8 International Organization ing banks to rationalize their asset portfolio,taking over the best paper held by their competitors and liquidating less desirable items.28 Amalgamation naturally led to centralization-the relocation of bank headquar- ters in financial centers.Centralization allowed banks to capture external scale econo- mies:central clearing allowed banks to economize on working balances,and the greater breadth of the market increased the liquidity of security issues.29 Moreover. centralization allowed banks to enter lucrative lines of activity,such as the underwrit- ing of government and railroad loans.Centralization finally led to internationaliza- tion,since among these government loans figured those to foreign governments,until then the exclusive province of prestigious private banking houses.30 In sum,the liquidity squeeze that characterized commercial banking during the second half of the nineteenth century created a demand for short assets and led banks to pursue a profit-making strategy geared to the capture of a larger share of the relatively diminishing supply of short assets. The Gold Standard and the Supply of Short Assets The gold standard gave a boost to international capital markets,making possible an absolute increase in the coveted short instruments.It did so directly,though to a small extent,by assisting the market for acceptances,and indirectly,yet to a greater extent,by giving a boost to long-term credits. The gold standard first assisted the market for short-term capital,that of interna- tional acceptances,by reducing the currency risk.We do not know to what extent. Surely,the currency risk was already low under preceding bimetallism.Moreover, the market for international acceptances was,from 1870 on,monopolized by Lon- don;international acceptances did play substitute for vanishing bills of exchange in Britain,but not elsewhere.The greatest contribution to the uniform supply of short assets across financial centers,I believe,was more indirect;it was a spin-off of the boom in long-term foreign investment.I first develop the impact of the gold standard on long-term foreign investment and then its related effects on banks'short assets. The gold standard stimulated the long-term financial market.Operating as a com- mitment rule,according to which gold countries pledged to maintain a fixed parity between one unit of their currency and a given quantity of gold,the gold standard made possible the systematic transfer of capital from capital-rich and slow-growing economies to capital-poor and fast-growing economies.31 Countries seeking long- 28.Lamoreaux 1994,144. 29.Kindleberger 1978,72-75. 30.See Bouvier 1968:and Cameron 1991.14-16. 31.The gold standard is viewed by Bordo and Kydland 1995 as a solution to the time-inconsistency problem analyzed by Kydland and Prescott 1977.In the initial story,a government with discretion over the formulation of monetary policy will have an incentive to engineer a surprise inflation to stimulate employ- ment.Absent a binding commitment,the public will come to anticipate the outcome,leading to an infla- tionary equilibrium.A solution to the dilemma is for the government to waive discretion and pledge to abide by a binding rule.A variation on that story,one that makes time-inconsistency relevant to the gold standard,runs like this:a government with discretion over its monetary and fiscal policy will have aning banks to rationalize their asset portfolio, taking over the best paper held by their competitors and liquidating less desirable items.28 Amalgamation naturally led to centralization—the relocation of bank headquar￾tersin Ž nancial centers. Centralization allowed banks to capture external scale econo- mies: central clearing allowed banks to economize on working balances, and the greater breadth of the market increased the liquidity of security issues.29 Moreover, centralization allowed banks to enter lucrative lines of activity,such asthe underwrit￾ing of government and railroad loans. Centralization Ž nally led to internationaliza￾tion, since among these government loans Ž gured those to foreign governments, until then the exclusive province of prestigious private banking houses.30 In sum, the liquidity squeeze that characterized commercial banking during the second half of the nineteenth century created a demand for short assets and led banks to pursue a proŽ t-making strategy geared to the capture of a larger share of the relatively diminishing supply of short assets. The Gold Standard and the Supply of Short Assets The gold standard gave a boost to international capital markets, making possible an absolute increase in the coveted short instruments. It did so directly, though to a small extent, by assisting the market for acceptances, and indirectly, yet to a greater extent, by giving a boost to long-term credits. The gold standard Ž rst assisted the market for short-term capital, that of interna￾tional acceptances, by reducing the currency risk. We do not know to what extent. Surely, the currency risk was already low under preceding bimetallism. Moreover, the market for international acceptances was, from 1870 on, monopolized by Lon- don; international acceptances did play substitute for vanishing bills of exchange in Britain, but not elsewhere. The greatest contribution to the uniform supply of short assets across Ž nancial centers, I believe, was more indirect; it was a spin-off of the boom in long-term foreign investment. I Ž rst develop the impact of the gold standard on long-term foreign investment and then its related effects on banks’short assets. The gold standard stimulated the long-term Ž nancial market. Operating as a com- mitment rule, according to which gold countries pledged to maintain a Ž xed parity between one unit of their currency and a given quantity of gold, the gold standard made possible the systematic transfer of capital from capital-rich and slow-growing economies to capital-poor and fast-growing economies.31 Countries seeking long- 28. Lamoreaux 1994, 144. 29. Kindleberger 1978, 72–75. 30. See Bouvier 1968; and Cameron 1991, 14–16. 31. The gold standard is viewed by Bordo and Kydland 1995 as a solution to the time-inconsistency problem analyzed by Kydland and Prescott 1977. In the initial story, a government with discretion over the formulation of monetary policy will have an incentive to engineer a surprise in ation to stimulate employ- ment. Absent a binding commitment, the public will come to anticipate the outcome, leading to an in a￾tionary equilibrium. A solution to the dilemma is for the government to waive discretion and pledge to abide by a binding rule. A variation on that story, one that makes time-inconsistency relevant to the gold standard, runs like this: a government with discretion over its monetary and Ž scal policy will have an 8 International Organization