In contrast to the 20th century, over the 19th century economic fluctuations became increasingly severe. This paper uses a structural vector autoregression estimated on ante- and postbellum data to distinguish the influences of changes in the nature or magnitude of the disturbances from those of changes in the response of the system to shocks (i.e., changes in structure) in contributing to this increased economic instability. The increased cyclical severity in the postbellum period is found to have been the result of greater sensitivity to monetary disturbances, rather than of larger or more volatile shocks.

Traditional models of portfolio selection assume that all assets are traded in competitive markets, so that rates of return to any individual investor are fixed. This paper represents an extension of portfolio theory to the case in which asset markets are not perfectly competitive and rates of return cannot be taken as given. Klein [10] has noted that, when asset markets are imperfect, the separation theorem no longer holds but does not solve explicitly for the relationship between risk and return. Here for simplicity we shall consider the case of the investor who has a monopoly in an asset he creates, so that its risk and return characteristics are determined by the decisions of the portfolio selector and hence are endogenous. It will be shown that even if the market for an asset in the portfolio is imperfectly competitive, as long as the demand curve for the asset is well behaved, the locus of efficient portfolios facing the investor, which is composed of combinations of the riskless asset and the optimal combination of risky assets, will be a concave function, as opposed to a linear function in the competitive case. In other words, the introduction of capital market imperfections does not affect the positive slope of the efficient set of portfolios. Moreover, the expected return on the imperfectly competitive asset will be shown to be easily decomposable into the standard risk premium and a monopoly premium.

The authors develop a model in which states may choose to form coalitions to capture efficiency gains from policy coordination. Joining a coalition entails setting the policy variable to maximize the coalition's aggregate payoff at a Nash equilibrium against nonmembers and to commit to a transfer scheme to share the gains. With two states, the unique equilibrium structure is complete federation; with more than two states, incomplete federation can be the unique equilibrium. Interpreting this result in terms of custom unions, the trend to trading-bloc formation may be equilibrium behavior even with cooperation and transfers within customs unions. Copyright 1997 by American Economic Association.

IN the postbellum United States a number of mechanisms existed which promoted the interregional transfer of short-term capital. For example, the correspondent banking system linked country banks with city banks in a pervasive network, as indicated by the fact that in 1913 10 selected New York banks alone held over 15,000 accounts of out-of-state banks (Beckhart and Smith, 1932, p. 156). Slightly later, in 1925, 600 out of 655 Georgia banks maintained accounts in New York; while as far away as CaliforRia, 515 out of 644 banks did (Watkins, 1929, pp. 408-411). These city correspondents purchased commercial paper for country banks, giving even remote banks access to national funds markets, and also transferred funds to them through interbank lending and rediscounting. Although interbank borrowing amounted to only about 112 % of total national bank loans and discounts in 1892-1897, it was an important source of funds for a region like the South, where it constituted at least around 10% of total loans and discounts (Breckenridge, 1898, p. 137). Other methods of interregional funds transfer existed outside of the correspondent banking system, such as direct interregional lending. In 1915 almost 30% of the loans of eastern reserve city banks were made interregionally; almost one-half of all loans in the South made by reserve city banks in 1915 were made by banks outside the South (U.S. Comptroller of the Currency, 1915, pp. 18-19). Interregional holdings of bank stock also represented important sources of funds in some areas; for example, over the late nineteenth century between 25% and 40% of total national bank shares in the Great Plains and western states were held by investors outside the state. Finally, the commercial paper market facilitated the transfer of funds from lenders to borrowers in different regions. Although there were transfers of funds among regions,1 nevertheless substantial interregional interest rate differentials in realized as well as in quoted rates existed.2 These differences were taken as evidence of an imperfect national short-term capital market and of the existence of local monopoly power in southern, midwestern, and western states. Explanations of the movement toward a national capital market over this period have all assumed the existence of barriers to interregional capital mobility. To Lance Davis the westward spread of the commercial paper market facilitated interregional transfers of funds; Richard Sylla, on the other hand, has emphasized the role of high minimum capital requirements and other legal barriers to entry as supports of local bank monopoly power before the more liberalized requirements of the Gold Standard Act of 1900 took effect.3 Risk, however, has to be taken into account explicitly; even in a perfect capital market local interest rates may diverge if differences in risk across regions exist. Were the existing institutions for the interregional transfer of short-term capital in the postbellum period adequate for the operation of a well-functioning national money market? In other words, did a perfect national capital market exist at that time? In order to separate Received for publication June 30, 1975. Revision accepted for publication February 3, 1976. * I am greatly indebted to Peter Temin and Richard West for their many helpful suggestions and comments and to R. M. Hartwell for his diction. This article originally constituted part of a much more lengthy paper presented at the Cliometrics Conference, Madison, Wisconsin, April 1975, and at the economic history workshop of the University of Chicago. Comments from participants at these sessions are also gratefully acknowledged. Responsibility for any remaining errors lies with the author. 1 For a rough estimate of the magnitudes of long-term and short-term interregional capital flows over the 1900-1910 decade, see James (1974), pp. 200-212. 2 For a contemporary discussion of this phenomenon, see Breckenridge (1898). 3 See especially Sylla (1969) and Davis (1965).

Investment spending by US public firms is highly concentrated. The 100 largest spenders account for 60% of total capital expenditures and drive most of the variation in aggregate investment. This high concentration creates a disconnect between the average public firm and macroeconomic aggregates. For large firms, cash flow remains the primary driver of investment spending and has not declined in importance as it has for smaller public firms. The cash flowing to big spenders provides a better forecast of future investment opportunities than noisy proxies for Tobin's q even though these firms are not financially constrained. These results suggest that, at least for the largest spenders, it is unlikely that measurement error drives the significance of cash flow. Our results are also inconsistent with recent models that predict higher investment-cash flow sensitivity for small young growth firms and suggest that cash flow is still the most important determinant of macroeconomic fluctuations in investment spending.

Virtually from its founding the United States has not followed a free-trade policy. Tariffs were the principal source of federal revenue in the nineteenth century and protection of domestic industries was a significant factor as well from the first tariff act of 1789 onward (see Frank Taussig, pp. 14-15). One of the more interesting (and controversial, at least in the antebellum period) questions in American economic history as well as in international trade and development is what the effects of such a protective policy in fact were. It is well known that a country with monopoly power in international trade can improve its lot over the free-trade equilibrium. Up to some point by increasing its tariff, it should be able by improving its terms of trade also to increase national welfare. The antebellum United States may well have had such power due to its position as the major world supplier of raw cotton. In the period between 1840 and 1860, the United States produced almost two-thirds of world cotton output, while the United Kingdom, the major customer of new cotton, purchased

In contrast to the twentieth century, over the nineteenth century economic fluctuations became increasingly severe. This paper uses a structural vector autoregression estimated on ante- and postbellum data to distinguish the influences of changes in the nature or magnitude of the disturbances from those of changes in the response of the system to shocks (i.e., changes in structure) in contributing to this increased economic instability. The increased cyclical severity in the postbellum period is found to have been the result of greater sensitivity to monetary disturbances, rather than of larger or more volatile shocks. Copyright 1993 by American Economic Association.