipation; Or, John Bull Gulled Out Of Twenty Millions’ by C.J. Grant. In Richard Pound (UCL, 1998), C.J. Grant’s ‘Political Drama’, a radical satirist rediscovered‘. Available at <https://www.ucl.ac.uk/lbs/project/logo/&gt;

In 1834, the British Empire emancipated its slaves. This should have quickly triggered a major shift away from plantation labour and towards a free society where ex-slaves would bargain for better wages and force the planters to adopt new business models or go under. But the planters and plantation system survived, even if slavery did not. What went wrong?

This research follows the £20 million paid in compensation by the British government in 1834 (equivalent to about £20 billion today). This money was paid not to the slaves, but to the former slave-owners for the loss of their human property.

Thanks to the Legacies of British Slave-ownership project at University College London, we now know who received the money and how much. But until this study, we knew very little about how the former slave-owners used this money, or what effect this had on colonial societies in the West Indies or South Africa as they confronted the demands of this new world.

The study suggests why so little changed. It shows that slave-owners in places such as Jamaica, Guyana, South Africa and Mauritius used the money they received not just to pay off their debts, but also to set up new banks, which created credit by issuing bank notes and then supplied the planters with cash and credit.

Planters used the credit to improve their plantations and the cash to pay wages to their new free labourers, who therefore lacked the power to bargain for better conditions. Able to accommodate the social and economic pressures that would otherwise have forced them to reassess their business models and find new approaches that did not rely on the unremitting exploitation of black labour, planters could therefore resist the demands for broader economic and social change.

Tracking the ebb and flow of money shows that in Jamaica, for example, in 1836 about 200 planters chose to subscribe half the £450,000 they had received in compensation in the new Bank of Jamaica. By 1839, the bank had issued almost £300,000 in notes, enabling planters across the island to meet their workers’ wages without otherwise altering the plantation system.

When the Planters’ Bank was founded in 1839, it issued a further £100,000. ‘We congratulate the country on the prospects of a local institution of this kind’, the Jamaica Despatch commented in May 1839, ‘ … designed to aid and relieve those who are labouring under difficulties peculiar to the Jamaican planter at the present time’.

In other cases, the money even allowed farmers to expand the system of exploitation. In the Cape of Good Hope, the Eastern Province Bank at Grahamstown raised £26,000 with money from slavery compensation but provided the British settlers with £170,000 in short-term loans, helping them to dispossess native peoples of their land and use them as cheap labour to raise wool for Britain’s textile factories.

‘With united influence and energy’, the bank told its shareholders in 1840, for example, ‘the bank must become useful, as well to the residents at Grahamstown and our rapidly thriving agriculturists as prosperous itself’.

This study shows for the first time why planters could carry on after 1834 with business as usual. The new banks created after 1834 helped planters throughout the British Empire to evade the major social and economic changes that abolitionists had wanted and which their opponents had feared.

By investing their slavery compensation money in banks that then offered cash and credit, the planters could prolong and even expand their place in economies and societies built on the plantation system and the exploitation of black labour.

 

To contact the author: aaron.graham@ucl.ac.uk

 

The UK’s unpaid war debts to the United States, 1917-1980

by David James Gill (University of Nottingham)

ww1fe-562830
Trenches in World War I. From <www.express.co.uk>

We all think we know the consequences of the Great War – from the millions of dead to the rise of Nazism – but the story of the UK’s war debts to the United States remains largely untold.

In 1934, the British government defaulted on these loans, leaving unpaid debts exceeding $4 billion. The UK decided to cease repayment 18 months after France had defaulted on its war debts, making one full and two token repayments prior to Congressional approval of the Johnson Act, which prohibited further partial contributions.

Economists and political scientists typically attribute such hesitation to concerns about economic reprisals or the costs of future borrowing. Historians have instead stressed that delay reflected either a desire to protect transatlantic relations or a naive hope for outright cancellation.

Archival research reveals that the British cabinet’s principal concern was that many states owing money to the UK might use its default on war loans as an excuse to cease repayment on their own debts. In addition, ministers feared that refusal to pay would profoundly shock a large section of public opinion, thereby undermining the popularity of the National government. Eighteen months of continued repayment therefore provided the British government with more time to manage these risks.

The consequences of the UK’s default have attracted curiously limited attention. Economists and political scientists tend to assume dire political costs to incumbent governments as well as significant short-term economic shocks in terms of external borrowing, international trade, and the domestic economy. None of these consequences apply to the National government or the UK in the years that followed.

Most historians consider these unpaid war debts to be largely irrelevant to the course of domestic and international politics within five years. Yet archival research reveals that they continued to play an important role in British and American policy-making for at least four more decades.

During the 1940s, the issue of the UK’s default arose on several occasions, most clearly during negotiations concerning Lend-Lease and the Anglo-American loan, fuelling Congressional resistance that limited the size and duration of American financial support.

Successive American administrations also struggled to resist growing Congressional pressure to use these unpaid debts as a diplomatic tool to address growing balance of payment deficits from the 1950s to the 1970s. In addition, British default presented a formidable legal obstacle for the UK’s return to the New York bond market in the late 1970s, threatening to undermine the efficient refinancing of the government’s recent loans from the International Monetary Fund.

The consequences of the UK’s default on its First World War debts to the United States were therefore longer lasting and more significant to policy-making on both sides of the Atlantic than widely assumed.

 

Decimalising the pound: a victory for the gentlemanly City against the forces of modernity?

by Andy Cook (University of Huddersfield)

 

1813 guinea

Some media commentators have identified the decimalisation of the UK’s currency in 1971 as the start of a submerging of British identity. For example, writing in the Daily Mail, Dominic Sandbrook characterises it as ‘marking the end of a proud history of defiant insularity and the beginning of the creeping ­Europeanisation of ­Britain’s institutions.’

This research, based on Cabinet papers, Bank of England archives, Parliamentary records and other sources, reveals that this interpretation is spurious and reflects more modern preoccupations with the arguments that dominated much of the Brexit debate, rather than the actual motivation of key players at the time.

The research examines arguments made by the proponents of alternative systems based on either decimalising the pound, or creating a new unit worth the equivalent of 10 shillings. South Africa, Australia and New Zealand had all recently adopted a 10-shilling unit, and this system was favoured by a wide range of interest groups in the UK, representing consumers, retailers, small and large businesses, and media commentators.

Virtually a lone voice in lobbying for retention of the pound was the City of London, and its arguments, articulated by the Bank of England, were based on a traditional attachment to the international status of sterling. These arguments were accepted, both by the Committee of Enquiry on Decimal currency, which reported in 1963, and, in 1966, by a Labour government headed by Harold Wilson, who shared the City’s emotional attachment to the pound.

Yet by 1960, the UK had faced the imminent prospect of being virtually the only country retaining non-decimal coinage. Most key economic players agreed that decimalisation was necessary and the only significant bone of contention was the choice of system.

Most informed opinion favoured a new major unit equivalent to 10 shillings, as reflected in evidence given by retailers and other businesses to the Committee of Enquiry on Decimal Coinage, and the formation of a Decimal Action Committee by the Consumers Association to press for such a system.

The City, represented by the Bank of England, was implacably opposed to such a system, arguing that the pound’s international prestige was crucial to underpinning the position of the City as a leading financial centre. This assertion was not evidence-based, and internal Bank documents acknowledge that their argument was ‘to some extent based on sentiment’.

This sentiment was shared by Harold Wilson, whose government announced the decision to introduce decimal currency based on the pound in 1966. Five years earlier, he had made an emotional plea to keep the pound arguing that ‘the world will lose something if the pound disappears from the markets of the world’.

Far from being the end of ‘defiant insularity’, the decision to retain a higher-value basic currency unit of any major economy, rather than adopting one closer in value either to the US dollar or the even lower-value European currencies, reflected the desire of the City and government to maintain a distinctive symbol of Britishness, the pound, overcoming opposition from interests with more practical concerns.

THE FINANCIAL POWER OF THE POWERLESS: Evidence from Ottoman Istanbul on socio-economic status, legal protection and the cost of borrowing

In Ottoman Istanbul, privileged groups such as men, Muslims and other elites paid more for credit than the under-privileged – the exact opposite of what happens in a modern economy.

New research by Professors Timur Kuran (Duke University) and Jared Rubin (Chapman University), published in the March 2018 issue of the Economic Journal, explains why: a key influence on the cost of borrowing is the rule of law and in particular the extent to which courts will enforce a credit contract.

In pre-modern Turkey, it was the wealthy who could benefit from judicial bias to evade their creditors – and who, because of this default risk, faced higher interest rates on loans. Nowadays, it is under-privileged people who face higher borrowing costs because there are various institutions through which they can escape loan repayment, including bankruptcy options and organisations that will defend poor defaulters as victims of exploitation.

In the modern world, we take it for granted that the under-privileged incur higher borrowing costs than the upper socio-economic classes. Indeed, Americans in the bottom quartile of the US income distribution usually borrow through pawnshops and payday lenders at rates of around 450% per annum, while those in the top quartile take out short-term loans through credit cards at 13-16%. Unlike the under-privileged, the wealthy also have access to long-term credit through home equity loans at rates of around 4%.

The logic connecting socio-economic status to borrowing costs will seem obvious to anyone familiar with basic economics: the higher costs of the poor reflect higher default risk, for which the lender must be compensated.

The new study sets out to test whether the classic negative correlation between socio-economic status and borrowing cost holds in a pre-modern setting outside the industrialised West. To this end, the authors built a data set of private loans issued in Ottoman Istanbul during the period from 1602 to 1799.

These data reveal the exact opposite of what happens in a modern economy: the privileged paid more for credit than the under-privileged. In a society where the average real interest rate was around 19%, men paid an interest surcharge of around 3.4 percentage points; Muslims paid a surcharge of 1.9 percentage points; and elites paid a surcharge of about 2.3 percentage points (see Figure 1).

pic

What might explain this reversal of relative borrowing costs? Why did socially advantaged groups pay more for credit, not less?

The data led the authors to consider a second factor contributing to the price of credit, often taken for granted: the partiality of the law. Implicit in the logic that explains relative credit costs in modern lending markets is that financial contracts are enforceable impartially when the borrower is able to pay. Thus, the rich pay less for credit because they are relatively unlikely to default and because, if they do, lenders can force repayment through courts whose verdicts are more or less impartial.

But in settings where the courts are biased in favour of the wealthy, creditors will expect compensation for the risk of being unable to obtain restitution. The wealth and judicial partiality effects thus work against each other. The former lowers the credit cost for the rich; the latter raises it.

Islamic Ottoman courts served all Ottoman subjects through procedures that were manifestly biased in favour of clearly defined groups. These courts gave Muslims rights that they denied to Christians and Jews. They privileged men over women.

Moreover, because the courts lacked independence from the state, Ottoman subjects connected to the sultan enjoyed favourable treatment. Theory developed in the new study explains why their weak legal power may translate into strong financial power.

More generally, this research suggests that in a free financial market, any hindrance to the enforcement of a credit contract will raise the borrower’s credit cost. Just as judicial biases in favour of the wealthy raise their interest rates on loans, institutions that allow the poor to escape loan repayment – bankruptcy options, shielding of assets from creditors, organisations that defend poor defaulters as victims of exploitation – raise interest rates charged to the poor.

Today, wealth and credit cost are negatively correlated for multiple reasons. The rich benefit both from a higher capacity to post collateral and from better enforcement of their credit obligations relative to those of the poor.

 

To contact the authors:
Timur Kuran (t.kuran@duke.edu); Jared Rubin (jrubin@chapman.edu)

How did investors view the reforms and supervisory organisations of the late nineteenth century?

by Avni Önder Hanedar (Sakarya University)

In the last couple of decades, high debt burden in emerging economies created financial crises and the low growth rate during the 2008 financial crisis led to a default problem for Greece. Some reforms were proposed, such as institutional changes and the establishment of an entity under control of the other Eurozone members to supervise the repayment of debts. These events have some similarities with the default of the Ottoman Empire and the establishment of the Ottoman Public Debt Administration (OPDA) (Düyun-u Umumiye). To deal with the inefficiencies in the Ottoman economy and political system, reforms were implemented, as supervisory organizations were established during the nineteenth century. Important ones were the adoption of the gold standard in 1880, the Administration of Six Indirect Revenues (Rüsum-u Sitte) (ASIR) in 1879, and the OPDA in 1881. It seems that many of them were not seen by investors as promising, since a British weekly magazine, Punch or The London Charivari, illustrated these events as bubbles. A paper of  Elmas Yaldız Hanedar, Avni Önder Hanedar, and Ferdi Çelikay examined how such events were perceived at the İstanbul bourse, which could shed light on today’s realities.

1
Cartoon of Punch or The London Charivari on 6 January 1877 about the Ottoman reforms.a caption

 

The paper manually collected historical data on the price of the General Debt bond traded at the İstanbul bourse between 1873 and 1883 from volumes of daily Ottoman newspapers, i.e., Basiret, Ceride-i Havadis, and Vakit. This bond was the most actively traded one at the İstanbul bourse in 1881, during the foundation of the OPDA.

2
A column of Vakit pointing out the values of bonds, stocks, and foreign currencies at the İstanbul bourse on 6 October 1875 (Vakit. (6 October 1875). Sarafiye, Galata piyasası, 2)

The paper is the first to measure in econometrically sophisticated manner investors’ beliefs at the İstanbul bourse in reference to the reforms and financial control organizations. Historical research does not include detailed empirical information for the effects of reforms and financial control organizations on the İstanbul bourse during the default period. Using unique data on the most actively traded Ottoman government bond, the paper extends the historical literature on the İstanbul bourse (See Hanedar et al. (2017)) and reforms (See Mauro et al. (2006), Birdal (2010), Mitchener and Weidenmier (2010) looking at bond markets in multiple developing countries, with samples that include the Ottoman Empire).

The methodology in the paper was to analyse the variance of returns (derived from the price showed in above) as a proxy of financial instabilities and risks. To model volatility, the paper estimated a GARCH model with dummy variables for reforms and financial control organizations at and after the dates of the events (i.e., short- and long-run).

 

 

 

 

 

 

3
The General Debt bond price (Turkish Liras) and key events. The data are derived from Vakit, Ceride-i Havadis, and Basiret, 187383.

The empirical results indicated a permanent decrease in volatility after the establishment of the OPDA and the gold standard. The foundation of a locally controlled finance commission in 1874 was correlated with a lower volatility level at the date of the event, but increased volatility in the long term. The Ottoman case is instructive for the understanding of today’s economic situation in emerging markets such as Greece, while it could be argued that long-lived and comprehensive measures with foreign creditors’ supervision on fiscal and monetary systems matter more for investors’ perceptions. Lowering government interventions on economic system and transaction costs due to bimetallism were viewed as promising. Investor beliefs that the local and short-lived reforms and supervisory organizations were ineffective could be due to several factors such as lack of measures to limit public expenditures.

 

4
Volatility changes in the General Debt bond return, 1873–83. * and *** denote statistically significant coefficients at 10% and 1%.

 

References

Vakit. (6 October 1875). Sarafiye, Galata piyasası, 2.

Birdal, M. (2010). The Political economy of Ottoman public debt, insolvency and European control in the late nineteenth century. London: I. B. Tauris and Co Ltd.

Hanedar, A. Ö., Hanedar, E. Y., Torun, E., & Ertuğrul, H. M. (2017). Dissolution of an Empire: Insights from the İstanbul Bourse and the Ottoman War Bond. Defence and Peace Economics, (Forthcoming).

Mauro, P., Sussman, N., & Yafeh, Y. (2006). Emerging markets and financial globalization: Sovereign bond spreads in 1870-1913 and today. Oxford: Oxford University press.

Mitchener, K. J. & Weidenmier, M. D. (2010). Super sanctions and sovereign debt repayment. Journal of International Money and Finance, 29(1), 19–36.

A Brief Monetary History of Ireland

by Seán Kenny (Lund University) and Jason Lennard (Lund University and National Institute of Economic and Social Research)

 

The Irish Famine of the 1840s is one of the great tragedies of history. Beginning with a bout of potato blight, the Irish population subsequently declined by 20 per cent between the censuses of 1841 and 1851 and has never recovered (O’Rourke, 1991). How did an agricultural shock have such devastating effects? Lynch and Vaizey (1960) argue that a lack of monetization facilitated self-dependence and barter, leaving the Irish economy vulnerable to exogenous shocks like the Famine.

In a forthcoming paper in the Economic History Review available here, we constructed new monthly estimates of the narrow money supply and annual estimates of the broad money supply between 1840 and 1921. The aggregates were constructed from a range of archival sources and contemporary publications. A major task was to reconstruct the Irish coin supply. We did this by tracking shipments of coin between the Royal Mint and Irish banks using records held at the National Archives. These flows were then added to stocks, which were either recalculated from contemporary estimates or based on recoinages.

A number of interesting results emerge from the data. First, we find that, by standard measures, Ireland was no backwater, but well monetized on the eve of the Famine. Not only was it more monetized than other European countries for which data is available, such as Norway and Sweden, it was decades ahead of others, such as Germany and the Netherlands. The new data is therefore at odds with the Lynch and Vaizey hypothesis.

A second major finding is the scale of the collapse in the money supply during the Great Famine. This monetary contraction was the largest during any event in the economic history of Ireland since 1840 and perhaps one of the deepest in economic history more generally. Currency in the hands of the public, the nation’s liquidity, collapsed by more than half, the monetary base (currency in the hands of the public plus reserves) by 48 per cent and the broad money supply (currency in the hands of the public plus net deposits) by 27 per cent.

Untitled
Figure 1. The Great Famine versus the Great Contraction
Notes: Ireland indexed to 1846 = 100. US indexed to 1928 = 100. Year end.
Sources: Kenny and Lennard, ‘Monetary aggregates for Ireland’; Friedman and Schwartz, Monetary history.

 

Figure 1 plots the narrow (M0) and broad (M3) money supplies in Ireland during the Great Famine against equivalent measures for the United States during the Great Depression. As can be seen in this tale of two crises, the narrow money supply slumped much deeper during the Great Famine than in the Great Contraction. The broad money supply initially declined more steeply in Ireland than in the US. However, the Irish recovery was underway from 1849, while the American contraction continued until 1933.

This new data shines a light on Ireland’s statistical Dark Age, allowing us to revisit old hypotheses and others to develop new ones. On the monetary origins of the Great Famine, we found that Ireland was no less monetized than its European peer group. The Famine did, however, unleash the Great Irish Contraction, during which the money supply drastically slumped.

 

To contact the authors:

sean.kenny@ekh.lu.se
j.lennard@niesr.ac.uk

 

References

Friedman, M. and Schwartz, A. J., A monetary history of the United States, 1867–1960 (Princeton, NJ, 1963).

Kenny, S. and Lennard, J., ‘Monetary aggregates for Ireland, 1840–1921’, Economic History Review (2017).

Lynch, P. and Vaizey, J., Guinness’s brewery in the Irish economy, 1759–1876 (1960).

O’Rourke, K. H., ‘Did the Great Irish Famine matter?’, Journal of Economic History, 51 (1991), pp. 1–22.

EHS 2018 special: Long-term effects of financial crises

by Chenzi Xu (Harvard University)

 

The global financial crisis of 2008 was not unique. It had a precedent in the London banking crisis of 1866. Just as in 2008, the crisis began in the core financial market and spread to the periphery, the same happened in 1866.

The 1866 crisis has only been studied as a purely British event, but my research presents new evidence that it was a global financial crisis on the scale of 2008’s. The cities around the world that depended on British banks that happened to fail in London suffered immediate losses in exports activity. These losses took decades to recover, with the hysteresis persisting until the twentieth century.

In May 1866, Overend and Gurney, a bank’s bank and one of the most prestigious financial entities in London, declared bankruptcy. A panic erupted and almost 20% of banks headquartered in London failed. Crucially, these banks had been established in the mid-nineteenth century to globalise financial markets and trade, and they operated in cities around the world.

n.png
Figure 1. Map of British credits and failures around the world

 

Figure 1 shows the concentration of British banking, and the degree to which the banking crisis in London affected them. Red denotes greater losses in British financing, and the size of the circles denotes the amount of lending before the crisis.

I study the impacts of the failures of British banks in London on trade activity around the world, outside of the UK, at hundreds of ports. At the extreme, losing access to all British credit caused exports to drop 80% in the year following the crisis. The aggregate global loss in trade was 17%, which is comparable to the levels seen in the latest crisis. Given that the mid-late 19th century was otherwise a period of great expansion and growth, the counterfactual without this crisis would have been even more spectacular.

The historical context also makes it possible to study the long-run effects, and I find that countries suffering the largest drops in the supply of British credit did not recover their exports to previous partners for several decades. These persistent effects suggest that losing access to financial markets can cause substantial hysteresis.

These long-term consequences of financial market instability have yet to be established for recent crises simply because not enough time has passed. But early evidence suggests that international trade has not rebounded, even ten years after the financial crisis.

RECONSTRUCTION OF MONEY SUPPLY OVER THE LONG RUN: THE CASE OF ENGLAND, 1270-1870

by Nuno Palma (University of Manchester)

This paper provides the first annual time series of coin and money supply estimates for about six hundred years of English history.

It presents a baseline set of estimates, but also considers a variety of alternative plausible scenarios and provide several robustness checks. It concentrates on carefully setting out the details for the data construction, rather than on analysis, but the hope is that these new estimates – the longest such series ever assembled, for any country – will open new vistas to help us understand the complex interaction between the real and the monetary sides of the English economy, at both business-cycle and long-run frequencies. Many applications are possible; for instance, O’Brien and Palma (2016) use it in their analysis of the Restriction period (1797-1821). Furthermore, the new methodology set out here may serve as a blueprint for a similar reconstruction of coin and money supply series for other economies for which the analogous required data is available.

The paper proposes two new estimation methods. The first, referred to as the “direct method”, is used to measure the value of government-provided, legal-tender coin supply only. This method does not consider broader forms of money such as banknotes, deposits, inland bills of exchange, government tallies, exchequer paper or private tokens, which became increasingly important from the seventeenth century onwards. The second method is an “indirect method,” which relies on a combination of information about nominal GDP with the value of coin supply or M2 known at certain benchmark periods. This permits estimating the volume of a broader measure of money supply over time. Figure 1 shows the main results.

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Figure 1. English nominal coin supply, 1270-1870 (log scale of base 2). The periods when direct method A cannot be seen means it coincides with the baseline method (aka direct method B). Source: my calculation based on a series of sources; see text for details.

This paper is forthcoming in The Economic History Review (currently available in early view), and the underlying data has now been included by the Bank of England in their historical database

To contact the author:
nuno.palma@manchester.ac.uk
@nunopgpalma