FOREIGN BANKS AND THE LONDON MONEY MARKET DURING THE FIRST GLOBALISATION
June 2023 | Global Correspondent Banking 1870–2000 Working Paper Series, Vol.1, No.2 | University of Oxford.
Abstract
This study examines the relationship between the London Money Market (LMM) and the credit provision of non-British overseas banks during the first wave of globalisation. Using monthly data between 1889 and 1913, we find a positive relationship between the amount of credit authorised by the German Brasilianische Bank für Deutschland in Brazil and the spread between the London market and floating rate. Our results suggest that an increase in demand for foreign bills and/or a decrease in borrowing costs in the LMM leads to an increase in credit supply. We use the impact of annual tax payments on the spread between market and floating rate as an instrumental variable (IV) to show that this relationship is causal. Although there is a significant amount of literature on London's historic role as a global financial centre and a growing number of studies on foreign banking history, little quantitative evidence is available about the connection between the two. This study bridges this gap.
Keywords
London Money Market, first wave of globalisation, non-British overseas banks, German foreign bank, sterling dominance, international banking before 1914
