Working Paper: CEPR ID: DP13372
Authors: Pilar Nogues-Marco
Abstract: This article focuses on money markets and exchange rates in preindustrial Europe. The foreign exchange market was mostly based on bills of exchange, the instrument used to transfer money and provide credit between distant centers in pre-industrial Europe. In this chapter, first I explain bill of exchange operations, money market integration, usury regulations and circumventions to hide the market interest rate as well as the evolution of bills of exchange in history, focusing mainly on the most relevant features generalized during the first half of the 17th century: endorsement and the joint liability rule, which facilitated the full expansion of the foreign exchange market beyond personal networks. Then, I describe the European geography of money in the mid-18th century, characterized by a very high degree of multilateralism with the triangle of Amsterdam, London and Paris as the backbone of the European settlement system. Finally, I measure the cost of capital and relate it to liquidity. I show evidence of interest rates in the 18th century for Amsterdam, London, Paris and Cadiz. While Amsterdam, London and Paris presented low and similar interest rates, Cadiz had higher interest rates, mostly being double the cost of capital. These results seem to show a high inverse correlation between liquidity and interest rates, suggesting that the share in international trade of European centers might have been a powerful driver of international monetary leadership. While more empirical evidence and further research is needed, this approach opens the scope of the analysis beyond the national institutional explanation.
Keywords: money market; bills of exchange; monetary geography; usury regulations; cost of capital; exchange rates; interest rates; specie-point mechanism
JEL Codes: E42; F31; G15; N23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bills of exchange (F33) | enhanced trade relations (F15) |
| bills of exchange (F33) | circumvent usury regulations (G21) |
| usury regulations (G21) | development of capital markets (G10) |
| liberalization of bullion movements (F33) | improved market integration (F15) |
| share in international trade (F10) | monetary leadership (E60) |
| liquidity (E41) | interest rates (E43) |