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The history of national money market integration: Spain in the 19th century

The adoption of the euro, for all its flaws, constituted a giant step in the process of full integration between the European economies. It also reproduced at a larger scale the dynamics of monetary unification that took place during the 19thcentury. This column presents a historical study of Spain, evaluating the changes in the internal money market. The analysis suggests that transaction costs undertook a sustained decline over the 19th century. By contrast, the efficiency of the market did not improve before the 1880s, perhaps due to a shift in monetary leadership changes in national economic geography.

Although there is still much controversy surrounding the European single currency, the euro, in its short life, seems to already have had significant effects on the European economies (Campos and Coricelli 2019). A similar process of monetary integration within the main European economies took place in the mid-19th century, as a result of the establishment of national payment systems, which allowed the transfer of funds across regions at almost zero cost (Helleiner 2003). These developments were essential for economic growth, since a well-functioning money market is key to financial and macroeconomic stability (Accominotti et al. 2020). Contrary to the leading European economies, a centralised national payment system was established in Spain in the late 1880s (previously the country had had to rely on traditional systems of interregional payments using bills of exchange as a medium of exchange). In a recent paper (Nogues-Marco et al. 2019), we analyse the integration of the Spanish money market before the nationalisation of the country’s payment system. Before the 1880s, Spain had a diversity of provincial issuing banks, and the circulation of each bank’s notes was restricted to the bank’s location and the surrounding area.

We use a novel database (hand-collected with almost daily quotations) comprising of bills of exchange traded in ten major Spanish commercial and financial centres over the period 1825-1875. When prices of bills-of-exchange were too high, this indicated scarcity of bills and potential liquidity problems in the commercial link between the two cities involved. In this case, it was more profitable to transport gold and silver commodity-money instead. As a consequence, bill prices moved within a fluctuation band, limited by those price levels beyond which the use of bills was replaced by the movement of precious metals. The band limits were defined by the cost of moving gold and silver across the national geography, in the context of a bi-metallic standard (similar to the international gold standard of the late-19th and early-20th century).

For each pair of cities, we adopt two indicators of money market integration. First, we analyse the evolution of transaction costs in money markets (equivalent to the cost of moving gold or silver) by measuring the limits of the fluctuation band of bill-of-exchange prices. Second, we estimate the efficiency of money market operations, which is essentially the speed of adjustment after a shock, which takes prices out of the band limits. Defining this speed of adjustment as the ‘half-life’, we estimate the number of days of the price being outside of the fluctuation band needed to reduce its distance from the band limit by half. We adopt those two indicators for each city pair, and for time windows of 5,000 daily price observations (around fifteen years).

Our results are very interesting, yet still somehow surprising. The estimates of transaction costs and half-lives are generally reasonable. For the whole period (and for all city pairs), transaction costs were, on average, 0.9% of the traded value, which is consistent with available direct evidence of the cost of moving precious metals across the Spanish geography. Moreover, the average half-life is estimated to be 9.6 days, which is in line with existing research on other 19th century money markets (Canjels et al. 2004). 

What is more interesting, however, is the analysis of the evolution of these money market indicators over time. We show that transaction costs in the Spanish money market tended to decrease over time. However, in most cases this decrease started relatively early, way before the construction of the telegraph and railway links between the cities in our sample (which took place between the late-1850s and the late-1860s). This goes against the widespread idea that Spanish market integration made almost no progress before the arrival of the railways (Rosés et al. 2010). We argue that these early advances might have been the result of government investment in the road network and the reorganisation of postal and passenger transport services in the first half of the 19th century. Those improvements, as seen in the following picture, increased the speed of information transmission from 50 km per day in the 1820s, to 150-200 km per day in the late-1840s and early-1850s.

Figure 1 Speed of transmission of information from several cities to Madrid (km. per day, 3-month averages)

The picture is very different, however, if we look at the half-life estimates – the efficiency indicator. In this case, we do not observe a generalised trend to increased market integration. In fact, we observe quite the opposite: for many city pairs, efficiency seems to have decreased during those decades. Consequently, for many city connections, the reduction of transaction costs was not accompanied by efficiency improvements. Still, these different trends in convergence and in efficiency are also observed in the wheat market in Spain (Jacks 2005), as well as in other European peripheral countries (Russia and Norway).

To better understand the main drivers behind the dynamics of money market integration in Spain, we differentiate those market links where efficiency grew over time from those that experienced a decline. Among the former, we find the links between four North-East centres of Barcelona, Bilbao, Santander, and Zaragoza. The latter group includes the monetary relations of Madrid and three cities in the South (Cadiz, Malaga, and Seville), as well as the areas between these cities across the rest of the country. These differences are depicted in Figure 2.

Figure 2

Our study suggests that this diversity reflects the changes that took place during the 19th century in terms of the Spanish economic geography, as well as regarding the country’s monetary and financial leadership. At the beginning of the century, the Spanish monetary system was dominated by Madrid and Cadiz, whose commercial and financial activity was heavily dependent on the colonies. With the loss of most of the Empire, both centres (and especially Cadiz) started to lose their prominence. At the same time, a number of North-Eastern economies (that were closer to the European core) started to take off as a result of an incipient industrialisation. This represented a significant change in the economic balance between regions, with a liquidity reduction in Madrid and the Southern ports and a gradual liquidity improvement in the more dynamic Northern regions.

Madrid would finally recover its central position in the financial and monetary system towards the end of the 19th century, thanks to the establishment of a centralised monetary system managed by the Bank of Spain during 1875-1884. The Bank’s interregional transfer system would make the use of bills of exchange obsolete and would allow a virtually perfect monetary integration. It was only then that Spain joined other advanced European countries in abandoning its previous decentralised payment system. In sum, the Spanish monetary experience prior to the 1880s provides an interesting example of the complexity of market integration, in which the reduction in transaction costs is not always accompanied by higher market efficiency.


Accominotti, O, D Lucena-Piquero and S Ugolini (2020), “Robust money markets: Lessons from the first globalization”, VoxEU, 23 April.

Campos, N and F Coricelly (2020), “Euro 20/20: Twenty papers to better understand the single currency”,, 08 July.  

Canjels, E, G Prakash-Canjels and A M Taylor (2004), “Measuring Market Integration: Foreign Exchange Arbitrage and The Gold Standard, 1879-1913”, Review of Economics and Statistics 86(4): 868-882. 

Helleiner, E (2003), The Making of National Money: Territorial Currencies in Historical Perspective, Cornell University Press.

Jacks, D S (2005), “Intra- and international commodity market integration in the Atlantic economy, 1800–1913”, Explorations in Economic History 42(3): 381-413.

Nogues-Marco, P, A Herranz-Loncán and N Aslanidis (2019), “The making of a national currency. Spatial transaction costs and money market integration in Spain (1825-1874)”, Journal of Economic History 79(4): 1094-1128 (also CEPR Discussion Paper 12453).

Rosés, J R, J Martínez-Galarraga and D A Tirado-Fabregat (2010), “The upswing of regional income inequality in Spain (1860–1930)”, Explorations in Economic History 47(2): 244–257.

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