A Silver Transformation: Chinese Monetary Integration in Times of Political Disintegration during 1898–1933

by Debin Ma (London School of Economics and Hitotsubashi University)  and Liuyan Zhao (Peking University)

The full article for this blog post will be published on  The Economic History Review

 

chinese coins
Two 19th Century Chinese Cash Coins. Available at <https://www.coincommunity.com/forum/topic.asp?TOPIC_ID=70505>

Despite the political turmoil, the early 20th century witnessed  fundamental economic and industrial transformations in China.  Our research documents the most important but neglected aspect of this development:  China remained on the silver standard until 1936 while many countries remained on gold.  Nonetheless, the Chinese silver regime defies easy classification because  its silver basis was traditionally not in coinage, but in the form of privately minted ingots called sycee, denoted by a unit of account called tael.  During our study period, sycee circulated alongside standardized silver coins such as Mexican and later Chinese silver dollars. We know relatively little about the operation of the silver exchange and monetary regime within China, in contrast to the large literature on the gold standard during the same era.

We present an in-depth analysis of China’s unique silver regime by offering a systematic econometric assessment of Chinese silver market integration between 1898 and 1933.  As a result of this integration, the dollar-tael exchange rate, the  yangli, became the most important indicator of the Chinese currency market. We compile a large data set culled from contemporary publications on the yangli across nineteen cities in Northern and Central China, and offer a threshold time series methodology for measuring silver integration comparable to that of gold points.

Picture 1
Figure 1. Silver point estimates between Shanghai and Tianjin in 10-year moving windows, Jan. 1898–March 1933. Source: Ma and Zhao (per article in the Economic History Review, 2019)

We find that the silver points between Shanghai and Tianjin, the two most important financial centers in Central and Northern China, declined  steadily from the 1910s for the rest of the period (Figure 1).  Our estimates of silver points from the daily rates of nineteen cities during the 1920s and 1930s also reveal that there was no substantial difference in the level of monetary integration between the Warlord Era of the 1920s and the Nanjing decade of the 1930s. Figure 2 provides a simple linear plot of  the distance between Shanghai and the estimated silver points of those cities paired with Shanghai during the 1920s and 1930s. This Figure shows a positive relationship between silver points and the distance from Shanghai, indicating the rise of a monetary system centered on Shanghai.

Our silver point estimates are closely aligned with the actual costs of the silver trade derived from contemporary accounts. Moreover, the silver points help predict corresponding transaction volumes: the majority of large silver exports from Shanghai occurred when the  yangli spread was above the silver export points;  only limited flows occurred when it fell within the bounds of the silver points. The econometric results reveal that monetary integration between Shanghai and Tianjin improved in the 1910s—precisely during the Warlord Era of national disintegration and civil strife—and these improvements spread to other cities in Central and Northern China in the 1920s and 1930s.

Picture 2
Figure 2. Silver points and distance. Source: Ma and Zhao (per article in the Economic History Review, 2019

Our research provides a historical analysis of the causes of monetary integration, attributing a central role to China’s infrastructure and financial improvements during this period. One plausible driving force was the rise of new transport and information infrastructure, for example, the completion of the Tianjin-Nanjing Railway, and the Shanghai-Nanjing and Shanghai-Hangzhou Railways constructed between 1908 and 1916, which linked the Northern and Southern China. Compared with road or water transport, railroads offered much faster, cheaper and safer delivery, an advantage far more significant for high-value silver shipments than low-value high-bulk commodities.

Another, more important factor was monetary and financial transformation indicated by the rise of a modern banking system from the end of the 19th century. Although it was the government that issued national dollars, banking communities played a key role in defending its reputation and purity. Overtime, the ‘countable’ dollar outperformed the ‘weighable’ sycee as a medium of exchange, gaining an increasing share in China’s monetary system. This eventually paved the way for the currency reform of 1933, which abolished the sycee and the tael, establishing the dollar as the sole standard. A notable monetary transformation was the increasing popularity of banknotes. The system of Chinese bank note issuance was largely run on a model of free banking with multiple public and private banks, Chinese or foreign, issuing silver-convertible banknotes based on reputation mechanism. Thus, the increasing note issue from the 1910s provided a much more elastic currency to smooth seasonality in the money markets and enhance financial integration.

 

To contact the authors:

Debin Ma (D.Ma1@lse.ac.uk)

Liuyan Zhao (zhly@pku.edu.cn)

Turkey’s Experience with Economic Development since 1820

by Sevket Pamuk, University of Bogazici (Bosphorus) 

This research is part of a broader article published in the Economic History Review.

A podcast of Sevket’s Tawney lecture can be found here.

 

Pamuk 1

New Map of Turkey in Europe, Divided into its Provinces, 1801. Available at Wikimedia Commons.

The Tawney lecture, based on my recent book – Uneven centuries: economic development of Turkey since 1820, Princeton University Press, 2018 – examined the economic development of Turkey from a comparative global perspective. Using GDP per capita and other data, the book showed that Turkey’s record in economic growth and human development since 1820 has been close to the world average and a little above the average for developing countries. The early focus of the lecture was on the proximate causes — average rates of investment, below average rates of schooling, low rates of total productivity growth, and low technology content of production —which provide important insights into why improvements in GDP per capita were not higher. For more fundamental explanations I emphasized the role of institutions and institutional change. Since the nineteenth century Turkey’s formal economic institutions were influenced by international rules which did not always support economic development. Turkey’s elites also made extensive changes in formal political and economic institutions. However, these institutions provide only part of the story:  the direction of institutional change also depended on the political order and the degree of understanding between different groups and their elites. When political institutions could not manage the recurring tensions and cleavages between the different elites, economic outcomes suffered.

There are a number of ways in which my study reflects some of the key trends in the historiography in recent decades.  For example, until fairly recently, economic historians focused almost exclusively on the developed economies of western Europe, North America, and Japan. Lately, however, economic historians have been changing their focus to developing economies. Moreover, as part of this reorientation, considerable effort has been expended on constructing long-run economic series, especially GDP and GDP per capita, as well as series on health and education.  In this context, I have constructed long-run series for the area within the present-day borders of Turkey. These series rely mostly on official estimates for the period after 1923 and make use of a variety of evidence for the Ottoman era, including wages, tax revenues and foreign trade series. In common with the series for other developing countries, many of my calculations involving Turkey  are subject to larger margins of error than similar series for developed countries. Nonetheless, they provide insights into the developmental experience of Turkey and other developing countries that would not have been possible two or three decades ago. Finally, in recent years, economists and economic historians have made an important distinction between the proximate causes and the deeper determinants of economic development. While literature on the proximate causes of development focuses on investment, accumulation of inputs, technology, and productivity, discussions of the deeper causes consider the broader social, political, and institutional environment. Both sets of arguments are utilized in my book.

I argue that an interest-based explanation can address both the causes of long-run economic growth and its limits. Turkey’s formal economic institutions and economic policies underwent extensive change during the last two centuries. In each of the four historical periods I define, Turkey’s economic institutions and policies were influenced by international or global rules which were enforced either by the leading global powers or, more recently, by international agencies. Additionally, since the nineteenth century, elites in Turkey made extensive changes to formal political institutions.  In response to European military and economic advances, the Ottoman elites adopted a programme of institutional changes that mirrored European developments; this programme  continued during the twentieth century. Such fundamental  changes helped foster significant increases in per capita income as well as  major improvements in health and education.

But it is also necessary to examine how these new formal institutions interacted with the process of economic change – for example, changing social structure and variations in the distribution of power and expectations — to understand the scale and characteristics of growth that the new institutional configurations generated.

These interactions were complex. It is not easy to ascribe the outcomes created in Turkey during these two centuries to a single cause. Nonetheless, it is safe to state that in each of the four periods, the successful development of  new institutions depended on the state making use of the different powers and capacities of the various elites. More generally, economic outcomes depended closely on the nature of the political order and the degree of understanding between different groups in society and the elites that led them. However, one of the more important characteristics of Turkey’s social structure has been the recurrence of tensions and cleavages between its elites. While they often appeared to be based on culture, these tensions overlapped with competing economic interests which were, in turn, shaped by the economic institutions and policies generated by the global economic system. When political institutions could not manage these tensions well, Turkey’s economic outcomes remained close to the world average.

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.

All quiet before the take-off? Pre-industrial regional inequality in Sweden (1571-1850)

by Anna Missiaia and Kersten Enflo (Lund University)

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

 

Missiaia Main.jpg
Södra Bancohuset (The Southern National Bank Building), Stockholm. Available here at Wikimedia Commons.

For a long time, scholars have thought about regional inequality merely as a by-product of modern economic growth: following a Kuznets-style interpretation, the front-running regions increase their income levels and regional inequality during industrialization; and it is only when the other regions catch-up that overall regional inequality decreases and completes the inverted-U shaped pattern. But early empirical research on this theme was largely focused on the  the 20th century, ignoring industrial take-off of many countries (Williamson, 1965).  More recent empirical studies have pushed the temporal boundary back to the mid-19th century, finding that inequality in regional GDP was already high at the outset of modern industrialization (see for instance Rosés et al., 2010 on Spain and Felice, 2018 on Italy).

The main constraint for taking the estimations well into the pre-industrial period is the availability of suitable regional sources. The exceptional quality of Swedish sources allowed us for the first time to estimate a dataset of regional GDP for a European economy going back to the 16th century (Enflo and Missiaia, 2018). The estimates used here for 1571 are largely based on a one-off tax proportional to the yearly production: the Swedish Crown imposed this tax on all Swedish citizens in order to pay a ransom for the strategic Älvsborg castle that had just been conquered by Denmark. For the period 1750-1850, the estimates rely on standard population censuses. By connecting the new series to the existing ones from 1860 onwards by Enflo et al. (2014), we obtain the longest regional GDP series for any given country.

We find that inequality increased dramatically between 1571 and 1750 and remained high until the mid-19th century. Thereafter, it declined during the modern industrialization of the country (Figure 1). Our results discard the traditional  view that regional divergence can only originate during an industrial take-off.

 

Figure 1. Coefficient of variation of GDP per capita across Swedish counties, 1571-2010.

Missiaia 1
Sources: 1571-1850: Enflo and. Missiaia, ‘Regional GDP estimates for Sweden, 1571-1850’; 1860-2010: Enflo et al, ‘Swedish regional GDP 1855-2000 and Rosés and Wolf, ‘The Economic Development of Europe’s Regions’.

 

Figure 2 shows the relative disparities in four benchmark years. If the country appeared relatively equal in 1571, between 1750 and 1850 both the mining districts in central and northern Sweden and the port cities of Stockholm and Gothenburg emerged.

 

Figure 2. The relative evolution of GDP per capita, 1571-1850 (Sweden=100).

Missiaia 2
Sources: 1571-1850: Enflo and. Missiaia, ‘Regional GDP estimates for Sweden, 1571-1850’; 2010: Rosés and Wolf, ‘The Economic Development of Europe’s Regions’.

The second part of the paper is devoted to the study of the drivers of pre-industrial regional inequality. Decomposing the Theil index for GDP per worker, we show that regional inequality was driven by structural change, meaning that regions diverged because they specialized in different sectors. A handful of regions specialized in either early manufacturing or in mining, both with a much higher productivity per worker compared to agriculture.

To explain this different trajectory, we use a theoretical framework introduced by Strulik and Weisdorf (2008) in the context of the British Industrial Revolution: in regions with a higher share of GDP in agriculture, technological advancements lead to productivity improvements but also to a proportional increase in population, impeding the growth in GDP per capita as in a classic Malthusian framework. Regions with a higher share of GDP in industry, on the other hand, experienced limited population growth due to the increasing relative price of children, leading to a higher level of GDP per capita. Regional inequality in this framework arises from a different role of the Malthusian mechanism in the two sectors.

Our work speaks to a growing literature on the origin of regional divergence and represents the first effort to perform this type of analysis before the 19th century.

 

To contact the authors:

anna.missiaia@ekh.lu.se

kerstin.enflo@ekh.lu.se

 

References

Enflo, K. and Missiaia, A., ‘Regional GDP estimates for Sweden, 1571-1850’, Historical Methods, 51(2018), 115-137.

Enflo, K., Henning, M. and Schön, L., ‘Swedish regional GDP 1855-2000 Estimations and general trends in the Swedish regional system’, Research in Economic History, 30(2014), pp. 47-89.

Felice, E., ‘The roots of a dual equilibrium: GDP, productivity, and structural change in the Italian regions in the long run (1871-2011)’, European Review of Economic History, (2018), forthcoming.

Rosés, J., Martínez-Galarraga, J. and Tirado, D., ‘The upswing of regional income inequality in Spain (1860–1930)’,  Explorations in Economic History, 47(2010), pp. 244-257.

Strulik, H., and J. Weisdorf. ‘Population, food, and knowledge: a simple unified growth theory.’ Journal of Economic Growth 13.3 (2008): 195.

Williamson, J., ‘Regional Inequality and the Process of National Development: A Description of the Patterns’, Economic Development and Cultural Change 13(1965), pp. 1-84.

 

Asia’s ‘little divergence’ in the twentieth century: evidence from PPP-based direct estimates of GDP per capita, 1913–69

by Jean-Pascal Bassino (ENS Lyon) and Pierre van der Eng (Australian National University)

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

 

Bassino1
Vietnam, rice paddy. Available at Pixabay.

In the ‘great divergence’ debate, China, India, and Japan have been used to represent the Asian continent. However, their development experience is not likely to be representative of the whole of Asia. The countries of Southeast Asia were relatively underpopulated for a considerable period.  Very different endowments of natural resources (particularly land) and labour were key parameters that determined economic development options.

Maddison’s series of per-capita GDP in purchasing power parity (PPP) adjusted international dollars, based on a single 1990 benchmark and backward extrapolation, indicate that a divergence took place in 19th century Asia: Japan was well above other Asian countries in 1913. In 2018 the Maddison Project Database released a new international series of GDP per capita that accommodate the available historical PPP-based converters. Due to the very limited availability of historical PPP-based converters for Asian countries, the 2018 database retains many of the shortcomings of the single-year extrapolation.

Maddison’s estimates indicate that Japan’s GDP per capita in 1913 was much higher than in other Asian countries, and that Asian countries started their development experiences from broadly comparable levels of GDP per capita in the early nineteenth century. This implies that an Asian divergence took place in the 19th century as a consequence of Japan’s economic transformation during the Meiji era (1868-1912). There is now  growing recognition that the use of a single benchmark year and the choice of a particular year may influence the historical levels of GDP per capita across countries. Relative levels of Asian countries based on Maddison’s estimates of per capita GDP are not confirmed by other indicators such as real unskilled wages or the average height of adults.

Our study uses available estimates of GDP per capita in current prices from historical national accounting projects, and estimates PPP-based converters and PPP-adjusted GDP with multiple benchmarks years (1913, 1922, 1938, 1952, 1958, and 1969) for India, Indonesia, Korea, Malaya, Myanmar (then Burma), the Philippines, Sri Lanka (then Ceylon), Taiwan, Thailand and Vietnam, relative to Japan. China is added on the basis of other studies. PPP-based converters are used to calculate GDP per capita in constant PPP yen. The indices of GDP per capita in Japan and other countries were expressed as a proportion of GDP per capita in Japan during the years 1910–70 in 1934–6 yen, and then converted to 1990 international dollars by relying on PPP-adjusted Japanese series comparable to US GDP series. Figure 1 presents the resulting series for Asian countries.

 

Figure 1. GDP per capita in selected Asian countries, 1910–1970 (1934–6 Japanese yen)

Bassino2
Sources: see original article.

 

The conventional view dates the start of the divergence to the nineteenth century. Our study identifies the First World War and the 1920s as the era during which the little divergence in Asia occurred. During the 1920s, most countries in Asia — except Japan —depended significantly on exports of primary commodities. The growth experience of Southeast Asia seems to have been largely characterised by market integration in national economies and by the mobilisation of hitherto underutilised resources (labour and land) for export production. Particularly in the land-abundant parts of Asia, the opening-up of land for agricultural production led to economic growth.

Commodity price changes may have become debilitating when their volatility increased after 1913. This was followed by episodes of import-substituting industrialisation, particularly during after 1945.  While Japan rapidly developed its export-oriented manufacturing industries from the First World War, other Asian countries increasingly had inward-looking economies. This pattern lasted until the 1970s, when some Asian countries followed Japan on a path of export-oriented industrialisation and economic growth. For some countries this was a staggered process that lasted well into the 1990s, when the World Bank labelled this development the ‘East Asian miracle’.

 

To contact the authors:

jean-pascal.bassino@ens-lyon.fr

pierre.vandereng@anu.edu.au

 

References

Bassino, J-P. and Van der Eng, P., ‘Asia’s ‘little divergence’ in the twentieth century: evidence from PPP-based direct estimates of GDP per capita, 1913–69’, Economic History Review (forthcoming).

Fouquet, R. and Broadberry, S., ‘Seven centuries of European economic growth and decline’, Journal of Economic Perspectives, 29 (2015), pp. 227–44.

Fukao, K., Ma, D., and Yuan, T., ‘Real GDP in pre-war Asia: a 1934–36 benchmark purchasing power parity comparison with the US’, Review of Income and Wealth, 53 (2007), pp. 503–37.

Inklaar, R., de Jong, H., Bolt, J., and van Zanden, J. L., ‘Rebasing “Maddison”: new income comparisons and the shape of long-run economic development’, Groningen Growth and Development Centre Research Memorandum no. 174 (2018).

Link to the website of the Southeast Asian Development in the Long Term (SEA-DELT) project:  https://seadelt.net

Global trade imbalances in the classical and post-classical world

by Jamus Jerome Lim (ESSEC Business School and Center for Analytical Finance)

 

Global_trade_visualization_map,_2014
A Global trade visualization map, with data is derived from Trade Map database of International Trade Center. Available on Wikipedia.

In 2017, the bilateral trade deficit between China and the United States amounted to $375 billion, a staggering amount just shy of what the latter incurred against the rest of the world combined. And not only is this deficit large, it has been remarkably persistent: the chronic imbalance emerged in earnest in 1989, and has persisted for the better part of three decades. Some have even pointed to such imbalances as a contributing factor to the global financial crisis of 2008.

While such massive, chronic imbalances may strike one as artefacts of a modern, hyperglobalised world economy, nothing could be further from the truth. For example, recent economic history records large, persistent imbalances between the United States and Britain during the former’s earlier stages of development. Such imbalances also characterised the rise of Japan following the Second World War.

In recent research, we show that external imbalances between two major economic powers – an established leader, and a rising follower – were also observed over three earlier periods in economic history. These were the deficits borne by the Roman empire vis-à-vis pre-Gupta India circa 1CE; the borrowing by the Abbasid caliphate from Carolingian Frankia in the early ninth century; and the imbalances between West European kingdoms and the Byzantine empire that emerged around the 1300s.

Although data paucity implies that definitive claims on current account deficits are all but impossible, it is possible to rely on indirect sources of evidence to infer the likely presence of imbalances. One such source consists of trade-related documents from the time as well as pottery finds, which ascertain not just the existence but also the size of exchange relationships.

For example, using such records, we demonstrate that Baghdad – the capital of the Abbasid Caliphate – received furs and slaves from the comparative economic backwater that was the Carolingian empire, in exchange for goods such as spices, dates and olive oil. This imbalance may have lasted as long as several centuries.

A second source of evidence comes from numismatic records, especially coin hoards. Hoards of Roman gold aurei and silver dinarii have been discovered, for example, in India, with coinage dating from as early as the reign of Augustus through until at least that of Marcus Aurelius, well over half a century. Rome relied on such specie exports to fund, among other expenditures, continued military adventurism during the second century.

Our final source of evidence relies on fiscal records. Given the close relationship between external and fiscal balances – all else equal, greater government borrowing gives rise to a larger external deficit – chronic budgetary shortfalls generally give rise to rising imbalances.

This was very much the case in Byzantium prior to its decline: around the turn of the previous millennium, the Empire’s saving and reserves were in significant surplus, lending credence to the notion that the flow of products went from East to West. The recipients of such goods? The kingdoms of Western Europe, paid for with silver.

Nineteenth century savings banks, their ledgers and depositors

by Linda Perriton (University of Stirling)

 

If you look up as you walk along the streets of British towns and cities, you will see the proud and sometimes colourful traces of nineteenth century savings banks. But evidence of the importance of savings banks to working- and middle-class savers is harder to locate in economic history research.

English and Welsh savings banks operated on a ‘savings only’ model that funded interest payments to savers by purchasing government bonds and, in doing so, placed themselves outside the history of productive financialisation (Horne, 1947). This is a matter of regret, because whatever minor role trustee savings banks played in the productive economy, there is little doubt that they helped to financialise segments of society previously detached from such activities.

Untitled.png
Image: Author’s own. A mosaic over the door of the former Fountainbridge branch of the Edinburgh Savings Bank.

 

The research that Stuart Henderson (Ulster University) and I presented at the EHS 2019 annual conference looks in detail at the financial activity of depositors in one savings bank – the Limehouse Savings Bank, situated in the East End of London.

Savings bank ledgers are a rich source of social history data in addition to the financial, especially in socially diverse larger cities. The apostils of clerks reveal amusement at the names chosen for local clubs (for example, the Royal Order of the Jolly Cocks merits an exclamation mark) or a note as to love gone wrong (for example, a woman who returns the passbook of a lover from whom she has not heard for two years).

We also want to look beyond the aggregate deposit figures for Limehouse recorded in the government reports to discover how individuals used the bank over the period 1830-76.

As a start, we have recorded the account transactions for each of the 195 new accounts opened in 1830, from the first deposit to the last withdrawal – a total of 3,598 transactions. Using the account header information, we have also compiled the personal details of the account holder – such as gender, occupation and place of residence. We use the header profile to trace individual savers in the historical record in order to establish their age and any notable life events, such as marriage and the birth of children.

Apart from 12 accounts, which were registered to individuals who gave addresses other than East End parishes, all the 1830 savers were registered at addresses within a four miles by one mile strip of urban development, which also enabled us to record the residential clustering of savers.

Summary statistics enable us to establish the differences between the categories of savers across several different indicators of transaction activity.

Perhaps unsurprisingly, the men in our 1830 sample tended to make larger deposits and larger withdrawals than the women, with the difference in magnitude masked somewhat by large transactions undertaken by widows. Widows in our sample tended to have a relatively large opening balance and a higher number of withdrawals, suggesting that their accounts functioned more as a ‘draw down’ fund (Perriton and Maltby, 2015).Men also tended to make more transactions than women.

We also see a significant portion of accounts where activity was very limited. The median number of deposits across our 195 accounts was just two, suggesting that a large proportion of accounts acted as something of a (very) temporary financial warehouse. Minors and servants tended to have smaller transactions, but appear to have accumulated more – relatively speaking – than others.

But our interest in the savers goes beyond summary statistics. We know that very few accounts were managed in the way that the sponsors of savings bank legislation intended; the low median of deposits is testament to that.

The basic information in the ledger headers for each account provides a starting point for thinking about when in the life-cycle savings was more successful. Even with the compulsory registration of births, deaths and marriages after 1837 and census data after 1841, the ability to trace an individual saver is not guaranteed.

With so few data points, it is easy to lose individuals at the periphery of the professional and skilled working classes, even in a relatively well documented city like London. Yet the ability to build individual case studies of savers is important to our understanding of savings banks in terms of establishing who were the ‘successful’ savers, and also when – relative to the overall life-cycle of the saver – accounts were held.

Our research presents ten case study accounts from our larger sample to challenge the proposition in social history research on household finances that savings increased when teenage and young adult children were contributing wages to the household. We also look at the evidence for any savings in anticipation of significant life events such as marriage or childbirth. The evidence is weak on both counts.

The distribution of age at account opening among the ten case studies is varied: under 20 years old (3), 21-29 (2), 30-39 (2), 40-49 (0) and 50-59 (3). The three cases of accounts opened after the age of 50 relate to a widow and two married couples, who all had children aged 10-25. But the majority of the accounts we examined were opened by younger adults with young children and growing families.

There is no obvious case for suggesting that savings were possible because expenses could be offset against the wages of teenage or young adult children. Nor can we see any obvious anticipatory or responsive saving for life events in the case studies.

One of our sample account holders did open her account soon after being widowed, but another widow opened her account seven years after the death of her husband. Two men opened accounts when their children were very young, but not in anticipation of their arrival. The only evidence we have in the case studies for changed behaviour as a result of a life event is in the case of marriage – where all account activity ceased for one of our men in the first years of his union.

The mixed quantitative and biographical approach that we use in our study of the Limehouse Savings Bank point to a promising alternative direction for historical savings bank research – one that reconnects savings bank history with the wider history of retail banking and allows for a much richer interplay between social history and financial history.

By looking at the patterns of use by the Limehouse account holders, it is possible to see the ways in which working families and individuals interacted with a standard product and standard service offering, sometimes adding layers of complexity in order to create a different banking product, or using the accounts to budget within a short-term cycle rather than saving for a significant purchase or event.

 

Further reading:

Horne, HO (1947) A History of Savings Banks, Oxford University Press.

Perriton, L, and J Maltby (2015) ‘Working-class Households and Savings in England, 1850-1880’, Enterprise and Society 16(2): 413-45.

 

To contact the author: linda.perriton@stir.ac.uk

Squeezing blood from a stone: eighteenth century debtors’ prisons worked

by Alex Wakelam (University of Cambridge)

 

Woodstreet Compter.jpg
Wood Street Compter, 1793. Image extracted from page 384 of volume 1 of Old and New London, Illustrated, by Walter Thornbury. Available at Wikimedia Commons. 

While it is often assumed that debtors’ prisons were illogical and ineffective, my research demonstrates that they were extremely economically effective for creditors though they could ruin the lives of debtors.

The debtors’ prison is a frequent historical bogeyman, a Dickensian symptom of the illogical cruelty of the past that disappeared with enlightened capitalism. As imprisoning someone who could not afford to pay their debts, keeping them away from work and family, seems futile it is assumed creditors were doing so to satisfy petty revenge.

But they were a feature of most of English history from 1283, and though their power was curbed in 1869, there were still debtors imprisoned in the 1920s. The reason they persisted, as my research shows, is because, for creditors, they worked well.

The majority of imprisoned debtors in the eighteenth century were released relatively quickly having paid their creditors. This revelation is timely when events in America demonstrate how easily these prisons can return.

As today, most eighteenth century purchases were done on credit due to the delay in wages, limited supply of coinage, and cultural preferences for buying goods on credit. But credit was based on a range of factors including personal reputation, social rank and moral status. Informal oral contracts could frequently be made with little sense of an individual’s actual financial status, particularly if they were a gentleman or aristocrat. As contracts were not based on goods and court processes were slow, it was difficult to seize property to recover debts when creditors required money.

Creditors were able to imprison debtors without trial in this period until they paid what they owed or died. The registers of a London Debtors’ Prison, the Woodstreet Compter (1741-1815), reveal that creditors had good reasons to do so. Most of the 10,156 debtors contained in the registers left prison relatively quickly – 91% were released in under a year while almost a third were released in less than 100 days.

In addition, 84% were ‘discharged’ by their creditors, indicating that either the prisoner had paid their debts or a new contract had been agreed. Imprisonment forced debtors to find a way to pay or at least to renegotiate with creditors.

Prisoners were not the poor, but usually middle class people in small amounts of debt. One of the largest groups was made up of shopkeepers (about 20% of prisoners) though male and female prisoners came from across society with gentlemen, cheesemongers, lawyers, wigmakers and professors rubbing shoulders.

Most used their time to coordinate the selling of goods to raise money, or borrowed yet more from family and friends. Many others called in their own debts by having their debtors imprisoned as well.

As prisons were relatively open, some debtors worked off their debts. John Grano, a trumpeter who worked for Handel, imprisoned in the 1720s, taught music lessons from his cell. Others sold liquor or food to fellow prisoners or continued as best they could at their trade in the prison yard. Those with a literary mind, such as Daniel Defoe, wrote their way out.

Though credit works on different terms today, that coercive imprisonment is effective at securing repayment remains true. There have been a number of US states operating what amount to debtors’ prisons in recent years where the poor, fined by the state usually for traffic violations, are held until they pay what they owe.

Attorney General Jeff Sessions even retracted an Obama era memo in December aimed at abolishing the practice. While eighteenth century prisons worked effectively for creditors, they could ruin the lives of debtors who were forced to sell anything they could to pay their dues and escape the unsanitary hole in which they were being kept without trial. Assuming that they did not work and therefore won’t return is shown by my research to be false.