¹ Macaulay, Frederick R., Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock. Prices in the United States Since 1856 (New York: National Bureau of Economic Research, 1938)Google Scholar; Bigelow, Erastus A., Tariff Questions in the United States (1862).Google Scholar

² In addition, the fact that there have been few attempts to analyse the financial records that do exist—in particular commercial bank records—further complicate any description drawn from the supply side.

³ These records are on deposit in the Baker Library of the Graduate School of Business Administration, Harvard University, Boston, Massachusetts.

⁴ The 2,385 loans represent about 80 per cent of the original cash loans of the eight firms. The remaining 20 per cent were excluded because of lack of adequate information. Trade credit was not included in the study. Finally, because borrowers frequently were permitted to renew loans at the rate prevailing at the time of the initial loan, renewals were also excluded.

⁵ General Statutes of Massachusetts, Chapter 53, Section 3, Laws of 1860.

⁶ It might be noted that the Boston experience with usury laws appears to have differed markedly from the English and, to some extent, other American experience. In England the usury laws forced the actual rate above what it would otherwise have been. There, the controlled institutions ceased making loans altogether whenever the free market rate rose above the legal limit. Instead these institutions moved into other assets yielding more competitive returns. In the western United States a similar situation appears to have prevailed. Thomas Berry reports that in Ohio the usury laws resulted in a withdrawal from loan investment and a channeling of capital into inland bills on which the rate was not controlled. Thus increases in the rate of interest reduced the volume of credit. In Boston, however, the controlled institutions continued to lend during such periods, and these low interest loans tended to hold the average interest rate below what it otherwise would have been. The explanation of this difference probably lies in the difference in legal investment opportunities. In Boston, the large institutional lenders and, to lesser extent, the commercial banks were legally and culturely limited in their investment alternatives. Thus an equilibrium rate in excess of the legal limit did not force them into other investments. For a discussion of the British experience, see Viner, JacobStudies in the Theory of International Trade(New York: Harper & Bros., 1937), pp. 119–289Google Scholar, and particularly pp. 149, 219, and 257. On experience in Ohio, see Berry, Thomas S.Western Prices Before 1861 (Cambridge, Mass.: Harvard University Press, 1943), pp. 494–95.Google Scholar

⁷ See Chart I and Table A-i.

⁸ Even the textile firms occasionally had to turn to non-regulated lenders to fill their credit needs. For example, in December 1851 the treasurer of the Lancaster Mills reported: “It is owing to the heavy charge of interest and diminishing production that our business has not been more profitable. It will be recollected that in the month of July money became suddenly very scarce indeed. Just at the time we had the dividend to provide for and our payments were unusually heavy. It was impossible to obtain all that was wanted from the bank, and on the balance it was necessary to pay a high rate of interest.” Lancaster Mills, “Treasurer's Report (Statement of Profit and Loss,”) Dec. 23, 1851. This manuscript is on deposit in the Baker Library, Graduate School of Business Administration, Harvard University, Boston, Massachusetts.

⁹ A certain amount of circumvention did take place through the use of intermediate in-state borrowers; however, an examination of the records of several institutional lenders indicates that this practice was rare and restricted to very reliable firms with close in-state connections (for example, firms whose majority ownership was lodged in the hands of Boston residents). For a complete description of such circumvention, see Davis, Lance E., “United States Financial Intermediaries in the Early Nineteenth Century: Four Case Studies” (Ph.D. dissertation, The Johns Hopkins University, 1956).Google Scholar

¹⁰ Extreme provincialism appears to have marked the portfolios of savings banks (the leading institutional lenders) throughout the ante-bellum period. Such provincialism certainly characterized the investment policies of the banks in New York, Pennsylvania, and Maryland. Payne, Peter and Davis, Lance, The Savings Bank, of Baltimore 1818–1866 (Baltimore: The Johns Hopkins Press, 1956), pp. 110–13.Google Scholar

¹¹ The relative importance of the eight groups is shown, by types of loans and by years, in Table A-I. A summary for the entire period is presented in Table I.

¹² Prior to 1850, the fire insurance companies provided some loan finance, but the quantity was never significant During the 1850's life insurance companies supplied an ever-increasing volume of credit, but even as late as 1860, their total contribution was small. Their loans do, however, indicate a willingness to supply industrial finance. Although Harvard University, The Boston Athenaeum, and the Church of The Redeemer are numbered among the miscellaneous institutions, this category is included only as a residual group. At no time did its members supply any significant volume of credit.

¹³ The reader should bear in mind that only formal new loans are included in this study and the addition of renewal or trade credit might alter the conclusions markedly. In particular the inclusion of renewals would have increased the proportion of savings banks and trust companies in the long-term totals and trade credit would have increased the representation of mercantile houses, individual and miscellaneous institutions in the thirty day to six month category. Renewals were not included because of the difficulty in determining what was a renewal and what was really only a part of the actual loan. Trade credit was excluded because such loans can not be readily increased independently of the scale of operations and, in addition, the terms of such offering did not change significantly during the period.

¹⁴ See Table A-I.

¹⁵ See Table A-I.

¹⁶ See Table A-I.

¹⁷ The average used was the weighted average where the X_i represents the interest rate charged on individual loans and the V₁ represents the dollar value of these individual loans.

¹⁸ The source of Bigelow's series remains unknown. Bigelow himself refers to them as figures on the Boston and New York markets. Arthur H. Cole thinks they refer to the New York market; however, F. R. Macaulay feels equally certain that they refer to the Boston market. Both authorities agree that they are the rates for short-term commercial paper. During the pre-Civil War period such commercial paper was probably more speculative than the industrial loans contained in the textile series. Risk differentials may explain the difference in levels between Bigelow's and the textile series (the former series average about 2 per cent higher than the latter); however, the two should be expected to move together. If Bigelow's series refers to New York, then non-coordinate movements may be explained by the conditions peculiar to one market; however, if his figures are for Boston, the discrepancies are more difficult to explain. See Cole, Arthur H. and Smith, Walter Buckingham, Fluctuation in American Business, 1790–1860 (Cambridge, Mass.: Harvard University Press, 1935), p. 125; and Macaulay, Interest Rates, p. A335. For purposes of comparison, Bigelow's series is presented in Chart I and Table A-3.Google Scholar

¹⁹ A rough test of significance shows that the November, December, and January figures are significantly different from 100 at the 95 per cent level. However, although November and January figures support Bigelow's conclusion, the December figure is in definite conflict. The same test applied to Bigelow's indices indicates that all four months are significantly different from 100.

²⁰ Myers, Margaret G., The New York Money Market, Origins and Developments (2 vols., New York: Columbia University Press, 1931), I,135–48.Google Scholar

²¹ Macaulay, Interest Rates, p. 230.

²² The monthly rates exceeded 7 per cent in January 1840, February 1841, March 1842, June 1848, and May 1851.

²³ The interest rates cited in the textile series include both interest and commission payments.

²⁴ Bankers’ Magazine, VII, n.s. (Dec. 1857), 500.Google Scholar

²⁵ Cole and Smith, Fluctuations, p. 127.

²⁶ In England the market, too, was characterized by very low rates. The Bank of England deliberately held its rates low and by May 1844 the market rate had fallen below 2 percent. Hawtrey, R. G., A Century of Bank Rate (London: Longmans, Green & Co., 1938), p. 19.Google Scholar

²⁷ Niles', Weekly Register, LXIV (Aug. 13, 1845), 384.Google Scholar

²⁸ The textile series show a low of 3 per cent in December 1843 (See Chart I) and in January Niles' reports: “New York money is more in demand this week.” Niles', Weekly Register, LXIV (Jan. 13, 1844), 320.Google Scholar

²⁹ Evidence from the textile series (Chart I) and from contemporary chronicles indicates that interest rates rose sharply during the early fall of 1844 and again in the spring and late fall of 1845. Niles', Weekly Register, LXVII (Sept. 21, 1844), 48; LXVII (Feb. 8, 1845), 386; LXIX (Dec. 13, 1845), 250.Google Scholar

³⁰ For example, in Hawtrey's analysis of business cycle behavior, the interest rates are supposed to remain low almost until the end of the upswing. The National Bureau findings for more recent periods are not this extreme, but they also indicate a lag between their reference cycle and the interest rates on commercial paper. Hanson, Alvin, Business Cycles and National Income (New York: Norton, 1951), pp. 377–84.Google ScholarMitchell, Wesley C., What Happens During Business Cycles, A Progress Report (New York: National Bureau of Economic Research, 1951), p. 167.Google Scholar For the early nineteenth century the English experience appears marked by a pattern similar to the American. Interest rates tended to rise during phases III—VII of the National Business reference cycle and to have declined during phases VII—III. Gayer, Arthur D., Rostow, W. W., and Schwartz, Anna J., The Growth and Fluctuations of the British Economy 1750–1850 (2 Vols., Oxford: Claredon Press, 1953), II, 676.Google Scholar

³¹ In earlier periods of financial stringency, the Second Bank of the United States had acted as a lender of last resort. See, for example, Payne and Davis, The Savings Bank of Baltimore, p. 85.

³² Thorp, Willard, Business Annals (New York: National Bureau of Economic Research, 1926), pp. 132–34;Google ScholarAyres, Leonard P., Turning Points in Business Cycles (New York: the MacMillan Co., 1939), p. 6Google Scholar and pp. 177–78.

³³ Niles', , LXIV (Aug. 26, 1843), 416.Google Scholar

³⁴ Smith and Cole, Fluctuations, pp. 125–26. Nor can foreign difficulties account for the yearlong increase. In Britain, for example, 1848 was a year of progressive easing of the credit market. The bond rate, the market rate, and the rates on bills of exchange all declined significantly over the year. Gayer, Rostow and Schwartz, Fluctuations, I, 331.

³⁵ Hunt's Merchants’ Magazine, XIX (July 1848), 81–82.Google Scholar

³⁶ Ibid., XIX (Sept. 1848), 201.

³⁷ Precisely the same pattern of events was observed in England during the spring, summer, and fall of 1857. See Hughes, J. R. T., “The Commercial Crisis of 1857,” Oxford Economic Papers, VIII-2, n.s. (June 1956), 194–227.CrossRefGoogle Scholar

³⁸ Bankers' Magazine, VII, n.s. (July 1857), 88, and VII, n.s. (Oct. 1857), 334.Google Scholar

³⁹ The more widely accepted expectational explanation of the term structure has been developed by J. R. Hicks, Value and Capital (2d. ed., Oxford: University Press 1946) ch. xi and Lutz, Friedrich A., “The Structure of Interest Rates,” Quarterly Jounal of Economics, LV (Nov. 1940)36–63.CrossRefGoogle Scholar Recently Culbertson, John M. has cast some doubt on the usefulness of the theory and has shown that for recent American developments, at least, an explanation based on the existence of semi-independent markets for each maturity seems to accord better with the facts. “The Term Structure of Interest Rates,” Quarterly Journal of Economics, LXXI (Nov. 1947), 485–517.Google Scholar Culbertson's concept of segregated credit markets was anticipated by the work of Evans, G. Heberton, [See, for example, his Basic Economics (New York: Alfred A. Knopf, 1950), pp. 226–34]Google Scholar, and Riefler, Winfield [See, Money Rates and Money Markets in the United States (New York: Harper & Bros., 1930)].Google Scholar

⁴⁰ There appears to have been enough marginal movement between the markets to cause rates in the separate markets to move together, but not sufficient movement to equalize the rates. This situation probably reflects the willingness of individuals to move between markets combined with the unwillingness and inability of the commercial banks to extend long-term credit and of the other financial institutions to move into the short end of the market.

⁴¹ Although for the whole period the standard deviation of Type III is slightly greater than that of Type II (.0084 vs. 0079), if the years 1856 and 1857 are excluded as abnormal the four conform perfectly to traditional theory.

⁴² Culbertson, “The Term Structure of Interest Rates,” p. 509.

⁴³ In the recent period the short rate has usually been below the long rate. Since 1920 the short rate has exceeded the long rate during only two relatively short periods 1920 and 1928–29. Culbertson, “The Term Structure of Interest Rates,” p. 504; and Federal Reserve Chart Book: Financial and Business Statistics, Historical Supplement (Washington, D. C: Board of. Governors, 1957), pp. 37–39.Google Scholar

⁴⁴ Culbertson, “The Term Structure of Interest Rates,” p. 504.

⁴⁵ An examination of the average maturities indicates that the commercial bank tended to reduce maturities in periods of credit stringency and increase them in periods of easy money.