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

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