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Integration in the American Foreign-Exchange Market, 1791–1900

Published online by Cambridge University Press:  03 March 2009

Lawrence H. Officer
Lawrence H. Officer
Affiliation:
The author is Professor of Economics at Michigan State University, East Lansing, Michigan 48824.
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Abstract

Integration in the American foreign-exchange market under the nineteenthcentury specie standard is examined using a newly developed series of the dollar- sterling exchange rate and estimates of specie-point spreads. A distinction is made between internal and external integration. The latter is much more important over the entire 1791 to 1900 time span, but by 1881–1900 the market is tightly integrated in both senses. The long-term trend of improved integration is interrupted only by wartime.

Type
Articles
Information
The Journal of Economic History , Volume 45 , Issue 3 , September 1985 , pp. 557 - 585
Copyright
Copyright © The Economic History Association 1985

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References

He is grateful to two anonymous referees for helpful comments.Google Scholar

1 Cole, Arthur H., “Seasonal Variation in Sterling Exchange,” Journal of Economic and Business History, 2 (11 1929), p. 203.Google Scholar

2 Cole, Arthur H., “Evolution of the Foreign-Exchange Market of the United States,” Journal of Economic and Business History, 1 (05 1929), pp. 405–406, 419–20, fn. 3;Google ScholarMyers, Margaret G., The New York Money Market (New York, 1931), pp. 74–75, 341–44.Google Scholar

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5 Morgenstern takes one set of median gold points from contemporary estimates to define the spread for the entire 1880–1914 period. Clark does little better, first using a 1906 estimate of direct shipping costs (excluding foregone interest) for his 1890–1908 period, then arbitrarily bifurcating the period with a totally conjectural cost for 1890–1904. See Morgenstern, International Financial Transactions, pp. 241–69; Clark, “Violations,” pp. 797–98, 804–805.Google Scholar

6 Morgenstern, International Financial Transactions, p. 277; Clark, “Violations,” p. 797.Google Scholar

7 Cole, “Seasonal Variation,” pp. 213–14; Cole, “Evolution,” p. 414;Google ScholarPerkins, Edwin J., “Foreign Interest Rates in American Financial Markets: A Revised Series of Dollar-Sterling Exchange Rates, 1835–1900,” this JOURNAL, 38 (06 1978), p. 396.Google Scholar

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9 See Cole, “Evolution,” p. 404.Google Scholar

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11 Notwithstanding the citations by Friedman, Milton and Schwartz, Anna Jacobson in A Monetary History of the United States (Princeton, N.J., 1963), p. 26, fn. 13, suggesting some usage of cable transfers from 1866, they were dominated by bills of exchange through 1900.Google Scholar In 1907 it could still be stated: “By foreign exchange, we mean bills of exchange … although sometimes money is paid on cabled orders, known as cable transfers,” from Strauss, Albert, “Gold Movements and the Foreign Exchanges,” in The Currency Problem and the Present Financial Situation (New York, 1908), p. 64.Google Scholar

12 See, for example, Clare, George, A Money-Market Primer (London, 1909), p.129;Google ScholarStrauss, “Gold Movements,” pp. 65–67, 73; The New York Times, 08 9, 1895, p. 8, where, in a detailed account of gold arbitrage from New York to London, only bills of exchange are mentioned; and The New York Times, 06 28, 1896, p. 2, where, while allusion is made to cables and sixty-day bills in passing, the presented gold-point figure pertains specifically to demand bills.Google Scholar

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14 Whitaker, Foreign Exchange, p. 534. This is confirmed in another text: “Cables are seldom, if ever, sold against gold exports,”Google Scholar from Cross, Iraq B., Domestic and Foreign Exchange (New York, 1923), p. 386.Google Scholar

15 Clark suggests that a forward-exchange transaction was used to cover the exchange risk of the cable operation, but I could find no evidence of this in the literature. It is interesting that contemporary data on forward-exchange rates do not exist, even into the twentieth century. See Goodhart, C. A. E., The New York Money Market and the Finance of Trade, 1900–1913 (Cambridge, Mass., 1969), p. 57.Google Scholar

16 Officer, Lawrence H., “Dollar-Sterling Mint Parity and Exchange Rates, 1791–1834,” this JOURNAL, 43 (09 1983), p. 608.Google Scholar

17 Quoted in Perkins, Financing, p. 27.Google Scholar

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20 In practice, these operations can be so intensive as to result in “overly perfect” integration, that is, R reduced to a value less than G/2.Google Scholar

21 A detailed description of the construction of the series is provided in the Appendix.Google Scholar

22 Davis and Hughes, “Dollar-Sterling Exchange,” p. 53.Google Scholar

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24 pp. 393–98, 401–402.Google Scholar

25 pp. 397–402.Google Scholar

26 p. 396.Google Scholar

27 See Appendix.Google Scholar

28 It has been suggested that the reason for this unique treatment in American exchange-market quotations, the opposite of that for all other currencies, “was probably that the pound sterling was the only unit which was larger than the dollar.” See Myers, New York Money Market, p. 347. An alternative explanation was the overriding importance of sterling in the American foreign-exchange market.Google Scholar

29 For the monetary history of the period and a complete discussion of these and other parity concepts, see Officer, “Dollar-Sterling Mint Parity,” pp. 580–96.Google Scholar

30 p. 592.Google Scholar

31 The meaning of “inconvertibility” was quite different in the nineteenth century, indeed through the 1920s, from what it has become for the past half century. The former meaning of inconvertibility was essentially “floating exchange rates”; the current definition is “far-reaching controls on trade and payments.” See Temin, Peter, The Jacksonian Economy (New York, 1969), pp. 114–18; andGoogle ScholarTriffin, Robert, Gold and the Dollar Crisis (New Haven, 1960), pp. 21–30.Google Scholar

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33 These measures differ from each other in two respects. First, the norm deviation from parity is the (algebraic) mean for the standard deviation, zero for the mean of absolute values. Second, the standard deviation squares deviations, while the mean of absolute values does not.Google Scholar

34 Not incidentally, this result effectively destroys the credibility of the Morgenstern-Clark findings of “violations” of gold points and an “inefficient” gold standard during this time period.Google Scholar

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36 The peacetime rate to Britain from Atlantic ports, applicable for 1791–1792, is 2 percent. For 1793–1800 the average of scattered, wartime rates is taken. The data source is Albion, Robert Greenhalgh and Pope, Jennie Barnes, Sea Lanes in Wartime (New York, 1942), p. 70.Google Scholar

37 The source is Albion, Robert Greenhalgh, The Rise of New York Port (New York, 1939), p. 412.Google Scholar

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39 The “cost of packing” is said to have “remained unchanged for very long periods,” from Einzig, Paul, International Gold Movements (London, 1929), p. 48.Google Scholar

40 See Smith, Waiter Buckingha and Cole, Arthur Harrison, Fluctuations in American Business 1790–1860 (Cambridge, Mass., 1935), p. 24;Google ScholarCarothers, Neil, Fractional Money (New York, 1930), p. 75; andGoogle ScholarOfficer, “Dollar-Sterling Mint Parity,” p. 595.Google Scholar

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44 Ibird.p. 65, referring to commission on the sale of gold in London in 1821. Brokerage of the same 0.25 percent for a silver transaction in England is mentioned for the year 1830 in Perkins, Financing, p. 192.Google Scholar

45 There is a reference in the contemporary literature to half-dollars exported “direct from the U.S. Mint” (Report … Gold and Silver, p. 65). This was a rate and serendipitous occurrence because of the delay in coining bullion at the mint during the period of the silver standard. Carothers notes that the “depositor of bullion had to wait weeks and even months for his coins” (Fractional Money, p. 73). Sumner cites a contemporary estimate of “two months to coin bullion left at the mint”.Google Scholar See Sumner, William G., A History of American Currency (New York, 1874), p. 105.Google Scholar

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50 The reason for this dichotomy is the prevailing westerly winds in the North Atlantic, which are especially stormy in the winter months. See Albion, Square-Riggers, pp. 9–10, 26; and Albion and Pope, Sea Lanes, pp. 26–27.Google Scholar

51 For the latter figure, see Albion, Square-Riggers, p. 200.Google Scholar

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53 For the latter rate, see Officer, “Dollar-Sterling Mint Parity,” p. 599.Google Scholar

54 Bank-rate data are in SirClapham, John, The Bank of England, vol. 2 (Cambridge, 1945), p. 429.Google Scholar

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57 Davis and Hughes, “Dollar-Sterling Exchange,” pp. 58–59.Google Scholar

58 Not only Davis and Hughes but also I should be surprised, as I cite the Davis-Hughes assessment with approval in “Dollar-Sterling Mint Parity,” p. 607; as should Perkins, who does the same in Financing, pp. 155–56.Google Scholar

59 Clare, Money-Market, pp. 129–30.Google Scholar

60 See Johnson, Joseph French, Money and Currency (Boston, 1905), p. 90, fn. 1.Google Scholar

61 On the role of cable communication, see Cole, “Evolution,” pp. 415–16.Google Scholar

62 See The New York Times, 01 17, 1895, p. 3; 06 28, 1896, p. 2.Google Scholar

63 For the entire history of the Bank's gold policy in this time period, see Sayers, R. S., Bank of England Operations 1890–1914 (London, 1936), pp. 71–101.Google Scholar

64 Under the Acts of 1882 and 1891; but the Treasury refused to provide bars from 1891 to 1895. See Huntington, A. T. and Mawhinney, Robert J., eds., Laws of the United States Concerning Money, Banking, and Loans, 1778–1909, Senate Document No. 580, 61st Cong., 2d sess. (Washington, D.C., 1910), pp. 586, 596;Google ScholarThe New York Times, 07 2, 1882, p. 9; 03 22, 1891, p. 5; 11 23, 1895, p. 1.Google Scholar

65 Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1900 (Washington, D.C., 1901), p. 333.Google Scholar

66 p. 333; Bankers' Magazine, 60 (06 1900), pp. 761–62.Google Scholar

67 For example, the Bank's minimum price for its purchase of bars was 77s. 9d., a deviation of 0.16 percent from the mint price of 77s. 10½d. See Sayers, Bank, pp. 72, 84.Google Scholar

68 See The New York Times, 06 28, 1896, p. 2.Google Scholar

69 For an excellent summary and references to the literature on this topic, see Perkins, Financing, pp. 154–55, 289, fns. 6–9.Google Scholar

70 The standard reference on the House of Brown is now Perkins, Financing, where a bibliography is provided on pp. 302–303.Google Scholar

71 pp. 156–57, 182.Google Scholar

72 On all this, see pp. 26–27, 160–61, 188, 206–207, 219–21, 224–26, 270, fn. 37.Google Scholar

73 p. 50.Google Scholar

74 The general-cargo index does not exhibit unusually high levels for the Civil War years, so no wartime adjustment is made.Google Scholar

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76 While the worst of the Confederate sea threat was over by July 1863, insurance companies were conservative, charging high rates and providing refunds later. By the beginning of 1865, the war was clearly won by the North and the maritime menance over except for whalers in distant seas. See Albion and Pope, Sea Lanes, pp. 166–68.Google Scholar

77 For the formula to convert exchange rates from a time-bill to a demand-bill basis, see Officer, “Dollar-Sterling Mint Parity,” pp. 598–600.Google Scholar

78 pp. 599–600.Google Scholar

79 For further details on the White data and its processing, see pp. 598–606.Google Scholar

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81 Davis and Hughes, “Dollar-Sterling Exchange”. The exchange-rate and maturity series are tabulated on pp. 70–72 and 75–76.Google Scholar

82 For 1835–1870, Perkins (“Foreign Interest Rates,” pp. 416–17) converts a recording of Bank- rate levels to quarterly averages of daily rates. For 1871–1878, I use the same method. The source data are in Clapham, Bank, pp. 429–31.Google Scholar

83 For 1835–1836 true parity was $4.8708; from January 18, 1837 onward it was $4.86656; and for 1837 (first quarter) a weighted daily average of the two yields $4.8674. See Officer, “Dollar-Sterling Mint Parity,” pp. 591–92.Google Scholar

84 For the history of these suspensions, see Davis and Hughes, “Dollar-Sterling Exchange”, pp. 57, 61;Google ScholarHammond, Bray, Banks and Politics in America (Princeton, N.J., 1957), pp. 451–548, 689;Google ScholarHepburn, A. Barton, A History of Currency in the United States (New York, 1924), pp. 132–38;Google ScholarKnox, John Jay, A History of Banking in the United States (New York, 1903), pp. 76–77, 502–506;Google ScholarMartin, Joseph G., Martin's History of the Boston Stock and Money Markets (Boston, 1898), pp. 30–33;Google ScholarMyers, New York Money Market, pp. 64–68, 172–73, 179;Google ScholarSmith, Walter Buckingham, Economic Aspects of the Second Bank of the United States (Cambridge, Mass., 1953), pp. 183–230;Google ScholarSumner, History, pp. 132–54; and Temin, Jacksonian Economy, pp. 113–71.Google Scholar

85 Data sources are Report from the Secretary of the Treasury… transmitting statements of the rates of exchange and prices of banknotes at different periods, Senate Document No. 457, 25th Cong., 2d sess., 05 28, 1838, for 04 1837 to 04 1838; Report from the Secretary of the Treasury… showing the rates of foreign and domestic exchange, and the prices of bank-notes and specie… Senate Document No. 69, 26th Cong., 2d sess., 01 13, 1841, for 05 1838 to 12 1840; andGoogle ScholarElliot, Jonathan, The Funding System of the United States and of Great Britain (Washington, D.C., 1845), p. 1172, for 1841.Google Scholar

86 The range for 1841 is 2.50 to 2.75 percent.Google Scholar

87 They track the well-known Martin series for New York very well. See Davis and Hughes, “Dollar-Sterling Exchange,” pp. 56–58, 70–72.Google Scholar

88 The series is tabulated in Perkins, “Foreign Interest Rates,” pp. 413–15.Google Scholar

89 Cole and others dispute that the time-bill versus demand-bill inconsistency in the Financial Review series exists. Their argument is unconvincing because it rests purely on nomenclature that appeared after 1878 and because it conflicts with the descriptions explicitly stated in the Financial Review. See Cole, “Seasonal Variation,” p. 214; andGoogle ScholarPersons, Warren M., Tuttle, Pierson M., and Frickey, Edwin, “Business and Financial Conditions Following the Civil War in the United States,” Review of Economic Statistics, 2 (supplement, 07 1920), p. 54.CrossRefGoogle Scholar

90 Perkins, Financing, p. 270, fn. 37. See also pp. 188, 219.Google Scholar

91 “In the antebellum era, seasonal operations generally increased overall margins. In the panic of 1837 the [Brown] firm realized margins of 10 to 15 percent on some transactions,” in p. 270, fn. 37.Google Scholar