¹ See Davis, Lance, “The Investment Market, 1870–1914: The Evolution of a National Market,” this Journal, 25 (Sept. 1965), 355–99Google Scholar. Richard Sylla used Davis's data to analyze the effects of the national banking act on interregional rate differences in his “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1863–1913,” this Journal, 29 (Dec. 1969), 657–86Google Scholar. The explanations of interest rate behavior offered by Davis and Sylla have been tested recently by Smiley, Gene, “Interest Rate Movement in the United States, 1888–1913,” this Journal, 35 (Sept. 1975), 591–620Google Scholar and by James, John. “The Development of the National Money Market, 1893–1911,” this Journal, 36 (Dec. 1976), 878–97Google Scholar. The only quantitative investigation of capital market integration of a non-American case is Lewis, Kenneth A. and Yamamura, Kozo, “Industrialization and Interregional Interest Rate Structure: The Japanese Case, 1889–1925,” Explorations in Economic History, 8 (Summer 1971), 473–99CrossRefGoogle Scholar.

² My study concerns the western portion of the Habsburg Monarchy created by the Ausgleich of 1867. Historians generally refer to this western “half” as Cisleithania or more conveniently “Austria.” The eastern “half” has traditionally been called Transleithania or “Hungary.” An excellent history of the Habsburg Monarchy in the late stages of its evolution is Macartney, C. A., The Habsburg Empire, 1790–1918 (London, 1968)Google Scholar.

³ A more thorough analysis of this important question is currently underway. See my “Growth and Integration in the Austro-Hungarian Economy, 1867–1913,” Working Paper No. 31, Dept. of Economics, Temple University, 1977.

⁴ Hertz, Friedrich, Economic Problems of the Danubian States (London, 1947), pp. 41, 49–51Google Scholar. This basically optimistic view is shared in part by other scholars. See Benedikt, Heinrich, Die wirtschaftliche Entwicklung in der Franz-Joseph-Zeit (Vienna, 1958)Google Scholar; Jenks, William A., “Economics, Constitutionalism, Administrative Class Structure,” Austrian History Yearbook, III, 1 (1967), p. 46Google Scholar; Tibor Kolassa in a comment on a paper by Macesich, George in Der österreichischungarische Ausgleich 1867, ed. Holotik, Ludovit (Bratislava, 1971), pp. 444–61Google Scholar and Whiteside, Andrew, “The Germans as an Integrative Force in Imperial Austria: The Dilemma of Dominance,” Austrian History Yearbook, III, 1 (1967), p. 168Google Scholar.

⁵ Jaszi, Oscar, The Dissolution of the Habsburg Monarchy (Chicago, 1961), pp. 185–212Google Scholar. See also Fink, Krisztina, Die österreichisch-ungarische Monarchie als Wirtschaftsgemeinschaft in Südosteuropa-Schriften, IX (Munich, 1968), p. 2Google Scholar; Křižek, Jurij, “Beitrag zur Geschichte der Entstehung und des Einflusses des Finanzkapitals in der Habsburger Monarchie in den Jahren 1900–1914,” in Die Frage des Finanzkapitals in der österreichisch-ungarischen Monarchie, 1900–1918 (Bucharest, 1965), pp. 5–52Google Scholar; Macesich, George, “Economic Theory and the Austro-Hungarian Ausgleich,” in Ausgleich, ed. Holotik, , pp. 380–447Google Scholar; März, Eduard, Österreichische Industrie- und Bankpolitik in der Zeit Franz Josephs I (Vienna, 1968), pp. 363–75Google Scholar; Rosenberg, Hans, Grosse Depression und Bismarckzeit (Berlin, 1967), pp. 227–52CrossRefGoogle Scholar. In his recently published lectures on Austrian economic history Alexander Gerschenkron accepts this pessimistic view: Gerschenkron, Alexander, An Economic Spurt That Failed (Princeton, 1977), esp. pp. 52 and 54Google Scholar.

⁶ See Friedman, Milton and Schwartz, Anna J., A Monetary History of the United States, 1867–1960 (Princeton, 1963), pp. 314–15Google Scholar; Kindleberger, Charles P., The World in Depression, 1929–1939 (Berkeley, 1973), pp. 148–51Google Scholar; Lewis, W. Arthur, Economic Survey, 1919–1939 (London, 1949), pp. 63–64Google Scholar; and Temin, Peter, Did Monetary Forces Cause the Great Depression? (New York, 1976), p. 173Google Scholar. The financial havoc associated with the break-up of the Habsburg Monarchy is stressed in a recent monetary history of Austria since 1924, Bachinger, Karl and Matis, Herbert, Der österreichische Schilling (Graz, 1974)Google Scholar.

⁷ Kindleberger, The World in Depression, pp. 148–49.

⁸ In the period of reform which followed the Revolution of 1848 in Central Europe, the entire Habsburg Monarchy was divided among 57 Chambers of Commerce. Twenty-nine of these were in what became Austria in 1867. Each chamber was obligated to file reports on local conditions and to serve in an advisory capacity to the central government. The members were important business and industrial leaders within each chamber. See Tremel, Ferdinand, “Der Binnenhandel und Seine Organization: Der Fremdenverkehr,” in Brusatti, Alois, ed., Die Wirtschaftliche Entwicklung, vol. I of Die Habsburgermonarchie, 1848–1918 (Vienna, 1973), pp. 393–96Google Scholar.

⁹ Sitzungsprotokolle der Handels- und Gewerbekammer in Budweis (June 6, 1876), pp. 9–10.

¹⁰ Stenographisches Protokoll über die Verhandlungen der von der Prager Handels- und Gewerbekammer veranstalteten Enquete behufs Festellung der Ursachen des Niederganges unserer Industrie und der Mittel zur Abhilfe (Prag, 1898), p. 174Google Scholar.

¹¹ See my “National Bias in the Austrian Capital Market before World War I,” Explorations in Economic History, 14 (Apr. 1977), 141–66CrossRefGoogle Scholar.

¹² In the Austrian context the use of the term “national market” may cause some confusion. The term does not imply that financial markets were becoming segmented within boundaries formed by each nationality group in Austria. Rather it has the normal meaning—that regionally separate markets were merging into a single, integrated market defined by the boundaries of the territorial state.

¹³ Much of the literature of capital market theory is summarized in Sharpe, William, Portfolio Theory and Capital Markets (New York, 1970)Google Scholar. For empirical applications in economic history see Edelstein, Michael, “Rigidity and Bias in the British Capital Market, 1870–1913,” in McCloskey, Donald, ed., Essays on a Mature Economy: Britain After 1840 (Princeton, 1971), pp. 83–105Google Scholar; Good, “National Bias,” James, “National Market,” and Smiley, Gene, “Risk, Market Structure, and Transactions Costs in the Development of the National Short Term Capital Market, 1888–1913,” Dept. of Economics Working Paper, Marquette University, 1977Google Scholar.

¹⁴ See Smiley, Gene, “Regional Differences in Interest Rates in the United States, 1888- 1913,” Dept. of Economics Working Paper 76–1, Marquette UniversityGoogle Scholar.

¹⁵ The price level was not stable in Austria during this period but instead reflected the general world pattern. Prices fell secularly from 1874 to 1896 at a rate of 1.1 percent per year and rose secularly in the period 1896–1913 at a rate of 1.6 percent per annum. Good, David, “The Cost-of-Living in Austria, 1874–1913,” Journal of European Economic History, 5 (Fall 1976), p. 399Google Scholar. Since interest rates are expressed in nominal terms, they would have fallen in the period of secular price decline and risen in the period of secular price rise. This happens as market participants adjust the nominal rate of return in line with desired real returns. An estimated coefficient of variation will change with either a change in the dispersion of rates around the mean or with a change in the mean rate reflecting price level changes. The resulting ambiguity can be easily shown. In a period of falling prices all rates and hence the mean rate will fall. Thus the computed coefficient of variation will rise even if the dispersion of regions around the mean is unchanged. One would mistakenly conclude that the regions were diverging in interest rate behavior. Likewise, in a period of rising prices, the computed coefficient will fell with a fall in nominal rates of interest and an unchanged dispersion of regions around the mean. Despite the decline in the relative dispersion measure, there would be no trend toward rate convergence among the regions.

¹⁶ Gary Becker has advanced this argument in his analysis of rates of return to education in Human Capital (New York, 1964), pp. 52–55Google Scholar. John James has proposed another alternative to the coefficient of variation. He computed the rate differential between various regions of the U.S. and the most developed region, the East. See his “National Market,” pp. 879–80.

¹⁷ For a history of the National Bank see Pressburger, S., Osterreichische Notenbank, 1816–1966 (Vienna, 1966)Google Scholar. In 1867 the Bank's name was changed officially to the Austro- Hungarian National Bank, reflecting the new relationship between the co-partners of the Ausgleich of 1867, Austria and Hungary.

¹⁸ For studies of the role of the joint-stock banks in Austrian economic history see März, Österreichische Industrie- und Bankpolitik; Michel, Bernard, Banques et banquiers en Autriche au début du 20^e siècle (Paris, 1976)Google Scholar and Rudolph, Richard, Banking and Industrialization in Austria-Hungary (New York, 1976)CrossRefGoogle Scholar.

¹⁹ In 1913 discounted bills and secured loans accounted for 10.6 percent of the total earning assets held by the savings banks. Calculated from data in Österreichische Statistik, N.F., Bd. 15, Hft. 1.

²⁰ For the joint-stock banks (excluding the National Bank) the shares in total non-mortgage credit were 61.1 percent for current account credit and 30.9 percent for discounted bills and secured loans. Calculated from data in Österreichische Statistik, N.F., Bd. 15, Hft. 1. For a description of the current account connection between banks and industry in Austria see Rudolph, Banking and Industrialization, pp. 87–90.

²¹ See my “National Bias,” Tables 2, 3, and 4.

²² In addition, a significant but declining portion of the interregional variation is accounted for by the nationality composition of the regions. All other things equal, interest rates were higher in regions with a heavy non-German nationality population than in regions where the population was predominantly German.

²³ For extensive documentation of the increasingly close relationship between specific Viennese and Prague banks and specific industrial firms throughout Austria see Rudolph, Banking and Industrialization, chaps. 4 and 5.

²⁴ See Rudolph, Banking and Industrialization, pp. 26–38. The depression of 1873 seems to have ended in 1879. See Matis, , Österreichs Wirtschaft, 1848–1913 (Berlin, 1972), p. 329Google Scholar. This permits a dating of the downswing prior to the start of Rudolph's industrial production index in 1880.

²⁵ U.S. data appear to display the same relationship. For example, there is regional rate divergence during the depression of the 1890s and rate convergence during the subsequent recovery. See Smiley, “Regional Differences,” p. 12.

²⁶ Quantitative information is available for Vienna, the major financial center within Austria, which supports this general interpretation of the cyclic pattern of interregional interest rate dispersion. As noted earlier the share of the main office of the National Bank (in Vienna) in total bills of exchange discounted declined sharply from 1877 to 1913. But this secular decline tended to be reversed or at least stabilized during major cyclic downturns in economic activity. (Compare Figure 2 with cycles listed in the text.) This is consistent with the view that interregional lenders such as the National Bank protected themselves in periods of economic weakness by drawing down positions in the relatively risky Austrian hinterland.

²⁷ Rostow, Walt W., The Stages of Economic Growth (Cambridge, 1960)Google Scholar.

²⁸ David, Paul, “The Growth of Real Product in the United States Before 1840: New Evidence, Controlled Conjectures,” this Journal, 27 (June 1967), 156–57Google Scholar.

²⁹ März, Österreichische Industrie- und Bankpolitik, p. 373. See also his “Comments,” Austrian History Yearbook, XI (1975), p. 28Google Scholar. Although he sees some elements of sustained growth appearing before 1914 and especially in the immediate prewar decade, his basic position is that no breakthrough occurred before the dissolution of the Monarchy.

³⁰ Rudolph, Richard, “The Pattern of Austrian Industrial Growth from the Eighteenth to the Early Twentieth Century,” Austrian History Yearbook, XI (1975), pp. 12–20Google Scholar.

³¹ For a more extensive discussion see my “Stagnation and ‘Take-Off’ in Austria, 1873–1913,” Economic History Review, 2nd ser., 27 (Feb. 1974), 83–84Google Scholar and my “Growth and Integration.”

³² For example, Rudolph's index of industrial production shows a period of rapid growth from 1830 to the mid-1840s followed by a 20-year period in which output essentially stagnated. For an excellent analysis of the role of Austrian monetary and fiscal policy in generating these stagnation tendencies see Huertas, Thomas, “Economic Growth and Economic Policy in a Multinational Setting: The Habsburg Monarchy, 1841–1865,” unpub. Ph.D. thesis, University of Chicago, 1977, chap. 3Google Scholar. From the mid-1860s Austrian growth entered a new path which was unbroken by periods of secular stagnation such as was experienced from the late 1840s to the mid-1860s. In fact, the upsurge from this turning point was so strong that it seemed to blunt the impact of the depression of 1873 on output growth. From 1865 to 1885 Austrian industrial output grew at a rate of 3.1 percent per year. This is almost identical to the 3.2 percent rate of manufacturing growth in Germany from 1850 to 1870, a period identified as its “great spurt” in a test of the Gerschenkron hypothesis. See Barsby, Steven, “Economic Backwardness and the Characteristics of Development,” this Journal, 29 (Sept. 1969), 456Google Scholar. Nachum Gross was the first to suggest the pre-1873 period as the most likely period of acceleration over a decade ago. See his “Industrialization in Austria in the Nineteenth Century,” unpub. Ph.D. thesis, University of California at Berkeley, 1966, p. 66Google Scholar.

³³ See James, “National Money Market,” and Sylla, “Banking Market Structure.”

³⁴ This conclusion is consistent with the work of Smiley who finds that differences in risk and transactions costs and not monopoly power account for most of the variation in interregional interest rates in late nineteenth-century America. See his “Risk, Market Structure,” pp. 35–36. It is also consistent with Davis's comparative study of capital mobility in England and the U.S. He emphasized the pressures of the huge regional transfers of capital on an undeveloped capital market as a major factor determining the character of the U.S. financial structure before 1914. See his “The Capital Markets and Industrial Concentration: The U.S. and U.K., a Comparative Study,” Economic History Review, 2nd ser., 19 (Aug. 1966), 255–72CrossRefGoogle Scholar.

³⁵ The view that the “normal” functioning of the economy stimulated nationalist sentiments in the Hungarian portion of the Habsburg Monarchy is the view of many Hungarian economic historians. See in particular Berend, Ivan and Ránki, György, “Economic Factors in Nationalism: The Example of Hungary at the Beginning of the Twentieth Century,” Austrian History Yearbook, III, 3 (1967), pp. 163–88CrossRefGoogle Scholar and Hanak, Peter, “Hungary in the Austro-Hungarian Monarchy,” Austrian History Yearbook, III, 1 (1967), pp. 260–302CrossRefGoogle Scholar. The complex interrelationship between economic growth and nationalism in the Austro-Hungarian Monarchy is the subject of research currently underway. See my “Growth and Integration” for the initial findings of this project.