Integration and Growth:

Capital and Grain Markets in Central Europe, 14th to 18th centuries


Max-Stephan Schulze and Oliver Volckart

With the aim of revealing the origins of economic growth in late medieval and early modern Europe, research has in recent years increasingly turned to the analysis of market integration. The underlying insight is that larger and better integrated markets allow specialisation, thereby promoting productivity. Our project addresses a gap in this research: whereas traditionally the focus has been on grain markets, we also look at capital markets.

In particular, we consider three broad questions: how capital markets integrated between 1350 and 1800, why, and with what consequences.

We are employing primary data previously unused, i.e. interest rates on annuities, and econometric methods, exploiting the idea that in a perfectly integrated market real interest rates converge to identity. Annuities were sold widely in Central Europe (Germany, Austria, Switzerland, Benelux) and Italy. As their price was not age-related, the ratio between the yearly payout and the purchase price is sufficient to derive the cost of capital. Moreover, as we examine annuities sold by public authorities, the data are comparatively well-preserved. This allows us to collect data from around 60 markets, each representing a hub of late medieval/early modern commercial and financial activity.

Specifically, the hypotheses that we test are:

1. The integration of capital markets preceded that of markets for commodities with less favourable weight value ratios. To compare the integration of capital and commodity markets, we draw on grain price data which have already been gathered.

2. The use of new financial instruments improved capital market integration while state formation had an adverse effect. To test if and to what extent new financial instruments such as negotiable bills of exchange, letters obligatory and early forms of paper money decreased transaction costs, thereby increasing capital mobility and improving financial integration, we examine which new financial technologies began to be used where and at what time. State formation involved bullionist/mercantilist policies that restricted the movement of capital; we therefore expect markets to integrate more readily within emerging states and to disintegrate (at least in relative terms) across states over time.

3. Late medieval and early modern economic growth was a consequence of the growth of the market, rather than of falling costs of capital. The data-set that we construct in this project uniquely allows the analysis of two major factors responsible for economic growth in the pre-industrial era: market integration and investment. Lacking data on per capita income, economic growth is proxied by urban population growth and food consumption; these data are available or can be estimated for the period from the fourteenth century onward.

The project comprises three phases: data-collection analysis, and writing. Four researchers are involved: Volckart and Sapoznik are primarily responsible for data collection; Schulze and Chilosi for the quantitative analysis.