The money market in transition: from city-based market arbitrage to a central banking system in nineteenth-century Spain

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This research supports the singularity of the Spanish case. The lessons we can learn are a product of the short transition in the mid 1880s from a city-based monetary system (supported by private actors) to a central banking system in the absence of a developed banking system with a nationwide scope, unlike what occurred in the rest of Western Europe. Introducing market arbitrage, we provide novel evidence – using new data – of how price formation in city-based money markets was driven by more than one price. Furthermore, factors such as market conditions, political circumstances and the asymmetrical development of market potential in the Spanish economic geography also played an important role. We also show new empirical support that transaction cost reduction was not associated with improving efficiency during the 1875–85 period when city-based money markets were still operating. The inland payment system was struggling even before its takeover by the Bank of Spain.