Imports and the Jacksonian Economy: The Business Cycle and the Balance of Payments

Anglo-American financial interrelations in the decades before the American Civil War have long been studied to understand better the business cycle phenomena surrounding the demise of the Second Bank of the United States and the victory of the Currency School over the Bank of England in 1844. Inasmuch as gold and silver discoveries, their mining, and their monetization were also features of the period, the price-specie-flow theory of balance of payments adjustment has been at the center of many attempts to explain the propagation and transmission of business cycles. By contrast, we show that the remarkable international mobility of capital holds the key to the connection between the balance of payments and business cycles. A portfolio approach to balance of payments adjustment is developed and found to be more consistent than price-specie-flow theory with basic macroeconomic aggregates for the the 1820-60 period. To the extent that money supply shocks account for the cycle, their influence is limited to their impact made via changes in the world money stock. Because individual country price levels under the prevailing metallic and bimetallic standards are defined relative to the world price level, they depend on both the world money stock and real market forces that distinguish one country from another. Money supply shocks relative to world money stocks do not appear to have been large enough to account for the magnitude of cycles in this period, suggesting the possibility that cycles could have been dominated by real shocks.