Beneath the Gold Points: European Financial Market Integration, 1844-1870

We measure the degree of financial integration among the top five financial centers of mid-19th-century Europe by applying threshold-regression analysis to a new database of exchange rates and bullion prices. We find that, instead of London, Hamburg, Frankfurt or Amsterdam, it was Paris that played the role of hub of European foreign exchange markets. We also document a high level of financial integration before the gold standard period, with estimated transaction costs far lower than historically-observed “gold” and “silver points” (i.e., the costs to bullion arbitrage). We review the assumptions of the classical gold-point arbitrage model and conclude that TAR-computed thresholds cannot be interpreted as transaction costs in the bullion trade. High integration may be explained not by low transaction costs in bilateral bullion arbitrage, but by the availability of multilateral financial arbitrage techniques.