The day the Atlantic
stopped being a delay
On 27 July 1866, a cable laid on the ocean floor joined Ireland to Newfoundland. News that had taken a week to cross the Atlantic now arrived within the day. What that copper wire abolished was not a distance: it was a price gap.
Among the first messages, the price of cotton
It had taken five attempts since 1857, four failures, breaks in mid-ocean and a reputation as a fantasy. On 27 July 1866, under the direction of the American financier Cyrus Field, the cable was finally hauled ashore at a Newfoundland fishing village called Heart's Content, some 1,686 nautical miles from the Irish island of Valentia. Among the very first messages sent: a congratulatory note from Queen Victoria, news of Bismarck's victory over the Austrian army, and cotton prices, quoted in New York and in Liverpool alike.
That last item was no footnote. Until then, the Liverpool price reached New York a week or more late, at the speed of ships. American merchants were therefore buying cotton against a European demand that no longer existed, with no remedy but costly and fire-prone storage. The cable's tariff was forbidding, a minimum of twenty pounds sterling for a message of twenty words; to a cotton broker, the information was worth it.
The effect can be measured. Comparing quotations on both shores, the economist Claudia Steinwender shows that the average gap between New York and Liverpool fell from 2.56 pence per pound of cotton before the cable to 1.65 pence after, a drop of more than a third, and that it became far less prone to violent swings.
Information is a transport cost
Better informed, New York exporters stopped shipping blind and began sizing their cargoes to actual demand rather than to their memory of it. Daily cotton export volumes rose by an average of 37%, and their variability by more than that, a sign that the adjustment was now made day by day. Steinwender puts the efficiency gain of the transatlantic cotton trade at 8% of its annual value, the equivalent of removing a 7% ad valorem tariff. A copper wire had just delivered what a trade treaty would have spent years negotiating.
The reach goes well beyond cotton. Shares of the New York and Erie Railroad, listed on both sides of the ocean, saw their price gap fall from roughly 5% to 10% down to 2% or 3%, and US bonds traded in London converged in the same way. Five years later the New York Cotton Exchange and its futures contracts were founded. The lesson still holds: the law of one price is not an abstract principle, it is the product of an infrastructure. Each time information accelerates, from the telegraph to fibre optics and the microwave links between Chicago and New York, the gaps close and the rent earned by those who lived off the delay evaporates.
Every arbitrage rent is a bet on the slowness of information.