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The Investment Market, 1870–1914: The Evolution of a National Market

Published online by Cambridge University Press:  03 February 2011

Lance E. Davis
Lance E. Davis
Affiliation:
Purdue University
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It is necessary not only that capital be accumulated, but also that it be mobilized for productive use, if an economy is to benefit from an increase in capital per person. The classical model of resource allocation assumes that within any economy capital is perfectly mobile. It implies, therefore, that once allowance is made for uncertainty and risk, returns on investment are equal in all industries in all regions. Such a model, while logically consistent, is not very useful for analyzing the process of economic growth. In the early stages of development, because the uncertainty discounts are high, capital is not very mobile. As a result, rates of return vary widely between industries and between regions; and growth in high-interest regions is retarded. Development, in part then, takes the form of a reduction in uncertainty discounts—a reduction that makes it possible for capital to move more freely between regions and industries.

Type
Articles
Information
The Journal of Economic History , Volume 25 , Issue 3 , September 1965 , pp. 355 - 399
Copyright
Copyright © The Economic History Association 1965

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References

1 M. M. Postan, in an unpublished series of lectures given in the graduate economic history seminar at Johns Hopkins University during the academic year 1954–55.

2 Postan.

3 North, “Capital Formation and the Industrialization of the United States,”a paper delivered before the Second International Economic History Conference,Aix-en-Provence, France,1962.Google Scholar

4 See Davis, L., “Capital Formation and the Industrialization of the United States: Comment,”a paper delivered before the Second International Economic History Conference,Aix-en-Provence,1962;Google Scholar and Davis, L., “Capital Immobilities and Finance Capitalism: A Study of Economic Evolution in the United States 1820–1920,” Explorations in Entrepreneurial History, second series, I, No. 1 (Fall 1963), 88–105.Google Scholar

5 Region I: Maine, Vermont, New Hampshire, Massachusetts, Connecticut, and Rhode Island.

Region II: New York, New Jersey, Pennsylvania, Delaware, Maryland, and the District of Columbia.

Region III: Virginia, West Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Mississippi, Louisiana, Texas, Arkansas, Kentucky, and Tennessee.

Region IV: Ohio, Indiana, Illinois, Michigan, Wisconsin, Minnesota, Iowa, and Missouri.

Region V: North Dakota, South Dakota, Nebraska, Kansas, Montana, Wyoming, Colorado, New Mexico, and Oklahoma.

Region VI: Washington, Oregon, California, Idaho, Utah, Nevada, and Arizona.

Region O: New York City.

6 Because of the difficulties induced by changing definitions, Chicago and St. Louis are included in their respective regions. The law required 25 per cent reserves (all in lawful money) in central-reserve-city banks; 25 per cent (but up to one half could be in the form of bank deposits) in reserve-city banks; and 15 per cent (up to three fifths in deposits) in non-reserve-city banks.

7 It is, of course, true that other factors aside from uncertainty may have engendered (and probably did engender) a part of the differential. It is likely that in the early period eastern lenders may have felt western loans were more risky. In addition, since the average loan size in the West was smaller, these loans may have entailed a higher percentage of administrative costs. These reasons, on the other hand, cannot be used to explain away the entire differential. Since substantial differentials were also apparent in the net rates of return (after losses had been deducted) it must have become obvious that western loans were not “all that much” riskier, but the differentials persist for some decades. Moreover, the differentials continued after the size differentials between eastern and western loans began to diminish.

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9 It is interesting to note that the movements of the regional rates seem to display a sequence of long swings. It appears that there was a long swing with a trough in 1878, a peak in 1887 or 1888, and a trough in 1895. A second long swing appears to date from the 1894 trough. The peak was apparently in 1901 and the final trough somewhere around 1914. With the exception of the first trough, these movements conform quite closely to the long swings in commodity output found by Robert E. Gallman.

10 Breckenridge, PSQ, XIII, 129.

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13 Greef, Albert, The Commercial Paper House in the United States (Cambridge: Harvard University Press, 1938), p. 18Google Scholar. Nor is this view completely dead today. In a recent book, a respected historian has suggested that the failure of Rhode Island to pass such legislation was a major defect of its political system; Coleman, P. J., The Transformation of Rhode Island (Providence, R. I.: Brown University Press, 1963), p. 199.Google Scholar

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22 This characteristic is certainly true of financial markets today and was probably more true in the earlier period.

23 Legal restrictions on investment policy can affect portfolio composition, but since there were no restrictions on lending at home these legal restrictions would tend to increase the sensitivity of the ratios. Moreover, while state-to-state differences in legal regulation certainly did exist, these differences would tend to “wash out” between regions.

24 Analysis of variance assumes that taken all together the observations are normally distributed and that they are homogeneous within each cell. In this case the normalcy assumption was not fulfilled with the raw data, but an arc sin transformation produced a distribution that met the two assumptions.

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34 Ibid., p. 213.

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36 Ibid., p. 267.

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38 In this light, it is interesting to note that if analysis of variance Test No. 1 is repeated without the Pacific region, the f ratio for the interaction term rises to over 2.

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43 Ibid., p. 50.

44 In the years 1870–1885, there were only five state-year observations on savings banks among the thirteen southern states. This compares with 62 in Region I, 53 in II, 18 in IV, and 12 in VI. If comparison is made in terms of number of banks, the results are even more skewed.

45 Frederiksen, JPE, II, 213.

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49 Jordan.