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The Integration of Regional and Interregional Capital Markets: Evidence from the Pacific Coast, 1883–1913

Published online by Cambridge University Press:  03 March 2009

Kerry A. Odell
Kerry A. Odell
Affiliation:
Assistant Professor of Economics, Scripps College, Claremont, CA 91711.
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Extract

The literature on national capital market integration in nineteenth-century America has overlooked the role of markets at a regional level. Such markets were important in reducing the possible burden of isolation by efficiently recycling local savings, and in promoting eventual integration into a national financial market. This article presents evidence that a commercial market centered on San Francisco extended into the Pacific Coast states and formed the basis for a regional financial market. The degree of market integration is measured through tests of interest rate covariability and convergence.

Type
Articles
Information
The Journal of Economic History , Volume 49 , Issue 2 , June 1989 , pp. 297 - 310
Copyright
Copyright © The Economic History Association 1989

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References

1 Literature in this area includes Davis, Lance, “The Investment Market, 1870–1914: The Evolution of a National Market,” this Journal. 25 (09 1965), pp. 355–99;Google ScholarSylla, Richard, “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1863–1913,” this Journal, 29 (12 1969), pp. 657–86;Google ScholarSmiley, Gene, “Interest Rate Movement in the United States. 1883–1913,” this Journal, 35 (09 1975), pp. 591–620;Google Scholar and James, John, “The Development of the National Money Market. 1893–1911,” this Journal. 36 (12 1976), pp. 878–97.Google Scholar

2 James, “Development of National Market,” p. 878; emphasis added.Google Scholar

3 See, for example. Myrdal, Gunnar, Economic Theory and Under-Developed Regions (London, 1957).Google Scholar

4 This is discussed in Isard, Walter and Tung, Tze Hsuing, “Some Concepts for the Analysis of Spatial Organization: Part II,” Papers and Proceedings of the Regional Science Association, 12 (1964), pp. 1–25.CrossRefGoogle Scholar

5 Research on the role of merchant profits and information is found in Porter, Glenn and Livesay, Harold, Merchants and Manufacturers (Baltimore, 1971);Google Scholar and Madison, James, “The Evolution of Commercial Credit Reporting Agencies in Nineteenth-Century America,” Business History Review, 48 (Summer 1974), pp. 164–86.CrossRefGoogle Scholar

6 See Pred, Alan, The Spatial Dynamics of U.S. Urban-Industrial Growth, 1800–1914 (Cambridge, MA, 1966).Google Scholar

7 Easterlin, Richard, “State Income Estimates,” in Lee, Everett S. et al. , Population Redistribution and Economic Growth, United States, 1870–1950, vol. 1 (Philadelphia, 1957), p. 753.Google Scholar

8 The San Francisco Bay provided the only Pacific Coast natural harbor with easy access to the interior prior to the major railroad and harbor construction projects of the late nineteenth century.Google Scholar

9 Jacobs, Jane, Cities and the Wealth of Nations (New York, 1984), p. 145.Google Scholar

10 These figures are derived in Odell, Kerry Ann, “Capital Mobilization and Regional Financial Markets: The Pacific Coast States, 1860–1913,” (Ph.D. diss., University of California, 1987), p. 99.Google ScholarThey rely on data calculated by Easterlin, “State Income Estimates,” pp. 729–33, 753.Google Scholar

11 William Code refers to this assumption of financial leadership by outside centers as “pirating” See Code, William, “The Spatial Dynamics of Financial Intermediaries: An Interpretation of the Distribution of Financial Decision-Making in Canada” (Ph.D. diss., University of California, 1971), p. 255.Google Scholar

12 Code, “Spatial Dynamics,” p. 254.Google Scholar

13 See Lewis, Oscar, The Big Four (New York, 1938), for early research on this group.Google Scholar Naomi Lamoreaux has also addressed the role of “groups” in capital mobilization in “Banks, Kinship, and Economic Development: The New England Case,” this Journal, 46 (09. 1986), pp. 647–67.Google Scholar

14 For a full bibliography on these institutions, see Odell, “Capital Mobilization,” pp. 100–16.Google Scholar

15 Sylla, “Federal Policy,” p.658.Google Scholar See also James, John, “The Evolution of the National Money Market” (Ph.D. diss., M.I.T., 1974).Google Scholar

16 Willis, Parker, The Federal Reserve Bank of San Francisco (New York, 1937), p. 80.Google Scholar

17 Data on Pacific Coast correspondent figures are from Odell, “Capital Mobilization,” pp. 127–28. James also finds that San Francisco dominated its region in holding correspondent balances more than any other city dominated its region, with the exception of New York City in the Middle Atlantic, and Boston in New England. See James, “Evolution of National Market,” p. 168.Google Scholar

18 Federal Bank Organization Committee, Letter to the Federal Reserve Board Relative to the Location of the Federal Reserve Banks, U.S. Senate Document 485 (63rd Congress, 2nd session, 1914), pp. 351–55.Google Scholar

19 See Odell, “Capital Mobilization” pp. 140–41.Google Scholar Extensive use of this data from California state banking reports is made by Doti, Lynn Pierson, “Banking in California: Some Evidence on Structure, 1878–1905 (Ph.D. diss., University of California, Riverside, 1978).Google Scholar

20 It is possible that common rate fluctuations represent the influence of a shared business cycle. This is, in fact, just another kind of market integration.Google Scholar

21 The series is constructed in James, “Evolution of a National Market,” and is assessed in Odell, “Capital Mobilization.” I would like to thank Professor James for generously sharing his raw data and final series.Google Scholar

22 The only exception to the differentials approach is presented in Sushka, Marie and Barrett, Brian, “Banking Stucture and the National Capital Market, 1860–1914,” this Journal, 44 (1984), pp. 463–77.Google Scholar

23 Stigler, George, “Imperfections in the Capital Market,” Journal of Political Economy, 75 (06 1967), pp. 287–92.CrossRefGoogle Scholar

24 Work on contemporary capital market integration considers covariability to be a better test of integration than the size or movements of differentials. See, for example, Logue, Dennis, Salant, Michael, and Sweeney, Richard, “International Integration of Financial Markets: Survey, Synthesis, and Results,” in Stem, Carl et al. , eds., Eurocurrencies and the International Monetary System (Washington, DC, 1976), pp. 91–137.Google Scholar

25 The logarithmic specification also has the advantage of correcting for heteroskedasticity, which occurs when the variance of the data increases with the level of the data. See Pindyck, Robert and Rubinfeld, Daniel, Econometric Models and Econometric Forecasts (New York, 1981), pp. 589–90.Google ScholarMarie Sushka and Brian Barrett suggest that this may be the case when risk premia rise or fall with interest rate levels; Kenneth Snowden also finds heteroskedasticity when effective loan rates are averaged across borrowers in a market. Sushka, Marie and Barrett, Brian, “Banking Structure and the National Capital Market. 1869–1914,” (unpublished manuscript, 1983), p. 21;Google Scholar and Snowden, Kenneth, “Mortgage Rates and American Capital Market Development in the Late Nineteenth Century,” this Journal, 47 (08. 1987). p. 677.Google Scholar

26 See Cross, Ira, Financing an Empire (Chicago, 1927), p. 365.Google Scholar

27 Another interpretation is that national center rates such as Chicago and New York City reflect more than just the conditions in the local area.Google Scholar

28 See Odell, “Capital Mobilization,” for details on the relationship between San Franciscans and economic development in Washington.Google Scholar

29 The possibility that Portland had not developed networks into the hinterland of Oregon is evident in that, in 1893, only 37 percent of Oregon banks chose a Portland correspondent.Google Scholar

30 Regressions which include an interactive trend variable suggest that the sensitivity of Pacific Coast rates to San Francisco rates was increasing slightly over the period, but the results are not statistically significant.Google Scholar