Financial Markets and Twentieth Century Industrialization: Evidence From U.S. and Canadian Steel Producers

Despite the diverse and developed nature of twentieth century U.S. and Canadian financial markets, the history of both economies is replete with claims of inefficiency and inadequacy among financial intermediaries, particularly the banking sectors. In Canada it has been argued that banks were oligopolistic and favoured an entrenched merchant class over industrialists. In the U.S. the unit banking system has been perceived as unstable and of an inefficiently small scale. This paper examines the experiences of a set of firms from a large and economically important manufacturing industry; primary steel production; in an effort to determine the impact differences in macro financial markets have had on micro financial decision making. We find statistically significant, but not necessarily economically important, relationships among national capital market characteristics, firms' financing decisions, and firms' capital costs.North American Industrialization, Capital Market Development, Financial Intermediation

Is Deflation depressing? Evidence from the Classical Gold Standard

We distinguish between good and bad deflations. In the former case, falling prices may be caused by aggregate supply (possibly driven by technology advances) increasing more rapidly than aggregate demand. In the latter case, declines in aggregate demand outpace any expansion in aggregate supply. This was the experience in the Great Depression (1929-33), the recession of 1919-21, and may be the case in Japan today. In this paper we focus on the price level and growth experience of the United States and Canada, 1870-1913. Both countries adhered to the international gold standard. This meant that the domestic price level was largely determined by international (exogenous) forces. In addition, neither country had a central bank which could intervene in the gold market to shield the domestic economy from external conditions. We proceed by identifying separate supply' shocks, money supply shocks and demand shocks using a Blanchard-Quah methodology. We model the economy as a small open economy on the gold standard and identify the shocks by imposing long run restrictions on the impact of the shocks and on output prices. We then do a historical decomposition to examine the impact of each shock on output. The results for the U.S. are clear: the different rates of change in the price levels before and after 1890 are attributed to different monetary shocks, but these shocks explain very little of output growth or volatility, which is almost entirely a response to supply' shocks. For Canada the results are murkier. As in the U.S., the money supply shocks before 1896 are predominantly negative and after that are largely positive. However, they are non-neutral, and relative to the U.S., money supply shocks play a larger role in determining output behavior in Canada. The key conclusion of our analysis is that the simple demarcation of good vs. bad deflation, where either prices fall because of a positive supply shock, or prices fall because of a negative demand (money) shock does not capture the complexity of the historical experience of the pre-1896 period. Indeed, we find that prices fell as a result of a combination of negative money supply shocks and positive supply shocks.

A model of commodity money with minting and melting

We construct a random matching model of a monetary economy with commodity money in the form of potentially different types of silver coins that are distinguishable by the quantity of metal they contain. The quantity of silver in the economy is assumed to be fixed, but agents can mint and melt coins. Coins yield no utility, but can be traded. Uncoined silver yields direct utility to the holder. We find that optimal coin size increases with the probability of trade and with the stock of silver. We use these predictions of our model to analyze the coinage decisions of the monetary authorities in medieval Venice and England. Our model provides theoretical support for the view that decisions about coin sizes and types during the medieval period reflected a desire to improve the economic welfare of the general population, not just the desire for seigniorage revenue.

Coin sizes and payments in commodity money systems

Contemporaries, and economic historians, have noted several features of medieval and early modern European monetary systems that are hard to analyze using models of centralized exchange. For example, contemporaries complained of recurrent shortages of small change and argued that an abundance/dearth of money had real effects on exchange. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that adding small coins to an economy with only large coins is welfare improving. This effect is amplified by increases in trading opportunities. Further, changes in the quantity of monetary metals affect the real economy and the amount of exchange as well as the optimal denomination size. Finally, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare improving.Coinage

The Optimal Supply Of Bank Money: Upper Canada\u27s Experience On And Off The Specie Standard

This thesis examines the fluctuations in the money stock of Upper Canada in the 1830s, and in doing so contradicts the existing interpretation of the monetary events, and also sheds further light on the operation of the early specie standard. The model of the monetary system used, incorporates the potential for currency substitution and expectations to affect monetary behaviour.;Banking in Upper Canada is characterized by a system of three colluding, chartered banks, which attempted to maximize profits in a small open economy. These banks were legally constrained by usury laws and the requirement that notes be redeemable in specie on demand. They operated on a demand curve determined by the utility maximizing choices of individual agents, whose decisions reflected the perceived stability of the banking system and the utility obtained from the characteristics offered by bank money, in comparison to those of the competitive money, specie (coins) and the utility obtained from goods.;The model is employed to analyze monetary behaviour in Upper Canada during the financial crises of the late 1830s. The results suggest that the American suspension of specie payments in May 1837 affected the Upper Canadian economy only indirectly, causing expectations of similar behavior in Upper Canada, and not, as the literature suggests, directly through an external drain.;During the subsequent suspension by the Upper Canada banks there was a dramatic increase in the stock of bank money. The model is modified to allow for the issue of temporarily non-redeemable bank money stock. The explanation for the doubling of the bank notes in circulation lay not in the suspension of convertability, but in the coincidental influx of foreign exchange resulting from expenditures by the British Army in 1838/9

Coin sizes and payments in commodity money systems

Commodity money standards in medieval and early modern Europe were characterized by recurring complaints of small change shortages and by numerous debasements of the coinage. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that changes in the size of the small coin affect ex ante welfare. Further, the optimal ratio of coin sizes is shown to depend upon the trading opportunities in a country and a country's wealth. Thus, coinage debasements can be interpreted as optimal responses to changes in fundamentals. Further, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare-improving.Coinage

70 Years of Central Banking: The Bank of Canada in an International Context, 1935-2005

Bordo and Redish examine the evolution of central banking over the past 70 years and identify periods where Canada was either a notable innovator with regard to central banking practices or appeared to be following a slightly different course. They note that global forces seemed to play an important role in determining inflation outcomes throughout the 70-year period, and that Canada and the United States experienced roughly similar inflation rates despite some important differences in their monetary policy regimes. Canada, for example, was comparatively late in establishing a central bank, launching the Bank of Canada long after most other industrial countries had one. Canada also operated under a flexible exchange rate through much of the Bretton Woods period, unlike any other country in the 1950s and early 1960s; adopted inflation targets well before most other central banks; and introduced a number of other innovative changes with regard to the implementation of monetary policy in the 1990s.

Seventy Years of Central Banking: The Bank of Canada in International Context, 1935-2005

On the seventieth birthday of the Bank of Canada, we evaluate the Bank's contribution to monetary policy in an international context. We focus on: the reasons for the establishment of the central bank in 1935, its unique record of floating in a sea of fixed currencies under Bretton Woods; its experience with the Great Inflation and monetarism; its pioneering adoption of inflation targeting; and recent innovations in the payments and the phasing out of reserve requirements.

How "Original Sin" was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions

This paper examines the historical origins of "Original Sin" or why countries are unable to issue long term debt domestically or borrow abroad in terms of the domestic currency. We conduct an historical case study for a group of countries that had largely overcome the problem of Original Sin by the third quarter of the twentieth century. The group consists of several former colonies of Great Britain: the United States, Canada, Australia, New Zealand and South Africa. We trace out their debt history relating the currency to the place of issue, exploring the residency of those holding local and foreign currency debt and looking at the maturity of domestic debt in the nineteenth and twentieth centuries. We find that sound fiscal institutions, high credibility of the monetary regime and good financial development are not sufficient to completely break free from Original Sin. Conversely, poor performance in these policy realms is not, for the most part, a necessary condition for Original Sin. The factor we emphasize for the common movements across the five countries is the role of shocks such as wars, massive economic disruption and the emergence of global markets. The differences in evolution between the U.S. and the Dominions we attribute to differences in size, the traits of a key currency, which the U.S. possessed and the others did not, and to membership in the British Empire. The important role of major shocks suggests that the establishment of a bond market involved significant start-up costs, while the role of scale suggests that network externalities and liquidity were pivotal in the existence of overseas markets in domestic currency debt.

A Comparison of the United States and Canadian Banking Systems in the Twentieth Century: Stability vs. Efficiency?

This paper asks whether the vaunted comparative stability of the Canadian banking system has been purchased at the cost of creating an oligopoly. We assembled a data set that compares bank failures, lending rates, interest paid on deposits and related variables over the period 1920 to 1980. Our principal findings are that: (1) interest rates paid on deposits were generally higher in Canada; (2) interest income received on securities was generally slightly higher in Canada; (3) interest rates charged on loans were generally quite similar; (4) net rates of return to equity were generally higher in Canada than in the U.S..