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Integration in the American Foreign-Exchange Market, 1791–1900

  • Lawrence H. Officer (a1)

Integration in the American foreign-exchange market under the nineteenthcentury specie standard is examined using a newly developed series of the dollar- sterling exchange rate and estimates of specie-point spreads. A distinction is made between internal and external integration. The latter is much more important over the entire 1791 to 1900 time span, but by 1881–1900 the market is tightly integrated in both senses. The long-term trend of improved integration is interrupted only by wartime.

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He is grateful to two anonymous referees for helpful comments.

1 Cole, Arthur H., “Seasonal Variation in Sterling Exchange,” Journal of Economic and Business History, 2 (11 1929), p. 203.

2 Cole, Arthur H., “Evolution of the Foreign-Exchange Market of the United States,” Journal of Economic and Business History, 1 (05 1929), pp. 405406, 419–20, fn. 3;Myers, Margaret G., The New York Money Market (New York, 1931), pp. 7475, 341–44.

3 Morgenstern, Oskar, International Financial Transactions and Business Cycles (Princeton, N.J., 1959), p. 276.

4 Clark, Truman A., “Violations of the Gold Points, 1890–1908,” Journal of Political Economic, 92 (10 1984), p. 818.

5 Morgenstern takes one set of median gold points from contemporary estimates to define the spread for the entire 1880–1914 period. Clark does little better, first using a 1906 estimate of direct shipping costs (excluding foregone interest) for his 1890–1908 period, then arbitrarily bifurcating the period with a totally conjectural cost for 1890–1904. See Morgenstern, International Financial Transactions, pp. 241–69; Clark, “Violations,” pp. 797–98, 804–805.

6 Morgenstern, International Financial Transactions, p. 277; Clark, “Violations,” p. 797.

7 Cole, “Seasonal Variation,” pp. 213–14; Cole, “Evolution,” p. 414;Perkins, Edwin J., “Foreign Interest Rates in American Financial Markets: A Revised Series of Dollar-Sterling Exchange Rates, 1835–1900,” this JOURNAL, 38 (06 1978), p. 396.

8 Davis, L. E. and Hughes, J.R.T., “A Dollar-Sterling Exchange, 1803–1895,” Economic History Review, 13 (1960), p. 59;Perkins, Edwin J., Financing Anglo-American Trade (Cambridge, Mass., 1975), pp. 184, 291, fn. 24;Perkins, “Foreign Interest Rates,” pp. 405–407.

9 See Cole, “Evolution,” p. 404.

10 Cole, “Evolution,” pp. 414–15; Davis and Hughes, “Dollar-Sterling Exchange,” p. 59; Perkins, “Foreign Interest Rates,” p. 406; Perkins, Financing, pp. 184, 291, fn. 24.

11 Notwithstanding the citations by Friedman, Milton and Schwartz, Anna Jacobson in A Monetary History of the United States (Princeton, N.J., 1963), p. 26, fn. 13, suggesting some usage of cable transfers from 1866, they were dominated by bills of exchange through 1900. In 1907 it could still be stated: “By foreign exchange, we mean bills of exchange … although sometimes money is paid on cabled orders, known as cable transfers,” from Strauss, Albert, “Gold Movements and the Foreign Exchanges,” in The Currency Problem and the Present Financial Situation (New York, 1908), p. 64.

12 See, for example, Clare, George, A Money-Market Primer (London, 1909), p.129;Strauss, “Gold Movements,” pp. 65–67, 73; The New York Times, 08 9, 1895, p. 8, where, in a detailed account of gold arbitrage from New York to London, only bills of exchange are mentioned; and The New York Times, 06 28, 1896, p. 2, where, while allusion is made to cables and sixty-day bills in passing, the presented gold-point figure pertains specifically to demand bills.

13 Whitaker, Albert C., Foreign Exchange (New York, 1919), p. 536.

14 Whitaker, Foreign Exchange, p. 534. This is confirmed in another text: “Cables are seldom, if ever, sold against gold exports,” from Cross, Iraq B., Domestic and Foreign Exchange (New York, 1923), p. 386.

15 Clark suggests that a forward-exchange transaction was used to cover the exchange risk of the cable operation, but I could find no evidence of this in the literature. It is interesting that contemporary data on forward-exchange rates do not exist, even into the twentieth century. See Goodhart, C. A. E., The New York Money Market and the Finance of Trade, 1900–1913 (Cambridge, Mass., 1969), p. 57.

16 Officer, Lawrence H., “Dollar-Sterling Mint Parity and Exchange Rates, 1791–1834,” this JOURNAL, 43 (09 1983), p. 608.

17 Quoted in Perkins, Financing, p. 27.

18 Financing, p. 28.

19 Cole, “Evolution,” p. 406; Cole, “Seasonal Variation,” pp. 207, 211–13; Davis and Hughes, “Dollar-Sterling Exchange,” pp. 58–59; Officer, “Dollar-Sterling Mint Parity,” pp. 603, 606–609.

20 In practice, these operations can be so intensive as to result in “overly perfect” integration, that is, R reduced to a value less than G/2.

21 A detailed description of the construction of the series is provided in the Appendix.

22 Davis and Hughes, “Dollar-Sterling Exchange,” p. 53.

23 Perkins, “Foreign Interest Rates,” pp. 405–406.

24 pp. 393–98, 401–402.

25 pp. 397–402.

26 p. 396.

27 See Appendix.

28 It has been suggested that the reason for this unique treatment in American exchange-market quotations, the opposite of that for all other currencies, “was probably that the pound sterling was the only unit which was larger than the dollar.” See Myers, New York Money Market, p. 347. An alternative explanation was the overriding importance of sterling in the American foreign-exchange market.

29 For the monetary history of the period and a complete discussion of these and other parity concepts, see Officer, “Dollar-Sterling Mint Parity,” pp. 580–96.

30 p. 592.

31 The meaning of “inconvertibility” was quite different in the nineteenth century, indeed through the 1920s, from what it has become for the past half century. The former meaning of inconvertibility was essentially “floating exchange rates”; the current definition is “far-reaching controls on trade and payments.” See Temin, Peter, The Jacksonian Economy (New York, 1969), pp. 114–18; andTriffin, Robert, Gold and the Dollar Crisis (New Haven, 1960), pp. 2130.

32 Reasons were limited number or size of banks involved, brief time span of suspension, and increased geographic integration of the foreign-exchange market. See Davis and Hughes, “Dollar-Sterling Exchange,” p. 62, and Perkins, Financing, pp. 155–56.

33 These measures differ from each other in two respects. First, the norm deviation from parity is the (algebraic) mean for the standard deviation, zero for the mean of absolute values. Second, the standard deviation squares deviations, while the mean of absolute values does not.

34 Not incidentally, this result effectively destroys the credibility of the Morgenstern-Clark findings of “violations” of gold points and an “inefficient” gold standard during this time period.

35 The index for 1814–1913 is tabulated in North, Douglass C., “The Role of Transportation in the Economic Development of North America,” in Les Grandes Voles Maritimes dans le Monde, XV–XIX Siècles (Paris, 1965), p. 36; it is linked to an index for 1790–1813 on the basis of the 1814 overlap. The later index is found in North, Doughas C., “The United States Balance of Payments, 1790–1860,” in Trends in the American Economy in the Nineteenth Century (Princeton, N.J., 1960), p. 595.

36 The peacetime rate to Britain from Atlantic ports, applicable for 1791–1792, is 2 percent. For 1793–1800 the average of scattered, wartime rates is taken. The data source is Albion, Robert Greenhalgh and Pope, Jennie Barnes, Sea Lanes in Wartime (New York, 1942), p. 70.

37 The source is Albion, Robert Greenhalgh, The Rise of New York Port (New York, 1939), p. 412.

38 The source is Reuss, W. F., Calculations and Statements Relative to the Trade Between Great Britain and the United States of America (London, 1833), p. 97.

39 The “cost of packing” is said to have “remained unchanged for very long periods,” from Einzig, Paul, International Gold Movements (London, 1929), p. 48.

40 See Smith, Waiter Buckingha and Cole, Arthur Harrison, Fluctuations in American Business 1790–1860 (Cambridge, Mass., 1935), p. 24;Carothers, Neil, Fractional Money (New York, 1930), p. 75; andOfficer, “Dollar-Sterling Mint Parity,” p. 595.

41 Taxay, Don, The U.S. Mint and Coinage (New York, 1966), p. 125.

42 See Carothers, Fractional Money, pp. 66, 74.

43 Report from the Secretary of the Treasury Respecting the Relative Value of Gold and Silver, House Document No. 117, 21st Cong., 1st sess., 05 29, 1830, p. 91.

44 Ibird.p. 65, referring to commission on the sale of gold in London in 1821. Brokerage of the same 0.25 percent for a silver transaction in England is mentioned for the year 1830 in Perkins, Financing, p. 192.

45 There is a reference in the contemporary literature to half-dollars exported “direct from the U.S. Mint” (Report … Gold and Silver, p. 65). This was a rate and serendipitous occurrence because of the delay in coining bullion at the mint during the period of the silver standard. Carothers notes that the “depositor of bullion had to wait weeks and even months for his coins” (Fractional Money, p. 73). Sumner cites a contemporary estimate of “two months to coin bullion left at the mint”. See Sumner, William G., A History of American Currency (New York, 1874), p. 105.

46 Taxay, U.S. Mint, p. 66.

47 Report… Gold and Silver, p. 49.

48 Perkins, Financing, pp. 192–93.

49 Albion, Robert Greenhaigh, Square-Riggers on Schedule (Princeton, N.J., 1938), pp. 1617.

50 The reason for this dichotomy is the prevailing westerly winds in the North Atlantic, which are especially stormy in the winter months. See Albion, Square-Riggers, pp. 9–10, 26; and Albion and Pope, Sea Lanes, pp. 26–27.

51 For the latter figure, see Albion, Square-Riggers, p. 200.

52 Report … Gold and Silver, p. 90.

53 For the latter rate, see Officer, “Dollar-Sterling Mint Parity,” p. 599.

54 Bank-rate data are in SirClapham, John, The Bank of England, vol. 2 (Cambridge, 1945), p. 429.

55 Report… Gold and Silver, p. 91.

56 Financial Register of the United States, 1838, p. 288.

57 Davis and Hughes, “Dollar-Sterling Exchange,” pp. 58–59.

58 Not only Davis and Hughes but also I should be surprised, as I cite the Davis-Hughes assessment with approval in “Dollar-Sterling Mint Parity,” p. 607; as should Perkins, who does the same in Financing, pp. 155–56.

59 Clare, Money-Market, pp. 129–30.

60 See Johnson, Joseph French, Money and Currency (Boston, 1905), p. 90, fn. 1.

61 On the role of cable communication, see Cole, “Evolution,” pp. 415–16.

62 See The New York Times, 01 17, 1895, p. 3; 06 28, 1896, p. 2.

63 For the entire history of the Bank's gold policy in this time period, see Sayers, R. S., Bank of England Operations 1890–1914 (London, 1936), pp. 71101.

64 Under the Acts of 1882 and 1891; but the Treasury refused to provide bars from 1891 to 1895. See Huntington, A. T. and Mawhinney, Robert J., eds., Laws of the United States Concerning Money, Banking, and Loans, 1778–1909, Senate Document No. 580, 61st Cong., 2d sess. (Washington, D.C., 1910), pp. 586, 596;The New York Times, 07 2, 1882, p. 9; 03 22, 1891, p. 5; 11 23, 1895, p. 1.

65 Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1900 (Washington, D.C., 1901), p. 333.

66 p. 333; Bankers' Magazine, 60 (06 1900), pp. 761–62.

67 For example, the Bank's minimum price for its purchase of bars was 77s. 9d., a deviation of 0.16 percent from the mint price of 77s. 10½d. See Sayers, Bank, pp. 72, 84.

68 See The New York Times, 06 28, 1896, p. 2.

69 For an excellent summary and references to the literature on this topic, see Perkins, Financing, pp. 154–55, 289, fns. 6–9.

70 The standard reference on the House of Brown is now Perkins, Financing, where a bibliography is provided on pp. 302–303.

71 pp. 156–57, 182.

72 On all this, see pp. 26–27, 160–61, 188, 206–207, 219–21, 224–26, 270, fn. 37.

73 p. 50.

74 The general-cargo index does not exhibit unusually high levels for the Civil War years, so no wartime adjustment is made.

75 Albion and Pope, Sea Lanes, p. 165.

76 While the worst of the Confederate sea threat was over by July 1863, insurance companies were conservative, charging high rates and providing refunds later. By the beginning of 1865, the war was clearly won by the North and the maritime menance over except for whalers in distant seas. See Albion and Pope, Sea Lanes, pp. 166–68.

77 For the formula to convert exchange rates from a time-bill to a demand-bill basis, see Officer, “Dollar-Sterling Mint Parity,” pp. 598–600.

78 pp. 599–600.

79 For further details on the White data and its processing, see pp. 598–606.

80 The series is tabulated in Bankers' Magazine, new series, 1 (02 1852), pp. 599–600.

81 Davis and Hughes, “Dollar-Sterling Exchange”. The exchange-rate and maturity series are tabulated on pp. 70–72 and 75–76.

82 For 1835–1870, Perkins (“Foreign Interest Rates,” pp. 416–17) converts a recording of Bank- rate levels to quarterly averages of daily rates. For 1871–1878, I use the same method. The source data are in Clapham, Bank, pp. 429–31.

83 For 1835–1836 true parity was $4.8708; from January 18, 1837 onward it was $4.86656; and for 1837 (first quarter) a weighted daily average of the two yields $4.8674. See Officer, “Dollar-Sterling Mint Parity,” pp. 591–92.

84 For the history of these suspensions, see Davis and Hughes, “Dollar-Sterling Exchange”, pp. 57, 61;Hammond, Bray, Banks and Politics in America (Princeton, N.J., 1957), pp. 451548, 689;Hepburn, A. Barton, A History of Currency in the United States (New York, 1924), pp. 132–38;Knox, John Jay, A History of Banking in the United States (New York, 1903), pp. 7677, 502–506;Martin, Joseph G., Martin's History of the Boston Stock and Money Markets (Boston, 1898), pp. 3033;Myers, New York Money Market, pp. 64–68, 172–73, 179;Smith, Walter Buckingham, Economic Aspects of the Second Bank of the United States (Cambridge, Mass., 1953), pp. 183230;Sumner, History, pp. 132–54; and Temin, Jacksonian Economy, pp. 113–71.

85 Data sources are Report from the Secretary of the Treasury… transmitting statements of the rates of exchange and prices of banknotes at different periods, Senate Document No. 457, 25th Cong., 2d sess., 05 28, 1838, for 04 1837 to 04 1838; Report from the Secretary of the Treasury… showing the rates of foreign and domestic exchange, and the prices of bank-notes and specie… Senate Document No. 69, 26th Cong., 2d sess., 01 13, 1841, for 05 1838 to 12 1840; andElliot, Jonathan, The Funding System of the United States and of Great Britain (Washington, D.C., 1845), p. 1172, for 1841.

86 The range for 1841 is 2.50 to 2.75 percent.

87 They track the well-known Martin series for New York very well. See Davis and Hughes, “Dollar-Sterling Exchange,” pp. 56–58, 70–72.

88 The series is tabulated in Perkins, “Foreign Interest Rates,” pp. 413–15.

89 Cole and others dispute that the time-bill versus demand-bill inconsistency in the Financial Review series exists. Their argument is unconvincing because it rests purely on nomenclature that appeared after 1878 and because it conflicts with the descriptions explicitly stated in the Financial Review. See Cole, “Seasonal Variation,” p. 214; andPersons, Warren M., Tuttle, Pierson M., and Frickey, Edwin, “Business and Financial Conditions Following the Civil War in the United States,” Review of Economic Statistics, 2 (supplement, 07 1920), p. 54.

90 Perkins, Financing, p. 270, fn. 37. See also pp. 188, 219.

91 “In the antebellum era, seasonal operations generally increased overall margins. In the panic of 1837 the [Brown] firm realized margins of 10 to 15 percent on some transactions,” in p. 270, fn. 37.

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