The Alchemy of Gold: Interest Rates, Money Stock, and Credit in Eighteenth‐Century Lisbon

26 Pages Posted: 10 Oct 2018

See all articles by Leonor Freire Costa

Leonor Freire Costa

University of Lisbon

Maria Manuela Rocha

University of Lisbon

Paulo B. Brito

Technical University of Lisbon - School of Economics and Management and UECE

Date Written: November 2018

Abstract

This article addresses the partial equilibrium functioning of the short‐term credit market in eighteenth‐century Lisbon and its response to massive gold inflows from Brazil. Gold inflows were a colonial rent, and thus a source of income and a financial asset that increased the liquidity supply in a credit market populated by both (direct) participants and non‐participants in the colonial trade or in mining. As a source of income it would induce a positive upward pressure on interest rates, while as a financial asset it would lead to the opposite. A method is developed to extract interest rates from notarized personal credit, unbundling the aggregate and the idiosyncratic components of risk pricing. The results show that interest rates in Lisbon did not differ critically from those observed in other cities at the core of the premodern European economy, which were spared from devastation by the earthquake that struck Lisbon in 1755. A simple model relating the market interest rate series to gold stock variations finds that the liquidity channel dominated over the endowment channel, which explains the downward trend in interest rates up until 1757 when the interest rates were freely settled. Mild credit rationing may have been introduced by a 5 per cent ceiling on interest rates that was imposed after 1757.

Suggested Citation

Costa, Leonor Freire and Rocha, Maria Manuela and Brito, Paulo B., The Alchemy of Gold: Interest Rates, Money Stock, and Credit in Eighteenth‐Century Lisbon (November 2018). The Economic History Review, Vol. 71, Issue 4, pp. 1147-1172, 2018. Available at SSRN: https://ssrn.com/abstract=3264244 or http://dx.doi.org/10.1111/ehr.12610

Leonor Freire Costa (Contact Author)

University of Lisbon

R. Branca Edmée Marques
Dept. Plant Biology
Lisboa, 1600-276
Portugal

Maria Manuela Rocha

University of Lisbon

R. Branca Edmée Marques
Dept. Plant Biology
Lisboa, 1600-276
Portugal

Paulo B. Brito

Technical University of Lisbon - School of Economics and Management and UECE ( email )

ISEG-UTL
R.Miguel Lupi, 20
Lisbon, 1249-078
Portugal

HOME PAGE: http://pascal.iseg.utl.pt/~pbrito/

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
28
PlumX Metrics