• Chart of the Week
  • April 4, 2018

Smaller world, better prices

The first transatlantic cable connection has relevant lessons for today.

AnnekaS/BigStock

Information can spread around the world faster than ever before. The Internet enables companies to learn about price changes almost instantaneously, and big data helps firms to predict consumer demand.

As economists try to understand the potential impacts of this technology, one researcher is looking to history for answers. In the March issue of the American Economic Review, Claudia Steinwender examines how the 1866 transatlantic telegraph cable affected cotton price volatility.

Before the telegraph cable existed, steamships relayed cotton price information between New York and Liverpool — about a ten-day voyage. With the telegraph, Americans could use up-to-date information about Britain to better forecast demand and determine how much cotton to export. This led to fewer shortages and surpluses, which translated into more consistent prices.  

 

Figure 2 from Steinwender (2018)

 

The difference between Liverpool and New York prices became less likely to take on extreme values, as shown in the figure above. The vertical line marks the establishment of the connection, and the bold line shows the price difference.

Even though the two countries secured their telegraph connection over a century ago, the lessons are still relevant today as technology continues to advance and economies become more globalized.