Tariffs, Trains, and Trade: The Role of Institutions versus Technology in the Expansion of Markets

Were institutional or technological factors more important for commodity market integration in 19 century Europe? This period witnessed major institutional changes in the form of currency agreements and the Zollverein customs liberalizations as well as transport cost reductions in the form of the building of railways. A priori, it is not evident which of these factors were most important, although much research on currency and trade agreements suggests these institutions had significant impacts on market integration in both historical and contemporary settings. This paper studies changes in market integration in terms of the spatial dispersion of grain prices in 68 markets with more than 10,000 observations, located in five different countries and fifteen different German states. In our direct comparison of the leading factors that contribute to market integration, we find that the emergence of integrated commodity markets in 19 century Europe is in a major part due to the transportation revolution in form of the railways. The evidence for the effect of customs liberalizations is mixed, and in a direct comparison, much smaller than the impact of railroads. Finally, we do not find evidence for effects from currency agreements on market integration. These results suggest that as significant as institutional factors were for the expansion of markets, technology factors may have been even more important. Implications for economic development are discussed. 1 We thank Lee Alston, Jörg Baten, Ann Carlos, Gregory Clark, Price Fishback, Rainer Fremdling, Murat Iyigun, Michael Kopsidis, Larry Neal, Kevin O’Rourke, John Sutton, and the audiences at the 2006 NBER/CEPR conference in Lund, the NBER Spring ITI meeting, and the 2007 North American Cliometrics meeting for useful comments, and Michael Kopsidis as well for providing us with data. NSF support under grant number SES 0453040 is gratefully acknowledged. 2 Department of Economics, University of Colorado, Boulder, CO 80309; [email protected] 3 Department of Economics, University of Colorado, Boulder, CO 80309; [email protected]