Capital Markets in China and Britain, 18th and 19th Century: Evidence from Grain Prices

Wolfgang Keller, Carol H. Shiue, Xin Wang

NBER Working Paper No. 21349
Issued in July 2015, Revised in March 2016
NBER Program(s):Asset Pricing, Development of the American Economy, Economic Fluctuations and Growth

Does the difference in capital market development between major advanced economies during the 18th and 19th centuries explain the subsequent divergence in their income levels? We employ a storage model to obtain regional interest rates from monthly grain price changes, and we compare the integration of capital markets in Britain and China. The first step is to validate the approach by showing that grain price-based interest rates match salient features of the 19th century U.S. capital market. Our analysis using almost 20,000 new interest rates reveals that Britain’s rates were lower than China’s, even compared to China’s more developed areas, although not by a large margin. The regional integration of capital markets in Britain was substantially higher than in China, however, indicating lower barriers to capital flows than in China. At distances above 200 kilometers regional interest rates in British regions are about three times as strongly correlated as interest rates in China. Our results show that while China appears not to have been as capital-scarce as generally presumed, it had a strong disadvantage relative to Britain in its ability to allocate capital to the location of efficient use. Overall these results suggest that capital market performance may have been an important reason behind the divergence in incomes across countries in the 18th and 19th century.

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Document Object Identifier (DOI): 10.3386/w21349

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