Turning Points during the U.S. Civil War: Views from the Grayback Market

This paper introduces a new high frequency time series of Confederate money prices taken from the newspapers of Richmond and leading cities in the Eastern Confederacy. The new Grayback series is tested for “turning points.” The empirical analysis suggests that “turning points” in the Confederate Grayback market were different from those identified in the Union Greenback market by Willard et al. (1996). It appears that war did not always have symmetric effects on Northern and Southern money prices.Confederacy, turning points

The Politics of Selective Default: The Foreign Debts of the Confederate States of America

The Confederate States of America floated two small bond issues in Europe during the American Civil War; cotton bonds that traded primarily in England and junk bonds in Amsterdam. The Confederacy serviced the cotton bonds for the duration of the war and defaulted on the junk bond issue. Evidently the South believed that the cotton bonds provided a financial incentive for England to intervene or give military support. This policy of selective default suggests that reputation spillovers across markets may be smaller than indicated in theoretical models of debt repayment (Cole and Kehoe, 1994).

Victory or Repudiation? The Probability of the Southern Confederacy Winning the Civil War

Historians have long wondered whether the Southern Confederacy had a realistic chance at winning the American Civil War. We provide some quantitative evidence on this question by introducing a new methodology for estimating the probability of winning a civil war or revolution based on decisions in financial markets. Using a unique dataset of Confederate gold bonds in Amsterdam, we apply this methodology to estimate the probability of a Southern victory from the summer of 1863 until the end of the war. Our results suggest that European investors gave the Confederacy approximately a 42 percent chance of victory prior to the battle of Gettysburg/Vicksburg. News of the severity of the two rebel defeats led to a sell-off in Confederate bonds. By the end of 1863, the probability of a Southern victory fell to about 15 percent. Confederate victory prospects generally decreased for the remainder of the war. The analysis also suggests that McClellan's possible election as U.S. President on a peace party platform as well as Confederate military victories in 1864 did little to reverse the market's assessment that the South would probably lose the Civil War.

Real Shock, Monetary Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907

The Panic of 1907 is an important episode in American financial history because it led, in part, to the creation of the Federal Reserve. Although much has been written about the crisis, little has been said about its underlying causes. This study identifies the San Francisco earthquake and its subsequent conflagration as the proximate cause of the panic. London fire-houses insured San Francisco during this period. The payment of claims by British insurance companies following the quake and fire produced a large capital outflow in the fall of 1906, forcing the Bank of England to nearly double interest rates and discriminate against US trade bills. These actions pushed the US into a recession and made markets vulnerable to shocks that otherwise would have been transitory in nature. World financial markets crashed in October 1907 with the collapse of the Knickerbocker Trust Company in New York.

Crises in The Global Economy from Tulips to Today: Contagion and Consequences

We examine the historical record of the financial crises that have often accompanied surges of globalization in the past. The issue of contagion, the spread of financial turbulence from the crisis center to its trading partners, is confronted with historical and statistical evidence on the causes and consequences of well-known crises. Special attention is given to the gold standard period of 1880-1913, which we find useful to divide into the initial period of deflation, 1880-1896, and the following period of mild inflation, 1897-1913. We find evidence of changes in the pattern of "contagion" from core to periphery countries between the two periods, finding that apparent contagions can more readily be interpreted as responses to common shocks. Lessons for the present period can only be tentative, but the similarities in learning experiences are striking.contagion; gold standard

Interest-Bearing Currency and Legal Restrictions Theory: Lessons from the Southern Confederacy

Instances of interest-bearing currency are relatively rare. The Southern Confederacy issued both interest and non-interest-bearing notes during the Civil War. The two types of notes apparently circulated alongside one another with the interest-bearing currency generally commanding the premium implied by legal restrictions theory. Government-imposed restrictions on banks prevented the non-interest-bearing notes from being driven out of circulation. The Southern experience appears to be consistent with the legal restrictions theory of money and suggests a potential role for interest-bearing currency as a circulating medium.

The Baring Crisis and the Great Latin American Meltdown of the 1890s

The Baring Crisis is the nineteenth century's most famous sovereign debt crisis. Few studies, however, have attempted to understand the extent to which the crisis mattered for countries other than Argentina and England. Using a new database consisting of more than 15,000 observations of weekly sovereign debt prices, we assess the extent to which the Barings Crisis affected other emerging market borrowers and find empirical evidence of a regional crisis. We find that Latin American yield spreads increased by more than 200 basis points during the crisis relative to the rest of the world, even after controlling for macroeconomic, trade, political-institutional factors, and other country-specific effects. Our evidence suggests that European investors may have sold off or reduced their holdings of Latin American securities in the wake of the Baring Crisis.

Supersanctions and Sovereign Debt Repayment

Theoretical models have suggested that sanctions may be important for enforcing sovereign debt contracts (Bulow and Rogoff, 1989a, 1989b). This paper examines the role of sanctions in promoting debt repayment during the classical gold standard period. We analyze a wide range of sanctions including gunboat diplomacy, external fiscal control over a country's finances, asset seizures by private creditors, and trade sanctions. We find that "supersanctions," instances where military pressure or political control were applied in response to default, were an important and commonly used enforcement mechanism from 1870-1913. Following the implementation of supersanctions, on average, ex ante default probabilities on new debt issues fell by more than 60 percent, yield spreads declined approximately 800 basis points, and defaulting countries experienced almost a 100 percent reduction of time spent in default. We also find that debt defaulters that surrendered their fiscal sovereignty for an extended period of time were able to issue large amounts of new debt on international capital markets. Consistent with policies advocated by Caballero and Dornbusch (2002) for Argentina, our results suggest that third-party enforcement mechanisms, with the authority to enact financial and fiscal reforms, may be beneficial for resuscitating the capital market reputation of sovereign defaulters.

Real Shock, Monetary Aftershock: The San Francisco Earthquake and the Panic of 1907

Economists have long studied the relationship between the real and monetary sectors. We examine the macroeconomic effects of the 1906 San Francisco earthquake, a shock that immediately reduced United States. GNP by 1.5-1.8 percentage points. The quake's impact manifested itself in gold flows, as British insurance companies paid their San Francisco claims out of home funds in the fall of 1906. The capital outflow prompted the Bank of England to raise interest rates and discriminate against American finance bills. British bank policy pushed the US into recession and set the stage for the 1907 financial crisis. The 1907 panic led to the formation of the National Monetary Commission whose proposals recommended the creation of the Federal Reserve. In this study, we identify the San Francisco earthquake as the shock that triggered the chain of events that culminated in the panic of 1907.