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We use a novel data set spanning 1820–1910 to assess the factors leading to the creation of formal bank supervisory institutions across American states. We show that it took more than a century for all states to create separate agencies tasked with monitoring the safety and soundness of banks. State legislatures initially pursued cheaper regulatory alternatives, such as double liability laws; however, banking distress at the state level as well as the structural shift from note-issuing to deposit-taking commercial banks and competition with national banks propelled policymakers to adopt costly and permanent supervisory institutions.
We use a standard metric from international finance, the currency risk premium, to assess the credibility of fixed exchange rates during the classical gold standard era. Theory suggests that a completely credible and permanent commitment to join the gold standard would have zero currency risk or no expectation of devaluation. We find that, even five years after a typical emerging-market country joined the gold standard, the currency risk premium averaged at least 220 basis points. Fixed-effects, panel-regression estimates that control for a variety of borrower-specific factors also show large and positive currency risk premia. In contrast to core gold standard countries, such as France and Germany, the persistence of large premia, long after gold standard adoption, suggest that financial markets did not view the pegs in emerging markets as credible and expected that they devaluation.
Why did policymakers adopt the gold standard? We first examine the political economy of Japan's adoption of the gold standard in 1897 by exploring the ex ante motives of policymakers as well as how the legislative decision to adopt gold won approval. We then show that joining the gold standard did not reduce Japanese interest rates or lead to a domestic investment boom. However, we find that membership in the gold standard increased Japan's exports by lowering transactions costs. Joining gold allowed Japan to tap into its growing share of global trade that was centered on the gold standard.
Using a newly constructed panel data set, which includes annual estimates of lending rates for 47 Japanese prefectures, we analyze why interest rates converged over the period 1884–1925. We find evidence that technological innovations and institutional changes played an important role in creating a national capital market in Japan. In particular, the diffusion in the use of the telegraph, the growth in commercial branch banking networks, and the development of Bank of Japan's branches reduced interest rate differentials. Bank regulation appears to have played little role in impeding financial market integration.
The Baring Crisis is the nineteenth century's most famous sovereign debt crisis. Using a database of more than 15,000 observations, we assess its effect on emerging market borrowers and find empirical evidence of a regional crisis but not a global crisis. During the crisis, Latin American yield spreads increased by more than 200 basis points 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.
In 1904 the Roosevelt Corollary to the Monroe Doctrine proclaimed that the United States would intervene in the affairs of unstable Central American and Caribbean countries that did not pay their debts. We find that the average sovereign debt price for countries under the U.S. “sphere of influence” rose by 74 percent in response to the pronouncement and actions to make it credible. We use this policy change to show that the United States subsequently acted as a regional hegemon and provided the global public goods of increased financial stability and peace. Reduced conflict spurred export growth and better fiscal management, but debt settlements were driven primarily by gunboat diplomacy.
Even after controlling for local economic conditions, differences in supervision and regulation help explain the large variation in state bank suspension rates across U.S. counties during the Great Depression. More stringent capital requirements lowered suspension rates whereas laws prohibiting branch banking and imposing high reserve requirements raised them. States whose bank supervisors could liquidate banks minimized contagion and credit-channel dislocations and experienced lower suspension rates. Those that gave their supervisors sole authority to issue bank charters and granted their supervisors long terms strengthened the incentives for bank lobbyists to influence supervisory decisions and consequently experienced higher rates of suspension.
State personal income per capita estimates at six census years are adjusted for state differences in prices and labor input per capita. Decomposition of the variation in state nominal income levels into the contributions of prices, demography, and (residual) labor productivity reveals considerable diversity in the relative importance of each by region and period. Convergence rates across the century differ according to the choice of series (nominal income, price-adjusted income, or productivity). The West and the South play crucial roles in regional convergence, but at different times.
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