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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jfineco.2005.04.002 Byline: William O. Brown (a), Richard C.K. Burdekin (a), Marc D. Weidenmier (a)(b) Keywords: Asset prices; Financial market volatility; Consols; Pax Britannica Abstract: Although it has been well established that financial volatility is related to news and macroeconomic shocks, less emphasis has been placed on the importance of underlying economic and political stability. In this paper we study the behavior of consol returns since 1729 and identify a greater-than-50% decline in volatility from the end of the Napoleonic Wars in 1815 until the First World War. News events and macroeconomic variables cannot account for this extended period of reduced volatility. Underlying political stability under Pax Britannica seems to be a more likely explanation. Author Affiliation: (a) Claremont McKenna College, 500 E. Ninth Street, Claremont, CA, 91711, USA (b) National Bureau of Economic Research, Cambridge, MA, USA Article History: Received 2 February 2005; Revised 14 March 2005; Accepted 6 April 2005 Article Note: (footnote) [star] An earlier version of this paper was presented at the Western Economic Association meetings in Denver, Colorado, July 11-15, 2003. We thank Niall Ferguson, Farrokh Langdana, Hugh Rockoff, Shaun Vahey, Tom Willett, Levis Kochin, Larry Neal, Bryan Taylor, Eugene White and an anonymous referee for helpful comments and suggestions.

Many states that formed the Southern Confederacy defaulted on sovereign debt sold in international capital markets during the 1840s. The Confederacy also elected President Jefferson Davis, who openly advocated the repudiation of U.S. states' debts while a member of Congress. Despite its poor credit record, the Confederate government managed to float cotton bonds in England that constituted under 2% of its expenditures. The bonds were largely issued to settle overdue debts with gun contractors who had cut off trade credit. The South serviced the bonds as late as March 1865, a time of domestic hyperinflation and weeks before the fall of Richmond. Although the Confederate experience shows that trade sanctions can promote debt repayment, the gunboat model can only account for a small amount of lending. A reputation or another type of sanction would be necessary to support higher levels of lending in international capital markets. Keywords: Debt repayment; Gunboats; Reputation; Confederacy JEL classification: F34; N2

Confederate asset price stabilization policies appear to have increased the velocity of circulation and counterproductively channeled inflationary pressures into other areas of the economy. Three successive monetary reforms encouraged holders of Treasury notes to exchange these notes for bonds by imposing deadlines on their convertibility. We show that Confederate funding acts aimed at precipitating the conversion of currency into bonds did temporarily suppress currency depreciation. These acts also triggered upsurges in commodity prices, however, because note holders rushed to spend the currency before their exchange rights were reduced. (JEL E52, N21), I. INTRODUCTION The absorption of Treasury notes by the funding process is progressing favorably, and will counteract the tendency to a further depreciation of our currency arising from the heavy [...]

Instances of interest-bearing currency are relatively rare. The Southern Confederacy issued both interest-bearing and non-interest-beating notes during the Civil War. The two types of notes apparently circulated alongside one another [...]

This article introduces a new high-frequency time series of Confederate money prices taken from the newspapers of Richmond and leading cities in the Eastern Confederacy. The new grayback series is tested for turning points. The empirical analysis suggests that turning points in the Confederate grayback market were different from those identified in the Northern greenback market by Willard, Guinnane, and Rosen (1996). It appears that war did not always have symmetric effects on Northern and Southern money prices. Financial and commercial matters fluctuate under the successes and reverses of the war like ebb and tide, and it is not to be wondered that under the great military events that are now transpiring [Gettysburg], there should be a suspension of operations in [gold] trade. (Richmond Examiner July 9, 1863, p. 1), 1. Introduction Recent studies of Civil War financial markets have largely focused on the role of war news in asset price determination. The news literature on Civil War asset prices [...]

Confederate cotton bond prices were chiefly determined by increased cotton prices during the US Civil War. Investors were able to convert these bonds into cotton, providing a hedge against war risk.