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Examining the Role of a Private-Order Institution in Global Trade: The Liverpool Cotton Brokers’ Association and the Crowning of King Cotton, 1811–1900

Journal: Business History Review

Date: 2021

Author: Michael Aldous, Christopher Coyle

Abstract:
In the nineteenth century, the Liverpool Cotton Brokers' Association (CBA) coordinated the dramatic growth of Liverpool's raw cotton market. This article shows how the CBA achieved this through the development of a private-order institutional framework that improved information flows, introduced standardization and contracting regimes, and regulated market exchange platforms. These developments corresponded with significantly improved market coordination, which facilitated the growth of the largest raw cotton market in the world. The article's findings demonstrate and quantify the importance of nonstate actors in creating institutions of global exchange central to the first wave of globalization.

Link: Google Scholar

Background and Context

Time Period & Setting

This study examines the Liverpool cotton market from 1811-1900, which became the world's largest raw cotton market in the 19th century.

Key Institution

The Liverpool Cotton Brokers' Association (CBA) was established in 1841 as a private-order institution to coordinate and regulate cotton trade.

Methodology

Analysis uses new data from broker reports and CBA circulars to quantify the effects of institutional changes on market coordination and price volatility.

Growth in Liverpool Cotton Market Volume (1811-1900)

  • Shows the dramatic tenfold expansion of Liverpool's cotton market over the 19th century
  • Market growth accelerated after the CBA's establishment in 1841
  • Demonstrates Liverpool's emergence as the world's leading cotton market

Improved Market Coordination After CBA Formation

  • Demonstrates improved coordination between supply and demand after CBA formation
  • Correlation between imports and consumption increased from 0.43 to 0.70
  • Indicates CBA's success in reducing market inefficiencies

Reduction in Stock Levels Over Time

  • Shows decline in average stock levels from 18.2 weeks to 11.12 weeks
  • Indicates improved market efficiency in matching supply with demand
  • Demonstrates reduced capital tied up in inventory

Decline in Price Volatility After CBA Formation

  • Shows declining trend in price volatility except during Civil War period (1861-70)
  • Volatility decreased from 0.29 in 1811-20 to 0.08 in 1881-90
  • Indicates improved market stability under CBA governance

CBA's Institutional Framework Development

Key Institutional Innovations

  • 1841: CBA Formation & Information Sharing
  • 1842: Quality Standards & Arbitration
  • 1863: Formal Constitution & Laws
  • 1876: Cotton Clearing House
  • 1878: Cotton Brokers' Bank
  • 1882: Settlement Association
  • Illustrates progressive development of institutional framework
  • Shows adaptation to market needs and technological changes
  • Demonstrates evolution from informal to formal governance structures

Contribution and Implications

  • Demonstrates the crucial role of private-order institutions in facilitating international trade during the first wave of globalization
  • Shows how private organizations can effectively create and enforce market standards without state intervention
  • Provides evidence that institutional innovations were as important as technological advances in enabling market growth

Data Sources

  • Import growth chart based on Table 1 data on Liverpool cotton imports 1811-1900
  • Market coordination chart based on correlation analysis mentioned in text before Table 1
  • Stock levels chart based on Table 2 stock data
  • Price volatility chart based on Table 2 CV data
  • Institutional timeline based on chronological developments described throughout text