Money Supply and the Credit Market in Early Modern Economies: The Case of Eighteenth-Century Lisbon

In this paper, we address the partial equilibrium functioning of the shortterm credit market in the Eighteenth-century Lisbon and its response to three major events: massive gold inflows from Brazil, a catastrophic destruction of capital caused by the 1755 earthquake and the enactment of a 5% legal ceiling on interest rates 1757. We build a time series for the market interest rate, and a regression shows money stock and real estates as two significant variables. Interest rates were affected negatively by the former and positively by the latter. We conclude that changes in the money stock tended to operate through the supply of loanable funds. The wealth effect, measured by the stock of real estate, operated over demand and tended to be the most significant effect among several other possible countervailing effects (e.g., the impact of wealth effects on supply, the informational effects of collaterals). The inflow of gold clearly generated a liquidity which by itself explained the downward trend in interest rates up until around 1780. However, the huge variations experienced by the stock of capital after the earthquake also explains the steadiness of interest rates in a period when the inflow of money started to recede. For the whole period during which the 5 % ceiling on interest rates was in force we do not find any evidence to confirm the existence of disequilibrium credit rationing: the notional interest rate predicted by our model was very close to the 5% legal ceiling.