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Share Liquidity and Industrial Growth in an Emerging Market: The Case of New England, 1854-1897

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  • Peter L. Rousseau

Abstract

The rapid growth of equity markets in emerging economies over the past decade has prompted economists to raise important questions about their macroeconomic impact. Although the relative brevity of this expansion has made it challenging to perform such an evaluation, there remains a strong notion that liquidity promotes participation in equity markets and is thus central to their deepening. Interestingly the first U.S. market for industrial equities arose in Boston more than 150 years ago, when capital flows were considerably less volatile than those associated with today's emerging markets. This difference makes it possible to gain insights about the long-run effects of growing sophistication in equity markets by studying the full period of Boston's emergence. From primary sources hitherto unused for scholarly investigations, namely the running annual worksheets of securities price fluctuations which underlie Boston broker Joseph Martin's volumes on the history of the Boston stock market, this paper formulates and presents broad-based indices of annual prices and returns for banking and industrial equities traded from 1854 to 1897 as well as measures of overall market capitalization in these sectors. A set of vector autoregressive models then relates increases in liquidity, as measured by the falling par values of industrial shares to rising prices and capitalizations of firms traded in the Boston market. Increases in liquidity and the real market value of equity capital in banks and industrials are also linked to higher annual earnings among the region's industrial workers. The results support the view that share liquidity was a key factor in the rise of the U.S. as a classic case of finance-led industrialization

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Historical Working Papers with number 0117.

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Date of creation: Mar 1999
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Handle: RePEc:nbr:nberhi:0117

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  1. Greenwood, Jeremy & Smith, Bruce D., 1997. "Financial markets in development, and the development of financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 145-181, January.
  2. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
  3. Jeremy Atack & Peter L. Rousseau, 1997. "Business Activity and the Boston Stock Market, 1835-1869," NBER Historical Working Papers 0103, National Bureau of Economic Research, Inc.
  4. Hiro Y. Toda & Peter C.B. Phillips, 1991. "Vector Autoregression and Causality," Cowles Foundation Discussion Papers 977, Cowles Foundation for Research in Economics, Yale University.
  5. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
  6. Davis, Lance E., 1960. "The New England Textile Mills and the Capital Markets: A Study of Industrial Borrowing 1840–1860," The Journal of Economic History, Cambridge University Press, vol. 20(01), pages 1-30, March.
  7. Clarence D. Long, 1960. "Wages and Earnings in the United States, 1860-1890," NBER Books, National Bureau of Economic Research, Inc, number long60-1, October.
  8. Lamoreaux, Naomi R., 1986. "Banks, Kinship, and Economic Development: The New England Case," The Journal of Economic History, Cambridge University Press, vol. 46(03), pages 647-667, September.
  9. Rousseau, Peter L., 1998. "The permanent effects of innovation on financial depth:: Theory and US historical evidence from unobservable components models," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 387-425, July.
  10. Bencivenga Valerie R. & Smith Bruce D. & Starr Ross M., 1995. "Transactions Costs, Technological Choice, and Endogenous Growth," Journal of Economic Theory, Elsevier, vol. 67(1), pages 153-177, October.
  11. Richard Sylla, 1998. "U.S. securities markets and the banking system, 1790-1840," Review, Federal Reserve Bank of St. Louis, issue May, pages 83-98.
  12. Rousseau, Peter L & Wachtel, Paul, 1998. "Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 657-78, November.
  13. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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Cited by:
  1. Peter L. Rousseau & Richard Sylla, 2000. "Emerging Financial Markets and Early U.S. Growth," Econometric Society World Congress 2000 Contributed Papers 1254, Econometric Society.
  2. Boyan Jovanovic & Peter L. Rousseau, 2005. "General Purpose Technologies," NBER Working Papers 11093, National Bureau of Economic Research, Inc.
  3. Boyan Jovanovic & Peter L. Rousseau, 2000. "Technology and the Stock Market: 1885-1998," Vanderbilt University Department of Economics Working Papers 0042, Vanderbilt University Department of Economics.
  4. Boyan Jovanovic & Peter L. Rousseau, 2000. "Vintage organization capital," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.

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