Book Review: The Corsairs of Saint-Malo

Disclaimer: the publisher, Columbia University Press, kindly sent me a copy of this book. Sometimes publishers send me copies; I do not always read or review the books, but if a copy was given to me I will write a disclaimer on top as I am doing now.

This book was a pleasure to read. It tells the fascinting story of French privateers (corsaires, in French) who were legaly sanctioned by the French government during wartime. Its author is Henning Hillmann, a professor of economic and organizational sociology at the University of Mannheim. I initially noticed that the book had an endorsement from Phil Hoffman of Caltech, who is in my opinion one of the best economic historians or indeed social scientist alive. That was in itself somewhat of a guarantee that reading this would be worth it – and it was.

Hillmann’s book considers in detail a series of related questions (listed in p. 3 of the book):

  • How did the partnerships for these course ventures form?
  • How did they entwine with parallel partnerships that the same armateurs formed to promote their ventures in overseas trade?
  • How did these various partnership networks combine to yield social cohesion within the merchant community?
  • How and why did this social fabric wax and wane over the course of more than a hundred years, from 1681 through 1792, from the reign of Louis XIV, the Sun King, to the French Revolution?

The author then gives answers to these questions, for example arguing that “the course played a pivotal role in upholding social cohesion among the local merchant elite in Saint-Malo. When opportunities for the course were absent, however, fragmentation rather than cohesion prevailed”. The book has the merit of not being afraid to engage with numbers – unlike what is often the case in other historical or sociological books. The quantification of matters such as population, trade, or merchant elite wealth, is welcome and complements well the qualitative discussion that is also provided. The frequent reliance on primary sources from Brittany is also a plus.

However, there are pitfalls too. Chapter 5, for example, includes a worthwile attempt to estimate returns to privateering. But when attempting to build measures of estimated fitting costs (Table 5.1.), the author engages in the common error of comparing nominal amounts (i.e. values in the unit of account, here livres tournois) across long spans of time. A similar problem exists elsewhere, too, in Figure 2.9. when considering trends in foreign commerce. The fact that inflation isn’t accounted for makes such comparisons almost meaningless, or at least hard to interpret. And yet there is no excuse to do this, since price indexes for 18th century France are available, most recently from the Ridolfi’s Journal of Economic History paper (data available here).

The author also spends a great deal of time discussing the dynamics of partnership networks, which seems to be one of his main focus of interest here. To me, that was a bit too much. I enjoyed the descriptive aspects of the book more than the explanations provided, but at the same time I felt that there was a lot of micro detail given at times without an adequate motivation. For example, some of the readers of this post will know that with coauthors I have worked on a paper entitled “The vagaries of the sea: evidence on the real effects of money from maritime disasters in the Spanish Empire“. In that paper we show that the vast majority of shipwrecks and maritime disasters in fact happen as a consequence of weather accidents, not piracy, even though piracy has, of course, broader Hollywoodesque appeal. Still, our evidence is related to the American Treasure Fleets exclusively, and it was interesting to read here about priacy and privatering in a somewhat different context.

While some of the stories provided are fascinating, at the same time, felt that the book sometimes gets into so much detail about individual “trees”, indeed so much that “the forest” gets out of sight completely: why should the reader care? Perhaps I’m just more interested in more “macro” questions by nature, but it wasn’t always clear to me why I should care about some of the fine details here, or indeed why they mattered to the overall story. The matter of the forest, i.e. the macro picture and its implications, being lost of sight seems relevant, because we know, for example, that French intercontinental commerce was in fact rather small by comparison with other powers, in per capita terms – a matter which the issue of piracy could not overturn (see this paper for the sources of the figure below):

Per capita intercontinental trade, at constant £ per capita of 1700. Adapted from Palma, N. (2016). Sailing away from Malthus: Intercontinental trade and European economic growth, 1500–1800. Cliometrica10(2), 129-149.

Indeed, more effort to provide international comparisons (and discussion of their implications) would have been welcome in this book. Yet, at the same time, Hillmann’s work is not primarly aimed at economists, so perhaps this is understandable. While the book is in ways reminiscent of Peter Leeson’s The Invisible Hook: The Hidden Economics of Pirates, Hillmann’s effort is more scholarly and historical (and as a result, more targeted at a specialized audience too).

Overalll, despite my abovementioned relatively minor quibbles, the book is very much worth reading. For the most part, I enjoyed learning from it.

The Corsairs of Saint-Malo: Network Organization of a Merchant Elite Under  the Ancien Régime (The Middle Range Series): Hillmann, Henning:  9780231180399: Books
Henning Hillmann’s “The Corsairs of Saint-Malo: Network Organization of a Merchant Elite Under the Ancien Régime”

The long-run effects of risk

Advanced economies tend to have large but unstable intermediation sectors. In a new paper (also avaliable as a CEPR discussion paper), we study how a higher degree of risk in the financial sector affects long-run macroeconomic outcomes when banks have limited liability in a general equilibrium model. With full deposit insurance, banks expand balance sheets when risk increases, leading to higher investment and output. With no deposit insurance, we observe substantial drops in long-run credit provision, investment, and output. These differences provide a novel argument in favor of deposit insurance. Our welfare analysis finds that increased risk reduces welfare, except when there is full deposit insurance and deadweight costs are small.

Cross-country evidence reveals substantial heterogeneity across countries with respect to bank risk-taking attitudes. More developed countries tend to have a larger, and more unstable, intermediation sector, with variation depending on a number of factors including the nature and extent of regulation (Bezemer et al., 2020, Calomiris and Haber, 2015). In new research, we consider a quantitative equilibrium model in which banks have limited liability which allows us to investigate how exogenous financial sector risk affects risk-taking by banks, and subsequently long run macroeconomic outcomes (Van der Kwaak et al., 2021). By financial risk we mean the volatility or standard deviation of idiosyncratic shocks to the return on banks’ assets (Christiano et al., 2014). Therefore, our paper contrasts with the baseline Real Business Cycle (RBC) or New Keynesian (NK) models where risk does not affect the steady state or balanced growth path.

In our model, intermediate goods producers issue corporate securities that are purchased by banks, which finance these securities through net worth and deposits. Banks have limited liability and freely choose the degree of leverage in the first period by paying out part of their net worth in the form of dividends. They face the above-mentioned shocks which affect the performance of their securities portfolios and therefore the profits they pay to their owners. Because bankers operate under limited liability, they only care about the distribution of financial risk conditional on survival when making their balance sheet decisions (Diamond and Rajan, 2011). Therefore, changes in the distribution of the shock affect credit provision, investment and output. In our model, the government is responsible for the degree of deposit insurance, which amounts to the fraction of deposits that are reimbursed in case of bank default (Clerc et al., 2015). For simplicity, we do not explicitly model other government regulations or capital requirements that the banks have to abide by, as in Gertler and Karadi (2011). However, we assume that the level of financial risk can be influenced by government regulation, but we take the extent of regulation itself and its political origins and motivations as exogenous. We interpret the standard deviation of shocks to bankers’ idiosyncratic risk as a proxy measure of the degree to which banks are regulated, with a large standard deviation representing a regime with little regulation, as the financial sector will be able to invest in riskier projects that have both a higher payoff in the good state of the world, as well as a much lower payoff in the bad state.

Our analysis focuses on long-run outcomes. The combination of limited liability and (partial) deposit insurance introduces moral hazard into our model (Kareken and Wallace, 1978): as a result, an increase in the shock’s standard deviation increases the expected return on corporate securities conditional on the bank surviving the realization of the shock next period, incentivizing bankers to hold more corporate securities (as in Diamond and Rajan, 2011). In Figure 1 we show that for the full deposit insurance case, banks expanding credit in this way leads to an increase of steady state investment and output with respect to no limited liability. Simultaneously, a higher level of financial risk increases the probability of bank default (and therefore the fraction of banks that default ex post), which raises the deadweight costs from default in equilibrium.

Figure 1: Impact on long run outcomes from changes in the level of financial risk shocks (the solid line shows the full deposit insurance case with limited liability and the black dotted the case without limited liability)

Moral hazard can be reduced by lowering the fraction of deposits that are reimbursed in case of bank default: the smaller the fraction the more the probability of default is priced in by banks’ creditors. However, we find that decreasing moral hazard in this way actually increases the probability of bank default in equilibrium because of a nonlinear feedback loop between banks’ funding costs and the probability of default: the larger the fraction of deposits that are not reimbursed, the more creditors increase interest rates to price in the probability of bank default (see Figure 2). This increase in funding costs, however, decreases banks’ (expected) profitability, which then further increases the probability of bank default. This, in turn, further increases banks’ funding costs, which then have amplification effects. As a result, we find that the strength of this feedback loop increases nonlinearly with the fraction of deposits that are not reimbursed by the deposit insurance agency. In equilibrium, the long-run probability of bank default under a regime with no deposit insurance is quadrupled with respect to the case where half of deposits are reimbursed by the government, which in turn is only slightly higher than in the case of full deposit insurance.

Figure 2: Impact on long run outcomes from changes in the level of financial risk shocks with different levels of deposit insurance (in addition to the previous cases, the black dashed line shows the 50% deposit insurance case with limited liability and the black solid line shows the no deposit insurance case with limited liability).

The impact on the real economy from a complete absence of deposit insurance is large: as a result of higher funding costs, credit provision can drop by 80% with respect to the case of no limited liability when moral hazard is entirely eliminated, causing long-run output to drop by more than 25%. This sharply contrasts with the case of full deposit insurance, where credit provision and output increase relative to no limited liability. The negative impact on the macroeconomy from a complete absence of deposit insurance is substantially mitigated when 50% of deposits are reimbursed, although credit provision, investment, and output still decrease with respect to the no limited liability case.

Therefore, our results provide a second argument in favor of deposit insurance, in addition to the Diamond and Dybvig (1983) argument of preventing bank runs (which are absent in our model): deposit insurance eliminates the above-mentioned feedback loop that would otherwise cause banks’ funding costs to increase to such an extent that the probability of bank default increases far above that under full deposit insurance. As such, financial stability increases with more deposit insurance, despite introducing moral hazard along the way.

We also analyze the deregulation of the financial sector that started in the 1980s in several Western economies, which we capture via simultaneously increasing the level of financial risk and the fraction of bank debt that is not covered by deposit insurance (the latter captures the fact that financial institutions started to rely more on non-deposit financing). Both gradually increase over a period of 50 quarters to mimic the progressive deregulation of the financial sector since the 1980s.  We find that simultaneously allowing for a decline in the long-run natural rate of interest (captured by an increase in the subjective discount factor) leads to an expansion in bank credit as has been observed in recent decades (Knott et al 2014). In the absence of a decline in the natural rate we find that under an increase in the level of risk leads to a higher probability of default and higher funding costs for banks which in turn decreases lending to the real economy leading to lower investment and output. These results suggest that the expansion of the financial sector in recent decades is primarily driven by the decline in the natural rate of interest.

Finally, we consider the consequences of an increase in financial risk on welfare, which is defined as the sum of expected discounted utility. In Figure 3, the vertical axis features welfare (defined as consumption equivalent from steady state consumption under no limited liability expressed in percentage). The two horizontal axes show the standard deviation of the idiosyncratic shock (which reflects the level of financial risk) and the deadweight costs from default (Bernanke et al., 1999). From the figure we see that welfare increases with the standard deviation when the deadweight costs are small, as financial intermediaries expand their balance sheet, thereby financing a larger capital stock which expands output. This allows consumption to increase leading to higher welfare. In the paper we additionally consider the cases of partial and no deposit insurance. Consumption is always decreasing with higher risk, which implies that welfare is so as well. For larger and empirically more realistic deadweight costs we see that the beneficial effect of higher risk is more than offset by deadweight costs absorbing a larger fraction of output, leading to lower consumption.

Figure 3: Steady state results for the model version with limited liability and full deposit insurance

Policy implications

We show banks expand their balance sheet when financial risk increases, by taking advantage of limited liability and deposit insurance to shift downside risk to others. Despite the existence of moral hazard this financial sector expansion has long run benefits, increasing investment and output. Eliminating moral hazard by abolishing deposit insurance would force creditors to correctly price in the probability of bank default, and thereby prevent banks from leveraging up. However in our paper we find that doing so in fact deteriorates financial stability (even in the absence of bank runs) because of a feedback loop between the probability of default and banks’ funding costs: depositors demand higher rates under no deposit insurance, which increases the probability of bank default. As a result depositors demand even higher rates, which then increase the probability of default even further. We also show that financial sector deregulation and the decrease in the natural rate of interest since the 1980s has increased the probability of bank default which has made the financial sector more unstable. Even under full deposit insurance we find that welfare decreases with higher financial risk, despite more credit provision and higher investment and output.


Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. Handbook of Macroeconomics, 1, 1341-1393.

Bezemer, D., Samarina, A., Zhang, L., 2020. Does mortgage lending impact business credit?

Evidence from a new disaggregated bank credit data set. Journal of Banking and Finance 113

Calomiris, C.W., Haber, S.H., 2015. Fragile by design: The political origins of banking crises and scarce credit. volume 48. Princeton University Press.

Christiano, L., Motto, R., Rostagno, M., 2014. Risk Shocks. American Economic Review 104, 27-65.

Clerc, L., Derviz, A., Mendicino, C., Moyen, S., Nikolov, K., Stracca, L., Suarez, J., Vardoulakis, A.P., 2015. Capital Regulation in a Macroeconomic Model with Three Layers of Default. International Journal of Central Banking 11, 9-63.

Diamond, D.W., and Rajan, R.G., 2011. Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes. The Quarterly Journal of Economics 126, 557-591.

Gertler, M., Karadi, P., 2011. A model of unconventional monetary policy. Journal of Monetary Economics 58, 17-34.

Kareken, J.H., and Wallace, N., 1978. Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition. The Journal of Business 51, 413-438

Knott, S., Richardson, P., Rismanchi, K., Sen, K., 2014. Understanding the fair value of banks’ loans. Bank of England Financial Stability Paper 31

Christiaan van der Kwaak, João Madeira and Nuno Palma, 2021. The long-run effects of risk: an equilibrium approach. CEPR Discussion Paper 15841

Historical gender discrimination does not explain comparative Western European development

Historical gender discrimination does not explain comparative Western European development: This is what we argue in a new paper (joint work with Jaime Reis and Lisbeth Rodrigues). Also available as a CEPR discussion paper.

Here’s the abstract:

Gender discrimination has been pointed out as a determining factor behind the long-run divergence in incomes of Southern vis-à-vis Northwestern Europe. In this paper, we show that there is no evidence that women in Portugal were historically more discriminated against than those of other parts of Western Europe, including England and the Netherlands. We rely on a new dataset of thousands of observations from archival sources which cover six centuries, and we complement it with a qualitative discussion of comparative social norms. Compared with Northwestern Europe, women in Portugal faced similar gender wage gaps, married at similar ages, and did not face more restrictions to labor market participation. Consequently, other factors must be responsible for the Little Divergence of Western European incomes.

Comparative gender wage gap (f/m) for unskilled casual workers

Slavery delayed the industrialization of Brazil

Slavery in Brazil was only abolished in 1888.

In a new paper we consider the relationship between slavery and development in 19th c. Brazil. The paper is forthcoming in Capitalism: A Journal of History and Economics.

We show that despite its centrality, slavery was not essential for the production of cotton or industrialization. Our paper provides a critical comparative perspective to the New History of Capitalism literature that has attracted a lot of attention from both scholars and the media in recent years by arguing that slavery was essential for economic development and industrialization in the USA.

We show that the Brazilian cotton export boom kickstarted by the American Civil War took place both in regions dependent on slave labor and those relying on free workers and was rooted in new seeds and technologies rather than an increase of violence.

We further show that large-scale slavery distorted and constrained industrial development by diminishing the ability of areas of Brazil well-suited for industrial development to leverage their comparative advantage.

We conclude that slavery enriched a small elite, while damaging Brazilian society and economy at large, as indeed was also the case for the U.S. south (e.g. as argued by Gavin Wright).

The Bank of England and the British economy, 1694-1844

New working paper by Patrick O’Brien and myself, avaliable here (open access), and also as a CEPR discussion paper (gated), here.

Not an ordinary bank but a great engine of state: the Bank of England and the British economy, 1694-1844

From its foundation as a private corporation in 1694 the Bank of England extended large amounts of credit to support the British private economy and to support an increasingly centralized British state. The Bank helped the British state reach a position of geopolitical and economic hegemony in the international economic order. In this paper we deploy recalibrated financial data to analyse an evolving trajectory of connections between the British economy, the state, and the Bank of England. We show how these connections contributed to form an effective and efficient fiscal-naval state and promoted the development of a system of financial intermediation for the economy. This symbiotic relationship became stronger after 1793. The evidence that we consider here shows that although the Bank was nominally a private institution and profits were paid to its shareholders, it was playing a public role well before Bagehot’s doctrine.

Here’s a picture of Patrick and me in my office in Manchester about two years ago, making progress:

Call of applications for a PhD at the Department of History of the University of Manchester

The PhD candidate will be writing a dissertation in Economic History under the supervision of Professor Philipp Roessner of the Department of History and Dr. Nuno Palma of the Department of Economics.

Funding for UK and international students is avaiable from the Department of History, from UKRI, from ESRC and from AHRC.

The successful applicant must have a good master’s degree in History, Economics, Economic History, or other closely related field. For candidates with a History background, prior knowledge of statistics would be useful but not mandatory. Good communication skills in English are required.

Information about the PhD program is available here.

Further information can be obtained from Professor Phillip Roessner []

The application must include: A detailed CV, a certified copy of your master’s degree certificate including all examination results, a letter of motivation, as well as a strong 1,500 word draft proposal outlining your proposed field of study, the state of the art, the innovative contributions that your research will make, why it is relevant, as well as a representative body of indicative historical primary sources that will help you to accomplish all this.

Please see the official university pages and follow the instructions there to apply. Please apply as early as possible to avoid disappointment.

The program starts on September 2021 and a student is expected to graduate in three years. In addition to the scholarship stipend, funding opportunities will be available for research trips abroad. During your PhD there is also the possibility of doing research visits to universities abroad.

The University of Manchester

Monetary Capacity: some background

New voxeu column and accompanying CEPR discussion paper, covering my work in co-authorship with Roberto Bonfatti, Adam Brzezinski, and K. Kivanç Karaman.

The paper touches a number of themes across economic history, historical political economy, and macro/monetary economics; but here’s a 1-sentence summary: we argue that monetary and fiscal capacity and, by extension, markets and states have a symbiotic relationship. And we provide causal evidence, too. If this peaked your curiosity, please have a look at the column and the paper itself.

In this short post, I’ll give some background about this work which makes more sense to be in a blog post than elsewhere.

We have been working in this paper for a long time – more than three years – and it feels great that we finally have a working paper. It’s worth pointing out our new paper is related to prior work by Kivanç Karaman and co-authors, as well as my own such as this piece, briefly summarized here.

For a long time, I’ve had the greatest admiration for Kivanç Karaman and the exciting work he has done, some of which with the equally impressive Sevket Pamuk, including the work they did in starting off a literature (which has since grown greatly) on empirical measures of historical state capacity. If you asked me who’s my favorite young economist in the world – and if I really can only pick one – then I’d have to answer it’s Kivanç. Whatever you do, do yourself a favor and read his work (you can thank me later!).

Our current work is in some sense the intersection of his research program with mine, and it has been wonderful working with him as well as my long-time friends and collaborators Adam Brzezinski and Roberto Bonfatti, who both also provided critical input and without whom the current paper would also not have been possible.

Economic History postdoc opportunity at the University of Manchester

BA Postdoctoral applications 2020

British Academy Postdoctoral Fellowships. Early career award, i.e. within a 3 year period from their VIVA (i.e. date of defense of the PhD).

This scheme provides funding to cover the costs of a 36 month fellowship. Earliest start date for the position: 1 September 2021.

Please pay attention to all the rules in the call (see the link above, as well as the guidance notes, here). In particular:

“Anyone of any nationality who has a doctorate from a UK university is eligible. If an applicant does not meet the prior categories, they may be accepted if they can demonstrate ‘strong prior association’ with the UK academic community. This typically means a current significant period – with a minimum period of one year, which will need to be completed prior to your application being submitted – of employment at a UK institution in either a teaching or research position which is not permanent. Postgraduate degrees (MA or MSc) do not count.”

“Eligible applicants are expected to be at an early stage in their career which is defined by BA as being within 3 years of their successful VIVA examination  between 1st April 2018 to 1st April 2021. Exemptions for maternity leave or illness may be considered. Applicants must not already have a permanent academic position. This is a two stage application whereby successful applicants at outline round are invited to submit a full application in spring 2021.”

Deadline of outline applications : 14/10/2020. You must write me well before this date (see below).

Each BA postdoctoral  application requires a UoM academic mentor. I wish to support one candidate who is an economic historian. Please note that the school will only allow one BA postdoctoral application per mentor so that each mentor may only support one application.

Since I can only support an application, this is expected to be a competitive call. Please send me by email a detailed research proposal and a short (2 pages max.) CV, by email. Please also ask an academic referee to email me a recommendation letter supporting you. Please do this as soon as possible, and for sure before mid September.

Fellowship in (macro)economic history

Opportunity in (macro)economic history – call for interest 

In antecipation of what will likely be a difficult year for job market candidates, I place this info here for those who may be looking for opportunities few months earlier than usual.

Please get in touch with Luís F. Costa, or alternatively, me, as soon as possible and surely before August 7, in case you are interested in applying to a well-paid temporary research position at 
ISEGUniversidade de Lisboa for an ambitious project. This is to be held at UECE/REM, a research centre of ISEG – Lisbon School of Economics & Management, Universidade de Lisboa, located in Lisbon, Portugal. This is a beautiful and historical city offering a rich array of cultural and social activities. Successful candidates will be provided with equipped office space, e-mail and internet access, as well as free access to library facilities.

We would be especially interested in collaborating with researchers aiming at identifying the effects of monetary shocks using Portuguese historical data from the early 20 th century. Given the nature of the project, extensive knowledge of Portuguese would be highly recommended. Researchers in both macroeconomics and (macro)economic history would be welcome to submit their pre-proposals.

This is to be held at UECEREM, a research centre of ISEG – Lisbon School of Economics & Management, Universidade de Lisboa, located in Lisbon, Portugal. This is a beautiful and historical city offering a rich array of cultural and social activities. Successful candidates will be provided with equipped office space, e-mail, and internet access, as well as free access to library facilities. ISEG has also very active research group in economic history GHES-CSG that may also be a source additional research interaction.

Expressions of interests for applications having UECE/REM as a Host Institution (beneficiary) will be evaluated within the framework of the following Marie Skłodowska-Curie Actions – Individual Fellowships (IF):European Fellowships (EF), including Career Restart, Reintegration, Society and Enterprise, and Standard European FellowshipsGlobal Fellowships (GF), which require a research period in a Third Country, followed by a reintegration period at the Host Institution. 

We particularly encourage applications from young scholars (i.e. think of this as a sort of postdoc), but applications from more senior scholars are also accepted.Please notice all the rules in the call, including:The Marie Skłodowska-Curie Individual Fellowships are available for experienced researchers of any nationality, who must have, at the date of the call deadline, a doctoral degree or at least four years of full-time equivalent research experience.Eligible candidates must comply with MSCA mobility rules:For European Fellowships: the researcher cannot have resided or carried out his/her main activity (work, studies, etc.) in the country of the beneficiary for more than 12 months in the three years immediately before the call deadline;For Global Fellowships: the researcher cannot have resided or carried out his/her main activity (work, studies, etc.) in the Third Country where the outgoing phase takes place for more than 12 months in the three years immediately before the call deadline. The deadline for submitting applications is August 7 2020, 11:59 pm (Lisbon time). The decision to host the candidate will be notified via e-mail by the end of August 2020.

Selected candidates will receive full support from UECE/REM and supervisors to develop their proposal throughout the submission process.The final deadline for submissions into the Funding & tender opportunities portal is September 9th, 2020, 5 pm (Brussels time).


UECE – Research Unit on Complexity and Economics is a research centre of ISEG – Lisbon School of Economics & Management, Universidade de Lisboa. UECE produces research, both theoretical and applied, mainly in Economics, but also in the Sciences of Complexity and in inter-disciplinary areas. The main UECE goals are: Promoting research on dynamical systems and on complexity, with an emphasis on economic applications, and also on other economic fields, such as game theory and macroeconomics. Developing new statistical methods applied to economics. Studying the consequences of dynamic, non-linear and complex systems in what concerns economic analysis and forecasting. Organising seminars, conferences and other events to disseminate scientific results. Participating in international research networks and promoting participation of researchers in international congresses and conferences. Promoting and publishing papers, working papers and other documents to stimulate research in these recent economic theory areas. 

UECE is part of REM – Research in Economics and Mathematics, a research consortium of ISEG – Lisbon School of Economics & Management, Universidade de Lisboa, founded in 2017, and aggregates two research centers, CEMAPRE and UECE. REM produces research, both theoretical and applied, mainly in Economics and in Mathematics, and also in inter-disciplinary areas. REM’s researchers are organized in six groups: Econometrics; Economics and Mathematics of Complex Systems; Mathematical Analysis and Computational Finance; Macroeconomics; Microeconomics; Statistics and Actuarial Science. REM also organizes seminars, conferences and other events to disseminate scientific results; participates in international research networks; and promotes and publishes papers, working papers and other documents to stimulate research in the abovementioned areas. REM supports XLAB – Behavioural Research Lab. REM is a member of the EconPol Europe – the European network for economic and fiscal policy research – a network of 14 policy-oriented university and non-university research institutes across 12 countries (Czech Republic, the Netherlands, Portugal, Spain, Switzerland, Germany, France, the UK, Finland, Austria, Italy and Belgium).

The efficiency of the Chinese silver standard, 1920-33

Updated April 2021.

This paper is now forthcoming at the Journal of Economic History.

Our database: black dots represent the locations of major commercial centers in Central and North China while triangles show our sample of smaller or more remote cities.

Market fragmentation prevailed in China during its Republican and Nationalist periods. That is what most of the existing literature says, at least: domestic markets were segmented due to a largely self-sufficient peasant economy, backward transport, and low state capacity. The latter led to political instability and various warlords controlling different regions of the country. As a consequence, port cities and the countryside had independent markets, which limited economic growth.

In a new CEPR discussion paper (written by Liuyan Zhao of the school of economics of Peking University and myself), we test for money market integration in China during 1920-1933 using a new dataset of daily domestic exchange rates. We consider ten Chinese cities, all of which were on a silver standard, for 1920-1933. We find that despite political instability, domestic financial markets were highly integrated.

With the exception of the period of the Northern Expedition (09/1926-12/1928), the
exchange-market efficiency of the Chinese silver standard among China’s main economic hubs was not much different in magnitude to that of the classical Dollar-Sterling gold standard before World War I. We hence conclude that there was a substantial degree of Chinese financial markets integration before the Sino-Japanese War, and we attribute this fact to technological advancements such as the rapidly explanding railway and telegraph lines, to monetary innovations, and to China’s low labor costs which contributed towards low transportation costs. Most of these factors were of Western origin, and spread due to Western influence and presence in China, even if that presence also arguably represented a threat to Chinese sovereignty. However, remote cities in South China not under central government control were less integrated.

Our study carries implications for the historical understanding of market integration
at a time of political disintegration during the Warlord Era and the early years of the
Nanjing Decade. The finding that the Chinese silver standard in parts of the country was remarkably efficient at this time, but political turmoil and weak state capacity implied that Chinese economic development in parts of the country was kept in check.

A open access version of our paper is here. The CEPR discussion paper version is here.