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Financial Integration in Antebellum America: Strengthening Bodenhorn's Results

Published online by Cambridge University Press:  03 March 2009

Sumner J. La Croix  and
Christopher Grandy
Sumner J. La Croix
Affiliation:
Professor, Department of Economics and Social Research Institute, University of Hawaii, Honolulu, Hawaii 96822
Christopher Grandy
Affiliation:
Assistant Professor, Department of Economics, Barnard College, New York, NY 10027
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Abstract

In a recent article in this Journal, Howard Bodenhorn made a remarkable suggestion: “Antebellum financial markets may have outperformed those of the post–Civil War period.” According to Bodenhorn, antebellum capital markets displayed notable integration, as indicated by movements in short-term (60–day) interest rate data for important commercial centers east of the Mississippi. When considered in light of Lance Davis's work, suggesting poor integration of credit markets immediately after the Civil War and only gradual integration thereafter, we believe economic historians will find Bodenhorn's hypothesis provocative—even startling. We found the hypothesis so suggestive that we attempted to replicate Bodenhorn's analysis—a process that generated both “bad news” and “good news.” The “bad news” is that we believe the evidence Bodenhorn provided for his hypothesis is weak or irrelevant. The “good news” is that the data Bodenhorn generated support the integration hypothesis more strongly than even Bodenhorn suggested.

Type
Articles
Information
The Journal of Economic History , Volume 53 , Issue 3 , September 1993 , pp. 653 - 658
Copyright
Copyright © The Economic History Association 1993

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References

1 Bodenhorn, Howard, “Capital Mobility and Financial Integration in Antebellum America,” this Journal, 52 (09 1992), p. 586.Google Scholar

2 Davis, Lance, “The Investment Market, 1870–1914: The Evolution of a National Market,” this Journal, 20 (03 1960), pp. 1–30.Google Scholar

3 Macaulay, Frederick R., The Movements of Interest Rates, Bond Yields and Stock Prices in the United States Since 1856 (New York, 1938).Google Scholar See notes to appendix table 1 of Bodenhorn, , “Capital Mobility,” p. 609Google Scholar for detailed sources of data.

4 Schubert, Eric S., “Arbitrage in the Foreign Exchange Markets of London and Amsterdam during the 18th Century,” Explorations in Economic History, 26 (01 1989), pp. 2–3.CrossRefGoogle Scholar

5 Bodenhorn, , “Capital Mobility,” p. 590,Google Scholar table 1.

6 Ibid., pp. 591–92, figures 2 and 3.

7 Ibid., pp. 593–94.

8 To some extent it is an artifact. Because of substantial missing observations in some of the series, the means and standard deviations reported in Table 2, column 2, are not strictly comparable, but they are suggestive.

9 We could not verify Bodenhorn's coefficient for Boston/Philadelphia. Communication with Bodenhorn indicated that his reported coefficient reflected a transposition error and that our estimate is correct.

10 Bodenhorn did not report tests for statistical significance in the correlation coefficients.

11 We believe this expression is inappropriate as a test for stationarity and that the correct test requires estimating the following:

both with and without a time trend. In fact, we think Bodenhorn estimated this specification. We failed to replicate his results by estimating equation 1, but we came quite close with our estimation of this alternative expression.

12 Engle, R. F. and Granger, C. W. J., eds., Long-Run Economic Relationships, Readings in Cointegration (New York, 1991), p. 6.Google Scholar

13 As Bodenhorn noted (“Capital Mobility,” p. 593, fn. 21), the number of lags must be determined empirically in order to reduce the error term to white noise. Rather than using Bodenhorn's method, however, we chose to follow the simpler procedure advocated by Campbell, John Y. and Perron, Pierre, “Pitfalls and Opportunities: What Macroeconomists should Know about Unit Roots,” in Blanchard, Olivier Jean and Fischer, Stanley, eds., NBER Marcroeconomics Annual 1991 (Cambridge, MA, 1991), p. 155.Google Scholar We also ran the regressions with time trends, but found the coefficients on time statistically insignificant and the implications for stationarity unaffected by including the trend.

14 Bodenhorn, , “Capital Mobility,” p. 590;Google Scholar and Stigler, George and Sherwin, Robert A., “The Extent of the Market,” Journal of Law & Economics, 28 (10 1985), pp. 558, 562.CrossRefGoogle Scholar

15 See, for example, their discussion of silver futures prices (Stigler and Sherwin, “Extent,” p. 559).

16 Correlations of interest rate levels in fact reflect movements of interest rates relative to their means. Bodenhorn correctly notes that equality of interest rates in two regions (either at a given point in time or on average) is neither necessary nor sufficient for integration. This reasoning may have led him erroneously to reject level correlations as a test of market integration. High correlations of interest-rate levels do not imply, nor are they implied by, equality of interest rates at a point in time or on average.

17 Bodenhorn, , “Capital Mobility,” pp. 591–92,Google Scholar figs. 2 and 3.

18 We recognize that, as a practical matter, information and capital must have moved with lags, and that measurement error especially afflicts data recorded long after they were generated. Both considerations suggest that a more sophisticated, dynamic specification of the relationships between rates would improve the analysis. Nevertheless, we find these results encouraging, and we hope others will undertake the more detailed, dynamic analysis that they suggest will prove fruitful.