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American Treasure and the Price Revolution in Spain, 1501-1650

Author(s):Hamilton, Earl J.
Reviewer(s):Munro, John

Classic Reviews in Economic History

Earl J. Hamilton, American Treasure and the Price Revolution in Spain, 1501-1650. Cambridge, MA: Harvard University Press, 1934. xii + 428 pp.

Review Essay by John Munro, Department of Economics, University of Toronto.

Hamilton and the Price Revolution: A Revindication of His Tarnished Reputation and of a Modified Quantity Theory

Hamilton and the Quantity Theory Explanation of Inflation

As Duke University’s website for the “Earl J. Hamilton Papers on the Economic History of Spain, 1351-1830″ so aptly states: Hamilton “helped to pioneer the field of quantitative economic history during a career that spanned 50 years.”[1] Certainly his most important publication in this field is the 1934 monograph that is the subject of this “classic review.” It provided the first set of concrete, reliable annual data on both the imports of gold and silver bullion from Spain’s American colonies ? principally from what is now Bolivia (Vice Royalty of Peru) and Mexico (New Spain) ? from 1503 to 1660 (when bullion registration and thus the accounts cease); and on prices (including wages) in Spain (Old and New Castile, Andalusia, Valencia), for the 150 year period from 1501 to 1650.[2] His object was to validate the Quantity Theory of Money: in seeking to demonstrate that the influx of American silver was chiefly, if not entirely, responsible for the inflation of much of the Price Revolution era, from ca. 1520 to ca. 1650: but, principally only for the specific period of ca. 1540 to ca. 1600. Many economic historians (myself included, regrettably) have misunderstood Hamilton on this point, concerning both the origins and conclusion of the Price Revolution. Of course the Quantity Theory of Money, even in its more refined modern guise, is no longer a fashionable tool in economic history; and thus only a minority of us today espouse a basically monetary explanation for the European Price Revolution (ca. 1515/20-1650) ? though no such explanation can be purely monetary.[3]

If inflations had been frequent in European economic history, from the twelfth century to the present, the Price Revolution was unique in the persistence and duration of inflation over a period of at least 130 years.[4] Furthermore, if commodity money ? i.e., gold and especially silver specie ? was not the sole monetary factor that explains the Price Revolution that commodity money certainly played a relatively much greater role than it did in the subsequent inflations (of much shorter duration) from the mid-eighteenth century to the present. The role of specie, and specifically Spanish-American silver, in “causing” the Price Revolution was a commonplace in Classical Economics and Hamilton cites Adam Smith’s statement in The Wealth of Nations (p. 191) that “the discovery of abundant mines of America seems to have been the sole cause of this diminution in the value of silver in proportion to that of corn [grain].”[5]

The Comparative Roles of Spanish-American Silver and Coinage Debasements: The Bodin Thesis

According to Hamilton (p. 283) ? and indeed to most authorities to this very day ? the very first scholar to make this quantity-theory link between the influx of American “treasure” and the Price Revolution was the renowned French philosopher Jean Bodin, in his 1568 response to a 1566 treatise by the royal councilor Jean Cherruyt de Malestroit on the explanations for the then quite evident rise in French prices over the previous several decades. Malestroit had contended that coinage debasements were the chief culprit ? as indeed they most certainly had been in the periodic inflations of the fourteenth and fifteenth centuries.[6] Bodin responded by dismissing those arguments and by contending that the growing influx of silver from the Spanish Americas was the primary cause of that inflation.[7]

Hamilton (in chapter 13) was therefore astounded to find, after voluminous and meticulous research in many Spanish treatises, letters, and other relevant documents, that no Spanish writer of the sixteenth century had voiced similar opinions, all evidently ignorant of Bodin’s views. Hamilton, however, had neglected to find (as Marjorie Grice-Hutchinson did, much later) one such Spanish treatise, produced in 1556 ? i.e., twelve years before Bodin ? in which Azpilcueta Navarra, a cleric of the Salamanca School, noted that: “even in Spain, in times when money was scarcer, saleable goods and labor were given for very much less than after the discovery of the Indies, which flooded the country with gold and silver.”[8]

Hamilton also erred, if forgivably so, in two other respects. First, in utilizing what were then, and in many cases still are, imperfect price indexes for many countries ? France, England, Germany, Italy (but not for the Low Countries) ? Hamilton (1934, pp. 205-10) concluded that the rise in the general level of prices during the Price Revolution was the greatest in Spain. In fact, more recent research, based on the Phelps Brown and Hopkins (1956) Composite Price Index for England and the Van der Wee (1975) Composite Price Index (hereafter: CPI) for Brabant, in the southern Low Countries, reveals the opposite to be true. If we adopt a common base of 1501-10 = 100, in comparing the behavior of the price levels in Spain, England, and Brabant, for the period 1511-1650, we find that the Hamilton’s CPI for Spain rose from a quinquennial mean of 98.98 in 1511-15 to one of 343.36 in 1646-50 (for silver-based prices only: a 3.47 fold rise); in southern England, the CPI rose from a quinquennial mean of 103.08 in 1511-15 to one of 697.54 (a 6.77 fold rise); and in Brabant, the CPI rose from a quinquennial mean of 114.80 in 1511-15 to one of 845.07 (a 7.36 fold rise).[9] Both the Phelps Brown and Hopkins and the Van der Wee price indexes are, it must be noted, weighted, with roughly the same weights (80 percent foodstuffs in the former and 74 percent in the latter). Hamilton, while fully admitting that “only index numbers weighted according to the expenditures of the average family accurately measure changes in the cost of living,” was forced to use a simple unweighted arithmetic mean (or equally weighted for all commodities), for he was unable to find any household expenditure budgets or any other reliable guides to produce such a weighted index.[10]

Undoubtedly, however, the principal if not the only explanation for the differences between the three sets of price indexes ? to explain why the Spanish rose the least and the Brabantine the most ? is the one offered by Malestroit: namely, coinage debasements. Spain, unlike almost all other European countries of this era, underwent no debasements of the gold and silver coinages (none from 1497 to 1686),[11] but in 1599 the new Spanish king Philip III (1598-1621) did introduce a purely copper “vellon” coinage, a topic that requires a separate and very necessary analysis. The England of Henry VIII (1509-1547) is famous ? or infamous ? for his “Great Debasement.” He had begun modestly in 1526, by debasing Edward IV’s silver coinage by 11.11% (reducing its weight and silver contents from 0.719 to 0.639 grams of fine silver); but in 1542, he debased the silver by another 23.14% (to 0.491 grams of fine silver). When the Great Debasement had reached its nadir under his successor (Northumberland, regent for Edward VI), in June 1553, the fine silver contents of the penny had been reduced (in both weight and fineness) to just 0.108 grams of fine silver: an overall reduction in the silver content of 83.1% from the 1526 coinage. In November 1560, Elizabeth restored the silver coinage to traditional sterling fineness (92.5% fine silver) and much of the weight: so that the penny now contained 0.480 grams of fine silver (i.e., 75.1% of the silver in the 1526 coinage). The English silver coinage remained untouched until July 1601, when its weight and fine silver contents were reduced by a modest 3.23%. Thereafter the English silver coinage remained untouched until 1817 (when the silver contents were reduced by another 6.06%). Thus for the entire period of the Price Revolution, from ca. 1520 to 1650, the English silver coinage lost 35.5% of its silver contents.[12] In the southern Low Countries (including Brabant), the silver coinage was debased ? in both fineness and weight ? a total of twelve times from 1521 to 1644: from 0.33 grams to 0.17 grams of fine silver in the penny, for an overall loss of 48.5%.[13]

A New Form of Debasement: The New “Fractional” Copper or Vellon Coinages in Spain and Elsewhere

In terms of the general theme of coinage debasement, a very major difference between Spain and these other two countries, from 1599, was the issue of a purely copper coinage called vellon, to which Hamilton devotes two major chapters.[14] Virtually all countries in late medieval and early modern Europe issued a series of petty or low-denomination “fractional” coins ? in various fractions of the penny, chiefly to enable the populace to buy such low-priced commodities as bread and beer (or wine). But in all later-medieval countries the issues of the petty, fractional coinage almost always accounted for a very small proportion of total mint outputs (well under 5% of the aggregate value in Flanders).[15] They were commonly known as monnaie noire (zwart geld in Flemish): i.e., black money, because they contained so much copper, a base metal. Indeed all coins? both silver and gold ? always required at least some copper content as a hardening agent, so that the coins did not suffer too much erosion or breakage in circulation.

The term “debasement” is in fact derived from the fact that the most common mechanism for reducing the silver contents of a coin had been to replace it with more and more copper, a great temptation for so many princes who often derived substantial seigniorage revenues from the increased mint outputs that debasements induced (in both reminting current coin and in attracting bullion from abroad). In this respect, England was an exception ? apart from the era of the Great Debasement (1542-1553) ? for its government virtually always maintained sterling silver fineness (92.5% silver, 7.5% copper), and reduced the silver contents for all denominations equally, by reducing the size and weight of the coin. In continental Europe, the extent of the debasement, whether by fineness or by weight, or by both together, did vary by the denomination (to compensate for the greater labor costs in minting the greater number of lower-valued coins); but the petty “black money” coins ? also known (in French) as billon, linguistically related to vellon, always contained some silver, and always suffered the same or roughly similar proportional reduction of silver as other denominations during debasements until 1543. In that year, the government of the Habsburg Netherlands was the first to break that link: in issuing Europe’s first all-copper coin. France followed suit with an all copper denier (1 d tournois) in 1577; but England did not do so until 1672.[16]

Hamilton gives the erroneous impression that Spain (i.e., Castile) was the first to do so, in issuing an all copper vellon coin in 1599. Previously, Spanish kings (at least from 1471) had issued a largely copper fractional coinage called blancas , with a nominal money-of-account value of 0.5 maraved?, but with a very small amount of silver ? to convince the public that it was indeed precious-metal “money.” The blanca issued in 1471 had a silver fineness of 10 grains or 3.47% (weighing 1.107g).[17] In 1497, that fineness was reduced to 7 grains (2.43% fine); in 1552, to 5.5 grains (1.909% fine); in 1566, to 4 grains (1.39% fine). In 1597, Philip II (1556-1598) had agreed to the issue of a maraved? coin itself, with, however, only 1 grain of silver (0.34% fine), weighing 1.576g.; but whether any were issued is not clear.[18]

Hamilton commends Philip II on his resolute stance on the issue vellon coinages: for, in “believing that it could be maintained at parity only by limitation of its quantity to that required for change and petty transactions, he was exceedingly careful to restrict the supply.”[19] That is a very prescient comment, in almost exactly stating the principle of maintaining a sound system of fractional or petty coinage that Carlo Cipolla (1956) later enunciated,[20] in turn inspiring the recent monograph on this subject by Sargent and Velde (2002).[21] But neither of them gave Hamilton (1934) any credit for this fundamentally important observation, one whose great importance Hamilton deduced from the subsequent, seventeenth-century history of copper coinages in Spain.

Thus, as indicated earlier, in the year following the accession of the aforementioned Philip III, 1599, the government issued Spain’s first purely copper coin (minted at 140 per copper marc of 230.047 g), and from 1602 at 280 per marc: i.e., reducing the weight by half from 1.643 g to 0.8216 g).[22] Certainly some of the ensuing inflation in seventeenth-century Spain, with a widening gap between nominal and silver-based prices, ranging from 4.0 percent in 1620 to 104.2 percent in 1650, has to be explained by such issues of a purely copper coinage. Indeed, in Hamilton’s very pronounced view, the principal cause of inflation in the first half of the seventeenth century lay in such vellon issues ? more of a culprit than the continuing influx of Spanish American silver.[23]

If, however, we use Hamilton’s own CPI based on the actual nominal prices produced with the circulation of the vellon copper coinage, from 1599-1600, we find that this index rose only 4.61 fold from the quinquennial mean of 1511-15 (98.98) to the mean of 1646-50 (457.07) ? again well less than the overall rise of the English and Brabant composite price indexes. Nevertheless, the differences between the silver-based and vellon-based price indexes in Spain for the first half of the seventeenth century are significant. For the former (silver), the CPI rose from a mean of 320.98 in 1596-1600 to one of 343.36 in 1646-50, an overall rise of just 6.97%. For the latter (vellon-based) index, the CPI rose to 457.09 in 1646-50, for a very substantial overall rise of 41.41%. What certainly did now differentiate Spain from the other two, and indeed almost all other European countries in this period, is that in all the latter countries the purely copper petty coinage formed such a very much smaller, indeed minuscule, proportion of the total coined money supply.[24]

The Evidence on Spanish-American Silver Mining and Silver Imports into Seville to 1600

What this discussion of the vellon coinage makes crystal clear is that Hamilton did not attribute all of the inflation of the Price Revolution era to the “abundant mines of the Americas.” Nevertheless many economic historians, after carefully examining Hamilton’s data on prices and imports of Spanish American bullion, noted ? as Hamilton himself clearly demonstrated ? that the Price Revolution had begun as early as the quinquennium 1516-20, long before, decades before, any significant amounts of Spanish American silver had reached Seville. Virtually none was imported in the 1520s; and an annual mean of only 5,090.8 kg in 1531-35.[25] The really substantial imports took place only after by far the two most important silver mines were brought into production: those of Potosi in “Peru” (modern-day Bolivia) in 1545, and Zacatecas, in Mexico, the following year, 1546. From that quinquennium of 1546-50, mean annual silver imports into Seville rose from 18,698.8 kg to 273,704.5 kg in the quinquennium of 1591-95, marking the peak of the silver imports. Between these two quinquennia, the total mined silver outputs of Potosi and Zacatecas (unknown to Hamilton) rose from an annual mean of 64,848.9 kg to one of 219,457.4 kg (indicating that silver was coming from other sources than just these two mines).[26] Even then, their production began to boom only with the application of the mercury amalgamation process (which Hamilton barely mentioned ? only on p. 16), greatly aided by abundant local supplies of mercury ? at Zacatecas, from about 1554-57, and at Potosi, from 1572.[27]

The Alternative Explanation for the Price Revolution: Population Growth

If all this evidence does indeed prove that the influx of Spanish silver was certainly not the initial cause of the European Price Revolution, surely the data should indicate that the subsequent influx of that silver, especially from the 1550s, very likely did play a significant role in fueling an ongoing inflation. But so many of the anti-monetarist historians leapt to an alternative ? and in my view ? false conclusion that population growth was the initial and the prime-mover in “causing” the Price Revolution.[28] My objections to this demographic-oriented thesis are two-fold.

In the first place, the now available evidence on demographic recovery and growth in England and the southern Low Countries (Brabant) does not at all correspond to the statistical evidence on inflation during the early phase of the Price Revolution ? in the early sixteenth century. For England the best estimate of population in the early 1520s, when the Price Revolution was already underway, is 2.25 or 2.30 million, about half of the most conservative estimate for England’s population in 1300: about 4.5 million ? an estimate still rejected by the majority of medieval economic historians, who prefer the more traditional estimate of 6.0 million.[29] If England in the early 1520s was obviously still very unpopulated, compared to its late-medieval peak, and if its population had just begun to recover, how could any such renewed growth, from such a very low level, have so immediately sparked inflation: how could it have caused a rise in the CPI (Phelps Brown and Hopkins) from a quinquennial mean of 96.70 (1451-75 = 100) in 1496-1500 to one of 146.05 in 1521-25?

We find a similar demographic situation in Brabant. From the 1437 census to the 1496 census, the number of registered households fell from 92,738 to just 75,343: a fall of 18.76 percent.[30] If we further assume that a fall in population also involved a decline in the average family or household size, the demographic decline would have been much greater than these data indicate. According to Herman Van der Wee (1963), Brabant, like England, did not commence its demographic recovery until the early sixteenth century; and his estimated average annual rate of population growth from 1496 to 1526 was 0.96%.[31] For this same period, Van der Wee’s CPI for Brabant shows a rise from 115.35 in 1496-1500 (again 1451-75 = 100) to one of 179.94 in 1521-25. How can any such renewed population growth explain that inflation?

In the second place, the arguments and analyses supplied involve faulty economics: an erroneous transfer of micro-economic analysis to macro-economics. One can well argue, for early-modern western Europe, that the effect of sustained population growth for the agrarian sector, with necessary additions of “marginal lands” that were generally inferior in fertility and more distant from markets, and without a widespread diffusion of technological changes to offset diminishing returns in this sector, inevitably led to sharply rising marginal costs. That in turn resulted in price increases for grains and other agricultural commodities (including timber) that were greater than those for non-agrarian and especially industrial commodities, certainly in both England and the southern Low Countries during the course of the sixteenth and first half of the seventeenth century.[32] But that basically micro-economic model concerning individual, relative commodity prices is, however, very different from a macro-economic model contending that population growth by itself led to an overall increase in the level of prices ? i.e., in the CPI.

We should remember that, almost 35 years ago, Donald McCloskey (1972), in a review of Ramsey (1971), responded to these demographic-oriented explanations of the Price Revolution by contending that, if both monetary variables (M and V) were held constant, then population growth (if translated into an increased T or y, in MV = Py) should have led to a fall in P, in the CPI. Nevertheless, there is some validity to the argument that population growth and changes in the demographic structures may have influenced the role of another monetary factor in the Price Revolution: namely changes in the income velocity of money, to be discussed as a separate topic later in this review.

Hamilton’s Explanations for the Origins of the Price Revolution before the Influx of Spanish Treasure: The Roles of Gold, South German Silver Mining, and Changes in Credit

How then did Hamilton ? and how do we ? explain the origins of the Spanish and indeed European-wide Price Revolution, in the early sixteenth century, i.e., for the period well before any significant influxes of American silver, and also before there was any significant population growth (at least in England and the Low Countries). Was Hamilton that ignorant of the implications of his own data? Certainly not. On p. 299, in his chapter XIII entitled “Why Prices Rose,” he stated that: “the gold imports from the Antilles significantly influenced Andalusian and New Castilian prices even in the first two decades of the sixteenth century,” without, however, elaborating that point any further.[33] More important are his observations on p. 301, where he explicitly moderates his emphasis on the role of Spanish-American treasure imports, in stating that: “Only at the beginning of the sixteenth century, when, as has been shown, colonial demand, credit expansion, and the increased output of German silver made themselves felt, and at the end of the century, when a devastating epidemic, and an over issue of vellon coinage took place, did other factors play important roles in the price upheaval [i.e., the Price Revolution].” Indeed, in his own view, the paramount role of the influxes of Spanish-American bullion apply to only, at most, 65 years of the 130 years of the Price Revolution era, i.e., to just half the era ? from ca. 1535 to 1600, though the evidence for that role seems to be more clear for just the half-century 1550-1600.

It is most regrettable that Hamilton himself failed to elaborate the role of any these factors, principally monetary, in producing inflation in early-sixteenth century Spain. Had he done so, surely he would have been spared the subsequent and really unfair criticism that he was offering a simplistic monocausal explanation of the Price Revolution, and one in the form of a very crude Quantity Theory of Money. The most important of “initial causes” that Hamilton lists was surely the question of “German silver,” or more specifically, the South-German and Central European silver-copper mining boom from about the 1460s to the 1540s. Where he derived his information is not clear, but from other footnotes it was presumably from the publications of two much earlier German economic historians, Adolf Soetbeer and Georg Wiebe. The latter was, in fact, the first to write a major monograph on the Price Revolution (Geschichte der Preisrevolution des XVI. und XVII. Jahrhunderts), and he seems to have coined (so to speak) the term.[34] The former, though a pioneer in trying to quantity both European and world supplies of precious metals, providing a significant influence on Wiebe, produced seriously defective data on German mining outputs in the later fifteenth and sixteenth centuries, greatly underestimating total outputs, as John Nef demonstrated in a seminal article published in 1941, subsequently elaborated in Nef (1952).[35] In Nef’s view, this South German mining boom may have quintupled Europe’s supply of silver by the 1530s, and thus before any major influx of Spanish-American silver.[36]

Since then a number of economic historians, me included, have published their research on this South German-Central European silver-copper mining boom.[37] These mountainous regions contained immensely rich ores bearing these two metals, which, however were largely inaccessible for two reasons: first, there was no known method of separating the two metals in smelting the argentiferous-cupric ores; and second, the ever-present danger of flooding in the regions containing these ore bodies made mined extraction very difficult and costly. In my view, the very serious deflation that Europe experienced during the second of the so-called “bullion famines,” from the 1440s to the 1460s, provided the profit incentive for the necessary technological changes to resolve these two problems. Consider that since virtually all of Europe’s money-of-account pricing system was based on, tied to, the silver coinage, deflation (low prices) ipso facto meant a corresponding rise in the real value of silver, gram per gram (just as inflation means a fall in the real value of silver, per gram). The solutions lay in innovations in both mechanical engineering and chemical engineering. The first was the development of water-powered or horse-powered piston vacuum pumps (along with slanted drainage adits in the mountain sides) to resolve the water-flooding problem. The second was the so-called Saigerh?tten process by which lead was added to the ore-bodies in smelting (also using hydraulic machinery and the new blast furnaces) ? during the smelting process the lead combined with the silver to precipitate the copper, and the silver-lead amalgam was then resmelted to remove the lead.

Both processes were certainly in operation by the 1460s; and by my very conservative estimates, certainly incomplete, the combined outputs of mines in Saxony, Thuringia, Bohemia, Slovakia, Hungary, and the Tyrol rose from a quinquennial mean of 12,973.4 kg in 1471-75 (when adequate output data can first be utilized) to a peak production in 1536-40 (thus later than Nef’s estimates), with a quinquennial mean output of 55,703.8 kg ? a 4.29-fold increase overall (i.e.. 329.36% increase) ? close enough to Nef’s five-fold estimate, given the likely lacunae in the data.[38] Consider that this output, for the late 1530s, was not exceeded by Spanish-American silver influxes until a quarter of a century later, in 1561-65, when, thanks to the recently applied mercury amalgamation process, a quinquennial mean import of 83,373.92 kg reached Seville (compared to a mean import of just 27,145.03 in 1556-60).[39]

But where did all this Central European silver go? Historically, from the mid-fourteenth century, most of the German silver-mining outputs had been sent to Venice, whose merchants re-exported most of that silver to the Levant, in exchange for Syrian cotton and Asian spices and other luxury goods. Two separate factors helped to reverse the direction of that flow, down the Rhine, to Antwerp and the Brabant Fairs. The first was Burgundian monetary policy: debasements in 1466-67, which, besides attracting silver in itself, reversed a half-century long pro-gold mint policy to a pro-silver policy, offering a relative value for silver (in gold and in goods) higher than anywhere else in Europe.[40] Thus the combined Flemish and Brabantine mint outputs, measured in kilograms of fine silver rose from nil (0) in 1461-65 to 9,341.50 kg in 1476-80 ? though much of that was recycled silver coin and bullion in quite severe debasements. But in 1496-1500, after the debasements had ceased, the mean annual output in that quinquennium was 4,872.96 kg; and in 1536-40, at the peak of the mining boom (and, again, before any substantial Spanish-American imports) the mean output was 5,364.99 kg.[41]

The second factor in altering the silver flows was increasingly severe disruptions in Venice’s Levant trade with the now major Ottoman conquests in the Balkans and the eastern Mediterranean, from the 1460s (and especially from the mid-1480s) culminating (if not ending) with the Turkish conquest of the Mamluk Levant (i.e., Egypt, Palestine, Syria) itself in 1517 (along with conquests in Arabia and the western Indian Ocean). While we have no data on silver flows, we do have data for the joint-product of the Central European mining boom ? copper, a very important export as well to the Levant. In 1491-95, 32.13% of the Central European mined copper outputs went to Venice, but only 5.22% went to Antwerp; by 1511-15, the situation was almost totally reversed: only 3.64% of the mined copper went to Venice, while 58.36% was sent to Antwerp. May we conjecture that there was a related shift in the flows of silver? By the 1530s, the copper flows to Venice, which now had more peaceful relations with the Turks, had risen to 11.07%, but 53.88% of the copper was still being sent to the Antwerp Fairs.[42] Of course, by this time the Portuguese, having made Antwerp the European staple for their recently acquired Indian Ocean spice trade (1501), were shipping significant (if unmeasurable) quantities of both copper and silver to the East Indies. Then in 1549, the Portuguese moved their staple to Seville, to gain access to the now growing imports of Spanish-American silver.

The Early Sixteenth-century “Financial Revolutions”: In Private and Public Credit

The other monetary factor that Hamilton mentioned ? but never discussed ? to help explain the rise of prices in early sixteenth-century Spain was the role of credit. Indeed, as Herman Van der Wee (1963, 1967, 1977, 2000) and others have now demonstrated, the Spanish Habsburg Netherlands experienced a veritable financial revolution involving both negotiability and organized markets for public debt instruments. As for the first, the lack of legal and institutional mechanisms to make medieval credit instruments fully negotiable had hindered their ability to counteract frequent deflationary forces; and at best, such credit instruments (such as the bill of exchange) could act only to increase ? or decrease ? the income velocity of money.[43] The first of two major institutional barriers was the refusal of courts to recognize the legal rights of the “bearer” to collect the full proceeds of a commercial bill on its stipulated redemption date: i.e., the financial and legally enforceable rights of those who had purchased or otherwise licitly acquired a commercial bill from the designated payee before that redemption date. Indeed, most medieval courts were reluctant to recognize the validity of any “holograph” bill: those that not been officially notarized and registered with civic authorities. The second barrier was the Church’s usury doctrine: for, any sale and transfer of a credit instrument to a third party before the stipulated redemption date would obviously have had to be at some rate of discount ? and that would have revealed an implicit interest payment in the transaction. Thus this financial revolution, in the realm of private credit, in the Low Countries involved the role of urban law courts (law-merchant courts), beginning with Antwerp in 1507, then most of other Netherlander towns, in guaranteeing such rights of third parties to whom these bills were sold or transferred. Finally, in the years 1539-1543, the Estates General of the Habsburg Netherlands firmly established, with national legislation, all of the legal requirements for full-fledged negotiability (as opposed to mere transferability) of all credit instruments: to protect the rights of third parties in transferable bills, so that bills obligatory and bills of exchange could circulate from hand to hand, amongst merchants, in commercial and financial transactions. One of the important acts of the Estates-General, in 1543 ? possibly reflecting the growing influence of Calvinism ? boldly rejected the long-held usury doctrine by legalizing the payment of interest, up to a maximum of 12% (so that anything above that was now “usury”).[44] England’s Protestant Parliament, under Henry VIII, followed suit two years later, in 1545, though with a legal maximum interest of 10%.[45] That provision thereby permitted the openly public discounting of commercial credit instruments, though this financial innovation was slow to spread, until accompanied, by the end of the sixteenth century, with the much more common device of written endorsements.[46]

The other major component of the early-sixteenth century “financial revolution” lay in public finance, principally in the Spanish Habsburg Netherlands, France, much of Imperial Germany, and Spain itself ? in the now growing shift from interest-bearing government loans to the sale of annuities, generally known as rentes or renten or (in Spain) juros, especially after several fifteenth-century papal bulls had firmly established, once and for all, that they were not loans (a mutuum, in both Roman and canon law), and thus not subject to the usury ban.[47] Those who bought such rentes or annuities from local, territorial, or national governments purchased an annual stream of income, either for a lifetime, or in perpetuity; and the purchaser could reclaim his capital only by finding some third party to purchase from him the rente and the attached annuity income. That, therefore, also required both the full legal and institutional establishment of negotiability, with now organized financial markets.

In 1531, Antwerp, now indisputably the commercial and financial capital of at least northern Europe, provided such an institution with the establishment of its financial exchange, commonly known as the beurse (the “purse” ? copied by Amsterdam in 1608, and London in 1695, in its Stock Exchange). Thanks to the role of the South German merchant-bankers ? the Fuggers, Welsers, H?chstetters, Herwarts, Imhofs, and Tuchers ? the Antwerp beurse played a major role in the international marketing of such government securities, during the rest of the sixteenth century, in particular the Spanish juros, whose issue expanded from 3.586 million ducats (escudos of 375 maraved?s) in 1516 to 80.040 million ducats in 1598, at the death of Philip II ? a 22.4-fold increase. Most these perpetual and fully negotiable juros were held abroad.[48] According to Herman Van der Wee (1977), this sixteenth-century “age of the Fuggers and [then] of the Genoese [merchant-bankers, who replaced the Germans] was one of spectacular growth in public finances.”[49] Finally, it is important to note the relationship between changes in money stocks and issues of credit. For, as Frank Spooner (1972) observed (and documented in his study of European money and prices in the sixteenth century), even anticipated arrivals of Spanish treasure fleets would induce these South German and Genoese merchant-bankers to expand credit issues by some multiples of the perceived bullion values.[50]

The Debate about Changes in the Income Velocity of Money (or Cambridge “k”)

The combined effect of this “revolution” in both private and public finance was to increase both the effective supply of money ? in so far as these negotiable credit instruments circulated widely, as though they were paper money ? and also, and even more so, the income velocity of money. This latter concept brings up two very important issues, one involving Hamilton’s book itself, in particular his interpretation of the causes of the Price Revolution. Most postwar (World War II) economic historians, myself included (up to now, in writing this review), have unfairly regarded Hamilton’s thesis as a very crude, simplistic version of the Quantity Theory of Money. That was based on a careless reading (mea culpa!) of pp. 301-03 in his Chapter XIII on “Why Prices Rose,” wherein he stated, first, in explaining the purpose his Chart 20,[51] that:

The extremely close correlation between the increase in the volume of [Spanish-American] treasure imports and the advance ofcommodity prices throughout the sixteenth century, particularly from 1535 on, demonstrates beyond question that the “abundant mines of America” [i.e., Adam Smith’s description] were the principal cause of the Price Revolution in Spain. We should note, first, that the “close correlation” is only a visual image from the graph, for he never computed any mathematical correlations (few did in that prewar era). Second, Ingrid Hammarstr?m was perfectly correct in noting that Hamilton’s correlation between the annual values of treasure imports (gold and silver in pesos of 450 marevedis) and the composite price index is not in accordance with the quantity theory, which seeks to establish a relationship between aggregates: i.e., the total accumulated stock of money (M) and the price level (P).[52] But that would have been an impossible task for Hamilton. For, if he had added up the annual increments from bullion exports in order to arrive at some estimate of accumulated bullion stocks, he would have had to deduct from that estimate the annual outflows of bullion, for which there are absolutely no data. Furthermore, estimates of net (remaining) bullion stocks are not the same as estimates of the coined money stock; and the coined money stock does not represent the total supply of money.[53]

Third, concerning Hamilton’s views on the Quantity Theory itself, his important monetary qualifications concerning the early sixteenth century and first half of the seventeenth century have already been noted. We should now note his further and very important qualification (p. 301), as follows: “The reader should bear in mind that a graphic verification of that crude form of the quantity theory of money which takes no account of the velocity of circulation is not the purpose of Chart 20.” He did not, however, discuss this issue any further; and it is notable that his bibliography does not list Irving Fisher’s classic 1911 monograph, which had thoroughly analyzed his own concepts of the Transactions Velocity of Money.[54]

Most economics students are familiar with Fisher’s Equation of Exchange, to explain the Quantity Theory of Money in a much better fashion than nineteenth-century Classical Economists had done: namely, MV = PT. If many continue to debate the definition of M, as high-powered money, and of P ? i.e., on how to construct a valid weighted CPI ? the most troublesome aspect is the completely amorphous and unmeasurable “T” ? as the aggregate volume of total transactions in the economy in a given year. Many have replaced T with Q: the total volume of goods and services produced each year. But the best substitute for T is “y” (lower case Y: a version attributed to Milton Friedman) ? i.e., a deflated measure of Keynesian Y, as the Net National Product = Net National Income (by definition).[55]

The variable “V” thus becomes the income velocity of money (rather than Fisher’s Transactions Velocity) ? of the unit of money in the creation of the net national income in the course of a year. It is obviously derived mathematically by this equation: V = Py/M (and Py of course equals the current nominal value of NNI). Almost entirely eschewed by students (my students, at least), but much preferred by most economists, is the Cambridge Cash Balances equation: whose modernized form would similarly be M = kPy, in which Cambridge “k” represents that share of the value of Net National Income that the public chooses to hold in real cash balances, i.e., in high-powered money (a straight tautology, as is the Fisher Equation). We should be reminded that both V and k are mathematically linked reciprocals in that: V = 1/k and thus k = 1/V. Keynesian economists would logically (and I think, rightly) contend that ceteris paribus an increase in the supply of money should lead to a reduction in V and thus to an increase in Cambridge “k.” If V represents the extent to which society collectively seeks to economize on the use of money, the necessity to do so would diminish if the money supply rises (indeed, to create an “excess”). But this result and concept is all the more clear in the Cambridge Cash Balances approach. For the opportunity cost of “k” ? of holding cash balances ? is to forgo the potential income from its alternative use, i.e., by investing those funds. If we assume that the Liquidity Preference Schedule is (in the short run) fixed ? in terms of the transactions, precautionary, and speculative motives for holding money ? then a rightward shift of the Money Supply schedule along the fixed or stationary LP schedule should have led to a fall in the real rate of interest, and thus in the opportunity cost of holding cash balances. And if that were so, then “k” should rise (exactly reflecting the fall in V).

What makes this theory so interesting for the interpretation of the causes of at least the subsequent inflations of the Price Revolution ? say from the 1550s or 1560s ? is that several very prominent economic historians have argued that an equally or even more powerful force for inflation was a continuing rise in V, the income velocity of money (i.e., and thus to a fall in “k”): in particular, Harry Miskimin (1975), Jack Goldstone (1984, 1991a, 1991b), and Peter Lindert (1985). Furthermore, all three have related this role of “V” to structural changes in the economy brought about by population growth. Their theories are too complex to be discussed here, but the most intriguing, in summary, is Goldstone’s thesis. He contended, in referring to sixteenth-century England, that its population growth was accompanied by a highly disproportionate growth in urbanization, a rapid and extensive development of commercialized agriculture, urban markets, and an explosive growth in the use of credit instruments. In such a situation, with a rapid growth “in occupationally specialized linked networks, the potential velocity of circulation of coins grows as the square of the size of the network.” Lindert’s somewhat simpler view is that demographic growth was also accompanied by a two-fold set of changes: (1) changes in relative prices ? in the aforementioned steep rise in agricultural prices, rising not only above industrial prices, but above nominal wages, thus creating severe household budget constraints; and (2) in pyramidal age structures, and thus with changes in dependency ratios (between adult producers and dependent children) that necessitated both dishoarding and a rapid reduction in Cambridge “k” ( = rise in V).

Those arguments and the apparent contradiction with traditional Keynesian theory on the relationships between M and V (or Cambridge “k”) intrigued and inspired Nicholas Mayhew (1995), a renowned British medieval and early-modern monetary historian, to investigate these propositions over a much longer period of time: from 1300 to 1700.[56] He found that in all periods of monetary expansion during these four centuries, the Keynesian interpretation of changes in V or “k” held true, with one singular anomalous exception: the sixteenth and early seventeenth-century Price Revolution. That anomaly may (or may not) be explained by the various arguments set forth by Miskimin, Goldstone, and Lindert.

The Debates about the Spanish and European Distributions of Spanish American “Treasure” and the Monetary Approach to the Balance of Payments Theorem

We may now return to Hamilton’s own considerations about the complex relationships between the influx of Spanish-American silver and its distribution in terms of various factors influencing (at least implicitly) the “V” and “y” variables, in turn influencing changes in P (the CPI). He contends first (pp. 301-02) that “the increase in the world stock of precious metals during the sixteenth century was probably more than twice ? possibly as much as four times ? as great as the advance of prices” in Spain. He speculates, first, that some proportion of this influx was hoarded or converted, not just by the Church, in ecclesiastical artifacts, but also by the Spanish nobility (thus leading to a rise in “k”), while a significantly increasing proportion was exported in trade with Asia, though mentioning only the role of the English East India Company (from 1600), surprisingly ignoring the even more prominent contemporary role of the Dutch, and the much earlier role of the Portuguese (from 1501, though the latter used principally South German silver). We now estimate that of the total value of European purchases made in Asia in late-medieval and early modern eras, about 65-70 percent were paid for in bullion and thus only 25-30 percent from the sale of European merchandise in Asia.[57] Finally, Hamilton also fairly speculated that “the enhanced production and exchange of goods which accompanied the growth of population, the substitution of monetary payments for produce rents [in kind] … and the shift from wages wholly or partially in kind to monetary remunerations for services, and the decrease of barter tended to counteract the rapid augmentation of gold and silver money:” i.e., a combination of interacting factors that affected both Cambridge “k” and Friedman’s “y.” Clearly Hamilton was no simplistic proponent of a crude Quantity Theory of Money.

From my own studies of monetary and price history over the past four decades, I offer these observations, in terms of the modernized version of Fisher’s Equation of Exchange, for the history of European prices from ca. 1100 to 1914. An increase in M virtually always resulted in some degree of inflation, but one that was usually offset by some reduction in V (increase in ” k”) and by some increase in y, especially if and when lower interest rates promoted increased investment.[58] Thus the inflationary consequences of increasing the money supply are historically indeterminate, though usually the price rise was, for these reasons, less than proportional to the increase in the monetary stock, except when excessively severe debasements created a veritable “flight from coinage,” when coined money was exchanged for durable goods (i.e., another instance in which an increase in M was accompanied by an increase in V).[59]

One of the major issues related to this debate about the Price Revolution is the extent to which the Spanish-American silver that flowed into Spain soon flowed out to other parts of Europe (i.e., apart from the aggregate European bullion exports to Asia and Russia). There is little mystery in explaining how that outflow took place. Spain, under both Charles V (I of Spain) and Philip II, ruled a vast, far-flung empire: including not only the American colonies and the Philippines, but also the entire Low Countries, and major parts of Germany and Italy, and then Portugal and its colonies from 1580 to 1640. Maintaining and defending such a vast empire inevitably led to war, almost continuous war, with Spain’s neighbors, especially France. Then, in 1568, most of the Low Countries (Habsburg Netherlands) revolted against Spanish rule, a revolt that (despite a truce from 1609 to 1621) merged into the Thirty Years War (1618-48), finally resolved by the Treaty of Westphalia. As Hamilton himself suggests (but without offering any corroborative evidence ? nor can I), vast quantities of silver (and gold) thus undoubtedly flowed from Spain into the various military theaters, in payment for wages, munitions, supplies, and diplomacy, while the German and then Genoese bankers presumably received considerable quantities of bullion (or goods so purchased) in repayment of loans.[60] Other factors that Hamilton suggested were: adverse trade balances, or simply expanding imports, especially from Italy and the Low Countries (with an increased marginal propensity to import); and operations of divergent bimetallic mint ratios. What role piracy and smuggling actually played in this international diffusion of precious metals cannot be ascertained.[61]

But Outhwaite (1969, 1982), in analyzing the monetary factors that might explain the Price Revolution in Tudor and early Stuart England, asserted (again with no evidence) that: “Spanish silver … appears to have played little or no part before 1630 and a very limited one thereafter.”[62] That statement, however, is simply untrue. For, as Challis (1975) has demonstrated, four of the five extant “Melting Books,” tabulating the sources of bullion for London’s Tower Mint, between 1561 and 1599, indicate that Spanish silver accounted for proportions of total bullion coined that ranged from a low of 75.0% (1561-62) to a high of 86.3% (1584-85). The “melting books” also indicate that almost all of the remaining foreign silver bullion brought to the Tower Mint came from the Spanish Habsburg Low Counties (the southern Netherlands, which the Spanish had quickly reconquered).[63] Furthermore, if we ignore the mint outputs during the Great Debasement (1542-1553) and during the Elizabethan Recoinage (1561-63), we find that the quantity of silver bullion coined in the English mints rose from a quinquennial mean of 1,089.012 kg in 1511-15 (at the onset of the Price Revolution) to a peak of 18,653.36 kg in 1591-95, after almost four decades of stable money: a 17.13 fold increase. Over this same period, the proportion of the total value of the aggregate mint outputs accounted for by silver rose from 12.32% to 90.35% ? and (apart from the Great Debasement era) without any significant change in the official bimetallic ratio.[64]

Those economists who favor the Monetary Approach to the Balance of Payments Theorem in explaining inflation as an international phenomenon would contend that we do not have to explain any specific bullion flows between individual countries, and certainly not in terms of a Hume-Turgot price-specie flow mechanism.[65] In essence, this theorem states that world bullion stocks (up to 1914, with a wholesale shift to fiat money) determine the overall world price level; and that individual countries, through international arbitrage and the “law of one price,” undergo the necessary adjustments in establishing a commensurate domestic price level and the requisite money supply (in part determined by changes in private and public credit) ? not just through international trade in goods and services, but especially in capital flows (exchanging assets for money) at existing exchange rates, without specifically related bullion flows.

Nevertheless, in the specific case of sixteenth century England, we are naturally led to ask: where did all this silver come from; and why did England shift from a gold-based to a silver-based economy during this century? More specifically, if Nicholas Mayhew (1995) is reasonably close in his estimates of England’s Y = Gross National Income (Table I, p. 244), from 1300 to 1700, as measured in the silver-based sterling money-of-account, that it rose from about ?3.5 million pounds sterling in 1470 (with a population of 2.3 million) to ?40.88 million pound sterling in 1670 (a population of 5.0 million) ? an 11.68-fold increase ? then we again may ask this fundamental question. Where did all these extra pounds sterling come from in maintaining that latter level of national income? Did they come from an increase in the stock of silver coinages, and/or from a vast increase in the income velocity of money? Indeed that monetary shift from gold to silver may have had some influence on the presumed increase in the income velocity of money since the lower-valued silver coins had a far greater turnover in circulation than did the very high-valued gold coins.[66]

Statistical Measurements of the Impact of Increased Silver Supplies: Bimetallic Ratios and Inflation

There are two other statistical measures to indicate the economic impact within Europe itself of the influx of South German and then Spanish American silver during the Price Revolution era, i.e., until the 1650s. The first is the bimetallic ratio. In England, despite the previously cited evidence on its relative stability in the sixteenth-century, by 1660, the official mint ratio had risen to 14.485:1 (from the low of 10.333:1 in 1464).[67] In Spain, the official bimetallic ratio had risen from 10.11:1 in 1497 to 15.45:1 in 1650; and in Amsterdam, the gold:silver mint ratio had risen from 11.21 in 1600 to 13.93:1 in 1640 to 14.56:1 in 1650.[68] These ratios indicate that silver had become relatively that much cheaper than gold from the early sixteenth to mid-seventeenth century; and also that, despite very significant European exports of silver to the Levant and to South Asia and Indonesia in the seventeenth century, Europe still remained awash with silver.[69] At the same time, it is also a valid conjecture that the greatest impact of the influx of Spanish American silver (and gold) in this era was to permit a very great expansion in European trade with Asia, indeed inaugurating a new era of globalization.

The second important indicator of the change in the relative value of silver is the rise in the price level: i.e., of inflation itself. As noted earlier, the English CPI experienced a 6.77-fold from 1511-15 to 1646-50, at the very peak of the Price Revolution; and the Brabant CPI experienced a 7.36-fold rise over the very same period (expressed in annual means per quinquennium).[70] Since these price indexes are expressed in terms of silver-based moneys-of-account, that necessarily meant that silver, gram per gram, had become that much cheaper in relation to tradable goods (as represented in the CPI) ? though, as noted earlier, the variations in the rates of change in these CPI are partly explained by differences in their respective coinage debasements.

A Comparison of the Data on Spanish-American Mining Outputs and Bullion Imports (into Seville)

Finally, how accurate are Hamilton’s data on the Spanish-American bullion imports? We can best gauge that accuracy by comparing the aggregate amount of fine silver bullion entering Seville with the now known data on the Spanish-American silver-mining outputs, for the years for which we have data for both of these variables: from 1551 to 1660.[71] One will recall that the Potosi mines were opened only in 1545; and those of Zacatecas in 1546; and recall, furthermore, that production at both began to boom only with the subsequent application of the mercury amalgamation process (not fully applied until the 1570s). The comparative results are surprisingly close. In that 110-year period permitting this comparison, total imports of fine silver, according to Hamilton, amounted to 16,886,815.3 kg; and the combined outputs from the Potosi and Zacatecas mines was very close to that figure: 17,057,938.2 kg.[72] It is also worth noting that the outputs from the Spanish-American mines and the silver imports both peak in the same quinquennium: 1591-95, when the annual mean mined silver output was 219,457.4 kg and the annual mean silver import was 272,704.5 kg. By 1626-30, the mean annual mined output had fallen 18.7% to 178,490.0 kg and the mean annual import had fallen even further, by 24.7%, to 206,045.26 kg (both sets of data indicate that the silver imports for these years were not based just on these two mines). Thereafter, the fall in imports is much more precipitous: declining by 86.4%, to an annual mean import of just 27,965.33 kg in the final quinquennium of recorded import data, in 1656-60. The combined mined output of the Potosi and Zacatecas mines also fell during this very same period, but not by as much: declining by 27.1%, with a mean output of 130,084.23 kg in 1656-60: i.e., a mean output that was 4.65 times more than the mean silver imports into Seville in that quinquennium.

The decline in the Spanish-American mining outputs of silver can be largely attributed to the expected rate of diminishing returns in a natural-resource industry without further technological changes. The differences between the two sets of data, on output and imports, were actually suggested by Hamilton himself (even though he lacked any knowledge of the Spanish-American production figures for this era): a higher proportion of the silver was being retained in the Spanish Americas for colonial economic development, and also for export (from Acapulco, in Mexico) across the Pacific to the Philippines and China, principally for the silk trades. Indeed, as TePaske (1983) subsequently demonstrated, the share of pubic revenues of the Viceroyalty of Peru retained for domestic development rose from 40.8% in 1591-1600 to a peak of 98.9% in 1681-90. We have no comparable statistics for the much less wealthy Mexico (in New Spain); but TePaske also supplies data on its silver exports to the Philippines. Those exports rose from an annual mean of 1,191.2 kg in 1591-1600 (4.8% of Mexican total silver outputs) to a peak of 9,388.2 kg in 1631-40 (29.6% of the total silver outputs). Though declining somewhat thereafter, such exports then recovered to 4,990.0 kg in 1681-90 (29.0% of the total silver outputs).[73]

The Morineau Challenge to Hamilton’s Data: Speculations on Post-1660 Bullion Imports and Deflation

Hamilton’s research on Spanish-American bullion imports into Seville ceased with the year, 1660, because that latter date marked “the termination of compulsory registration of treasure” at Seville.[74] Subsequently, the French economic historian Michel Morineau (1968, 1985) sought to remedy the post-1660 lacuna of bullion import data by extrapolating statistics from Dutch gazettes and newspapers. In doing so, contended that Spanish-American bullion imports strongly revived after the 1660s, a view that most historians have uncritically accepted.[75] But his two publications on this issue present a number of serious problems. First, there is the problem of comparing Spanish apples (actual data on bullion imports) with Dutch oranges (newspaper reports, many being speculations). Second, the statistics in the two publications differ strongly from each other. Third, except for one difficult-to-decipher semi-logarithmic graph, they do not provide specific data that allow us to distinguish clearly between gold and silver imports, either by weight or value.[76] Fourth, the statistics on bullion imports are vastly larger in kilograms of metal than those recorded for Spanish American mining outputs, and also differ radically in the trends recorded for the Spanish-American mining output data.[77]

Nevertheless, these Spanish American mining output data do indicate some considerable recovery in production in the later seventeenth century. Thus, while the output of the Potosi mines continued to fall in the later seventeenth century (to a mean of 56,884.9 kg in 1696-1700, and to one of just 30,990.86 kg in 1711-15), those at Zacatecas recovered from the low of 26,373.4 kg in 1656-60 to more than double, reaching an unprecedented peak of 64,139.87 kg in 1676-80. Then, shortly after, a new and very important Mexican silver mine was developed at Sombrerete, producing an annual mean output of 30,492.83 kg in 1681-85. Thus the aggregate (known) Spanish-American mining output rose from a low 101,533.96 kg in 1661-65 (mean annual output) to a high of 143,212.93 kg in 1686-90: a 1.41-fold increase.[78]

Whatever are the actual figures for the imports of Spanish-American silver between the 1660s and the 1690s, we are in fact better informed about the export of precious metals, primarily silver, by the two East India Companies: in those four decades, the two companies exported a total of 1,3345,342.0 kg of fine silver to Asia.[79] An indication of some relative West European scarcity of coined silver money, from the 1660s to the 1690s, can be found in the Consumer Price Indexes for both England and Brabant. In England, the quinquennial mean CPI (1451-75=100) fell from the Price Revolution peak of 734.39 in 1646-50 to a low of 547.58 in 1686-90: a fairly dramatic fall of 25.43%. By that time, however, the London Goldsmiths’ development of deposit and transfer banking, with fully negotiable promissory notes and rudimentary paper bank notes, was providing a financial remedy for any such monetary scarcity ? as did the subsequent vast imports of gold from Brazil.[80] Similarly, in Brabant, the quinquennial mean CPI (1451-75=100) fell from the aforementioned peak of 1015.138 in 1646-50 to a low of 652.217 ? an even greater fall of 35.8% ? similarly in 1686-90. In Spain (New Castile), the deflation commenced somewhat later, according to Hamilton (1947), who, for this period, used a CPI whose base is 1671-80=100. From a quinquennial mean peak of 103.5 in 1676-80 (perhaps reflecting the ongoing vellon inflation), the CPI fell to a low 59.0 in 1686-90 (an even more drastic fall of 43.0%): i.e., the very same period for deflationary nadir experienced in both England and Brabant.

These data are presented in Hamilton’s third major monograph (1947), which appeared thirteen years later, shortly after World War II, covering the period 1651-1800: in Table 5, p. 119. In between these two, Hamilton (1936), published his second monograph: covering the period 1351-1500 (but excluding Castile) One might thus be encouraged to believe that, thanks to Hamilton, we should possess a continuous “Spanish” price index from 1351-1800. Alas, that is not the case, for Hamilton kept shifting his price-index base for each half century over this period, without providing any overlapping price indexes or even similar sets of prices (in the maraved?s money-of-account) to permit (without exhaustive labor) the compilation of such a continuous price index.[81] That, perhaps, is my most serious criticism of Hamilton’s scholarship in these three volumes (though not of his journal articles), even if he has provided an enormous wealth of price data for a large number of commodities over these four and one-half centuries (and also voluminous wage data).[82]

Supplementary Criticisms of Hamilton’s Data on Gold and Silver Imports

One of the criticisms leveled against Morineau’s monetary data ? that they do not allow us to distinguish between the influxes of gold and silver ? can also be made, in part, against Hamilton’s 1934 monograph. The actual registrations of Spanish American bullion imports into Seville, from 1503 to 1660, were by the aggregate value of both gold and silver, in money-of-account pesos that were worth 450 marevedis, each of which represented 42.29 grams pure silver (for the entire period concerned, in which, as noted earlier, no silver debasements took place). Those amounts, for both public and private bullion imports, are recorded in Table 1 (p. 34), in quinquennial means. His Table 2 (p. 40) provides his estimates ? or speculations ? of the percentage distribution of gold and silver imports, by decade, but by weight alone: indicating that from the 1530s to the 1550s, about 86% was in silver, and thereafter, to 1660, from 97% to 99% of the total was consistently always in silver.[83] His table 3 (p. 42) provides his estimate of total decennial imports of silver and gold in grams. What is lacking, however, is the distribution by value, in money-of-account terms, whether in maraved?s, pesos, or ducats (worth 375 maraved?s). Since these money-of-account values remained unchanged from 1497 to 1598, and with only a few changes in gold thereafter (to 1686), Hamilton should have calculated these values as well, utilizing as well his Table 4 gold:silver bimetallic ratios (p. 71). Perhaps this is a task that I should undertake ? but not now, for this review. A more challenging task to be explored is to analyze the impact of gold inflows, especially of Brazilian gold from the 1690s, on prices that are expressed almost everywhere in Europe in terms of a silver-based money of account (e.g., the pound sterling). Obviously one important consequence of increased gold inflows was the liberation of silver to be employed elsewhere in the economy: i.e., effectively to increase the supply of silver for the economy.

At the same time, we should realize that the typical dichotomy of the role of the two metals, so often given in economic history literature ? that gold was the medium of international trade while silver was the medium of domestic trade ? is historically false, especially when we view Europe’s commercial relations with the Baltic, Russia, the Levant, and most of Asia.[84]

Conclusions

EH.Net’s Classic Reviews Selection Committee was certainly justified in selecting Hamilton’s American Treasure and the Price Revolution in Spain, 1501-1650 as one of the “classics” of economic history produced in the twentieth century; and Duke University’s website (see note 1) was also fully justified in declaring that Hamilton was one of the pioneers of quantitative economy history. In his preface, Hamilton noted (p. xii) that he and his wife spent 30,750 hours in collecting and processing this vast amount of quantitative data on Spanish bullion imports and prices and wages, “entirely from manuscript material,” with another 12,500 hours of labor rendered by hired research assistants ? all of this work, about three million computations, done without electronic calcula

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):17th Century

El Pacífico hispanoamericano: política y comercio asiático en el Imperio Espanol (1680-1784)

Author(s):Bonialian, Mariano Ardash
Reviewer(s):Duggan, Marie Christine

Published by EH.Net (May 2014)

Mariano Ardash Bonialian, El Pacífico hispanoamericano: Política y comercio asiático en el Imperio Espanol (1680-1784) – La centralidad de lo marginal. México D.F.: El Colegio de México, Centro de Estudios Historicos, 2012. 490 pp. $36.36 (hardcover), ISBN: 978-607-462-344-4.

Reviewed for EH.Net by Marie Christine Duggan, Department of Economics, Keene State College.

Mariano Ardash Bonialian’s El Pacifico hispanoamericano complements David Igler’s recent work which has inspired a resurgence of U.S. academic interest in eighteenth century Pacific trade.  Igler attributes the take-off of Pacific commerce to James Cook’s voyages in 1768.[1]  Bonialian’s El Pacifico hispanoamericano reveals that Latin American merchants financed thriving commerce in an earlier period (1680 to 1740) between Manila, Acapulco, and Callao.  Using data on confiscated contraband and multiple proposals for reform from the archives of Lima, Mexico City, Manila, Seville, and Madrid, Bonialian explains why Spain actively sought to limit commerce in the Pacific, and identifies the strategies of actors in Mexico City and Lima to undermine the restrictions.  As recent research has clarified, business in Spanish America was neither private nor completely controlled by the state, but rather the Consulados de Mexico and Lima were corporate bodies of business families who were granted limited captive markets in return for support to the Crown such as loans in time of war.[2]   Bonialian’s thesis is that Asian imports via Manila increased the bargaining power of the Consulados of Mexico and Lima relative to the Consulado of Cadiz by reducing their dependence on Spanish goods.  In reaction, the Crown limited such Asian trade as a means to increase the bargaining power of Spanish merchants in the markets of the Viceroyalties of New Spain and Peru.

Chapter 1 reviews Spanish policy restricting Asian imports.  As early as 1593, Spain began to suppress the China trade.  However, in 1660 war with Britain led the Spanish state to seek extra revenue from the Consulados of Lima and Mexico.  The Crown sold the right to collect port taxes to the hispanic Consulados.  This gave the merchants of Mexico City and Lima greater autonomy with which to evade restrictions on Asian goods.  Spain had authorized two Manila galleons of specific tonnage per year, so the merchants of Mexico City stuffed them to the gills with extra cloth.  Bonialian notes that they used up space that should have gone to water in order to squeeze in this much merchandise.  Though the trip from Manila to Acapulco could take four to six months, the ships had only enough water for two months.

Chapter 2 illustrates that despite the multiple bans on Asian goods flowing from Acapulco to Callao since 1671, Acapulco was known not only as the gateway to Asia, but also as the path to Peru. Viceroy Duque de Linares pointed out in 1711 that since the state-sponsored fleet had arrived at Portobelo only once since 1696, Spanish restrictions on trade between Acapulco and Callao were simply handing profits to the French (indeed, Spain authorized French ships to sail to Callao and the Philippines between 1701 and 1726). Yet the detailed manner in which Linares wrote of that trade suggests he was involved as more than a spectator.  One loophole was permission to import mercury from Peru, on the grounds that it was essential for Mexico’s silver production.  Bonialian shows that Lima’s merchants picked up cacao in Guayaquil as well as mercury on their journey from Callao to Acapulco, bringing back Asian imports or Spanish products on the return.

Chapter 3 argues that not only Asian, but even Spanish goods flowed from Acapulco to Callao. The merchants of Cadiz over-wintered in New Spain in order particularly to make contact with Peruvians plying illict trade out of Acapulco.  Perhaps they found the prices offered by the New Spanish merchants too low, and hence looked for better prices from the Peruvians.  The possibility of staying in New Spain to negotiate gave, then, the Consulado de Cadiz a bargaining advantage over the Consulado de Mexico. Bonialian lists captains sailing ships along the Pacific coast between 1671 and 1712, along with the names of contraband ports.  He finds proof in a legal case that Pedro Sanchez de Tagle, head of the Consulado de Mexico at the time (1703), was the intended recipient of boxes of silver in payment for illegal traffic from Acapulco confiscated on the ship upon its return from Callao.

In Chapter 4, Bonialian considers the end of the thriving interregional trade in the Pacific around 1740.   British Captain Anson’s taking of a Manila galleon in 1743 may have caused the Consulado de Mexico to shrink from risking more capital on Asian imports[3], but Bonialian attributes decline in Manila-Acapulco trade to the makeshift Spanish policy of individual authorized ships (navios de registro) from Spain after 1739 – the year in which the British sacked the state-sponsored port for Peru, Portobelo (Panama). The Spanish ships brought Asian products from Europe, where Spanish merchants had bought them from the Dutch and French.  Officials in Lima wrote to Spain to ask whether Asian goods imported via Spain were contraband or not.  And of course if Asian goods were permitted via Spain, they had an excuse for arriving in the warehouses of Callao merchants even if purchased illicitly from Dutch, British, or French ships as well.

In Chapter 4, Bonialian also addresses the debate as to whether Carlos III (1759-1789) freed trade or consolidated government control.  Bonialian agrees with Stanley and Barbara Stein[4] that the term “free” cannot be applied to Bourbon Reform, which simply increased the number of Spanish and Latin American ports which could participate in the state-sponsored system. Late eighteenth century reform shifted interregional trade in Latin America from contraband to legal status so that the Crown could tax it and increase revenues.  The Spanish state took back control of tax collection in Mexico City in 1754.  Furthermore, Carlos III acted to increase the bargaining power of merchants of Spain relative to those of Mexico City or Lima.  Pacific reform gained urgency when Britain occupied Manila from 1762 to 1764. After expelling the Chinese businessmen who had cooperated with the British, Carlos III created a Consulado de Manila in 1769 and permitted its members to sail to China and India to purchase goods.  Yet membership in the Manila consulado required a capital of only 5,000 pesos (380) while members of the Consulado de Mexico had been putting up 50,000 to 100,000 pesos each, so it could not have been the Philippine Spanish who financed the Manila Acapulco trade. Indeed, as part of the reforms, Carlos III opened the trade with the Philippines to companies based in Spain (400). Though reformers hoped the Spanish companies would bypass the Consulado de Mexico by travelling to Asia via Africa, the old route to Spain via Mexico persisted.  Indeed, twenty percent of the Manila-Acauplco galleon’s business was financed by the Casa de Uztariz, with other business undertaken by the merchant guild of Madrid, the Cinco Gremios.  This evidence supports Bonialian’s argument that Carlos III’s logic was not to free trade, but rather to shift the gains from trade to Spanish merchants rather than those of Mexico City.

Because of the contraband nature of the trade, quantitative data are difficult to rely upon.  Bonialian presents tax revenues on European and Asian products from Mexico City, but mentions that he thinks it less than perfect.  Furthermore, we learn that goods confiscated from one merchant as contraband would be sold in Lima at auction, with the tacit agreement of members of the Consulado of Lima that the original merchants should win the bidding.  Hence the use of auctions to estimate wholesale prices a few pages later rings false.  Bonialian brings to light remarkably well the competitive logic that motivated the actors in various markets.  Econometricians may be able to build on his insights by exploring retail prices for Asian and Spanish products in regional markets.

As English-language literature tends to overlook the vibrancy of Spain’s Pacific commerce, so does Mexican economic history tend to relegate Baja and Alta California to obscurity.  Bonialian does discuss the port of San Blas used to supply California in the 1770s, but he overlooks that in 1697 the Viceroy Duque de Linares along with the Conde de Miravalle and the treasurer of Acapulco (Pedro Gil de la Sierpe) financed Jesuit expansion into California.[5]  Bonilian writes that the Philippines were unique as a colony of Mexico rather than Spain, but his naming of actors in contraband Pacific trade permits us to see Mexican agents of commerce as responsible for expansion into Baja California as well.  All the more reason to read this fine work of original scholarship.

Notes:
1. David Igler (2013). The Great Ocean: Pacific Worlds from Captain Cook to the Gold Rush. New York: Oxford University Press, p. 13.

2. Guillermina del Valle Pavon (2012). Finanzas piadosas y redes de negocios: Los mercaderes de la ciudad de México ante la crisis de Nueva Espana, 1804-1808.  México: Instituto Mora.

3. Yuste Lopez, Carmen (2007). Emporios transpacificos: Comerciantes mexicanos en Manila, 1710-1815. Universidad Nacional Autónoma de Mexico, 2007.

4. Stanley Stein and Barbara Stein (2003). Apogee of Empire: Spain and New Spain in the Age of Charles III, 1759-1789. Baltimore: Johns Hopkins University Press.

5. María del Carmen Velázquez (1985). El fondo piadoso de las misiones de Californias. Mexico: Secretaría de relaciones exteriors.

Marie Duggan is researching a book to be titled Behind the Veil of 1848: Piety and Profits in Spanish California.  mduggan@keene.edu

Copyright (c) 2014 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (May 2014). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Economic Planning and Policy
International and Domestic Trade and Relations
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):17th Century
18th Century

The American Economy during World War II

Christopher J. Tassava

For the United States, World War II and the Great Depression constituted the most important economic event of the twentieth century. The war’s effects were varied and far-reaching. The war decisively ended the depression itself. The federal government emerged from the war as a potent economic actor, able to regulate economic activity and to partially control the economy through spending and consumption. American industry was revitalized by the war, and many sectors were by 1945 either sharply oriented to defense production (for example, aerospace and electronics) or completely dependent on it (atomic energy). The organized labor movement, strengthened by the war beyond even its depression-era height, became a major counterbalance to both the government and private industry. The war’s rapid scientific and technological changes continued and intensified trends begun during the Great Depression and created a permanent expectation of continued innovation on the part of many scientists, engineers, government officials and citizens. Similarly, the substantial increases in personal income and frequently, if not always, in quality of life during the war led many Americans to foresee permanent improvements to their material circumstances, even as others feared a postwar return of the depression. Finally, the war’s global scale severely damaged every major economy in the world except for the United States, which thus enjoyed unprecedented economic and political power after 1945.

The Great Depression

The global conflict which was labeled World War II emerged from the Great Depression, an upheaval which destabilized governments, economies, and entire nations around the world. In Germany, for instance, the rise of Adolph Hitler and the Nazi party occurred at least partly because Hitler claimed to be able to transform a weakened Germany into a self-sufficient military and economic power which could control its own destiny in European and world affairs, even as liberal powers like the United States and Great Britain were buffeted by the depression.

In the United States, President Franklin Roosevelt promised, less dramatically, to enact a “New Deal” which would essentially reconstruct American capitalism and governance on a new basis. As it waxed and waned between 1933 and 1940, Roosevelt’s New Deal mitigated some effects of the Great Depression, but did not end the economic crisis. In 1939, when World War II erupted in Europe with Germany’s invasion of Poland, numerous economic indicators suggested that the United States was still deeply mired in the depression. For instance, after 1929 the American gross domestic product declined for four straight years, then slowly and haltingly climbed back to its 1929 level, which was finally exceeded again in 1936. (Watkins, 2002; Johnston and Williamson, 2004)

Unemployment was another measure of the depression’s impact. Between 1929 and 1939, the American unemployment rate averaged 13.3 percent (calculated from “Corrected BLS” figures in Darby, 1976, 8). In the summer of 1940, about 5.3 million Americans were still unemployed — far fewer than the 11.5 million who had been unemployed in 1932 (about thirty percent of the American workforce) but still a significant pool of unused labor and, often, suffering citizens. (Darby, 1976, 7. For somewhat different figures, see Table 3 below.)

In spite of these dismal statistics, the United States was, in other ways, reasonably well prepared for war. The wide array of New Deal programs and agencies which existed in 1939 meant that the federal government was markedly larger and more actively engaged in social and economic activities than it had been in 1929. Moreover, the New Deal had accustomed Americans to a national government which played a prominent role in national affairs and which, at least under Roosevelt’s leadership, often chose to lead, not follow, private enterprise and to use new capacities to plan and administer large-scale endeavors.

Preparedness and Conversion

As war spread throughout Europe and Asia between 1939 and 1941, nowhere was the federal government’s leadership more important than in the realm of “preparedness” — the national project to ready for war by enlarging the military, strengthening certain allies such as Great Britain, and above all converting America’s industrial base to produce armaments and other war materiel rather than civilian goods. “Conversion” was the key issue in American economic life in 1940-1942. In many industries, company executives resisted converting to military production because they did not want to lose consumer market share to competitors who did not convert. Conversion thus became a goal pursued by public officials and labor leaders. In 1940, Walter Reuther, a high-ranking officer in the United Auto Workers labor union, provided impetus for conversion by advocating that the major automakers convert to aircraft production. Though initially rejected by car-company executives and many federal officials, the Reuther Plan effectively called the public’s attention to America’s lagging preparedness for war. Still, the auto companies only fully converted to war production in 1942 and only began substantially contributing to aircraft production in 1943.

Even for contemporary observers, not all industries seemed to be lagging as badly as autos, though. Merchant shipbuilding mobilized early and effectively. The industry was overseen by the U.S. Maritime Commission (USMC), a New Deal agency established in 1936 to revive the moribund shipbuilding industry, which had been in a depression since 1921, and to ensure that American shipyards would be capable of meeting wartime demands. With the USMC supporting and funding the establishment and expansion of shipyards around the country, including especially the Gulf and Pacific coasts, merchant shipbuilding took off. The entire industry had produced only 71 ships between 1930 and 1936, but from 1938 to 1940, commission-sponsored shipyards turned out 106 ships, and then almost that many in 1941 alone (Fischer, 41). The industry’s position in the vanguard of American preparedness grew from its strategic import — ever more ships were needed to transport American goods to Great Britain and France, among other American allies — and from the Maritime Commission’s ability to administer the industry through means as varied as construction contracts, shipyard inspectors, and raw goading of contractors by commission officials.

Many of the ships built in Maritime Commission shipyards carried American goods to the European allies as part of the “Lend-Lease” program, which was instituted in 1941 and provided another early indication that the United States could and would shoulder a heavy economic burden. By all accounts, Lend-Lease was crucial to enabling Great Britain and the Soviet Union to fight the Axis, not least before the United States formally entered the war in December 1941. (Though scholars are still assessing the impact of Lend-Lease on these two major allies, it is likely that both countries could have continued to wage war against Germany without American aid, which seems to have served largely to augment the British and Soviet armed forces and to have shortened the time necessary to retake the military offensive against Germany.) Between 1941 and 1945, the U.S. exported about $32.5 billion worth of goods through Lend-Lease, of which $13.8 billion went to Great Britain and $9.5 billion went to the Soviet Union (Milward, 71). The war dictated that aircraft, ships (and ship-repair services), military vehicles, and munitions would always rank among the quantitatively most important Lend-Lease goods, but food was also a major export to Britain (Milward, 72).

Pearl Harbor was an enormous spur to conversion. The formal declarations of war by the United States on Japan and Germany made plain, once and for all, that the American economy would now need to be transformed into what President Roosevelt had called “the Arsenal of Democracy” a full year before, in December 1940. From the perspective of federal officials in Washington, the first step toward wartime mobilization was the establishment of an effective administrative bureaucracy.

War Administration

From the beginning of preparedness in 1939 through the peak of war production in 1944, American leaders recognized that the stakes were too high to permit the war economy to grow in an unfettered, laissez-faire manner. American manufacturers, for instance, could not be trusted to stop producing consumer goods and to start producing materiel for the war effort. To organize the growing economy and to ensure that it produced the goods needed for war, the federal government spawned an array of mobilization agencies which not only often purchased goods (or arranged their purchase by the Army and Navy), but which in practice closely directed those goods’ manufacture and heavily influenced the operation of private companies and whole industries.

Though both the New Deal and mobilization for World War I served as models, the World War II mobilization bureaucracy assumed its own distinctive shape as the war economy expanded. Most importantly, American mobilization was markedly less centralized than mobilization in other belligerent nations. The war economies of Britain and Germany, for instance, were overseen by war councils which comprised military and civilian officials. In the United States, the Army and Navy were not incorporated into the civilian administrative apparatus, nor was a supreme body created to subsume military and civilian organizations and to direct the vast war economy.

Instead, the military services enjoyed almost-unchecked control over their enormous appetites for equipment and personnel. With respect to the economy, the services were largely able to curtail production destined for civilians (e.g., automobiles or many non-essential foods) and even for war-related but non-military purposes (e.g., textiles and clothing). In parallel to but never commensurate with the Army and Navy, a succession of top-level civilian mobilization agencies sought to influence Army and Navy procurement of manufactured goods like tanks, planes, and ships, raw materials like steel and aluminum, and even personnel. One way of gauging the scale of the increase in federal spending and the concomitant increase in military spending is through comparison with GDP, which itself rose sharply during the war. Table 1 shows the dramatic increases in GDP, federal spending, and military spending.

Table 1: Federal Spending and Military Spending during World War II

(dollar values in billions of constant 1940 dollars)

Nominal GDP Federal Spending Defense Spending
Year total $ % increase total $ % increase % of GDP total $ % increase % of GDP % of federal spending
1940 101.4 9.47 9.34% 1.66 1.64% 17.53%
1941 120.67 19.00% 13.00 37.28% 10.77% 6.13 269.28% 5.08% 47.15%
1942 139.06 15.24% 30.18 132.15% 21.70% 22.05 259.71% 15.86% 73.06%
1943 136.44 -1.88% 63.57 110.64% 46.59% 43.98 99.46% 32.23% 69.18%
1944 174.84 28.14% 72.62 14.24% 41.54% 62.95 43.13% 36.00% 86.68%
1945 173.52 -0.75% 72.11 -0.70% 41.56% 64.53 2.51% 37.19% 89.49%

Sources: 1940 GDP figure from “Nominal GDP: Louis Johnston and Samuel H. Williamson, “The Annual Real and Nominal GDP for the United States, 1789 — Present,” Economic History Services, March 2004, available at http://www.eh.net/hmit/gdp/ (accessed 27 July 2005). 1941-1945 GDP figures calculated using Bureau of Labor Statistics, “CPI Inflation Calculator,” available at http://data.bls.gov/cgi-bin/cpicalc.pl. Federal and defense spending figures from Government Printing Office, “Budget of the United States Government: Historical Tables Fiscal Year 2005,” Table 6.1—Composition of Outlays: 1940—2009 and Table 3.1—Outlays by Superfunction and Function: 1940—2009.

Preparedness Agencies

To oversee this growth, President Roosevelt created a number of preparedness agencies beginning in 1939, including the Office for Emergency Management and its key sub-organization, the National Defense Advisory Commission; the Office of Production Management; and the Supply Priorities Allocation Board. None of these organizations was particularly successful at generating or controlling mobilization because all included two competing parties. On one hand, private-sector executives and managers had joined the federal mobilization bureaucracy but continued to emphasize corporate priorities such as profits and positioning in the marketplace. On the other hand, reform-minded civil servants, who were often holdovers from the New Deal, emphasized the state’s prerogatives with respect to mobilization and war making. As a result of this basic division in the mobilization bureaucracy, “the military largely remained free of mobilization agency control” (Koistinen, 502).

War Production Board

In January 1942, as part of another effort to mesh civilian and military needs, President Roosevelt established a new mobilization agency, the War Production Board, and placed it under the direction of Donald Nelson, a former Sears Roebuck executive. Nelson understood immediately that the staggeringly complex problem of administering the war economy could be reduced to one key issue: balancing the needs of civilians — especially the workers whose efforts sustained the economy — against the needs of the military — especially those of servicemen and women but also their military and civilian leaders.

Though neither Nelson nor other high-ranking civilians ever fully resolved this issue, Nelson did realize several key economic goals. First, in late 1942, Nelson successfully resolved the so-called “feasibility dispute,” a conflict between civilian administrators and their military counterparts over the extent to which the American economy should be devoted to military needs during 1943 (and, by implication, in subsequent war years). Arguing that “all-out” production for war would harm America’s long-term ability to continue to produce for war after 1943, Nelson convinced the military to scale back its Olympian demands. He thereby also established a precedent for planning war production so as to meet most military and some civilian needs. Second (and partially as a result of the feasibility dispute), the WPB in late 1942 created the “Controlled Materials Plan,” which effectively allocated steel, aluminum, and copper to industrial users. The CMP obtained throughout the war, and helped curtail conflict among the military services and between them and civilian agencies over the growing but still scarce supplies of those three key metals.

Office of War Mobilization

By late 1942 it was clear that Nelson and the WPB were unable to fully control the growing war economy and especially to wrangle with the Army and Navy over the necessity of continued civilian production. Accordingly, in May 1943 President Roosevelt created the Office of War Mobilization and in July put James Byrne — a trusted advisor, a former U.S. Supreme Court justice, and the so-called “assistant president” — in charge. Though the WPB was not abolished, the OWM soon became the dominant mobilization body in Washington. Unlike Nelson, Byrnes was able to establish an accommodation with the military services over war production by “acting as an arbiter among contending forces in the WPB, settling disputes between the board and the armed services, and dealing with the multiple problems” of the War Manpower Commission, the agency charged with controlling civilian labor markets and with assuring a continuous supply of draftees to the military (Koistinen, 510).

Beneath the highest-level agencies like the WPB and the OWM, a vast array of other federal organizations administered everything from labor (the War Manpower Commission) to merchant shipbuilding (the Maritime Commission) and from prices (the Office of Price Administration) to food (the War Food Administration). Given the scale and scope of these agencies’ efforts, they did sometimes fail, and especially so when they carried with them the baggage of the New Deal. By the midpoint of America’s involvement in the war, for example, the Civilian Conservation Corps, the Works Progress Administration, and the Rural Electrification Administration — all prominent New Deal organizations which tried and failed to find a purpose in the mobilization bureaucracy — had been actually or virtually abolished.

Taxation

However, these agencies were often quite successful in achieving their respective, narrower aims. The Department of the Treasury, for instance, was remarkably successful at generating money to pay for the war, including the first general income tax in American history and the famous “war bonds” sold to the public. Beginning in 1940, the government extended the income tax to virtually all Americans and began collecting the tax via the now-familiar method of continuous withholdings from paychecks (rather than lump-sum payments after the fact). The number of Americans required to pay federal taxes rose from 4 million in 1939 to 43 million in 1945. With such a large pool of taxpayers, the American government took in $45 billion in 1945, an enormous increase over the $8.7 billion collected in 1941 but still far short of the $83 billion spent on the war in 1945. Over that same period, federal tax revenue grew from about 8 percent of GDP to more than 20 percent. Americans who earned as little as $500 per year paid income tax at a 23 percent rate, while those who earned more than $1 million per year paid a 94 percent rate. The average income tax rate peaked in 1944 at 20.9 percent (“Fact Sheet: Taxes”).

War Bonds

All told, taxes provided about $136.8 billion of the war’s total cost of $304 billion (Kennedy, 625). To cover the other $167.2 billion, the Treasury Department also expanded its bond program, creating the famous “war bonds” hawked by celebrities and purchased in vast numbers and enormous values by Americans. The first war bond was purchased by President Roosevelt on May 1, 1941 (“Introduction to Savings Bonds”). Though the bonds returned only 2.9 percent annual interest after a 10-year maturity, they nonetheless served as a valuable source of revenue for the federal government and an extremely important investment for many Americans. Bonds served as a way for citizens to make an economic contribution to the war effort, but because interest on them accumulated slower than consumer prices rose, they could not completely preserve income which could not be readily spent during the war. By the time war-bond sales ended in 1946, 85 million Americans had purchased more than $185 billion worth of the securities, often through automatic deductions from their paychecks (“Brief History of World War Two Advertising Campaigns: War Loans and Bonds”). Commercial institutions like banks also bought billions of dollars of bonds and other treasury paper, holding more than $24 billion at the war’s end (Kennedy, 626).

Price Controls and the Standard of Living

Fiscal and financial matters were also addressed by other federal agencies. For instance, the Office of Price Administration used its “General Maximum Price Regulation” (also known as “General Max”) to attempt to curtail inflation by maintaining prices at their March 1942 levels. In July, the National War Labor Board (NWLB; a successor to a New Deal-era body) limited wartime wage increases to about 15 percent, the factor by which the cost of living rose from January 1941 to May 1942. Neither “General Max” nor the wage-increase limit was entirely successful, though federal efforts did curtail inflation. Between April 1942 and June 1946, the period of the most stringent federal controls on inflation, the annual rate of inflation was just 3.5 percent; the annual rate had been 10.3 percent in the six months before April 1942 and it soared to 28.0 percent in the six months after June 1946 (Rockoff, “Price and Wage Controls in Four Wartime Periods,” 382).With wages rising about 65 percent over the course of the war, this limited success in cutting the rate of inflation meant that many American civilians enjoyed a stable or even improving quality of life during the war (Kennedy, 641). Improvement in the standard of living was not ubiquitous, however. In some regions, such as rural areas in the Deep South, living standards stagnated or even declined, and according to some economists, the national living standard barely stayed level or even declined (Higgs, 1992).

Labor Unions

Labor unions and their members benefited especially. The NWLB’s “maintenance-of-membership” rule allowed unions to count all new employees as union members and to draw union dues from those new employees’ paychecks, so long as the unions themselves had already been recognized by the employer. Given that most new employment occurred in unionized workplaces, including plants funded by the federal government through defense spending, “the maintenance-of-membership ruling was a fabulous boon for organized labor,” for it required employers to accept unions and allowed unions to grow dramatically: organized labor expanded from 10.5 million members in 1941 to 14.75 million in 1945 (Blum, 140). By 1945, approximately 35.5 percent of the non-agricultural workforce was unionized, a record high.

The War Economy at High Water

Despite the almost-continual crises of the civilian war agencies, the American economy expanded at an unprecedented (and unduplicated) rate between 1941 and 1945. The gross national product of the U.S., as measured in constant dollars, grew from $88.6 billion in 1939 — while the country was still suffering from the depression — to $135 billion in 1944. War-related production skyrocketed from just two percent of GNP to 40 percent in 1943 (Milward, 63).

As Table 2 shows, output in many American manufacturing sectors increased spectacularly from 1939 to 1944, the height of war production in many industries.

Table 2: Indices of American Manufacturing Output (1939 = 100)

1940 1941 1942 1943 1944
Aircraft 245 630 1706 2842 2805
Munitions 140 423 2167 3803 2033
Shipbuilding 159 375 1091 1815 1710
Aluminum 126 189 318 561 474
Rubber 109 144 152 202 206
Steel 131 171 190 202 197

Source: Milward, 69.

Expansion of Employment

The wartime economic boom spurred and benefited from several important social trends. Foremost among these trends was the expansion of employment, which paralleled the expansion of industrial production. In 1944, unemployment dipped to 1.2 percent of the civilian labor force, a record low in American economic history and as near to “full employment” as is likely possible (Samuelson). Table 3 shows the overall employment and unemployment figures during the war period.

Table 3: Civilian Employment and Unemployment during World War II

(Numbers in thousands)

1940 1941 1942 1943 1944 1945
All Non-institutional Civilians 99,840 99,900 98,640 94,640 93,220 94,090
Civilian Labor Force Total 55,640 55,910 56,410 55,540 54,630 53,860
% of Population 55.7% 56% 57.2% 58.7% 58.6% 57.2%
Employed Total 47,520 50,350 53,750 54,470 53,960 52,820
% of Population 47.6% 50.4% 54.5% 57.6% 57.9% 56.1%
% of Labor Force 85.4% 90.1% 95.3% 98.1% 98.8% 98.1%
Unemployed Total 8,120 5,560 2,660 1,070 670 1,040
% of Population 8.1% 5.6% 2.7% 1.1% 0.7% 1.1%
% of Labor Force 14.6% 9.9% 4.7% 1.9% 1.2% 1.9%

Source: Bureau of Labor Statistics, “Employment status of the civilian noninstitutional population, 1940 to date.” Available at http://www.bls.gov/cps/cpsaat1.pdf.

Not only those who were unemployed during the depression found jobs. So, too, did about 10.5 million Americans who either could not then have had jobs (the 3.25 million youths who came of age after Pearl Harbor) or who would not have then sought employment (3.5 million women, for instance). By 1945, the percentage of blacks who held war jobs — eight percent — approximated blacks’ percentage in the American population — about ten percent (Kennedy, 775). Almost 19 million American women (including millions of black women) were working outside the home by 1945. Though most continued to hold traditional female occupations such as clerical and service jobs, two million women did labor in war industries (half in aerospace alone) (Kennedy, 778). Employment did not just increase on the industrial front. Civilian employment by the executive branch of the federal government — which included the war administration agencies — rose from about 830,000 in 1938 (already a historical peak) to 2.9 million in June 1945 (Nash, 220).

Population Shifts

Migration was another major socioeconomic trend. The 15 million Americans who joined the military — who, that is, became employees of the military — all moved to and between military bases; 11.25 million ended up overseas. Continuing the movements of the depression era, about 15 million civilian Americans made a major move (defined as changing their county of residence). African-Americans moved with particular alacrity and permanence: 700,000 left the South and 120,000 arrived in Los Angeles during 1943 alone. Migration was especially strong along rural-urban axes, especially to war-production centers around the country, and along an east-west axis (Kennedy, 747-748, 768). For instance, as Table 4 shows, the population of the three Pacific Coast states grew by a third between 1940 and 1945, permanently altering their demographics and economies.

Table 4: Population Growth in Washington, Oregon, and California, 1940-1945

(populations in millions)

1940 1941 1942 1943 1944 1945 % growth
1940-1945
Washington 1.7 1.8 1.9 2.1 2.1 2.3 35.3%
Oregon 1.1 1.1 1.1 1.2 1.3 1.3 18.2%
California 7.0 7.4 8.0 8.5 9.0 9.5 35.7%
Total 9.8 10.3 11.0 11.8 12.4 13.1 33.7%

Source: Nash, 222.

A third wartime socioeconomic trend was somewhat ironic, given the reduction in the supply of civilian goods: rapid increases in many Americans’ personal incomes. Driven by the federal government’s abilities to prevent price inflation and to subsidize high wages through war contracting and by the increase in the size and power of organized labor, incomes rose for virtually all Americans — whites and blacks, men and women, skilled and unskilled. Workers at the lower end of the spectrum gained the most: manufacturing workers enjoyed about a quarter more real income in 1945 than in 1940 (Kennedy, 641). These rising incomes were part of a wartime “great compression” of wages which equalized the distribution of incomes across the American population (Goldin and Margo, 1992). Again focusing on three war-boom states in the West, Table 5 shows that personal-income growth continued after the war, as well.

Table 5: Personal Income per Capita in Washington, Oregon, and California, 1940 and 1948

1940 1948 % growth
Washington $655 $929 42%
Oregon $648 $941 45%
California $835 $1,017 22%

Source: Nash, 221. Adjusted for inflation using Bureau of Labor Statistics, “CPI Inflation Calculator,” available at http://data.bls.gov/cgi-bin/cpicalc.pl

Despite the focus on military-related production in general and the impact of rationing in particular, spending in many civilian sectors of the economy rose even as the war consumed billions of dollars of output. Hollywood boomed as workers bought movie tickets rather than scarce clothes or unavailable cars. Americans placed more legal wagers in 1943 and 1944, and racetracks made more money than at any time before. In 1942, Americans spent $95 million on legal pharmaceuticals, $20 million more than in 1941. Department-store sales in November 1944 were greater than in any previous month in any year (Blum, 95-98). Black markets for rationed or luxury goods — from meat and chocolate to tires and gasoline — also boomed during the war.

Scientific and Technological Innovation

As observers during the war and ever since have recognized, scientific and technological innovations were a key aspect in the American war effort and an important economic factor in the Allies’ victory. While all of the major belligerents were able to tap their scientific and technological resources to develop weapons and other tools of war, the American experience was impressive in that scientific and technological change positively affected virtually every facet of the war economy.

The Manhattan Project

American techno-scientific innovations mattered most dramatically in “high-tech” sectors which were often hidden from public view by wartime secrecy. For instance, the Manhattan Project to create an atomic weapon was a direct and massive result of a stunning scientific breakthrough: the creation of a controlled nuclear chain reaction by a team of scientists at the University of Chicago in December 1942. Under the direction of the U.S. Army and several private contractors, scientists, engineers, and workers built a nationwide complex of laboratories and plants to manufacture atomic fuel and to fabricate atomic weapons. This network included laboratories at the University of Chicago and the University of California-Berkeley, uranium-processing complexes at Oak Ridge, Tennessee, and Hanford, Washington, and the weapon-design lab at Los Alamos, New Mexico. The Manhattan Project climaxed in August 1945, when the United States dropped two atomic weapons on Hiroshima and Nagasaki, Japan; these attacks likely accelerated Japanese leaders’ decision to seek peace with the United States. By that time, the Manhattan Project had become a colossal economic endeavor, costing approximately $2 billion and employing more than 100,000.

Though important and gigantic, the Manhattan Project was an anomaly in the broader war economy. Technological and scientific innovation also transformed less-sophisticated but still complex sectors such as aerospace or shipbuilding. The United States, as David Kennedy writes, “ultimately proved capable of some epochal scientific and technical breakthroughs, [but] innovated most characteristically and most tellingly in plant layout, production organization, economies of scale, and process engineering” (Kennedy, 648).

Aerospace

Aerospace provides one crucial example. American heavy bombers, like the B-29 Superfortress, were highly sophisticated weapons which could not have existed, much less contributed to the air war on Germany and Japan, without innovations such as bombsights, radar, and high-performance engines or advances in aeronautical engineering, metallurgy, and even factory organization. Encompassing hundreds of thousands of workers, four major factories, and $3 billion in government spending, the B-29 project required almost unprecedented organizational capabilities by the U.S. Army Air Forces, several major private contractors, and labor unions (Vander Meulen, 7). Overall, American aircraft production was the single largest sector of the war economy, costing $45 billion (almost a quarter of the $183 billion spent on war production), employing a staggering two million workers, and, most importantly, producing over 125,000 aircraft, which Table 6 describe in more detail.

Table 6: Production of Selected U.S. Military Aircraft (1941-1945)

Bombers 49,123
Fighters 63,933
Cargo 14,710
Total 127,766

Source: Air Force History Support Office

Shipbuilding

Shipbuilding offers a third example of innovation’s importance to the war economy. Allied strategy in World War II utterly depended on the movement of war materiel produced in the United States to the fighting fronts in Africa, Europe, and Asia. Between 1939 and 1945, the hundred merchant shipyards overseen by the U.S. Maritime Commission (USMC) produced 5,777 ships at a cost of about $13 billion (navy shipbuilding cost about $18 billion) (Lane, 8). Four key innovations facilitated this enormous wartime output. First, the commission itself allowed the federal government to direct the merchant shipbuilding industry. Second, the commission funded entrepreneurs, the industrialist Henry J. Kaiser chief among them, who had never before built ships and who were eager to use mass-production methods in the shipyards. These methods, including the substitution of welding for riveting and the addition of hundreds of thousands of women and minorities to the formerly all-white and all-male shipyard workforces, were a third crucial innovation. Last, the commission facilitated mass production by choosing to build many standardized vessels like the ugly, slow, and ubiquitous “Liberty” ship. By adapting well-known manufacturing techniques and emphasizing easily-made ships, merchant shipbuilding became a low-tech counterexample to the atomic-bomb project and the aerospace industry, yet also a sector which was spectacularly successful.

Reconversion and the War’s Long-term Effects

Reconversion from military to civilian production had been an issue as early as 1944, when WPB Chairman Nelson began pushing to scale back war production in favor of renewed civilian production. The military’s opposition to Nelson had contributed to the accession by James Byrnes and the OWM to the paramount spot in the war-production bureaucracy. Meaningful planning for reconversion was postponed until 1944 and the actual process of reconversion only began in earnest in early 1945, accelerating through V-E Day in May and V-J Day in September.

The most obvious effect of reconversion was the shift away from military production and back to civilian production. As Table 7 shows, this shift — as measured by declines in overall federal spending and in military spending — was dramatic, but did not cause the postwar depression which many Americans dreaded. Rather, American GDP continued to grow after the war (albeit not as rapidly as it had during the war; compare Table 1). The high level of defense spending, in turn, contributed to the creation of the “military-industrial complex,” the network of private companies, non-governmental organizations, universities, and federal agencies which collectively shaped American national defense policy and activity during the Cold War.

Table 7: Federal Spending, and Military Spending after World War II

(dollar values in billions of constant 1945 dollars)

Nominal GDP Federal Spending Defense Spending
Year Total % increase total % increase % of GDP Total % increase % of GDP % of federal
spending
1945 223.10 92.71 1.50% 41.90% 82.97 4.80% 37.50% 89.50%
1946 222.30 -0.36% 55.23 -40.40% 24.80% 42.68 -48.60% 19.20% 77.30%
1947 244.20 8.97% 34.5 -37.50% 14.80% 12.81 -70.00% 5.50% 37.10%
1948 269.20 9.29% 29.76 -13.70% 11.60% 9.11 -28.90% 3.50% 30.60%
1949 267.30 -0.71% 38.84 30.50% 14.30% 13.15 44.40% 4.80% 33.90%
1950 293.80 9.02% 42.56 9.60% 15.60% 13.72 4.40% 5.00% 32.20%

1945 GDP figure from “Nominal GDP: Louis Johnston and Samuel H. Williamson, “The Annual Real and Nominal GDP for the United States, 1789 — Present,” Economic History Services, March 2004, available at http://www.eh.net/hmit/gdp/ (accessed 27 July 2005). 1946-1950 GDP figures calculated using Bureau of Labor Statistics, “CPI Inflation Calculator,” available at http://data.bls.gov/cgi-bin/cpicalc.pl. Federal and defense spending figures from Government Printing Office, “Budget of the United States Government: Historical Tables Fiscal Year 2005,” Table 6.1—Composition of Outlays: 1940—2009 and Table 3.1—Outlays by Superfunction and Function: 1940—2009.

Reconversion spurred the second major restructuring of the American workplace in five years, as returning servicemen flooded back into the workforce and many war workers left, either voluntarily or involuntarily. For instance, many women left the labor force beginning in 1944 — sometimes voluntarily and sometimes involuntarily. In 1947, about a quarter of all American women worked outside the home, roughly the same number who had held such jobs in 1940 and far off the wartime peak of 36 percent in 1944 (Kennedy, 779).

G.I. Bill

Servicemen obtained numerous other economic benefits beyond their jobs, including educational assistance from the federal government and guaranteed mortgages and small-business loans via the Serviceman’s Readjustment Act of 1944 or “G.I. Bill.” Former servicemen thus became a vast and advantaged class of citizens which demanded, among other goods, inexpensive, often suburban housing; vocational training and college educations; and private cars which had been unobtainable during the war (Kennedy, 786-787).

The U.S.’s Position at the End of the War

At a macroeconomic scale, the war not only decisively ended the Great Depression, but created the conditions for productive postwar collaboration between the federal government, private enterprise, and organized labor, the parties whose tripartite collaboration helped engender continued economic growth after the war. The U.S. emerged from the war not physically unscathed, but economically strengthened by wartime industrial expansion, which placed the United States at absolute and relative advantage over both its allies and its enemies.

Possessed of an economy which was larger and richer than any other in the world, American leaders determined to make the United States the center of the postwar world economy. American aid to Europe ($13 billion via the Economic Recovery Program (ERP) or “Marshall Plan,” 1947-1951) and Japan ($1.8 billion, 1946-1952) furthered this goal by tying the economic reconstruction of West Germany, France, Great Britain, and Japan to American import and export needs, among other factors. Even before the war ended, the Bretton Woods Conference in 1944 determined key aspects of international economic affairs by establishing standards for currency convertibility and creating institutions such as the International Monetary Fund and the precursor of the World Bank.

In brief, as economic historian Alan Milward writes, “the United States emerged in 1945 in an incomparably stronger position economically than in 1941″… By 1945 the foundations of the United States’ economic domination over the next quarter of a century had been secured”… [This] may have been the most influential consequence of the Second World War for the post-war world” (Milward, 63).

Selected References

Adams, Michael C.C. The Best War Ever: America and World War II. Baltimore: Johns Hopkins University Press, 1994.

Anderson, Karen. Wartime Women: Sex Roles, Family Relations, and the Status of Women during World War II. Westport, CT: Greenwood Press, 1981.

Air Force History Support Office. “Army Air Forces Aircraft: A Definitive Moment.” U.S. Air Force, 1993. Available at http://www.airforcehistory.hq.af.mil/PopTopics/AAFaircraft.htm.

Blum, John Morton. V Was for Victory: Politics and American Culture during World War II. New York: Harcourt Brace, 1976.

Bordo, Michael. “The Gold Standard, Bretton Woods, and Other Monetary Regimes: An Historical Appraisal.” NBER Working Paper No. 4310. April 1993.

“Brief History of World War Two Advertising Campaigns.” Duke University Rare Book, Manuscript, and Special Collections, 1999. Available at http://scriptorium.lib.duke.edu/adaccess/wwad-history.html

Brody, David. “The New Deal and World War II.” In The New Deal, vol. 1, The National Level, edited by John Braeman, Robert Bremmer, and David Brody, 267-309. Columbus: Ohio State University Press, 1975.

Connery, Robert. The Navy and Industrial Mobilization in World War II. Princeton: Princeton University Press, 1951.

Darby, Michael R. “Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934-1941.” Journal of Political Economy 84, no. 1 (February 1976): 1-16.

Field, Alexander J. “The Most Technologically Progressive Decade of the Century.” American Economic Review 93, no 4 (September 2003): 1399-1414.

Field, Alexander J. “U.S. Productivity Growth in the Interwar Period and the 1990s.” (Paper presented at “Understanding the 1990s: the Long Run Perspective” conference, Duke University and the University of North Carolina, March 26-27, 2004) Available at www.unc.edu/depts/econ/seminars/Field.pdf.

Fischer, Gerald J. A Statistical Summary of Shipbuilding under the U.S. Maritime Commission during World War II. Washington, DC: Historical Reports of War Administration; United States Maritime Commission, no. 2, 1949.

Friedberg, Aaron. In the Shadow of the Garrison State. Princeton: Princeton University Press, 2000.

Gluck, Sherna Berger. Rosie the Riveter Revisited: Women, the War, and Social Change. Boston: Twayne Publishers, 1987.

Goldin, Claudia. “The Role of World War II in the Rise of Women’s Employment.” American Economic Review 81, no. 4 (September 1991): 741-56.

Goldin, Claudia and Robert A. Margo. “The Great Compression: Wage Structure in the United States at Mid-Century.” Quarterly Journal of Economics 107, no. 2 (February 1992): 1-34.

Harrison, Mark, editor. The Economics of World War II: Six Great Powers in International Comparison. Cambridge: Cambridge University Press, 1998.

Higgs, Robert. “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s.” Journal of Economic History 52, no. 1 (March 1992): 41-60.

Holley, I.B. Buying Aircraft: Materiel Procurement for the Army Air Forces. Washington, DC: U.S. Government Printing Office, 1964.

Hooks, Gregory. Forging the Military-Industrial Complex: World War II’s Battle of the Potomac. Urbana: University of Illinois Press, 1991.

Janeway, Eliot. The Struggle for Survival: A Chronicle of Economic Mobilization in World War II. New Haven: Yale University Press, 1951.

Jeffries, John W. Wartime America: The World War II Home Front. Chicago: Ivan R. Dee, 1996.

Johnston, Louis and Samuel H. Williamson. “The Annual Real and Nominal GDP for the United States, 1789 – Present.” Available at Economic History Services, March 2004, URL: http://www.eh.net/hmit/gdp/; accessed 3 June 2005.

Kennedy, David M. Freedom from Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, 1999.

Kryder, Daniel. Divided Arsenal: Race and the American State during World War II. New York: Cambridge University Press, 2000.

Lane, Frederic, with Blanche D. Coll, Gerald J. Fischer, and David B. Tyler. Ships for Victory: A History of Shipbuilding under the U.S. Maritime Commission in World War II. Baltimore: Johns Hopkins University Press, 1951; republished, 2001.

Koistinen, Paul A.C. Arsenal of World War II: The Political Economy of American Warfare, 1940-1945. Lawrence, KS: University Press of Kansas, 2004.

Lichtenstein, Nelson. Labor’s War at Home: The CIO in World War II. New York: Cambridge University Press, 1982.

Lingeman, Richard P. Don’t You Know There’s a War On? The American Home Front, 1941-1945. New York: G.P. Putnam’s Sons, 1970.

Milkman, Ruth. Gender at Work: The Dynamics of Job Segregation by Sex during World War II. Urbana: University of Illinois Press, 1987.

Milward, Alan S. War, Economy, and Society, 1939-1945. Berkeley: University of California Press, 1979.

Nash, Gerald D. The American West Transformed: The Impact of the Second World War. Lincoln: University of Nebraska Press, 1985.

Nelson, Donald M. Arsenal of Democracy: The Story of American War Production. New York: Harcourt Brace, 1946.

O’Neill, William L. A Democracy at War: America’s Fight at Home and Abroad in World War II. New York: Free Press, 1993.

Overy, Richard. How the Allies Won. New York: W.W. Norton, 1995.

Rockoff, Hugh. “The Response of the Giant Corporations to Wage and Price Control in World War II.” Journal of Economic History 41, no. 1 (March 1981): 123-28.

Rockoff, Hugh. “Price and Wage Controls in Four Wartime Periods.” Journal of Economic History 41, no. 2 (June 1981): 381-401.

Samuelson, Robert J., “Great Depression.” The Concise Encyclopedia of Economics. Indianapolis: Liberty Fund, Inc., ed. David R. Henderson, 2002. Available at http://www.econlib.org/library/Enc/GreatDepression.html

U.S. Department of the Treasury, “Fact Sheet: Taxes,” n. d. Available at http://www.treas.gov/education/fact-sheets/taxes/ustax.shtml

U.S. Department of the Treasury, “Introduction to Savings Bonds,” n.d. Available at http://www.treas.gov/offices/treasurer/savings-bonds.shtml

Vander Meulen, Jacob. Building the B-29. Washington, DC: Smithsonian Institution Press, 1995.

Watkins, Thayer. “The Recovery from the Depression of the 1930s.” 2002. Available at http://www2.sjsu.edu/faculty/watkins/recovery.htm

Citation: Tassava, Christopher. “The American Economy during World War II”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/the-american-economy-during-world-war-ii/

Money in the American Colonies

Ron Michener, University of Virginia

“There certainly can’t be a greater Grievance to a Traveller, from one Colony to another, than the different values their Paper Money bears.” An English visitor, circa 1742 (Kimber, 1998, p. 52).

The monetary arrangements in use in America before the Revolution were extremely varied. Each colony had its own conventions, tender laws, and coin ratings, and each issued its own paper money. The monetary system within each colony evolved over time, sometimes dramatically, as when Massachusetts abolished the use of paper money within her borders in 1750 and returned to a specie standard. Any encyclopedia-length overview of the subject will, unavoidably, need to generalize, and few generalizations about the colonial monetary system are immune to criticism because counterexamples can usually be found somewhere in the historical record. Those readers who find their interest piqued by this article would be well advised to continue their study of the subject by consulting the more detailed discussions available in Brock (1956, 1975, 1992), Ernst (1973), and McCusker (1978).

Units of Account

In the colonial era the unit of account and the medium of exchange were distinct in ways that now seem strange. An example from modern times suggests how the ancient system worked. Nowadays race horses are auctioned in England using guineas as the unit of account, although the guinea coin has long since disappeared. It is understood by all who participate in these auctions that payment is made according to the rule that one guinea equals 21s. Guineas are the unit of account, but the medium of exchange accepted in payment is something else entirely. The unit of account and medium of exchange were similarly disconnected in colonial times (Adler, 1900).

The units of account in colonial times were pounds, shillings, and pence (1£ = 20s., 1s. = 12d.).1 These pounds, shillings, and pence, however, were local units, such as New York money, Pennsylvania money, Massachusetts money, or South Carolina money and should not be confused with sterling. To do so is comparable to treating modern Canadian dollars and American dollars as interchangeable simply because they are both called “dollars.” All the local currencies were less valuable than sterling.2 A Spanish piece of eight, for instance, was worth 4 s. 6 d. sterling at the British mint. The same piece of eight, on the eve of the Revolution, would have been treated as 6 s. in New England, as 8 s. in New York, as 7 s. 6 d. in Philadelphia, and as 32 s. 6 d. in Charleston (McCusker, 1978).

Colonists assigned local currency values to foreign specie coins circulating there in these pounds, shillings and pence. The same foreign specie coins (most notably the Spanish dollar) continued to be legal tender in the United States in the first half of the nineteenth century as well as a considerable portion of the circulating specie (Andrews, 1904, pp. 327-28; Michener and Wright, 2005, p. 695). Because the decimal divisions of the dollar so familiar to us today were a newfangled innovation in the early Republic and because the same coins continued to circulate the traditional units of account were only gradually abandoned. Lucius Elmer, in his account of the early settlement of Cumberland County, New Jersey, describes how “Accounts were generally kept in this State in pounds, shillings, and pence, of the 7 s. 6 d. standard, until after 1799, in which year a law was passed requiring all accounts to be kept in dollars or units, dimes or tenths, cents or hundredths, and mills or thousandths. For several years, however, aged persons inquiring the price of an article in West Jersey or Philadelphia, required to told the value in shillings and pence, they not being able to keep in mind the newly-created cents or their relative value . . . So lately as 1820 some traders and tavern keepers in East Jersey kept their accounts in [New] York currency.”3 About 1820, John Quincy Adams (1822) surveyed the progress that had been made in familiarizing the public with the new units:

“It is now nearly thirty years since our new monies of account, our coins, and our mint, have been established. The dollar, under its new stamp, has preserved its name and circulation. The cent has become tolerably familiarized to the tongue, wherever it has been made by circulation familiar to the hand. But the dime having been seldom, and the mille never presented in their material images to the people, have remained . . . utterly unknown. . . . Even now, at the end of thirty years, ask a tradesman, or shopkeeper, in any of our cities, what is a dime or mille, and the chances are four in five that he will not understand your question. But go to New York and offer in payment the Spanish coin, the unit of the Spanish piece of eight [one reale], and the shop or market-man will take it for a shilling. Carry it to Boston or Richmond, and you shall be told it is not a shilling, but nine pence. Bring it to Philadelphia, Baltimore, or the City of Washington, and you shall find it recognized for an eleven-penny bit; and if you ask how that can be, you shall learn that, the dollar being of ninety-pence, the eight part of it is nearer to eleven than to any other number . . .4 And thus we have English denominations most absurdly and diversely applied to Spanish coins; while our own lawfully established dime and mille remain, to the great mass of the people, among the hidden mysteries of political economy – state secrets.”5

It took many more decades for the colonial unit of account to disappear completely. Elmer’s account (Elmer, 1869, p. 137) reported that “Even now, in New York, and in East Jersey, where the eighth of a dollar, so long the common coin in use, corresponded with the shilling of account, it is common to state the price of articles, not above two or three dollars, in shillings, as for instance, ten shillings rather than a dollar and a quarter.”

Not only were the unit of account and medium of exchange disconnected in an unfamiliar manner, but terms such as money and currency did not mean precisely the same thing in colonial times that they do today. In colonial times, “money” and “currency” were practically synonymous and signified whatever was conventionally used as a medium of exchange. The word “currency” today refers narrowly to paper money, but that wasn’t so in colonial times. “The Word, Currency,” Hugh Vance wrote in 1740, “is in common Use in the Plantations . . . and signifies Silver passing current either by Weight or Tale. The same Name is also applicable as well to Tobacco in Virginia, Sugars in the West Indies &c. Every thing at the Market-Rate may be called a Currency; more especially that most general Commodity, for which Contracts are usually made. And according to that Rule, Paper-Currency must signify certain Pieces of Paper, passing current in the Market as Money” (Vance, 1740, CCR III, pp. 396, 431).

Failure to appreciate that the unit of account and medium of exchange were quite distinct in colonial times, and that a familiar term like “currency” had a subtly different meaning, can lead unsuspecting historians astray. They often assume that a phrase such as “£100 New York money” or “£100 New York currency” necessarily refers to £100 of the bills of credit issued by New York. In fact, it simply means £100 of whatever was accepted as money in New York, according to the valuations prevailing in New York.6 Such subtle misunderstandings have led some historians to overestimate the ubiquity of paper money in colonial America.

Means of Payment – Book Credit

While simple “cash-and-carry” transactions sometimes occurred most purchases involved at least short-term book credit; Henry Laurens wrote that before the Revolution it had been “the practice to give credit for one and more years for 7/8th of the whole traffic” (Burnet, 1923, vol. 2, pp. 490-1). The buyer would receive goods and be debited on the seller’s books for an agreed amount in the local money of account. The debt would be extinguished when the buyer paid the seller either in the local medium of exchange or in equally valued goods or services acceptable to the seller. When it was mutually agreeable the debt could be and often was paid in ways that nowadays seem very unorthodox – with the delivery of chickens, or a week’s work fixing fences on land owned by the seller. The debt might be paid at one remove, by the buyer fixing fences on land owned by someone to whom the seller was himself indebted. Accounts would then be settled among the individuals involved. Account books testify to the pervasiveness of this system, termed “bookkeeping barter” by Baxter. Baxter examined the accounts of John Hancock and his father Thomas Hancock, both prominent Boston merchants, whose business dealings naturally involved an atypically large amount of cash. Even these gentlemen managed most of their transactions in such a way that no cash ever changed hands (Baxter, 1965; Plummer, 1942; Soltow, 1965, pp. 124-55; Forman, 1969).

An astonishing array of goods and services therefore served by mutual consent at some time or other to extinguish debt. Whether these goods ought all to be classified as “money” is doubtful; they certainly lacked the liquidity and universal acceptability in exchange that ordinarily defines money. At certain times and in certain colonies, however, specific commodities came to be so widely used in transactions that they might appropriately be termed money. Specie, of course, was such a commodity, but its worldwide acceptance as money made it special, so it is convenient to set it aside for a moment and focus on the others.

Means of Payment – Commodity Money

At various times and places in the colonies such items as tobacco, rice, sugar, beaver skins, wampum, and country pay all served as money. These items were generally accorded a special monetary status by various acts of colonial legislatures. Whether the legislative fiat was essential in monetizing these commodities or whether it simply acknowledged the existing state of affairs is open to question. Sugar was used in the British Caribbean, tobacco was used in the Chesapeake, and rice in South Carolina, each being the central product of their respective plantation economies. Wampum signifies the stringed shells used by the Indians as money before the arrival of European settlers. Wampum and beaver skins were commonly used as money in the northern colonies in the early stages of settlement when the fur trade and Indian trade were still mainstays of the local economy (Nettels, 1928, 1934; Fernow, 1893; Massey, 1976; Brock, 1975, pp. 9-18).

Country pay is more complicated. Where it was used, country pay consisted of a hodgepodge of locally produced agricultural commodities that had been monetized by the colonial legislature. A list of commodities, such as Indian corn, beef, pork, etc. were assigned specific monetary values (so many s. per bushel or barrel), and debtors were permitted by statute to pay certain debts with their choice of these commodities at nominal values set by the colonial legislature.7 In some instances country pay was declared a legal tender for all private debts although contracts explicitly requiring another form of payment might be exempted (Gottfried, 1936; Judd, 1905, pp. 94-96). Sometimes country pay was only a legal tender in payment of obligations to the colonial or town governments. Even where country pay was a legal tender only in payment of taxes it was often used in private transactions and even served as a unit of account. Probate inventories from colonial Connecticut, where country pay was widely used, are generally denominated in country pay (Main and Main, 1988).8

There were predictable difficulties where commodity money was used. A pound in “country pay” was simply not worth a pound in cash even as that cash was valued locally. The legislature sometimes overvalued agricultural commodities in setting their nominal prices. Even when the legislature’s prices were not biased in favor of debtors the debtor still had the power to select the particular commodity tendered and had some discretion over the quality of that commodity. In late 17th century Massachusetts the rule of thumb used to convert country pay to cash was that three pounds in country pay were worth two pounds cash (Republicæ, 1731, pp. 376, 390).9 Even this formula seems to have overvalued country pay. When a group of men seeking to rent a farm in Connecticut offered Boston merchant Thomas Bannister £22 of country pay in 1700, Bannister hesitated. It appears Bannister wanted to be paid £15 per annum in cash. Country pay was “a very uncertain thing,” he wrote. Some years £22 in country pay might be worth £10, some years £12, but he did not expect to see a day when it would fetch fifteen.10 Savvy merchants such as Bannister paid careful attention to the terms of payment. An unwary trader could easily be cheated. Just such an incident occurs in the comic satirical poem “The Sotweed Factor.” Sotweed is slang for tobacco, and a factor was a person in America representing a British merchant. Set in late seventeenth-century Maryland, the poem is a first-person account of the tribulations and humiliations a newly-arrived Briton suffers while seeking to enter the tobacco trade. The Briton agrees with a Quaker merchant to exchange his trade goods for ten thousand weight of oronoco tobacco in cask and ready to ship. When the Quaker fails to deliver any tobacco, the aggrieved factor sues him at the Annapolis court, only to discover that his attorney is a quack who divides his time between pretending to be a lawyer and pretending to be a doctor and that the judges have to be called away from their Punch and Rum at the tavern to hear his case. The verdict?

The Byast Court without delay,
Adjudg’d my Debt in Country Pay:
In Pipe staves, Corn, or Flesh of Boar,
Rare Cargo for the English Shoar.

Thus ruined the poor factor sails away never to return. A footnote to the reader explains “There is a Law in this Country, the Plaintiff may pay his Debt in Country pay, which consists in the produce of the Plantation” (Cooke, 1708).

By the middle of the eighteenth century commodity money had essentially disappeared in northern port cities, but still lingered in the hinterlands and plantation colonies. A pamphlet written in Boston in 1740 observed “Look into our British Plantations, and you’ll see [commodity] Money still in Use, As, Tobacco in Virginia, Rice in South Carolina, and Sugars in the Islands; they are the chief Commodities, used as the general Money, Contracts are made for them, Salaries and Fees of Office are paid in them, and sometimes they are made a lawful Tender at a yearly assigned Rate by publick Authority, even when Silver was promised” (Vance, 1740, CCR III, p. 396). North Carolina was an extreme case. Country pay there continued as a legal tender even in private debts. The system was amended in 1754 and 1764 to require rated commodities to be delivered to government warehouses and be judged of acceptable quality at which point warehouse certificates were issued to the value of the goods (at mandated, not market prices): these certificates were a legal tender (Bullock, 1969, pp. 126-7, 157).

Means of Payment – Bills of Credit

Cash came in two forms: full-bodied specie coins (usually Spanish or Portuguese) and paper money known as “bills of credit.” Bills of credit were notes issued by provincial governments that were similar in many ways to modern paper money: they were issued in convenient denominations, were often a legal tender in the payment of debts, and routinely passed from man to man in transactions.11 Bills of credit were ordinarily put into circulation in one of two ways. The most common method was for the colony to issue bills to pay its debts. Bills of credit were originally designed as a kind of tax-anticipation scrip, similar to that used by many localities in the United States during the Great Depression (Harper, 1948). Therefore when bills of credit were issued to pay for current expenditures a colony would ordinarily levy taxes over the next several years sufficient to call the bills in so they might be destroyed.12 A second method was for the colony to lend newly printed bills on land security at attractive interest rates. The agency established to make these loans was known as a “land bank” (Thayer, 1953).13 Bills of credit were denominated in the £., s., and d. of the colony of issue, and therefore were usually the only form of money in circulation that was actually denominated in the local unit of account.14

Sometimes even the bills of credit issued in a colony were not denominated in the local unit of account. In 1764 Maryland redeemed its Maryland-pound-denominated bills of credit and in 1767 issued new dollar-denominated bills of credit. Nonetheless Maryland pounds, not dollars, remained the predominant unit of account in Maryland up to the Revolution (Michener and Wright, 2006a, p. 34; Grubb; 2006a, pp. 66-67; Michener and Wright, 2006c, p. 264). The most striking example occurred in New England. Massachusetts, Connecticut, New Hampshire, and Rhode Island all had, long before the 1730s, emitted paper money in bills of credit known as “old tenor” bills of credit, and “old tenor” had become the most commonly-used unit of account in New England. The old tenor bills of all four colonies passed interchangeably and at par with one another throughout New England.

Beginning in 1737, Massachusetts introduced a new kind of paper money known as “new tenor.” New tenor can be thought of as a monetary reform that ultimately failed to address underlying issues. It also served as a way of evading a restriction the Board of Trade had placed on the Governor of Massachusetts that limited him to emissions of not more than £30,000. The Massachusetts assembly declared each pound of the new tenor bills to be worth £3 in old tenor bills. What actually happened is that old tenor (abbreviated in records of the time as “O.T.”) continued to be the unit of account in New England, and so long as the old bills continued to circulate, a decreasing portion of the medium of exchange. Each new tenor bill was reckoned at three times its face value in old tenor terms. This was just the beginning of the confusion, for yet newer Massachusetts “new tenor” emissions were created, and the original “new tenor” emission became known as the “middle tenor.”15 The new “new tenor” bills emitted by Massachusetts were accounted in old tenor terms at four times their face value. These bills, like the old ones, circulated across colony borders throughout New England. As if this were not complicated enough, New Hampshire, Rhode Island, and Connecticut all created new tenor emission of their own, and the factors used to convert these new tenor bills into old tenor terms varied across colonies (Davis, 1970; Brock, 1975; McCusker, pp. 131-137). Connecticut, for instance, had a new tenor emission such that each new tenor bill was worth 3½ times its face value in old tenor (Connecticut, vol. 8, pp. 359-60; Brock, 1975, pp. 45-6). “They have a variety of paper currencies in the [New England] provinces; viz., that of New Hampshire, the Massachusetts, Rhode Island, and Connecticut,” bemoaned an English visitor, “all of different value, divided and subdivided into old and new tenors, so that it is a science to know the nature and value of their moneys, and what will cost a stranger some study and application” (Hamilton, 1907, p. 179). Throughout New England, however, Old Tenor remained the unit of account. “The Price of [provisions sold at Market],” a contemporary pamphlet noted, “has been constantly computed in Bills of the old Tenor, ever since the Emission of the middle and new Tenor Bills, just as it was before their Emission, and with no more Regard to or Consideration of either the middle or new Tenor Bills, than if they had never been emitted” (Enquiry, 1744, CCR IV, p. 174). This occurred despite the fact that by 1750 only an inconsiderable portion of the bills of credit in circulation were denominated in old tenor.16

For the most part, bills of credit were fiat money. Although a colony’s treasurer would often consent to exchange these bills for other forms of cash in the treasury, there was rarely a provision in the law stating that holders of bills of credit had a legally binding claim on the government for a fixed sum in specie, and treasurers were sometimes unable to accommodate people who wished to exchange money (Nicholas, 1912, p. 257; The New York Mercury, January 27, 1759, November 24, 1760).17 The form of the bills themselves was sometimes misleading in this respect. It was not uncommon for the bills to be inscribed with an explicit statement that the bill was worth a certain sum in silver. This was often no more than an expression of the assembly’s hope, at the time of issuance, of how the bills would circulate.18 Colonial courts sometimes allowed inhabitants to pay less to royal officials and proprietors by valuing bills of credit used to pay fees, dues, and quit rents according to their “official” rather than actual specie values. (Michener and Wright, 2006c, p. 258, fn. 5; Hart, 2005, pp. 269-71).

Maryland’s paper money was unique. Maryland’s paper money – unlike that of other colonies – gave the possessor an explicit legal claim on a valuable asset. Maryland had levied a tax and invested the proceeds of the tax in London. It issued bills of credit promising a fixed sum in sterling bills of exchange at predetermined dates, to be drawn on the colony’s balance in London. The colony’s accrued balances in London were adequate to fund the redemption, and when redemption dates arrived in 1748 and 1764 the sums due were paid in full so the colony’s pledge was considered credible.

Maryland’s paper money was unique in other ways as well. Its first emission was put into circulation in a novel fashion. Of the £90,000 emitted in 1733, £42,000 was lent to inhabitants, while the other £48,000 was simply given away, at the rate of £1.5 per taxable (McCusker, 1978, pp. 190-196; Brock, 1975, chapter 8; Lester, 1970, chapter 5). Maryland’s paper money was so peculiar that it is unrepresentative of the colonial experience. This was recognized even by contemporaries. Hugh Vance, in the Postscript to his Inquiry into the Nature and Uses of Money, dismissed Maryland as “intirely out of the Question; their Bills being on the Foot of promissory Notes” Vance, 1740, CCR III, p. 462).

In 1690, Massachusetts was the first colony to issue bills of credit (Felt, 1839, pp. 49-52; Davis, 1970, vol. 1, chapter 1; Goldberg, 2009).19 The bills were issued to pay soldiers returning from a failed military expedition against Quebec. Over time, the rest of the colonies followed suit. The last holdout was Virginia, which issued its first bills of credit in 1755 to defray expenses associated with its entry into the French and Indian War (Brock, 1975, chapter 9). The common denominator here is wartime finance, and it is worthwhile to recognize that the vast majority of the bills of credit issued in the colonies were issued during wartime to pay for pressing military expenditures. Peacetime issues did occur and are in some respects quite interesting as they seem to have been motivated in part by a desire to stimulate the economy (Lester, 1970). However, peacetime emissions are dwarfed by those that occurred in war.20 Some historians enamored of the land bank system, whereby newly emitted bills were lent to landowners in order to promote economic development, have stressed the economic development aspect of colonial emissions – particularly those of Pennsylvania – while minimizing the military finance aspect (Schweitzer, 1989, pp. 313-4). The following graph, however, illustrates the fundamental importance of war finance; the dramatic spike marks the French and Indian War (Brock, 1992, Tables 4, 6).

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That bills in circulation peaked in 1760 reflects the fact that Quebec fell in 1759 and Montreal in 1760, so that the land war in North America was effectively over by 1760.

Because bills were disproportionally emitted for wartime finance it is not surprising that the colonies whose currencies depreciated due to over-issue were those who shared a border with a hostile neighbor – the New England colonies bordering French Canada and the Carolinas bordering Spanish Florida.21 The colonies from New York to Virginia were buffered by their neighbors and therefore issued no more than modest amounts of paper money until they were drawn into the French and Indian War, by which time their economies were large enough to temporarily absorb the issues.

It is important not to confuse the bills of credit issued by a colony with the bills of credit circulating in that colony. “Under the circumstances of America before the war,” a Maryland resident wrote in 1787, “there was a mutual tacit consent that the paper of each colony should be received by its neighbours” (Hanson, 1787, p. 24).22 Between 1710 and 1750, the currencies of Massachusetts, Connecticut, New Hampshire, and Rhode Island passed indiscriminately and at par with one another in everyday transactions throughout New England (Brock, 1975, pp. 35-6). Although not quite so integrated a currency area as New England the colonies of New York, Pennsylvania, New Jersey, and Delaware each had bills of credit circulating within its neighbors’ borders (McCusker, 1978, pp. 169-70, 181-182). In the early 1760s, Pennsylvania money was the primary medium of exchange in Maryland (Maryland Gazette, September 15, 1763; Hazard, 1852, Eighth Series, vol. VII, p. 5826; McCusker, 1978, p. 193). In 1764 one quarter of South Carolina’s bills of credit circulated in North Carolina and Georgia (Ernst, 1973, p. 106). Where the currencies of neighboring colonies were of equal value, as was the case in New England between 1710 and 1750, bills of credit of neighboring colonies could be credited and debited in book accounts at face value. When this was not the case, as when Pennsylvania, Connecticut, or New Jersey bills of credit were used to pay a debt in New York, an adjustment had to be made to convert these sums to New York money. The conversion was usually based on the par values assigned to Spanish dollars by each colony. Indeed, this was also how merchants generally handled intercolonial exchange transactions (McCusker, 1978, p. 123). For example, on the eve of the Revolution a Spanish dollar was rated at 7 s. 6 d. in Pennsylvania money and at 8 s. in New York money. The ratio of eight to seven and a half being equal to 1.06666, Pennsylvania bills of credit were accepted in New York at a 6 and 1/3% advance (Stevens, 1867, pp. 10-11, 18). Connecticut rated the Spanish dollar at 6 s., and because the ratio of eight to six is 1.333, Connecticut bills of credit were accepted at a one third advance in New York (New York Journal, July 13, 1775). New Jersey’s paper money was a peculiar exception to this rule. By the custom of New York’s merchants, New Jersey bills of credit were accepted for thirty years or more at an advance of one pence in the shilling, or 8 and 1/3%, even though New Jersey rated the Spanish dollar at 7 s, 6 d., just as Pennsylvania did. The practice was controversial in New York, and the advance was finally reduced to the “logical” 6 and 2/3% advance by an act of the New York assembly in 1774.23

Means of Payment – Foreign Specie Coins

Specie coins were the other kind of cash that commonly circulated in the colonies. Few specie coins were minted in the colonies. Massachusetts coined silver “pine tree shillings” between 1652 and the closing of the mint in the early 1680s. This was the only mint of any size or duration in the colonies, although minting of small copper coins and tokens did occur at a number of locations (Jordan, 2002; Mossman, 1993). Colonial coinage is interesting numismatically, but economically it was too slight to be of consequence. Most circulating specie was minted abroad. The gold and silver coins circulating in the colonies were generally of Spanish or Portuguese origin. Among the most important of these coins were the Portuguese Johannes and moidore (more formally, the moeda d’ouro) and the Spanish dollar and pistole. The Johanneses were gold coins, 8 escudos (12,800 reis) in denomination; their name derived from the obverse of the coin, which bore the bust of Johannes V. Minted in Portugal and Brazil they were commonly known in the colonies as “joes.” The fractional denominations were 4 escudo and 2 escudo coins of the same origin. The 4 escudo (6,400 reis) coin, or “half joe,” was one of the most commonly used coins in the late colonial period. The moidore was another Portuguese gold coin, 4,000 reis in denomination. That these coins were being used as a medium of exchange in the colonies is not so peculiar as it might appear. Raphael Solomon (1976, p. 37) noted that these coins “played a very active part in international commerce, flowing in and out of the major seaports in both the Eastern and Western Hemispheres.” In the late colonial period the mid-Atlantic colonies began selling wheat and flour to Spain and Portugal “for which in return, they get hard cash” (Lydon, 1965; Virginia Gazette, January 12, 1769; Brodhead, 1853, vol. 8, p. 448).

The Spanish dollar and its fractional parts were, in McCusker’s (1978, p. 7) words, “the premier coin of the Atlantic world in the seventeenth and eighteenth centuries.” Well known and widely circulated throughout the world, its preeminence in colonial North America accounts for the fact that the United States uses dollars, rather than pounds, as its unit of account. The Spanish pistole was the Spanish gold coin most often encountered in America. While these coins were the most common, many others also circulated there (Solomon, 1976; McCusker, 1978, pp. 3-12).

Alongside the well-known gold and silver coins were various copper coins, most notably the English half-pence, that served as small change in the colonies. Fractional parts of the Spanish dollar and the pistareen, a small silver coin of base alloy, were also commonly used as change.24

None of these foreign specie coins were denominated in local currency units, however. One needed a rule to determine what a particular coin, such as a Spanish dollar, was worth in the £., s., and d. of local currency. Because foreign specie coins were in circulation long before any of the colonies issued paper money setting a rating on these coins amounted to picking a numeraire for the economy; that is, it defined what one meant by a pound of local currency. The ratings attached to individual coins were not haphazard: They were designed to reflect the relative weight and purity of the bullion in each coin as well as the ratio of gold to silver prices prevailing in the wider world.

In the early years of colonization these coin values were set by the colonial assemblies (Nettels, 1934, chap. 9; Solomon, 1976, pp. 28-29; John Hemphill, 1964, chapter 3). In 1700 Pennsylvania passed an act raising the rated value of its coins, causing the Governor of Maryland to complain to the Board of Trade of the difficulties this created in Maryland. He sought the Board’s permission for Maryland to follow suit. When the Board investigated the matter it concluded that the “liberty taken in many of your Majesty’s Plantations, to alter the rates of their coins as often as they think fit, does encourage an indirect practice of drawing the money from one Plantation to another, to the undermining of each other’s trade.” In response they arranged for the disallowance of the Pennsylvania act and a royal proclamation to put an end to the practice.25

Queen Anne’s proclamation, issued in 1704, prohibited a Spanish dollar of 17½ dwt. from passing for more than 6 s. in the colonies. Other current foreign silver coins were rated proportionately and similarly prohibited from circulating at a higher value. This particular rating of coins became known as “proclamation money.”26 It might seem peculiar that the// proclamation did not dictate that the colonies adopt the same ratings as prevailed in England. The Privy Council, however, had incautiously approved a Massachusetts act passed in 1697 rating Spanish dollars at 6 s., and attorney general Edward Northey felt the act could not be nullified by proclamation. This induced the Board of Trade to adopt the rating of the Massachusetts act.27

Had the proclamation been put into operation its effects would have been extremely deflationary because in most colonies coins were already passing at higher rates. When the proclamation reached America only Barbados attempted to enforce it. In New York Governor Lord Cornbury suspended its operation and wrote the Board of Trade that he could not enforce it in New York while it was being ignored in neighboring colonies as New York would be “ruined beyond recovery” if he did so (Brodhead, 1853, vol. 4, pp. 1131-1133; Brock, 1975, chapter 4). A chorus of such responses led the Board of Trade to take the matter to Parliament in hopes of enforcing a uniform compliance throughout America (House of Lords, 1921, pp. 302-3). On April 1, 1708, Parliament passed “An Act for ascertaining the Rates of foreign Coins in her Majesty’s Plantations in America” (Ruffhead, vol. 4, pp. 324-5). The act reiterated the restrictions embodied in Queen Anne’s Proclamation, and declared that anyone “accounting, receiving, taking, or paying the same contrary to the Directions therein contained, shall suffer six Months Imprisonment . . . and shall likewise forfeit the Sum of ten Pounds for every such Offence . . .”

The “Act for ascertaining the Rates of foreign Coins” never achieved its desired aim. In the colonies it was largely ignored, and business continued to be conducted just as if the act had never been passed. Pennsylvania, it was true, went though a show of complying but even that lapsed after a while (Brock, 1975, chapter 4). What the act did do, however, was push the process of coin rating into the shadows because it was no longer possible to address it in an open way by legislative enactment. Laws that passed through colonial legislatures (certain charter and proprietary colonies excepted) were routinely reviewed by the Privy Council, and if found to be inconsistent with British law, were declared null and void.

Two avenues remained open to alter coin ratings – private agreements among merchants that would not be subject to review in London, and a legislative enactment so stealthy as to slip through review unnoticed. New York was the first to succeed using stealth. In November 1709 it emitted bills of credit “for Tenn thousand Ounces of Plate or fourteen Thousand Five hundred & fourty five Lyon Dollars” (Lincoln, 1894, vol. 1, chap. 207, pp. 695-7). The Lyon dollar was an obscure silver coin that had escaped being explicitly mentioned in the enumeration of allowable values that had accompanied Queen Anne’s proclamation. Since 15 years previously New York had rated the Lyon dollar at 5 s. 6 d., it was generally supposed that that rating was still in force (Solomon, 1976, p. 30). The value of silver implied in the law’s title is 8 s. an ounce – a value higher than allowed by Parliament. Until 1723, New York’s emission acts contained clauses designed to rate an ounce of silver at 8 s. The act in 1714, for instance, tediously enumerated the denominations of the bills to be printed, in language such as “Five Hundred Sixty-eight Bills, of Twenty-five Ounces of Plate, or Ten Pounds value each” (Lincoln, 1894, vol. 1, chap. 280, pp. 819). When the Board of Trade finally realized what New York was up to it was too late: the earlier laws had already been confirmed. When the Board wrote Governor Hunter to complain, he replied, in part, “Tis not in the power of men or angels to beat the people of this Continent out of a silly notion of their being gainers by the Augmentation of the value of Plate” (Brodhead, vol. 5, p. 476). These colony laws were still thought to be in force in the late colonial period. Gaine’s New York Pocket Almanack for 1760 states that “Spanish Silver . . . here ‘tis fixed by Law at 8 s. per Ounce, but is often sold and bought from 9 s. to 9 s. and 3 d.”

In 1753 Maryland also succeeded using stealth, including revised coin ratings inconsistent with Queen Anne’s proclamation in “An Act for Amending the Staple of Tobacco, for Preventing Fraud in His Majesty’s Customs, and for the Limitation of Officer’s Fees” (McCusker, 1978, p. 192).

The most common subterfuge was for a colony’s merchants to meet and agree on coin ratings. Once the merchants agreed on such ratings, the colonial courts appear to have deferred to them, which is not surprising in light of the fact that many judges and legislators were drawn from the merchants’ ranks (e.g. Horle, 1991). These private agreements effectively nullified not only the act of Parliament but also local statutes, such as those rating silver in New York at 8 s. an ounce. Records of many such agreements have survived.28 There is also testimony that these agreements were commonplace. Lewis Morris remarked that “It is a common practice … [for] the merchants to put what value they think fit upon Gold and Silver coynes current in the Plantations.” When the Philadelphia merchants published a notice in the Pennsylvania Gazette of September 16, 1742 enumerating the values they had agreed to put on foreign gold and silver coins, only the brazenness of the act came as a surprise to Morris. “Tho’ I believe by the merchants private Agreements amongst themselves they have allwaies done the same thing since the Existence of A paper currency, yet I do not remember so publick an instance of defying an act of parliament” (Morris, 1993, vol. 3, pp. 260-262, 273). These agreements, when backed by a strong consensus among merchants, seem to have been effective. Decades later, Benjamin Franklin (1959, vol. 14, p. 232) recollected how the agreement that had offended Morris “had a great Effect in fixing the Value and Rates of our Gold and Silver.”

After the New York Chamber of Commerce was founded in 1768, merchant deliberations on these agreements were recorded. During this period, the coin ratings in effect in New York were routinely published in almanacs, particularly Gaine’s New-York pocket almanac. When the New York Chamber of Commerce resolved to change the rating of coins and the minimum allowable weight for guineas the almanac values changed immediately to reflect those adopted by the Chamber (Stevens, 1867, pp. 56-7. 69).29

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The coin rating table above, reproduced from The New-York Pocket Almanack for the Year 1771 shows how coin-rating worked in practice in the late colonial period. (Note the reference to the deliberations of the Chamber of Commerce.) It shows, for instance, that if you tendered a half joe in payment of debt in Pennsylvania, you would be credited with having paid £3 Pennsylvania money. If the same half joe were tendered in payment of a debt in New York you would be credited with having paid £ 3 4 s. New York money. In Connecticut it would have been £2 8 s. Connecticut money.30

The colonists possessed no central bank and colonial treasurers, however willing they might have been to exchange paper for specie, sometimes found themselves without the means to do so. That these coin ratings were successfully maintained for decades on end was a testament to the public’s faith in the bills of credit, which made them willing to voluntarily exchange them for specie at the established rate. Writing in 1786 and attempting to explain why New Jersey’s colonial bills of credit had retained their value, “Eugenio” attributed their success to the fact that it possessed what he called “the means of instant realization at value.” This awkward phrase signified the bills were instantly convertible at par. “Eugenio” went on to explain why:

“It is true that government did not raise a sum of coin and deposit the same in the treasury to exchange the bills on demand; but the faith of the government, the opinion of the people, and the security of the fund formerly by a well-timed and steady policy, went so hand in hand and so concurred to support each other, that the people voluntarily and without the least compulsion threw all their gold and silver, not locking up a shilling, into circulation concurrently with the bills; whereby the whole coin of the government became forthwith upon an emission of paper, a bank of deposit at every man’s door for the instant realization or immediate exchange of his bill into gold or silver. This had a benign and equitable, a persuasive, a satisfactory, and an extensive influence. If any one doubted the validity or price of his bill, his neighbor immediately removed his doubts by exchanging it without loss into gold or silver. If any one for a particular purpose needed the precious metals, his bill procured them at the next door, without a moment’s delay or a penny’s diminution. So high was the opinion of the people raised, that often an advance was given for paper on account of the convenience of carriage. In the market as well as in the payment of debts, the paper and the coin possessed a voluntary, equal, and concurrent circulation, and no special contract was made which should be paid or whether they should be received at a difference. By this instant realization and immediate exchange, the government had all the gold and silver in the community as effectually in their hands as if those precious metals had all been locked up in their treasury. By this realization and exchange they could extend credit to any degree it was required. The people could not be induced to entertain a doubt of their paper, because the government had never failed them in a single instance, either in war or in peace (New Jersey Gazette, January 30, 1786).”

Insofar as colonial bills of credit were convertible on demand into specie at the rated specie value of coins, there is no mystery as to why those bills of credit maintained their value. How merchants maintained and enforced such accords, however, is relatively inscrutable. Some economists are incredulous that private associations of merchants could accomplish the feat. The best evidence on this question can be found in a pamphlet by a disgruntled inhabitant complaining of the actions of a merchants’ association in Antigua (Anon., 1740), which provides a tantalizing glimpse of the methods merchants used.

Means of Payment – Private debt instruments

This leaves private debt instruments, such as bank notes, bills of exchange, notes of hand, and shop notes. It is sometimes asserted that there were no banks in colonial America, but this is something of an overstatement. There were several experiments made and several embryonic private banks actually got notes into circulation. Andrew McFarland Davis devoted an entire volume to banking in colonial New England (Davis, 1970, vol. 2; Perkins 1991 ). Perhaps the most successful bank of the era was established in South Carolina in 1731. It apparently issued notes totaling £50,000 South Carolina money and operated successfully for a decade.31 However, the banks that did exist did not last long enough or succeed in putting enough notes in circulation for us to be especially concerned about them.

Bills of exchange were similar to checks. A hypothetical example will illustrate how they functioned. The process of creating a bill of exchange began when someone obtained a balance on account overseas (in the case of the colonies, that place was often London). Suppose a Virginia tobacco producer consigned his tobacco to be sold in England, with the sterling proceeds to remain temporarily in the hands of a London merchant. The Virginia planter could then draw on those funds, by writing a bill of exchange payable in London. Suppose further that the planter drew a bill of exchange on his London correspondent, and sold it to a Virginia merchant, who then transmitted it to London to pay a balance due on imported dry goods. When the bill of exchange reached London, the dry goods wholesaler who received it would call on the London merchant holding the funds in order to receive the payment specified in the bill of exchange.

Bills of exchange were widely used in foreign trade, and were the preferred and most common method for paying debts due overseas. Because of the nature of the trade they financed, bills of exchange were usually in large denominations. Also, because bills of exchange were drawn on particular people or institutions overseas, there was an element of risk involved. Perhaps the person drawing the bill was writing a bad check, or perhaps the person on whom the bill was drawn was himself a deadbeat. One needed to be confident of the reputations of the parties involved when purchasing a bill of exchange. Perhaps because of their large denominations and the asymmetric information problems involved, bills of exchange played a limited role as a medium of exchange in the inland economy (McCusker, 1978, especially pp. 20-21).

Small denomination IOUs, called “notes of hand” were widespread, and these were typically denominated in local currency units. For the most part, these were not designed to circulate as a medium of exchange. When someone purchased goods from a shopkeeper on credit, the shopkeeper would generally get a “note of hand” as a receipt. In the court records in the Connecticut archives, one can find the case files for countless colonial-era cases where an individual was sued for nonpayment of a small debt.32 The court records generally include a note of hand entered as evidence to prove the debt. Notes of hand sometimes were proffered to third parties in payment of debt, however, particularly if the issuer was a person of acknowledged creditworthiness (Mather, 1691, p. 191). Some individuals of modest means created notes of hand in small denominations and attempted to circulate them as a medium of exchange; in Pennsylvania in 1768, a newspaper account stated that 10% of the cash offered in the retail trade consisted of such notes (Pennsylvania Chronicle, October 12, 1768; Kimber, 1998, p. 53). Indeed, many private banking schemes, such as the Massachusetts merchants’ bank, the New Hampshire merchants’ bank, the New London Society, and the Land Bank of 1740 were modeled on private notes of hand, and each consisted of an association designed to circulate such notes on a large scale. For the most part, however, notes of hand lacked the universal acceptability that would have unambiguously qualified them as money.

Shop notes were “notes of hand” of a particular type and seem to have been especially widespread in colonial New England. The twentieth-century analogue to shop notes would be scrip issued by an employer that could be used for purchases at the company store.33 Shop notes were I.O.U.s of local shopkeepers, redeemable through the shopkeeper. Such an I.O.U. might promise, for example, £6 in local currency value, half in money and half in goods (Weeden, 1891, vol. 2, p. 589; Ernst, 1990). Hugh Vance described the origins of shop notes in a 1740 pamphlet:

“… by the best Information I can have from Men of Credit then living, the Fact is truly this, viz. about the Year 1700, Silver-Money became exceedingly scarce, and the Trade so embarassed, that we begun to go into the Use of Shop-Goods, as the Money. The Shopkeepers told the Tradesmen, who had Draughts upon them from the Merchants for all Money, that they could not pay all in Money (and very truly) and so by Degrees brought the Tradesmen into the Use of taking Part in Shop-Goods; and likewise the Merchants, who must always follow the natural Course of Trade, were forced into the Way of agreeing with Tradesmen, Fishermen, and others; and also with the Shopkeepers, to draw Bills for Part and sometimes for all Shop-Goods (Vance, 1740, CCR III, pp. 390-91).”

Vance’s account seems accurate in all respects save one. Merchants played an active role in introducing shop notes into circulation. By the 1740s shop notes had been much abused, and it was disingenuous of Vance (himself a merchant) to suggest that merchants had had the system thrust upon them by shopkeepers. Merchants used shop notes to expedite sales and returns. The merchant might contact a shopkeeper and a shipbuilder. The shipbuilder would build a ship for the merchant, the ship to be sent to England and sold as a way of making returns. In exchange the merchant would provide the builder with shop notes and the shopkeeper with imported goods. The builder used the shop notes to pay his workers. The shop notes, in turn, were redeemed at the shop of the shopkeeper when presented to him by workers (Boston Weekly Postboy, December 8, 1740). Thomas Fitch tried to interest an English partner in just such a scheme in 1710:

“Realy it’s extream difficult to raise money here, for goods are generally Sold to take 1/2 money & 1/2 goods again out of the buyers Shops to pay builders of Ships [etc?] which is a great advantage in the readier if not higher sale of goods, as well as that it procures the Return; Wherefore if we sell goods to be paid in money we must give long time or they will not medle (Fitch, 1711, to Edward Warner, November 22, 1710).”

Like other substitutes for cash, shop notes were seldom worth their stated values. A 1736 pamphlet, for instance, reported wages to be 6s in bills of credit, or 7s if paid in shop notes (Anonymous, 1736, p. 143). One reason shop notes failed to remain at par with cash is that shopkeepers often refused to redeem them except with merchandise of their own choosing. Another abuse was to interpret money to mean British goods; half money, half goods often meant no money at all.34

Controversies

Colonial bills of credit were controversial when they were first issued, and have remained controversial to this day. Those who have wanted to highlight the evils of inflation have focused narrowly on the colonies where the bills of credit depreciated most dramatically – those colonies being New England and the Carolinas, with New England being a special focus because of the wealth of material that exists concerning New England history. When Hillsborough drafted a report for the Board of Trade intended to support the abolition of legal tender paper money in the colonies he rested his argument on the inflationary experiences of these colonies (printed in Whitehead, 1885, vol. IX, pp. 405-414). Those who have wanted to defend the use of bills of credit in the colonies have focused on the Middle colonies, where inflation was practically nonexistent. This tradition dates back at least to Benjamin Franklin (1959, vol. 14, pp. 77-87), who drafted a reply to the Board of Trade’s report in an effort to persuade Parliament to repeal of the Currency Act of 1764. Nineteenth-century authors, such as Bullock (1969) and Davis (1970), tended to follow Hillsborough’s lead whereas twentieth-century authors, such as Ferguson (1953) and Schweitzer (1987), followed Franklin’s.

Changing popular attitudes towards inflation have helped to rehabilitate the colonists. Whereas inflation in earlier centuries was rare, and even the mild inflation suffered in England between 1797 and 1815 was sufficient to stir a political uproar, the twentieth century has become inured to inflation. Even in colonial New England between 1711 and 1749, which was thought to have done a disgraceful job in managing its bills of credit, peacetime inflation was only about 5% per annum. Inflation during King George’s War was about 35% per annum.35

Nineteenth-century economists were guilty of overgeneralizing based on the unrepresentative inflationary experiences and associated debtor-creditor conflicts that occurred in a few colonies. Some twentieth-century economists, however, have swung too far in the other direction by generalizing on the basis of the success of the system in the Middle colonies and by attributing the benign outcomes there to the fundamental soundness of the system and its sagacious management. It would be closer to the truth, I believe, to note that the virtuous restraint exhibited by the Middle colonies was imposed upon them. Emissions in these colonies were sometimes vetoed by royal authorities and frequently stymied by instructions issued to royal or proprietary governors. The success of the Middle colonies owes much to the simple fact that they did not exert themselves in war to the extent that their New England neighbors did and that they were not permitted to freely issue bills of credit in peacetime.

A recent controversy has developed over the correct answer to the question – Why did some bills of credit depreciate, while others did not? Many early writers took it for granted that the price level in a colony would vary proportionally with the number of bills of credit the colony issued. This assumption was mocked by Ernst (1973, chapter 1) and devastated by West (1978). West performed simple regressions relating the quantity of bills of credit outstanding to price indices where such data exist. For most colonies he found no correlation between these variables. This was particularly striking because in the Middle colonies there was a dramatic increase in the quantity of bills of credit outstanding during the French and Indian War, and a dramatic decrease afterwards. Yet this large fluctuation seemed to have little effect on the purchasing power of those bills of credit as measured by prices of bills of exchange and the imperfect commodity price indices we possess. Only in New England in the first half of the eighteenth century did there seem to be a strong correlation between bills of credit outstanding and prices and exchange rates. Officer (2005) examined the New England episode and concluded that the quantity theory provides an adequate explanation in this instance, making the contrast with many other colonies (most notably, the Middle colonies) even more remarkable.

Seizing on West’s results Bruce Smith suggested that they disproved the quantity theory of money and provided evidence in favor of an alternative theory of money based on theoretical models of Wallace and Sargent, which Smith characterized as the “backing theory.”36 According to Smith (1985a, p. 534), the redemption provisions enacted when bills of credit were introduced into circulation on tax and loan funds were what prevented them from depreciating. “Just as the value of privately issued liabilities depends on the issuers’ balance sheet,” he wrote, “the same is true for government liabilities. Thus issues of money which are accompanied by increases in the (expected) discounted present value of the government’s revenues need not be inflationary.” One obvious problem with this theory is that the New England bills of credit which did depreciate were issued in exactly the same way. Smith’s answer was that the New England colonies administered their tax and loan funds poorly and New England’s poor administration accounted for the inflation experienced there.

Others who did not wholly agree with Smith – especially his sweeping refutation of the quantity theory – nonetheless pointed to the redemption provisions in explaining why bills of credit often retained their value (Wicker, 1985; Bernholz, 1988; Calomiris, 1988; Sumner, 1993; Rousseau, 2007). Of those who assigned credit to the redemption provisions, however, only Smith grappled with the key question; namely, why essentially identical redemption provisions failed to prevent inflation elsewhere.

Crediting careful administration of tax and loan funds for the steady value of some colonial currencies, and haphazard administration for the depreciation of others looks superficially appealing. The experiences of Pennsylvania and Rhode Island, generally thought to be the most and least successful issuers of colonial bills of credit, fit the hypothesis nicely. However, when one examines other cases, the hypothesis breaks down. Connecticut was generally credited with administering her bills of credit very carefully, yet they depreciated in lockstep with those of her New England neighbors for forty years (Brock, 1975, pp. 43-47). Virginia’s bills of credit retained their value even though Virginia’s colonial treasurer was discovered to have embezzled a sum equal to nearly half of Virginia’s total outstanding bills of credit and returned them to circulation (Michener, 1987, p. 247). North Carolina’s bills of credit held their value well in the late colonial period despite tax administration so notoriously corrupt it led to an armed revolt (Michener, 1987, pp. 248-9, Ernst, 1973, p. 221).

A competing explanation has been offered by Michener (1987, 1988), Brock (1992), McCallum (1992), and Michener and Wright (2006b). According to this explanation, the coin rating system operating in the colonies meant they were effectively on a specie standard with a de facto fixed par of exchange. Provided emissions of paper money did not exceed the amount needed for domestic purposes (“normal real balances,” in McCallum’s terminology) some specie would remain in circulation, prices would remain stable, and the fixed par could be maintained. Where emissions exceeded this bound specie would disappear from circulation and exchange rates would float freely, no longer tethered to the fixed par. Further emissions would cause inflation.37 This was said to account for inflation in New England after 1712, where specie did, in fact, completely disappear from circulation (Hutchinson, 1936, vol. 2, p. 154; Michener, 1987, pp. 288-94). If this explanation is correct, it would suggest that emissions of bills of credit ought to be offset by specie outflows, ceteris paribus.

Critics of the “specie circulated at rated values” explanation have frequently disregarded the ceteris paribus qualification and maintained that the theory implies specie flows always ought to be highly negatively correlated with changes in the quantity of bills of credit. This amounts to assuming the quantity of money demanded per capita in colonial America was nearly constant. If this were a valid test of the theory, one would be forced to reject it, because the specie stock fell little, if at all, in the Middle colonies in 1755-1760 as bills of credit increased, and when bills of credit began to decrease after 1760, specie became scarcer.

The flaw in critics’ reasoning, in my opinion, is that it assumes three unwarranted facts. First, that the demand for money, narrowly defined to mean bills of credit plus specie, was very stable despite the widespread use of bookkeeping barter; Second, that the absence of evidence of large interest rate fluctuations is evidence of the absence of large interest rate fluctuations (Smith, 1985b, pp. 1193, 1198; Letwin, 1982, p. 466); Third, that the opportunity cost of holding money is adequately measured by the nominal interest rate.38

With respect to the first point, colonial wars significantly influenced the demand for money. During peacetime, most transactions were handled by means of book credit. During major wars, however, many men served in the militia. Men in military service were paid in cash and taken far from the community in which their creditworthiness was commonly known, reducing both their need for book credit and their ability to obtain it. Moreover, it would have to give a shopkeeper pause and discourage him from advancing book credit to consider the real possibility that even his civilian customers might find themselves in the militia in the near future and gone from the local community, possibly forever. In each of the major colonial wars there is evidence suggesting an increase in cash real balances that could be attributed to the war’s impact on the book credit system. The increase in real money balances during the French and Indian War and the subsequent decrease can be largely accounted for in this way. With respect to the second point, fluctuations in the money supply are even compatible with a stable demand for money if periods when money is scarce are also periods when interest rates are high, as is also suggested by the historical record.39 It is true that the maximum interest rates specified in colonial usury laws are stable, generally in the range of 6%-8% per annum, often a bit lower late in the colonial era than at its beginning. This has been taken as evidence that colonial interest rates were stable. However, we know that these usury laws were commonly evaded and that market rates were often much higher (Wright, 2002, pp. 19-26). Some indication of how much higher became evident in the summer of 1768 when the Privy Council unexpectedly struck down New Hampshire’s usury law.40 News of the disallowance did not reach New Hampshire until the end of the year, at which time New Hampshire, having sunk the bills of credit issued to finance the French and Indian War during the 5 year interval permitted by the Currency Act of 1751, was in the throes of a liquidity crisis.41 Governor Wentworth reported to the Lords of Trade, that “Interest arose to 30 p. Ct. within six days of the repeal of the late Act.”42 By contrast, when cash was plentiful in Pennsylvania at the height of the French and Indian War, Pennsylvania’s “wealthy people were catching at every opportunity of letting out their money on good security, on common interest [that is, seven per cent].”43 With respect to the third point, the received theory that the nominal interest rate measures the opportunity cost of holding real money balances is derived from models in which individuals are free to borrow and lend at the nominal interest rate. Insofar as lenders respected the usury ceilings, borrowers were unable to borrow freely at the nominal interest rate. Recent work on moral hazard and adverse selection suggest that even private unregulated lenders forced to make loans in an environment characterized by seriously asymmetric information would be wise to ration loans by charging less than market clearing rates and limiting allowed borrowing. The creditworthiness of individuals was more difficult to determine in colonial times than today, and asymmetric information problems were rife. Under such circumstances, even an unregulated market rate of interest (if we had such data, which we don’t) would understate the opportunity cost of holding money for constrained borrowers.

The debate over why some colonial bills of credit depreciated, while others did not has spilled over into another related question: how much cash [i.e., paper money plus specie] circulated in the American colonies, and how much was in bills of credit, and how much was in specie? Clearly, if there was hardly any specie anywhere in colonial America, the concomitant circulation of specie at fixed rates could scarcely account for the stable purchasing power of bills of credit.

Determining how much cash circulated in the colonies is no easy matter, because the amount of specie in circulation is so hard to determine. The issue is further complicated by the fact that the total amount of cash in circulation fluctuated considerably from year to year, depending on such things as the demand for colonial staples and the magnitude of British military expenditure in the colonies (Sachs, 1957; Hemphill, 1964). The mix of bills of credit and specie in circulation was also highly variable. In the Middle colonies – and much of the most contentious debate involves the Middle colonies – the quantity of bills of credit in circulation was very modest (both absolutely and in per-capita terms) before the French and Indian War. The quantity exploded to cover military expenditures during the French and Indian War, and then fell again following 1760, until by the late colonial period, the quantity outstanding was once again very modest. Pennsylvania’s experience is not atypical of the Middle colonies. In 1754, on the eve of the French and Indian War, only £81,500 in Pennsylvania bills of credit were in circulation. At the height of the conflict, in 1760, this had increased to £446,158, but by 1773 the sum had been reduced to only £135,006 (Brock, 1992, Table 6). Any conclusion about the importance of bills of credit in the colonial money supply has to be carefully qualified because it will depend on the year in question.

Traditionally, economic historians have focused their attention on the eve of the Revolution, with a special focus on 1774, because of Alice Hanson Jones’s extensive study of 1774 probate records. Even with the inquiry dramatically narrowed, estimates have varied widely. McCusker and Menard (1985, p. 338), citing Alexander Hamilton for authority, estimated that just before the Revolution the “current cash” totaled 30 million dollars. Of the 30 million dollars, Hamilton said 8 million consisted of specie (27%). On the basis of this authority, Smith (1985a, p. 538; 1988, p. 22) has maintained that specie was a comparatively minor component in the colonial money supply.

Hamilton was arguing in favor of banks when he made this oft-cited estimate, and his purpose in presenting it was to show that the circulation was capable of absorbing a great deal of paper money, which ought to make us wonder whether his estimate might have been biased by his political agenda. Whether biased, or simply misinformed, Hamilton clearly got his facts wrong.

All estimates of the quantity of colonial bills of credit in circulation – including those of Brock (1975, 1992) that have been relied on by recent authors of all sides of the debate – lead inescapably to the conclusion that in 1774 there were very few bills of credit left outstanding, nowhere near the 22 million dollars implied by Hamilton. Calculations along these lines were first performed by Ratchford. Ratchford (1941, pp. 24-25) estimated the total quantity of bills of credit outstanding in each colony on the eve of the Revolution, and then added the local £., s., and d. of all the colonies (a true case of adding apples and oranges), converted to dollars by valuing dollars at 6 s. each, and concluded that the total was equal to about $5.16 million.

Ratchford’s method of summing local pounds and then converting to dollars is incorrect because local pounds did not have a uniform value across colonies. Since dollars were commonly rated at more than 6 s., his procedure resulted in an inflated estimate. We can correct this error by using McCusker’s (1978) data on 1774 exchange rates to convert local currency to sterling for each colony, obtain a sum in pounds sterling, and then convert to dollars using the rated value of the dollar in pounds sterling, 4½ s. Four and a half s. was very near the dollar’s value in London bullion markets in 1774, so no appreciable error arises from using the rated value. Doing so reduces Ratchford’s estimate to $3.42 million. Replacing Ratchford’s estimates of currency outstanding in New York, New Jersey, Pennsylvania, Virginia, and South Carolina with apparently superior data published by Brock (1975, 1992) reduces the total to $2.93 million. Even allowing for some imprecision in the data, this simply can’t be reconciled with Hamilton’s apparently mythical $22 million in paper money!

How much current cash was there in the colonies in 1774? Alice Hanson Jones’s extensive research into probate records gives an independent estimate of the money supply. Jones (1980, table 5.2) estimated that per capita cash-holding in the Middle colonies in 1774 was £1.8 sterling, and that the entire money supply of the thirteen colonies was slightly more than 12 million dollars.44 McCallum (1992) proposed another way to estimate total money balances in the colonies. McCallum started with the few episodes where historians generally agree paper money entirely displaced specie, making the total money supply measurable. He used money balances in these episodes as a basis for estimating money balances in other colonies by deriving approximate measures of the variability of money holdings over colonies and over time. Given the starkly different methodologies, it is remarkable that McCallum’s approach yields an answer practically indistinguishable from Jones’s.45

Various contemporary estimates, including estimates by Pelatiah Webster, Noah Webster, and Lord Sheffield, also suggest the total colonial money supply in 1774 was ten to twelve million dollars, mostly in specie (Michener 1988, p. 687; Elliot, 1845, p. 938). If we tentatively accept that the total money supply in the American colonies in 1774 was about twelve million dollars, and that only three million dollars worth of bills of credit remained outstanding, then fully 75% of the prewar money supply must have been in specie.

Even this may be an underestimate. Colonial probate inventories are notoriously incomplete, and the usual presumption is that Jones’s estimates are likely to be downwardly biased. Two examples not involving money illustrate the general problem. In Jones’s collection of inventories, over 20% of the estates did not include any clothes (Lindert, 1981, p. 657). In an independent survey of Surry County, Virginia probate records, Anna Hawley (1987, pp. 27-8) noted that only 34% of the estates listed hoes despite the fact that the region’s staple crops, corn and tobacco, had to be hoed several times a year.

In Jones’s 1774 database an amazing 70% of all estates were devoid of money. While the widespread use of credit made it possible to do without money in most transactions it is likely some estates contained cash that does not appear in probate inventories. Peter Lindert (1981, p. 658) surmised “cash was simply allocated informally among survivors even before probate took place.” McCusker and Menard (1985, p. 338, fn. 14) concurred noting “cash would have been one of the things most likely to have been distributed outside the usual probate proceedings.” If Jones actually underestimated cash holdings in 1774 the implication would be that more than 75% of the prewar money supply must have been specie.

That most of the cash circulating in the colonies in 1774 must have been specie seems like an inescapable conclusion. The issue has been clouded, however, by the existence of many contradictory and internally inconsistent estimates in the literature. By using them to defend his contention that specie was relatively unimportant, Smith (1988, p. 22) drew attention to these estimates.

The first such estimate was made by Roger Weiss (1970, p. 779), who computed the ratio of paper money to total money in the Middle colonies, using Jones’s probate data to estimate total money balances as has been done here; he arrived at a considerably smaller fraction of specie in the money supply. There is a simple explanation for this puzzling result: Weiss, whose article was published in 1970, based his analysis on Jones’s 1968 dissertation rather than her 1980 book. In her dissertation, Jones (1968, Tables 3 and 4, pp. 50-51) estimated the money supply in the three Middle colonies at £2.0 local currency per free white capita. Since £1 local currency was worth about £0.6 sterling, Weiss began with an estimated total money supply of £1.2 sterling per free white capita (equal to £1.13 per capita), rather than Jones’s more recent estimate of £1.8 sterling per capita.

Another authority is Letwin (1982, p. 467), who estimated that more than 60% of the money supply of Pennsylvania in 1775 was paper. Letwin used the Historical Statistics of the United States for his money supply data, and a casual back-of-the-envelope estimate that nominal balances in Pennsylvania were £700,000 in 1775 to conclude that 63% of Pennsylvania’s money supply was paper money. However, the data in Historical Statistics of the United States are known to be incorrect: Using Letwin’s back-of-the-envelope estimate, but redoing the calculation using Brock’s estimates of paper money in circulation, gives the result that in 1775 only 45.5% of Pennsylvania’s money supply was paper money; for 1774 the figure is 31%.46

That good faith attempts to estimate the stock of specie in the colonies in 1774 have given rise to such wildly varying and inconsistent estimates gives some indication of the task that remains to be accomplished.47 Many hints about how the specie stock varied over time in colonial America can be found in newspapers, legislative records, pamphlets and correspondence. Organizing those fragments of evidence and interpreting them is going to require great skill and will probably have to be done colony by colony. In addition, if the key to the purchasing power of colonial currency lies in the ratings attached to coins as I personally believe it does, then more effort is going to have to be paid in the future to tracking how those ratings evolved over time. Our knowledge at the moment is very fragmentary, probably because the politics of paper money has so engrossed the attention of historians that few people have attached much significance to coin ratings.

Economic historian Farley Grubb has proposed (2003, 2004, 2007) that the composition of the medium of exchange in colonial America and the early Republic can be determined from the unit of account used in arm’s length transactions, such as rewards offered in runaway ads and prices recorded in indentured servant contract registrations. If, for instance, a runaway reward is offered in pounds, shillings and pence, it means (Grubb argues) that colonial or state bills of credit were the medium of exchange used, while dollar rewards in such ads would imply silver. Grubb then uses contract registrations in the early Republic (2003, 2007) and runaway ads in colonial Pennsylvania (2004) to develop time series for hitherto unmeasurable components of the money supply and draws many striking conclusions from them. I believe Grubb is proceeding on a mistaken premise. Reversing Grubb’s procedure and using runaway ads in the early Republic and contract registrations in colonial Pennsylvania yields dramatically different results, which suggests the method is not useful. I have participated in this contentious published debate (see Michener and Wright 2005, 2006a, 2006c and Grubb 2003, 2004, 2006a, 2006b, 2007) and will leave it to the reader to draw his or her own conclusions.

Notes:

1. Beginning in 1767, Maryland issued bills of credit denominated in dollars (McCusker, 1978, p. 194).

2. For a number of years, Georgia money was an exception to this rule (McCusker, 1978, pp. 227-8).

3. Elmer (1869, p. 137). Similarly, historian Robert Shalhope (Shalhope, 2003, pp. 140, 142, 147, 290) documents a Vermont farmer who continued to reckon, at least some of the time, in New York currency (i.e. 8 shillings = $1) well into the 1820s.

4. To clarify: In New York, a dollar was rated at eight shillings, hence one reale, an eighth of a dollar, was one shilling. In Richmond and Boston, the dollar was rated at six shillings, or 72 pence, one eighth of which is 9 pence. In Philadelphia and Baltimore, the dollar was rated at seven shillings six pence, or ninety pence, and an eighth of a dollar would be 11.25 pence.

5. In 1822, for example, P. T. Barnum, then a young man from Connecticut making his first visit to New York, paid too much for a brace of oranges because of confusion over the unit of account. “I was told,” he later related, “[the oranges] were four pence apiece [as Barnum failed to realise, in New York there were 96 pence to the dollar], and as four pence in Connecticut was six cents, I offered ten cents for two oranges, which was of course readily taken; and thus, instead of saving two cents, as I thought, I actually paid two cents more than the price demanded” (Barnum, 1886, p. 18).

6. One way to see the truth of this statement is to examine colonial records predating the emission of colonial bills of credit. Virginia pounds are referred to long before Virginia issued its first bills of credit in 1755. See, for example, Pennsylvania Gazette, September 20, 1736, quoting Votes of the House of Burgesses in Virginia, August 30, 1736 or the Pennsylvania Gazette, May 29, 1746, quoting a runaway ad that mentions “a bond from a certain Fielding Turner to William Williams, for 42 pounds Virginia currency.” Advertisements in the Philadelphia newspapers in 1720 promise rewards for the return of runaway servants and slaves in Pennsylvania pounds, even though Pennsylvania did not issue its first bills of credit until 1723. The contemporary meaning of “currency” sheds light on otherwise confusing statements, such as an ad in the Pennsylvania Gazette, May 12, 1763, where the advertiser offered a reward for the recovery of £460 “New York currency” that was stolen from him and then parenthetically noted “the greatest part of said Money was in Jersey Bills.”

7. For an example of a complete list, see Felt (1839, pp. 82-83).

8. Further discussion of country pay in Connecticut can be found in Bronson (1865, pp. 23-4).

9. Weiss (1974, pp. 580-85) cites a passage from an 1684 court case that appears to contradict this discount. However, inspecting the court records shows that the initial debt consisted of 34s. 5d. in money to which the court added 17s. 3d. to cover the difference between money and country pay, a ratio of pay to money of exactly 3 to 2 (Massachusetts, 1961, pp. 303-4). Other good illustrations of the divergence of cash and country pay prices can be found in Knight (1935, pp. 40-1) and Judd (1905, pp. 95-6). The multiple price system was not limited to Massachusetts and Connecticut (Coulter, 1944, p. 107).

10. Thomas Bannister to Mr. Joseph Thomson, March 8, 1699/1700 in (Bannister, 1708).

11. In New York, for instance, early issues were legal tender, but the Currency Act of 1764 put a halt to new issues of legal tender paper money; the legal tender status of practically all existing issues expired in 1768. After prolonged and contentious negotiation with imperial authorities, the Currency Act of 1770 permitted New York to issue paper money that was a legal tender in payments to the colonial government, but not in private transactions. New York made its first issue under the terms of the Currency Act of 1770 in early 1771 (Ernst, 1973).

12. Ordinarily, but not always. For instance, in 1731 South Carolina reissued £106,500 in bills of credit without creating any tax fund with which to redeem them (Nettels, 1934, pp. 261-2; Brock, 1975, p. 123). The Board of Trade repeatedly pressured the colony to create a tax fund for this purpose, but without success. That no tax funds had been earmarked to redeem these bills was common knowledge, but it did not make the bills less acceptable as a medium of exchange, or adversely affect their value. The episode contradicts the common supposition that the promise of future redemption played a key role in determining the value of colonial currencies.

13. Once the bills of credit were placed in circulation, no distinction was made between them based on how they were originally issued. It is not as if one could only pay taxes with bills of the first sort, or repay mortgages with bills of the second sort. Many colonies, to save the cost of printing, would reuse worn but serviceable notes. A bill originally issued on loan, upon returning to the colonial treasury, might be reissued on tax funds; often it would have been impossible, even in principle, for an individual to examine the bills in his possession and deduce the funds ostensibly backing them.

14. Late in the seventeenth century Massachusetts briefly operated a mint that issued silver coins denominated in the local unit of account (Jordon, 2002). On the eve of the Revolution, Virginia obtained official permission to have copper coins minted for use in Virginia (Davis, 1970, vol. 1, chapter 2; Newman, 1956).

15. The Massachusetts government, unable to honor redemption promises made when the first new tenor emission was first created, decided in 1742 to revalue these bills from three to one to four to one with old tenor as compensation. When Massachusetts returned to a specie standard, the remaining middle tenor bills were redeemed at four to one (Davis, 1970; McCusker, 1978, p. 133).

16. New and old tenors have led to much confusion. In the Boston Weekly News Letter, July 1, 1742, there is an ad pertaining to someone who mistakenly passed Rhode Island New Tenor in Boston at three to one, when it was supposed to be valued at four to one. Modern day historians have also occasionally been misled. An excellent example can be found in Patterson (1961, p. 27). Patterson believed he had unearthed evidence of outrageous fraud during the Massachusetts currency reform, whereas he had, in fact, simply failed to convert a sum in an official document stated in new tenor terms into appropriate old tenor terms. Sufro (1976, p. 247) following Patterson, made similar accusations based on a similar misunderstanding of New England’s monetary units.

17. That colonial treasurers did not unfailingly provide this service is implicit in statements found in merchant letters complaining of how difficult it sometimes became to convert paper money to specie (Beekman to Evan and Francis Malbone, March 10, 1769, White, 1956, p. 522).

18. Nathaniel Appleton (1748) preached a sermon excoriating the province of Massachusetts Bay for flagrantly failing to keep the promises inscribed on the face of its bills of credit.

19. Goldberg (2009) uses circumstantial evidence to suggest that Massachusetts was engaged in a “monetary ploy to fool the king” when it made its first emissions. In Goldberg’s telling of the tale, the king had been furious about the Massachusetts mint and officially issuing paper money that was a full legal tender would have been a “colossal mistake” because it would have endangered the colony’s effort to obtain a new charter, which was essential to confirm the land grants the colony had already made. The alleged ploy Goldberg discovered was a provision passed shortly afterwards: “Ordered that all country pay with one third abated shall pass as current money to pay all country’s debts at the same prices set by this court.” Since those with a claim on the Treasury were going to be tendered either paper money or country pay, and since Goldberg interprets this as requiring those creditors to accept either 3 pounds in paper money or 2 pounds in country pay, the provision was, in Goldberg’s estimation, a way of forcing the paper money on the populace at a one third discount. The shortchanging of the public creditors, through some mechanism not adequately explained to my understanding, was sufficient to make the new paper money a defacto legal tender.

There are several problems with Goldberg’s analysis. Jordan (2002, pp. 36-45) has recently written the definitive history of the Massachusetts mint, and he minutely reviews the evidence pertaining to the Massachusetts mint and British reaction to it. He concludes that “there was no concerted effort by the king and his ministers to crush the Massachusetts mint.” In 1692 Massachusetts obtained a new charter and passed a law making the bills of credit a legal tender. The new charter required Massachusetts to submit all its laws to London for review, yet the imperial authorities quietly ratified the legal tender law, even though they were fully empowered to veto it, which seems very peculiar if the legal tender status of the bills was as unpopular with the King and his ministers as Goldberg maintains. The smoking gun Goldberg cites appears to me to be no more than a statement of the “three pounds of country pay equals two pounds cash” rule that prevailed in Massachusetts in the late seventeenth century. In his argument, Goldberg tacitly assumes that a pound of country pay was equal in value to a pound of hard money; he observes that the new bills of credit initially circulated at a one third discount (with respect to specie) and that this might have arisen because recipients (according to his interpretation) were offered only two pounds of country pay in lieu of three pounds of bills of credit (Goldberg, p. 1102). However, because country pay itself was worth, at most, two thirds of its nominal value in specie, by Goldberg’s reasoning paper money should have been at a discount of at least five ninths with respect to specie.

The paper money era in Massachusetts brought forth approximately fifty pamphlets and hundreds of newspaper articles and public debates in the Assembly, none of which confirm Goldberg’s inference.

20. The role bills of credit played as a means of financing government expenditures is discussed in Ferguson (1953).

21. Georgia was not founded until 1733, and one reason for its founding was to create a military buffer to protect the Carolinas from the Spanish in Florida.

22. Grubb (2004, 2006a, 2006b) argues that bills of credit did not commonly circulate across colony borders. Michener and Wright (2006a, 2006c) dispute Grubb’s analysis and provide (Michener and Wright 2006a, pp. 12-13, 24-30) additional evidence of the phenomenon.

23. Poor Thomas Improved: Being More’s Country Almanack for … 1768 gives as a rule that “To reduce New-Jersey Bills into York Currency, only add one penny to every shilling, and the Sum is determined.” (McCusker, 1978, pp. 170-71; Stevens, 1867, pp. 151-3, 160-1, 168, 185-6, 296; Lincoln, 1894, vol. 5, Chapter 1654, pp. 638-9.)

24. In two articles, John R. Hanson (1979, 1980) argued that bills of credit were important to the colonial economy because they provided much-needed small denomination money. His analysis, however, completely ignores the presence of half-pence, pistareens, and fractional denominations of the Spanish dollar. The Spanish minted halves, quarters, eighths, and sixteenths of the dollar, which circulated in the colonies (Solomon, 1976, pp. 31-32). For a good introduction to small change in the colonies, see Andrews (1886), Newman (1976), Mossman (1993, pp. 105-142), and Kays (2001).

25. Council of Trade and Plantations to the Queen, November 23, 1703, in Calendar of State Papers, 1702-1703, entry #1299. Brock, 1975, chap. 4.

26. This, it should be noted, is what British authorities meant by “proclamation money.” Since salaries of royal officials, fees, quit rents, etc. were often denominated in proclamation money, colonial courts often found a rationale to attach their own interpretation to “proclamation money” so as to reduce the real value of such salaries and fees. In New York, for example, eight shillings in New York’s bills of credit were ostensibly worth one ounce of silver although by the late colonial period they were actually worth less. This valuation of bills of credit made each seven pounds of New York bills of credit in principle worth six pounds in proclamation money. The New York courts used that fact to establish the rule that seven pounds in New York currency could pay a debt of six pounds proclamation money. This rule allowed New Yorkers to pay less in real terms than was contemplated by the British (Hart, 2005, pp. 269-71).

27. Brock (1975). The text of the proclamation can be found in the Boston New-Letter, December 11, 1704. To be precise, the Proclamation rate was actually in slight contradiction to that in the Massachusetts law, which had rated a piece of eight weighing 17 dwt. at 6 s. See Brock (1975, p. 133, fn. 7).

28. This contention has engendered considerable controversy, but the evidence for it seems to me both considerable and compelling. Apart from evidence cited in the text, see for Massachusetts, Michener (1987, p. 291, fn. 54), Waite Winthrop to Samuel Reade, March 5, 1708 and Wait Winthrop to Samuel Reade, October 22, 1709 in Winthrop (1892, pp. 165, 201); For South Carolina see South Carolina Gazette, May 14, 1753; August 13, 1744; and Manigualt (1969, p. 188); For Pennsylvania see Pennsylvania Gazette, April 2, 1730, December 3, 1767, February 15, 1775, March 8, 1775; For St. Kitts see Roberdeau to Hyndman & Thomas, October 16, 1766, in Roberdeau (1771); For Antigua, see Anonymous (1740).

29. The Chamber of Commerce adopted its measure in October 1769, apparently too late in the year to appear in the “1770” almanacs, which were printed and sold in late 1769. The 1771 almanacs, printed in 1770, include the revised coin ratings.

30. Note that the relative ratings of the half joe are aligned with the ratings of the dollar. For example, the ratio of the New York value of the half joe to the Pennsylvania value is 64 s./60 s. = 1.066666, and the ratio of the New York value of the half joe to the Connecticut value is 64 s./48 s. = 1.3333.

31. This bank has been largely overlooked, but is well documented. Letter of a Merchant in South Carolina to Alexander Cumings, Charlestown, May 23, 1730, South Carolina Public Records, Vol XIV, pp. 117-20; Anonymous (1734); Easterby (1951, [March 5, 1736/37] vol. 1, pp. 309-10); Governor Johnson to the Board of Trade in Calendar of State Papers, 1731, entry 488, p. 342; Whitaker (1741, p. 25); and Vance (1740, p. 463).

32.I base this on my own experience reviewing the contents of RG3 Litchfield County Court Files, Box 1 at the Connecticut State Library.

33. Though best documented in New England, Benjamin Franklin (1729, CCR II, p. 340) mentions their use in Pennsylvania.

34. See Douglass (1740, CCR III, pp. 328-329) and Vance (1740, CCR III, pp. 328-329). Douglass and Vance disagreed on all the substantive issues, so that their agreement on this point is especially noteworthy. See also Boston Weekly Newsletter, Feb. 12-19, 1741.

35. Data on New England prices during this period are very limited, but annual data exist for wheat prices and silver prices. Regressing the log of these prices on time yields an annual growth rate of prices approximately that mentioned in the text. The price data leave much to be desired, and the inflation estimates should be understood as simply a crude characterization. However, it does show that New England’s peacetime inflation during this era was not so extreme as to shock modern sensibilities.

36. Smith (1985a, 1985b). The quantity theory holds that the price level is determined by the supply and demand for money – loosely, how much money is chasing how many goods. Smith’s version of the backing theory is summarized by the passage quoted from his article.

37. John Adams explained this very clearly in a letter written June 22, 1780 to Vergennes (Wharton, vol. 3, p. 811). Adams’s “certain sum” and McCallum’s “normal real balances” are essentially the same, although Adams is speaking in nominal and McCallum in real terms.

A certain sum of money is necessary to circulate among the society in order to carry on their business. This precise sum is discoverable by calculation and reducible to certainty. You may emit paper or any other currency for this purpose until you reach this rule, and it will not depreciate. After you exceed this rule it will depreciate, and no power or act of legislation hitherto invented will prevent it. In the case of paper, if you go on emitting forever, the whole mass will be worth no more than that was which was emitted within the rule.

38. One of the principle observations Smith (1985b, p. 1198) makes in dismissing the possible importance of interest rate fluctuations is “it is known that sterling bills of exchange did not circulate at a discount.” Sterling bills were payable at a future date, and Smith presumably means that sterling bills should have been discounted if interest made an appreciable difference in their market value. Sterling bills, however, were discounted. These bills were not payable at a particular fixed date, but rather on a certain number of days after they were first presented for payment. For example, a bill might be payable “on sixty days sight,” meaning that once the bill was presented (in London, for example, to the person upon whom it was drawn) the person would have sixty days in which to make payment. Not all bills were drawn at the same sight, and sight periods of 30, 60, and 90 days were all common. Bills payable sooner sold at higher prices, and bills could be and sometimes were discounted in London to obtain quicker payment (McCusker, 1978, p. 21, especially fn. 25; David Vanhorne to Nicholas Browne and Co., October 3, 1766. Brown Papers, P-V2, John Carter Brown Library). In the early Federal period many newspapers published extensive prices current that included prices of bills drawn on 30, 60, and 90 days’ sight.

39. Franklin (1729) wrote a tract on colonial currency, in which he maintained as one of his propositions that “A great Want of Money in any Trading Country, occasions Interest to be at a very high Rate.” An anonymous referee warned that when colonists complained of a “want of money” that they were not complaining of a lack of a circulating medium per se, but were expressing a desire for more credit at lower interest rates. I do not entirely agree with the referee. I believe many colonists, like Franklin, reasoned like modern-day Keynesians, and believed high interest rates and scarce credit were caused by an inadequate money supply. For more on this subject, see Wright (2002, chapter 1).

40. Public Record Office, CO 5/ 947, August 13, 1768, pp. 18-23.

41. New Hampshire Gazette and Historical Chronicle, January 13, 1769.

42. Public Record Office, Wentworth to Hillsborough, CO 5/ 936, July 3, 1769.

43. Pennsylvania Chronicle, and Universal Advertiser, 28 December 1767.

44. This should be understood to be paper money and specie equal in value to 12 million dollars, not 12 million Spanish dollars. The fraction of specie in the money supply can’t be directly estimated from probate records. Jones (1980, p. 132) found that “whether the cash was in coin or paper was rarely stated.”

45. McCallum deflated money balances by the free white population rather than the total population. Using population estimates to put the numbers on a comparable basis reveals how close McCallum’s estimates are to those of Jones. For example, McCallum’s estimate for the Middle colonies, converted to a per-capita basis, is approximately £1.88 sterling.

46. This incident illustrates how mistakes about colonial currency are propagated and seem never to die out. Henry Phillips 1865 book presented data on Pennsylvania bills of credit outstanding. One of his major “findings” was that Pennsylvania retired only £25,000 between 1760 and 1769. This was a mistake: Brock (1992, table 6) found £225,247 had been retired over the same period. Because of the retirements Phillips missed, he overestimated the quantity of Pennsylvania bills of credit in circulation in the late colonial period by 50 to 100%. Lester (1939, pp. 88, 108) used Phillips’s series; Ratchford (1941) obtained his data from Lester. Through Ratchford, Phillips’s series found its way into Historical Statistics of the United States.

47. Benjamin Allen Hicklin (2007) maintains that generations of historians have exaggerated the scarcity of specie in seventeenth and early eighteenth century Massachusetts. Hicklin’s analysis illustrates the unsettled state of our knowledge about colonial specie stocks.

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Citation: Michener, Ron. “Money in the American Colonies”. EH.Net Encyclopedia, edited by Robert Whaples. June 8, 2003, revised January 13, 2011. URL http://eh.net/encyclopedia/money-in-the-american-colonies/

Motives of Honor, Pleasure and Profit: Plantation Management in the Colonial Chesapeake, 1607-1763

Author(s):Walsh, Lorena S.
Reviewer(s):Coclanis, Peter A.

Published by EH.NET (October 2010)

Lorena S. Walsh, Motives of Honor, Pleasure and Profit: Plantation Management in the Colonial Chesapeake, 1607-1763. Chapel Hill: University of North Carolina Press, 2010.? xviii + 704 pp. $70 (cloth), ISBN: 978-0-8078-3234-9.

Reviewed for EH.Net by Peter A. Coclanis, Department of History, University of North Carolina-Chapel Hill.

Over the past thirty-five or forty years, no part of colonial British America has been better served by historical scholarship than the Chesapeake.? Much of this scholarship was produced by people associated with what has come to be known as the ?Chesapeake School,? the early core of which in the 1970s and 80s consisted of scholars such as Russell Menard, Darrett and Anita Rutman, Allan Kulikoff, Carville Earle, Lois Green Carr, and Lorena Walsh.? In reconstructing and reinterpreting the history of this region, these scholars not only revitalized the study of the Chesapeake, but also profoundly influenced historians working on other parts of British America, many of whom defined themselves in part by their degree of separation from Menard et al.?? And no member of the Chesapeake group has contributed more to our understanding of the region than Lorena Walsh.??

During the 1970s and 80s, Walsh?s published contributions came in the form of scholarly reports, articles, and book chapters.? Since then, she has continued publishing in such venues, but has gradually extended her scholarly reach — and ambition- – in three important books.? The first of these, Robert Cole?s World: Agriculture and Society in Early Maryland, co-authored with Russell Menard and her long-time collaborator, Lois Green Carr, appeared in 1991.? This book — which in my view was never given sufficient due — is unique in the literature on the early Chesapeake, representing, as it did, a deeply researched and textured micro study of one middling Chesapeake planter, his extended family, servants, and hirelings.? In the study one gets an unprecedented bird?s-eye (worm?s-eye?) view of the day-to-day realities involved in farming and farm-building in one part of the Chesapeake tidewater — St. Mary?s County, Maryland — in the middle decades of the seventeenth century.

Six years? later Walsh published her first single-authored book, From Calabar to Carter?s Grove: The History of a Virginia Slave Community.?? Whereas Robert Cole?s World examined one extended family over the course of two decades, Walsh extended her scholarly gaze considerably in her impressive 1997 monograph to treat, as the book?s subtitle suggests, an entire community: the African and African-American slaves that lived — and died — on a large plantation complex on the York River peninsula in tidewater Virginia between the late seventeenth century and the early nineteenth century.? The fact that Walsh was able to capture so much about a community that was not particularly well documented testifies to two of the qualities that have long been associated with her work: the creative use of non-traditional historical sources (including archaeological and architectural evidence) and meticulous, painstaking archival research.? As a result of her efforts, a previously unremembered, indeed, largely unknown slave community was recovered and brought to life.

Now in 2010 Walsh offers us a more ambitious volume still: Motives of Honor, Pleasure and Profit: Plantation Management in the Colonial Chesapeake, 1607-1763.? Although the stated focus of the volume is on elite planters, their economic behavior and mentalit?, in Motives of Honor, Pleasure and Profit, Walsh does much more than that, tracing, periodizing , and analyzing the economic history of Virginia and Maryland from Jamestown until the eve of the Revolution.? Moreover, in the massive volume, she covers a lot of social and political ground, and early on informs awe-struck readers that she is planning a sequel covering the region after its ?golden age? had passed, i.e., between about 1764 and 1820!

Walsh began working on Motives of Honor, Pleasure and Profit almost thirty years ago, and has already published some of the research findings contained therein, so that some readers will doubtless find familiar the broad thrust of her argument and a number of her conclusions.? To say this is not to diminish the author?s achievement.?? Indeed, situating the argument/conclusions in one place between hard covers usefully underscores for readers the massive research effort involved in the overall project, the care with which data were marshaled and arrayed, the author?s balance and judiciousness in interpretation, and her modesty of presentation.

And what, broadly speaking, does Walsh in fact argue??? On the basis of a wide variety of county and provincial records and close scrutiny of the private records — correspondence, diaries, account books, ledgers, and the like — of the thirty-two best documented Chesapeake planters, Walsh?s principal findings are straightforward and deceptively simple.? First and foremost is her conclusion that Chesapeake planters, particularly elite planters in the region, were economically rational agriculturalists.? These men (and a few women as well) responded readily to changing market conditions, attempted to allocate resources efficiently, and tried, more or less assiduously, to accumulate the land and capital assets necessary for successful farm-building.? Over the course of the seventeenth century, Chesapeake planters found a profitable staple in tobacco, and, via the enslavement of African and African-American populations, the labor force needed to cultivate it.?

Once established, the Chesapeake tobacco economy, not surprisingly, experienced ups and downs, with price swings characterized by sustained periods of low prices and some spikes, most notably, during the ?golden age? of the 1750s and early 1760s.? Through it all, Chesapeake planters responded rationally to price signals in tobacco and other product/factor markets.? The rationality of their responses is demonstrated by their shifting labor-force preferences, their efforts (largely successful) to enhance labor productivity — as measured by revenue per laborer or by a standard early modern proxy, ?shares [of export staples] per hand? — and, ultimately, by their changing crop mix, particularly the eighteenth-century shift in many parts of the region from tobacco to wheat and other grains.? In responding in these ways, they helped to create a highly prosperous agricultural economy, albeit one based on slave labor.

The above conclusions merely scratch the surface of Walsh?s treasure trove.?? Readers interested in tobacco cultivation practices, the consumer behavior of planters, or the material conditions of the enslaved — to cite but three important topics that come immediately to mind — will find much to sustain them in Motives of Honor, Pleasure and Profit.? Similar sustenance will also be found by readers interested in understanding what careful quantitative and qualitative research, methodological rigor, and historical praxis are all about.? In the quiet, non-splashy manner for which she is known, Lorena Walsh has in her magisterial third book offered us unrivaled access to the plantation business in the early Chesapeake.? Like many other scholars in the field, I avidly await the sequel, wherein she will treat the Chesapeake tobacco economy?s denouement.

Peter A. Coclanis is Albert R. Newsome Distinguished Professor of History and Director of the Global Research Institute at UNC-Chapel Hill.? He is author, most recently, of ?The Economics of Slavery,? in The Oxford Handbook of Slavery in the Americas, edited by Robert Paquette and Mark M. Smith (Oxford University Press, 2010), pp. 489-512.

Copyright (c) 2010 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (October 2010). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Business History
Servitude and Slavery
Geographic Area(s):North America
Time Period(s):17th Century
18th Century

The Silver of the Sierra Madre: John Robinson, Boss Shepherd, and the People of the Canyons

Author(s):Hart, John Mason
Reviewer(s):Beatty, Edward

Published by EH.NET (January 2009)

John Mason Hart, The Silver of the Sierra Madre: John Robinson, Boss Shepherd, and the People of the Canyons. Tucson: University of Arizona Press, 2008. ix + 237 pp. $45 (hardcover), ISBN: 978-0-8165-2704-5.

Reviewed for EH.NET by Edward Beatty, Department of History, University of Notre Dame.

Silver dug from the mountains of Mexico flowed through international economic markets for five centuries. During boom periods it motivated investments from Europe and the United States, attracting a flood of people and new technologies to Mexico, while the outflow of silver ingots and coins onto ships and then rail cars frequently left Mexico with periodic shortages of silver coins.

Historians, economic and otherwise, have examined many parts of this story, from its origins in the 1500s to its twentieth century decline. It is a story, like precious mining stories everywhere, of booms and busts, of recurrent cycles of discovery, investment, and production and, when the costs of extraction catch up to mineral prices, of decline, at least until metal prices rise or new techniques make extraction of lower grade ores profitable.

John Hart, the John and Rebecca Moores Professor of History at the University of Houston, is a historian of nineteenth and early twentieth century Mexico who has written extensively on that country?s revolution of 1910-20 and especially on the history of Americans and American interests south of the border. Nothing drew more Americans (and more investment dollars) to Mexico than the mining sector. By 1910 U.S. investors controlled the majority of all mining enterprises and dominated the business of smelting and refining, from gold and silver to the industrial metals. Hundreds of young Americans sought their fortune, or at least the opportunity to gain management experience south of the border before returning north. (They also found their way into popular culture, from Humphrey Bogart in The Treasure of the Sierra Madre to Wallace Stegner?s Pulitzer-winning Angle of Repose.)

In this book Hart offers a micro history of one mining center and the two American men who controlled it from 1860 to 1910. Batopilas lies deep in Chihuahua?s copper canyon country, remote both from the Pacific port of Mazatl?n and overland access to markets in the city Chihuahua and beyond. The great veins of silver ore that ran through the mountains surrounding the town had been worked modestly for a century or more when John Robinson arrived with enough cash to buy the central properties outright and enough connections to leverage further investment and connect local production to export markets.

The story Hart tells focuses primarily on the two men and their styles of entrepreneurship: their ability to build a network of connections in the U.S., for investment, and in Mexico, for support and protection. Hart paints Robinson as a somewhat benign paternal figure while Shepherd, in contrast, is cast as a classic feudal lord. His word and action ? backed by Federal authorities ? defined the law through a vast region, with little benign about it. Hart is most interested in tracing the impact of American investment and imperious entrepreneurship on the local region: the land and its inhabitants. He touches on the environmental destruction wrought by the mining boom: waters polluted by mercury and cyanide, mountain slopes denuded of all trees. He also details the transformative and often equally destructive social consequences ? with allegations of coerced labor in horrific conditions; the segregated lives of American owners, managers and technicians from the local population; and the ways in which Americans? authority undermined nearly all forms of local political voice. Mining?s impact on the regional indigenous population ? the Tarahumara or Raramuri people ? was particularly destructive.

Economic historians looking for insight into Mexican mining history, entrepreneurship, the silver business and its global context will find little here besides some vivid anecdotes. Hart?s interest lies in understanding Robinson and Shepherd and their relations with and impact on the local region and the people who lived there. We get bits and pieces of the business ? scattered references to wages and production levels and the introduction of new techniques ? but nothing systematic or analytical. It is not clear whether this is a function of the evidence available (the archival bibliography indicates substantial materials and an exhaustive search by Hart) or by the author?s disinterest in such questions. While painting a vivid portrait of the local empires that Robinson and Shepherd built in the barrancas around Batopilas, Hart?s account is often frustrating. Citations are relatively few, and long detailed passages are drawn from several contemporary and modern synthetic accounts.

Hart?s central argument, often implicit, is that this story is a classic one of the exploitative, immiserating effects of extractive foreign investment, part of ?the American takeover of Mexico.? There is little doubt that, first, the impact on the local environment and peoples was largely destructive ? especially under Shepherd?s tenure ? and second, that the vast wealth generated from local rock ended mostly abroad with little positive affect in Mexico. Clearly this was a near enclave activity, with few domestic linkages. The Mexican governments through this period failed to impose taxes or other requirements that might have siphoned off some portion of the profits and know-how generated by American investments. But there is no systematic examination of this and most other issues here. Moreover, there is no indication of whether things would have been any different under Mexican ownership (or any other counterfactual scenario). This book paints a vivid portrait of the local impact of one case within the global nineteenth century mining boom and, while offering little in the way of economic or business history, provides an additional window for anyone interested in understanding the full impact of this experience for Mexico.

Edward (Ted) Beatty is Associate Professor of History at the University of Notre Dame and currently serves as director of the Kellogg Institute for International Studies. He is working on a history of technological change in nineteenth century Mexico. ebeatty@nd.edu

Subject(s):Labor and Employment History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: Pre WWII

American Foundations: An Investigative History

Author(s):Dowie, Mark
Reviewer(s):Frey, Donald E.

Published by EH.NET (July 2003)

Mark Dowie, American Foundations: An Investigative History. Cambridge, MA: MIT Press, 2001. xl + 320 pp. $35 (cloth), ISBN: 0-262-04189-8; $18.95 (paperback), ISBN: 0-262-54141-6.

Reviewed for EH.NET by Donald E. Frey, Department of Economics, Wake Forest University.

Mark Dowie takes an opinionated look at philanthropic foundations over the last century. He rates foundations and their grant-making behavior against various norms of his own selection, often finding the foundations wanting. Most chapters are devoted to a single area of grant-making, but a few chapters deal with internal foundation operations. Material of particular interest to Dowie, or the case he is making, is covered in some detail, while other material, which might constitute the larger fraction of foundation activity, is merely sketched.

Typical is chapter 2 (on education grants). Little of the chapter deals with higher education although this sector has received the most foundation educational grants; Dowie merely confirms that higher education is the main beneficiary, and that a few institutions have been disproportionately favored. While Dowie mentions potentially significant issues, such as foundation efforts to lure denominational colleges from their churches in the early twentieth century, he chooses not to develop these issues.

The bulk of the chapter examines elementary and secondary education, reflecting the author’s conviction that education grants should be rated against the “Jeffersonian imperative” — i.e., the broad education of average citizens matters most. By this norm, Dowie is critical of foundations. Though foundations recently have paid more attention to public education, the efforts are inconsistent: some foundations fund experiments to improve public schools, but others seek to privatize education. Dowie notes wryly that either approach gives grant applicants and recipients every incentive to give a one-sided focus on the deficiencies of public education (p. 36).

If foundations fail by the Jeffersonian ideal, they also fail what might be called the evaluation norm: they fund all kinds of projects but rarely evaluate the results or try to replicate them. Foundations fail, too, by the norm of patience: they are fickle, funding first one idea, then abandoning it and moving on to another. The exceptions are conservative foundations whose privatization agenda has been patiently promoted.

A variety of other standards are applied in other chapters. Do foundations meet what might be called the grassroots test, or do they favor larger, establishment non-profits? Dowie suggests (chapter 5), for example, that the environmental movement has been pushed toward excessively timid strategies by foundation grants to the biggest, establishment environmental organizations. Do foundation grants meet what I’ll dub the benign-side-effects test? Or, when they are successful in producing an outcome, are there substantial negative side effects? Dowie argues (chapter 6) that the Green Revolution, which was a signal achievement of foundation-funded science, imposed social harm on some within less developed countries. Are foundation grants large enough to be effective? Dowie lauds one foundation whose significant impact in AIDS research occurred because it spent itself out of existence in one decade; yet, he suggests that most foundation grants more resemble pebbles dropped into the Mississippi River. Others of Dowie’s norms seem highly tendentious. In faulting science-based medicine and foundation grants to medicine, he claims “medical science needs to reach beyond the well-being of individual humans, beyond human diseases and their cures, and treat the planet as if it were a living organism” (p. 87).

Not all chapters deal with foundation grants. In the last chapters, Dowie turns to the internal operations of the foundations themselves. In a chapter called “imagination” he states that most American foundations “are mindless, lawyer-ridden tax dodges that accomplish little beyond the transfer of riches to already-wealthy institutions” (p. 221). Yet, he finds exceptions, extolling the imagination of George Roberts (of the leveraged-buyout firm KKR) and others who are involved personally in making grants, and who are not bound by the conventional ways of foundation bureaucrats.

In chapter 11, Dowie explicitly asks the fundamental question that seems to have been lying in the background throughout the book: “What is the proper function of these vast reservoirs of treasure in a liberal democracy” (p. 263)? Given the populist tone of the volume, I was surprised that Dowie shies from advocating abolition of very large foundations, say, by a requirement that they spend themselves out of existence over a given period. Instead, he favors a little democratization of foundation boards of trustees and a cap on the size of foundations. More democracy in foundation governance, he suggests, might cure the ills that afflict foundations.

One of these ills is the very low payout rate of foundations, whose trustees are typically obsessed with giving out so little that they ensure that the foundation’s wealth will grow and grow to perpetuity. Dowie suggests that more democratic governance would automatically raise the payout rates. Otherwise, however, he skimps on coverage of this important issue, giving it less than two pages (p. 261-62), and boxing it as a side issue. He shrugs off the issue, saying “the whole payout debate is a digression” from his preferred emphasis on the nature of grants. And in a clear error, Dowie asserts that the payout debate ignores “both the time value of money … and the urgent social problems that demand immediate attention” (p. 262). This is an egregious mistake: the payout debate is about these very issues. Higher payouts are required precisely because resolving current problems has a higher return to society than the financial returns to foundations’ hoards. The payout rate is also about equity: trends of economic growth strongly suggest that our present society is poorer than future society will be; thus, the poorer present has a stronger claim in equity on foundation resources than does the richer future.

The recent decline in foundation endowments, due to falling equity markets, highlights the importance of raising payout rates. By paying out far less than the returns they were earning in the late 1990s, foundations (and universities) reinvested funds at inflated prices only to see them evaporate in the prolonged bear market. In short, foundations chose to speculate with their gains rather than doing some good for humanity. A higher payout rate in the late 1990s would have provided benefits to mankind — an opportunity potentially lost forever. Dowie apparently does not see the relevance of such failures in foundation behavior.

In conclusion, Dowie’s book is an interesting, though highly opinionated, introduction to foundations and their history. His populist stance toward foundations does not overly detract from the book or render him incapable of good insights. For example, although he disagrees with the causes of conservative foundations, he gives them high marks for their coherence of goals and persistence. One can argue with Dowie’s opinions: for example, is the incremental approach to the environment really so bad, or is it the only realistic approach? And, does it really make sense to expect medicine to abandon the successful scientific model to follow a speculative environmental medical model? However, if one discounts sections that are overly opinionated, the book can serve as a decent primer to this major subject.

Donald Frey is author of “University Endowment Returns Are Underspent,” Challenge, Vol. 45, No.4 (July-Aug, 2002), pp.109-121.

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

American Agriculture and the Problem of Monopoly: The Political Economy of Grain Belt Farming, 1953-1980

Author(s):Lauck, Jon
Reviewer(s):Woeste, Victoria Saker

Published by EH.NET (July 2001)

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Jon Lauck, American Agriculture and the Problem of Monopoly: The Political Economy of Grain Belt Farming, 1953-1980. Lincoln: University of Nebraska Press, 2000. xiv + 250 pp. 10 tables, notes, index. $45.00 (cloth), ISBN 0-8032-2932-1.

Reviewed for EH.NET by Victoria Saker Woeste, American Bar Foundation, Chicago, Illinois

Twentieth-Century Agricultural Politics: Playing the Monopoly Card

Farmers’ attacks on monopoly have been the main event of U.S. agricultural politics since the Civil War. Industrialization transformed modes of production and processing, reconfigured the relationships between producers and consumers, and resulted in a higher concentration of bargaining power in corporate hands. These results supposedly sounded the death-knell for the family farm and answered the question of whether Jeffersonian values could endure in an industrial society, apparently in the negative. Though variations on this theme have been sung, the tune has remained the same. American agriculture’s monopoly problem has endured from the nineteenth through the twentieth. Yet we produce more food than ever before, pay less for it than ever before (even after adjusting for inflation), and we have fewer individual farmers than ever before.

Jon Lauck, a historian and practicing agricultural lawyer, has performed a valuable service for historians of American agriculture, business, and law with this book, American Agriculture and the Problem of Monopoly: The Political Economy of Grain Belt Farming, 1953-1980. Lauck’s purpose is to trace the politics of agriculture’s antimonopoly crusade in the post-World War II period. This is obviously a subject with a substantial “prehistory,” so to speak. Historians are pretty well versed in the history of nineteenth-century agricultural protests, even if we don’t agree on the meaning or implications of those protests.[1] We also know a fair amount about the impact of 1920s associationalism and the New Deal on the economic organization of agricultural production.[2] Yet it would be a mistake to believe that the entire story of American agribusiness has been told. In fact, as Lauck shows, while the essential nature of the political struggle between farmers and corporate monopoly hasn’t changed much since 1950, or even 1900, the changing American state has altered the ways in which farmers and politics interacted, producing new shifts in policy and shaping the processes of competition and concentration.

The book’s seven chapters survey what Lauck, writing in the tradition of Ellis Hawley, calls the political economy of farming. Chapter One surveys the problem of post-war American farming, which Lauck defines as the persistence of “monopoly capitalism” in the agricultural sector (p. 1). How, he asks, can competition be preserved in an economy with such a pronounced tendency towards oligopoly? And, more importantly, why should it be? The second question is much easier to answer than the first. We want to preserve competition in agriculture, according to Lauck, because farmers connect us to our democratic roots, to the Jeffersonian agrarian tradition, and corporations do not. In view of the rise of large-scale industrial and technological techniques of production, which have become permanent fixtures on farms throughout the country, however, it has become imperative to examine empirically the historical development of markets and to look at factors other than firm structure and market dominance in order to determine whether and where competition actually exists (pp. 9-18). Laws, including antitrust laws, Lauck writes, “are necessarily political” (p. 15). He might have added, all politics are local, for local, specifically situated agricultural interests and the national state, already intimately related by the recovery programs of the New Deal, became inseparable in the second half of the century. It is the resurgence of local interests, both political and economic, that continue to press for the preservation of competition, even though to do so is to swim against the current of our national market.[3]

In Chapter Two, Lauck surveys the debate over corporate farming and calls for policy makers to pay continued attention to the issue of corporate ownership of farm land and control over agricultural processing. Here he traces the interrelationships between public officials and corporate agribusiness, arguing that agribusiness influence over such institutions as the land grant colleges, the Small Business Administration, and the U.S. Department of Agriculture posed significant threats to the need to balance corporate influence with the values of family farming (pp. 23-25). The National Farmers’ Organization, the Farmer’s Union, and a whole host of other interest groups, including environmentalists, the Catholic Church, and prominent writers such as Wendell Berry, all vocally opposed corporate farming and criticized national political leaders for their collusion with agribusiness. Skipping across these pages are many of the nation’s most prominent political figures with agricultural constituencies: senators George McGovern, Hubert Humphrey, James Aborezek, Gaylord Nelson, and Frank Church and secretaries of agriculture Earl Butz and Orville Freeman. Their positions on and connections to corporate farming, farm subsidies, and antitrust enforcement were crucial to their political careers (pp. 36-38).

As Lauck proceeds to show in Chapter Three, the economic choices farmers and processors make are also not without political consequences. This chapter surveys the meat packing and grain processing industries through the 1980s, arguing that the best (and really, only) solution to concentrated corporate power is effective farmers’ marketing and bargaining associations (p. 40). Yet, surprisingly, “throughout the postwar period the sectors farms sold their livestock and grain to [sic] showed signs of competitiveness” (p. 40). Despite the record pace of merger in the food manufacturing sector in the early 1980s, which produced some gains in economies of scale and overall efficiency, firms did not always exercise monopoly power over prices or supply. As a result, Lauck argues, it remained important for farmers to criticize the creation of new monopolies (and to pressure the federal government to enliven antitrust enforcement), but at the same time, market-based checks on the economic power of food-processing conglomerates continued to emerge. For example, the growth of the food retailing sector-including grocery stores and restaurants-undermined the power of packers to dominate sales to end-consumers. More importantly, farmers held the means of their own continued survival in their own hands, if only they could make good on the promise of organizing themselves.

Chapter Four examines the grain-trading “cartel” that dominated the American grain market in the 1970s and 1980s. This chapter explores in detail the impact on American grain farmers of U.S. export policy, a policy that consisted of a slew of treaties, federal statutes, and the recommendations of federal commissions. The nationalization of international trade in grain and other agricultural commodities arose not only in the U.S. but also in Australia, Canada, Great Britain, and other countries whose farmers demanded protection against downward pressure on prices (pp. 69-72). Lauck examines the impact of the U.S.’s grain sales to the Soviet Union during the 1970s and the impact of the 1973 oil crisis on foreign trade in farm commodities. He concludes here, as before, that despite increases in mergers, the grain trade remained highly competitive, meaning that private market ordering by farmers remained a potent source of influence on supply and prices.

Chapter Five takes an extended look at the National Farm Organization, painting a more flattering portrait of the NFO during the 1950s and 1960s than it has tended to receive in the historical literature. Lauck argues that the NFO succeeded in providing some bargaining power to its member farmers in their dealings with food processors. Despite the outbreaks of violence that accompanied the NFO’s insistence on collective bargaining, Lauck writes, “the history of the NFO indicates that farmers could organize and receive better prices at times and were not always the hapless victims of the corporate ‘monopoly problem'” (p. 85). The NFO’s harsh criticism of meat packers’ control over livestock prices led it to advocate such practices as the “holding action,” which was essentially a boycott designed to force packers to deal directly with the NFO for the purchase of livestock (p. 91). Whether this strategy worked or not, Lauck admits, is difficult to determine, but he cites archival evidence that packers grudgingly acknowledged the NFO’s role in raising wholesale prices. During the 1960s the NFO turned to “block marketing,” a method by which it pooled its members commodities and acted as their agent in negotiating prices (p. 93), and to selling directly from farmers to consumers (p. 94). The NFO’s gains for its members spurred other farm groups such as the American Farm Bureau Federation to act; they formed similar pools and sought to reestablish their influence with their own members. These moves resulted in market practices and state laws that gave farmers further protection from the illegal exercise of monopoly power by processors. Lauck acknowledges that “the violence and radicalism of the NFO did serious damage to its credibility and undermined its larger goals,” which would seem to have some consequence for his argument that the NFO has gotten a bum rap (p. 103). The NFO succeeded not least in dividing farmers who disagreed about its methods and leadership and who believed that cooperation was their real ticket to economic stability. In view of farmer organizations’ evanescent influence on farm prices, Lauck’s claim that the NFO “succeeded” may come across as hyperbole.

Chapter Six gives a sustained examination of the postwar cooperative movement, giving Lauck an opportunity to restate his claim, originally made in the introduction, that historians have slighted agriculture in their study of postwar political economy. Lauck’s take on cooperatives follows his interpretation of the NFO: farmer-controlled marketing organizations helped to blunt the impact of monopoly on prices by enabling producers to assert collective control over the sale of their commodities to processors. His reliance on the NFO as his sole historical benchmark leads him to examine the cooperative movement from the perspective of the 1960s and 1970s, rather than recognizing that the legal foundation of cooperative marketing emerged out of its own process of experimentation, protest, litigation, and violence during the Progressive Era. For example, Lauck sees the Capper-Volstead Act, which exempts cooperatives from the federal antitrust laws, as “the first significant statutory help” to the cooperative movement (p. 111). In fact, state laws providing for the organization of cooperatives (both as nonstock associations and as capital stock corporations), state and federal laws exempting farmers from the antitrust laws, and federal laws restricting the Justice Department from spending appropriations dollars prosecuting farmers under the Sherman and Clayton Antitrust Acts all provided significant legal recognition to the cooperative movement several decades prior to the enactment of Capper-Volstead in 1922. Moreover, Capper-Volstead itself emerged out of a specific controversy that directly raised the question of the ability of a farmers’ marketing cooperative to monopolize its product. Though contemporary lawmakers fudged on the answer, it is important that historians recognize that, then as now, farmers have exploited for political purposes the image of corporations as inherently monopolistic and cooperatives as the pure and noble defense against that inevitable end. The New Deal, in fact, enabled cooperatives to act as monopolists in so many ways by providing mandatory production controls that eliminated uncontrollable surpluses. The ideological power of the farmer-owned and -controlled marketing association remained the political touchstone of the postwar era, with president after president making the obligatory declaration that a cooperative movement sufficiently protected by law would save the family farmer. With this kind of consistent support from the Executive Branch, the cooperative movement warded off all attempts to strip farmers’ organizations of their antitrust exemption and their federal tax exemption (p. 119). Lauck continues to press his thesis that farmers’ organizations were successful in competing with agricultural monopolists, despite his finding that cooperatives found it difficult to achieve vertical integration in the grain industry. He even hedges when it comes time to declare “how much the cooperative processors directly engaged the monopoly problem” in industries with commodities requiring a high degree of processing and manufacturing to render them saleable (p. 122). Farmers were and are, it’s safe to say, adept at playing the monopoly card in order to distance themselves (and their organizations) from the specter of concentrated economic power, in order to extract favorable treatment from the state, and to bolster their image as the bastion of democratic values in American society. This doesn’t mean the family farm isn’t worth saving, only that doing so is as much an ideological choice as a political or economic one.

Chapter Seven considers the relationship between the state and agricultural organization, observing the reliance of farmers on state structures and incentives for private efforts at organizing and marketing. Here Lauck ties such issues as the depopulation of American farms, surplus management, and budgetary politics to the identity of the political party in power in Washington and to the careers of certain senators with presidential ambitions (p. 141-148). Farmers continued to exhibit that streak of individualism and independence that persistently undermined attempts at coordinated crop control (p. 150), and by 1968, when the Democrats failed to understand that even endless subsidies might lose their appeal, the Republicans began swaying the farm vote their way. (One might note here that the Democrats have never fully recovered in the Plains states, at least in presidential races, if the 2000 election is any guide.) Part of the problem, as Lauck points out, is that the USDA was involved in programs to make farms more productive even as commodity surpluses spiraled higher (p. 152). Ultimately, in its attempts to create a rational pricing policy for American farm products, the state was unable to bridge the many divisions among farmers, reflected in the diffusion of power among the many farm lobbying organizations (p. 153).

The book presents an impressive collection of archival sources. Lauck’s research is downright amazing; if he’s quoted only half of what he collected, his files must contain a treasure trove of still unpublished evidence. Tons of inside information, excavated from the correspondence of dozens of politicians, farmers, farm leaders, and others, enable him to do a nice job of blending the trajectory of political careers with agriculture’s political fortunes during the twentieth century. The monopoly problem, so chronicled in the nineteenth century, deserves to be more fully understood for the twentieth, and Lauck has contributed mightily to that project.

He is in a good position to do so. Lauck is clearly unafraid of economics, or economists. He engages directly with claims about monopoly with clear and understandable analysis. Especially interesting is his critique of the Chicago School’s sustained attack on antitrust, though why he put this at the end of the book, buried in an epilogue whimsically titled, “Toward an Agrarian Antitrust,” is difficult to discern. If the integrity of the republic relies, as he argues, on the preservation of a competitive farm sector, and if the legal system has thwarted attempts to preserve competition, then debunking the intellectual (or ideological) supports for the status quo deserves to be put front and center.

Instead, Lauck’s central interest here seems to lie in the arena of old-fashioned political history, the history of party alignments and interest group politics. In an attack on the new social and rural history of the last twenty years, Lauck explicitly disdains the conceptual and historical categories of race, gender, ethnicity, arguing that they “overlook what [Louis] Harz called the ‘liberal tradition'” (p. 170). Lauck is deliberately looking back, as if to sweep aside the past twenty years of historical scholarship, in an attempt to reclaim Hartz through the words and values of rural America. Is it really impossible to return to Hartz unless we follow Lauck’s imperative? After all, the historical treatment of race, gender, and ethnicity can reveal the depths to which liberal democratic values permeate both economy and society, shape political and institutional responses. Indeed, scholars are already deeply engaged in creating what Catherine McNichol Stock and Robert Johnson are calling the new political history of rural America.[5]

However Lauck chooses to position himself within the field is of course the author’s prerogative. But the book suffers from a significant formal problem: Parts of every chapter save six and seven have been published previously. The result is the increasingly and lamentingly common form of a string of articles that have not been fully integrated into a whole. The narrative is disjointed and the reading experience fitful, because the book lacks a clearly laid out narrative structure and a clearly defined historical framework. For example, a degree of tunnel vision materializes in Lauck’s discussion of nineteenth century farm protest tactics. He views these through the lens of his interest in the NFO, rather than seeing farmer boycotts as a standard feature of agricultural protest. What is needed is more historicization and more explicit links to nineteenth-century agricultural organizations, which deserve to be understood on their own terms rather than as marginal in the light of subsequent events (p. 111). Each chapter has its own story to tell, but the links between these episodes don’t fully materialize, having been laid aside in favor of a repeated stress on the book’s main argument that farmers have done better in beating back the forces of monopoly than historians have recognized. That is an important argument to make, but to do so more effectively the argument needs to arise out of the historical narrative rather than appear as a superimposition on the evidence. This formal problem can be understood in terms of a specific issue: the task of framing the historical scope of the project. The book’s periodization, 1953-1980, is confusing. The absence of a clear framework undermines the logic of those dates. Several chapters, including 3, 4, and 6, contain historical sections that overlap with each other and aren’t as well developed as they might have been had Lauck treated the historical issues together in one integrated chapter at the beginning of the book instead of presenting them as background. Obvious redundancy could have been avoided with a better organization of the material. These recurring historical sections blur the periodization backwards in history by reaching back to the nineteenth century; other parts of these chapters muddy the ending date by referring to events in the 1980s and 1990s. Chapter 7 does both at once, displaying a maddening tendency to jump backwards and forwards in time without making explicit the connections between eventsor making clear the logic of the presentation. Many a historian has been taken to task for an overreaching title; perhaps Lauck’s sin is one of modesty rather than vanity.

The book also needed a stiffer editing than it got. There are too many awkward phrases and technical mistakes. The prose abounds with overlong paragraphs crammed full of information and quotations from sources but no topic or concluding sentences. In addition, the index is not as serviceable as it should be.

Yet, in the final analysis, what we do come away with here is the unavoidable conclusion that agricultural politics matter, even in an overwhelmingly urban society, because, just as gravity pulls water from higher elevations to lower, farmers will ultimately pursue whatever action brings them the best prices, and, at the same time, be bedeviled by market conditions that undermine those actions. As Lauck writes, “Farmers’ failure to achieve everything they wanted partly reflected their disagreement over which legislation was beneficial and partly reflected ideological opposition to state control of their economic lives” (p. 162). Hence the irony of the enactment of the Freedom to Farm Act of 1996, which supposedly phases out subsidies by 2003, and yet at the same time the federal government has been making record payouts to farmers to prevent widescale abandonment of farms due to-surprise, surprise-depressed prices caused by overplanting and overproduction.

[1] See, e.g., Lawrence Goodwyn, Democratic Promise: The Populist Moment in America (New York: Oxford University Press, 1976); Edward L. Ayers, The Promise of the New South: Life After Reconstruction (New York: Oxford University Press, 1992); Bruce Palmer, “Man Over Money: The Southern Populist Critique of American Capitalism (Chapel Hill: University of North Carolina Press, 1980).

[2] See, e.g., Colin Gordon, New Deals: Business, Labor, and Politics in America, 1920-1935 (New York: Cambridge University Press, 1994); Mary Neth, Preserving the Family Farm: Women, Community, and the Foundations of Agribusiness in the Midwest, 1900-1940 (Baltimore: Johns Hopkins University Press, 1995); Hal S. Barron, Mixed Harvest: The Second Great Transformation in the Rural North, 1870-1930 (Chapel Hill: University of North Carolina Press, 1997); and David Hamilton, From New Day to New Deal: American Farm Policy from Hoover to Roosevelt, 1928-1933 (Chapel Hill: University of North Carolina Press, 1991).

[4] For a brilliant study of local politics and the contingency of regulatory solutions in the railroad industry, see Gerald Berk, Alternative Tracks: The Constitution of American Industrial Order, 1865-1917 (Baltimore: Johns Hopkins University Press, 1994).

[5] Catherine McNicol Stock and Robert Johnston, “Introduction,” in Stock and Johnston, eds., The Countryside in the Age of the Modern State: Political Histories of Rural America (Ithaca, N.Y.: Cornell University Press, 2001, forthcoming).

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Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

The Trading World of Asia and the English East India Company, 1660-1760

Author(s):Chaudhuri, K. N.
Reviewer(s):Hejeebu, Santhi

Project 2000: Significant Works in Twentieth-Century Economic History

K. N. Chaudhuri, The Trading World of Asia and the English East India Company, 1660-1760. Cambridge: Cambridge University Press, 1978.

Review essay by Santhi Hejeebu, Department of Economics, University of Iowa.

Asia in the Making of the K. N. Chaudhuri’s East India Company, 1660-1760

The Trading World of Asia and the English East India Company reveals the monumental importance a single, long-lived organization can have on world history. Between 1600 and 1858 the East India Company operated mostly as a commercial enterprise, but in its last century it also became a territorial ruler. Chaudhuri’s book covers the long era of the Company’s commercial maturity, 1660-1760. The East India Company’s goals were simple: buy low in the East and sell high in the West. At its most basic level the Company was a great shipping concern that rented its fleets and owned its cargos of pepper, textiles, coffee, and tea. The Company straddled the major trading centers of Asia and the British capital, bringing together the talents of artisan-cultivators and the tastes of final consumers.

Mainstream economic history is still coming to grips with the importance of Asia and the history of economic growth outside of European frames of references. Through the lens of a single organization one sees the effects of monetary expansion (American silver) on trade flows and the development of bureaucratic multinational machinery. One also observes the unfolding of colonial conquest and the peculiar results that emerge when market power is wedded with political power. The Honourable Company has beguiled writers since the eighteenth century and the secondary literature alone would constitute a considerable library. But no future investigator of the East India Company or its complicated legacy will be able to progress far without engaging Chaudhuri’s “magisterial” (Raychaudhuri 1980, 433) Trading World of Asia.

Chaudhuri was the first to analyze the Company as a principally commercial enterprise. He first trained as a classicist and commands Sanskrit, Latin, and Greek, plus four European and at least two South Asian languages. His linguistic prowess made accessible to him the records of all the major European groups who traded with South Asia. In shifting to the early modern period, Chaudhuri displayed his distinct mathematical bent and brought a new formalism to the topic.

Trading World of Asia places Chaudhuri in the tradition of W.R. Scott (1910), the distinguished analyst of English chartered companies of the seventeenth century (1). It has been said that Chaudhuri did for the East India Company what Kristoff Glamann did for the Dutch East India Company (VOC), Ralph Davies for the Royal African Company, and E.E. Rich for the Hudson’s Bay Company — that he performed the role of Company historian, defender and critic. Chaudhuri’s authority, like those of the other Company historians, rests on his command of the source material. The sheer magnitude of the East India Company materials makes its comprehensive history extraordinarily difficult to achieve. Furthermore Chaudhuri brings to the subject an intimate knowledge of the regions in which the trade goods were acquired. He understood his Asian input markets — their language, history, and customs — better than historians of other chartered companies understood their overseas markets. His analytic approach, his enormous devotion to the sources, and his understanding of the very different societies joined by trade make the Trading World of Asia a most remarkable achievement.

The book’s objectives are threefold: 1. to reconstruct “the Company’s own history for the period from 1660-1760″ 2. to analyze “the economic life of those countries in Asia where the Company had established trading relations” and 3. “to discover through the records and the activities of the East India Company the general problems of long-distance trade in pre-Industrial Revolution societies” (p. xv-xvi).

As Company history, Trading World of Asia provided a fresh perspective. In contrast to earlier treatments that emphasized the Company’s role as a vehicle for British imperial aims (2), Trading World of Asia gazed unflinchingly at the structure of the Company’s organization and its decision-making process — at home and abroad. Using a systems analysis approach, Chaudhuri tells how the firm worked. Tasks were divided among seven committees that reported to the Court of Directors. The Court was made up of 24 directors who were elected annually by the General Court of Proprietors. He explains the specialized duties of the committees in London and the Presidency-factory system in place across Asia.

For each institutional unit within the firm, Chaudhuri identifies its access to information and its generation of specific decision-variables. He also identifies the time lags involved between one “subsystem” of the Company and another. For example, to decide how much bullion was required to fill the current order lists, the Directors would need to know the amount of cash reserves on hand at the Presidencies. Delays in receiving such information would likely result in an over or under allocation of funds, implying less or more reliance on Indian capital markets. The Directors would face this problem year in and year out. The recurrent nature of the problem would over time encourage them to establish decision-rules for minimizing the discrepancy. Institutionally this would link transactions in the Treasure Committee with those in Asian Presidencies and ultimately with those in the Accountant General’s Department. In terms of Chaudhuri’s model, this would illustrate the interaction between subsystem I (London) and subsystem II (Asia) and then between subsystem II (Asia) and subsystem III (London). By mapping decision-variables and information flows to specific units, Chaudhuri formalizes the management structure into a “trading model.” The technique gives him a global view of the Company’s operations and leads him to conclude that “the economic success of the East India Company was in large measure the result of a systematic process of decision-making, communication, and control.” (p. 33).

The Company history extends through a description of the pattern of commercial settlements in Asia as Chaudhuri describes the various methods of acquiring goods. In Bengal a system of brokers and middlemen was used to contract textile production, while in China goods were purchased onboard ships commanded by supercargoes. He provides quantitative analysis on the long-term fluctuations in the volume of imports and exports and in the “terms-of-trade.” He describes the politics of foreign trade in Mughal India, the Company’s pursuit of trading privileges and the private trade of the Company’s servants. The shipping schedule, the export of treasure — nearly every aspect of trade with Asia is addressed. As Company history, the work is “detailed and definitive” (Prakash 1980, 139).

The second objective is more ambitious than the first. Chaudhuri hoped to analyze the economies of Asia that traded with the Company. This would include the “Arab world, the Persian Empire, the Mughal dominions, South East Asia, and China” (p. 55). Given the heterogeneity of these economies and the constraints of space, it is not surprising that his discussion is truncated to the specific markets in which the Company operated. His subsequent works Trade and Civilization in the Indian Ocean (1985) and Asia before Europe (1990) however are not Company-centric and greatly illuminate the study of comparative Asian history.

Still Trading World of Asia makes important contributions in specific areas of Asian economic history, namely in dispelling the van Leur thesis and in the study of the Indian textile industry in the seventeenth and eighteenth centuries. In his 1955 classic Indonesian Trade and Society, J.C. van Leur characterized the Asian merchants as peddlers and Asian trading ports as overburdened with a multiplicity of currency, weights, measures, and customs. The overall picture is one of small-scale traders eking out a living in the face of crippling transactions costs. Van Leur’s thesis went unchallenged for decades and was crucial to Niels Steensgaard’s 1973 study of the decline of the trans-Eurasian caravan trade.

Chaudhuri contextualizes van Leur’s argument. He shows how the peddler characterization depends on a selective use of Dutch sources, the diary of a single Armenian merchant, and a handful of travelers’ accounts. Chaudhuri counters that the type of Indian merchant most often discussed in Dutch and English company sources resembles “the Indian equivalent of the Medici family, or Fuggers, and the Tripps” (p. 138). As for the nature of Asian trade centers, Chaudhuri points out that a multiplicity of weights, measures, and regulations was common in European cities as well. More importantly, Chaudhuri argues that however large the European companies were relative to their Asian counterparts, they were never substantial enough to “command the market” (p. 139) without resort to violence. Later substantiated by empirical research, Chaudhuri’s argument did much to undermine the then prevalent misconceptions about the nature of Asian merchants communities (3).

A second major contribution to Asian economic history is the astute analysis of the Indian textile industry of the period. Chaudhuri describes the four major regions of India (Punjab, Gujarat, Coromandel Coast, and Bengal) that specialized in the production of cloth for export. He explores the organization of the industry, including the very high degree of specialization of labor and the role of merchants in financing the different stages of production and marketing the finished products. He also explains the juridical tradition that gave rise to the system of commercial advances common in the period. After exploring the cost structure of handicraft production he considers the impact of European purchases of textiles on the wages of weavers. The a priori expectation that wages would rise in the face of growing international demand is complicated by the fact the sources speak almost categorically of the impoverished state of the weaver. The discussion of Indian textile producers raises, if not fully answers, many important questions. Finally, he addresses the issue of technological stagnation. Indian textile output increased over the eighteenth century not by process innovation but by the expansion of the labor force (and implicitly the replication of specialized human capital). Chaudhuri argues that workmen in India lacked economic incentives to shift to capital-intensive techniques so long as the appropriation of producer surplus remained acute. He writes, “Specialization had gone so far that it would have required very great incentives to induce such men to change their production methods and habits drastically” (p. 275). Morris Morris described Chaudhuri’s “analysis of production and marketing activities in Asia,” as “by far the best available” (1980, 390).

The third objective of the book is to identify the “general problems of long-distance trade in pre-Industrial Revolution societies” (p. xvi). Chaudhuri does this by exploring the role of the monsoon winds and the techniques used to minimize shipping expenses (pp. 71-4, 193, 201-2, 330) and by examining the persistent communication and control problems within the Company (pp. 32-3, 74-7, 208-213, 298-9, 302). The problem of forecasting future demand and determining which commodities in what quantities should be ordered(pp. 278-81, 299-305, 331-2) would also fall under the rubric of “general problems of long-distance trade.” Unfortunately, Chaudhuri does not bring these and other recurrent challenges under a single heading. They jointly constitute one of the unifying themes of the book, yet the problems are scattered across many chapters, in many differing contexts. This is a weakness in the organization of the theme and not in the sophistication with which Chaudhuri handles it. A careful reader will find all the elements there.

As Chaudhuri admits, his method of analysis can be disorienting. “The methodology adopted was exceptionally complex, though not by itself but because of its combinations. It is easier to say what the book is not than to say what the book is. It is not true narrative history. It is not pure economic analysis, nor is it economic history in the conventional sense” (Chaudhuri 1983, 10). He uses neoclassical economic analysis and yet borrows insights from Polanyi and Marx. The influence of Braudel, quite marked in Chaudhuri’s later works, can be traced here. Trading World of Asia situates the Company primarily in terms of its economic activities (the markets which it engaged). It also emphasizes the physical or geographic space (the Asian littoral) and the cultural space (the language, customs, and mentalit? of the directors, their agents, Asian merchants, and even the Mughal aristocracy) the Company occupied. To this Chaudhuri reiterates the importance of time, investment cycles, monsoon season, harvest season, and the arrival and departure of ships. His ability to discern almost at once the many dimensions of cross-cultural, transcontinental exchange makes the Trading World of Asia a methodological hybrid.

Systems analysis receives prominent attention. He writes of the Company as a trading system, one in which the decision-rules employed by management can be mapped to a sequence of physical inputs and outputs, suggesting the Company operated like an engine. Systems analysis enables him to test statistically a series of hypotheses, such as “average costs are a decreasing function of the volume of trade, the cost price of goods, and of time, with an associated level of fixed costs” (p. 486).

The approach looks rather alien to those who learned industrial organization from Tirole (1989) or Stigler (1968) a generation earlier. It is not typically taught in economics or in history departments though it is widely used in information systems management and environmental engineering. System analysis requires the investigator to redefine structural and functional relationships on a firm-by-firm basis. What surprises (and annoys) the economist is the absence of a theory of the firm. The cost functions in Appendix 3 are hypotheses relating costs to accounting and physical variables. They do not imbibe the idea that costs functions arise from production functions and must include opportunity costs.

Can systems theory be useful to economic history? Certainly. It requires a much lower level of abstraction than conventional microeconomics and can be particularly useful when a researcher needs to make a detailed plan of a complex organization. This is precisely the sense in which computing professionals in the business world use the theory. The emphasis on information flows and functional relations across different subsystems can help organize data-gathering efforts. And this is precisely how the theory was useful to Chaudhuri. Chaudhuri (1983, 14) writes, “The historical material was collected and analysed with very strict adherence to the concept of the model. The exposition was then ‘translated’ into the idiom of historians.” The gargantuan task of synthesizing the thousands of volumes of records pertaining to the Company over the period indeed required a coherent approach embedded in a structural model of the Company’s various operations.

The drawback to systems theory is that it is a static model of the organization and it therefore offers no guidance on how to ask the deeper questions about efficiency or organizational change. Writes Chaudhuri, “For a model cannot without destroying itself take account of the passage of time which affects its structural boundaries and parameters” (p. 41). Theories of institutional change are of fundamental concern and those that are not amenable to changes over time appear to have little explanatory power. Thus while useful as an organizing heuristic, systems analysis seems rather unlikely to yield insights regarding organizational change.

Beyond systems analysis and econometric estimation, much of the book uses a traditional narrative approach. His presentation of the Company’s overall financial position, for example, is alive with illustrative examples, contextualized by contemporary opinion, and balanced by principles of modern accounting. One reviewer considered such treatment as “a model of how “Old” and “New” methods of economic history can be fruitfully combined” (Ambirajan 1981, 79). Chaudhuri’s six chapters on individual commodities also move smoothly between general and specific, between theory and evidence. One of the book’s “special virtues,” as Curtin (1980, 508) rightly says is “the way in which [Chaudhuri] maintains a counterpoint between central aggregates and the intimate detail.”

The most long-lasting contribution of the book is the stunning amount of quantitative data on commodities and specie flows between Britain and Asia. Appendix 5 provides the annual time series for nearly a dozen commodities originating from six locations — representing a fraction of the 400 tables originally produced. Chaudhuri’s research involved tracking more than 91 different textiles, 7 types of tea, and 30 other commodities imported into London. On the export side, he followed the course of 12 products plus treasure. By following the order lists and invoices of literally every Company ship between 1660 and 1760, he and his assistants made available data that had been scattered across hundreds of volumes of financial records and thousands of volumes of correspondence. Clive Dewey wrote that Trading World of Asia “represented the work of a lifetime, not only — or even mainly — in the sense that it took a significant proportion of [the author’s] working life to write, but in the sense that such a book is only likely to be written once in a lifetime” (Chaudhuri 1983, 11). Ten productive years of archival work (involving English, French, Dutch, Belgain sources) went in to the production of Trading World of Asia and that staggering effort alone will ensure its longevity.

The book influenced numerous literatures within economics and history. Chaudhuri’s emphasis on the efficiency of the East India Company resonates in the literature on the origins of the multinational organization and on the character of the English chartered companies. While Chaudhuri used systems theory, others (Anderson et. al. 1983 and Carlos and Nicholas, 1988) have employed transactions cost analysis, agency theory, and Chandlerian analysis of firm structure to argue that the East India Company was an organizational innovation on par with a modern multinational firm such as General Motors. They emphasize the efficacy of the firm’s internal operations as its main commercial legacy. They de-emphasize the firm’s imperial legacy. Other studies by contrast have highlighted the significance of “merchant empires” to European expansion. These works have also drawn on Chaudhuri’s insights.

The contribution of Trading World of Asia to the study of the foreign impact on the Indian economy has also been fruitful. Most notably, Chaudhuri’s argument that India’s, and in particular Bengal’s, textile production increased through an expansion of employment has resulted in several important monographs. Om Prakash (1985) builds directly on the claim by asking how much did Bengal’s employment rise as a result of European demand for textiles. His qualified answer: about 10%. Numerous studies have focused on the economic dislocation experienced by weavers and other groups connected with the Company’s trade. From the perspective of the Mughal ruling classes it was certainly difficult, if not impossible, to separate the Company’s commercial purposes from its political ones. For example, in dealing with Asian powers, the Company, Chaudhuri explains, had every incentive to present itself as having the delegated power of the British Crown. In the Indian economy, the East India Company employees insisted on special treatment and trading privileges.

This brings us back to indigenous commerce. Chaudhuri effectively utilizes European archival sources to discern the contours of Asian trades and traders. In this way Trading World of Asia contributed to the growth of Indian Ocean studies such as Das Gupta and Pearson (1987) in which the European chartered companies are viewed as one among many participants in the emporia trade. Chaudhuri’s later books (Trade and Civilization and Asia before Europe) take a long view of the structure of Indian Ocean commerce and the merchants involved. These works have helped replace Van Leur’s peddler paradigm with a fuller identification and appreciation of diasporic communities, about the ways community norms mitigate problems of long-distance trade, and about the comparative advantage of family firms (Levi, forthcoming). Rather than an ill-informed, itinerant peddler, the early Asian trader is now recognized as a “portfolio capitalist” (Subrahmanyam, 1990) enjoying political and social along with spatial mobility. By bringing to the foreground the Asian commercial milieu Chaudhuri helped initiate new literatures in Asian history.

For the range and importance of its findings, its unique method, and its empirical bounty, Trading World of Asia deserved the unanimous praise it received upon publication in 1978. For those same reasons and for its lasting impact on economic history, Trading World of Asia certainly deserves its present distinction — one of the most significant works of the twentieth century (4).

Notes:

1. Philip Curtin (1980, 507) remarked, “Chaudhuri intended from the beginning to present a case study of a large, bureaucratic, pre-industrial trading firm as a contribution to the history of European business institutions in general.”

2. See for example The Cambridge History of India, Volume V (1922), Bal Krishna, Commercial Relations between India and England (1924), and S. Bhattacharya, The East India Company and the Economy of Bengal (1954).

3. My “Market Power and the English East India Company in Bengal” presented at the 1995 SSHA Conference estimates the residual supply curves faced by the Company in the cotton textile, raw silk, and saltpeter markets. In the first two markets, the firm faced high elasticities of supply suggesting little price-setting ability. The findings are consistent with Chaudhuri’s position that the East India Company was not large enough to determine input prices.

4. Before his recent retirement, Chaudhuri was affiliated with the European University Institute. The bulk of his career, however, was at the School of Oriental and Asian Studies, University of London.

References:

Gary Anderson, Robert McCormick and Robert Tollison. 1983. “The Economic Organization of the English East India Company,” Journal of Economic Behavior and Organization. 4 (4): 221-238.

Ann Carlos and Nicholas, Stephen. 1988. “‘Giants of an Earlier Capitalism': The Chartered Trading Companies as Modern Multinationals,” Business History Review. 62 (Autumn): 398-419.

K. N. Chaudhuri. 1978. The Trading World of Asia and the English East India Company, 1660-1760. Cambridge: Cambridge University Press. K. N. Chaudhuri. 1983. “The Trading World of Asia and the English East India Company, 1660-1760: A review of reviews.” South Asia Research (London) 3 (1) (May): 10-17.

K. N. Chaudhuri. 1985. Trade and Civilization in the Indian Ocean: An Economic History from the Rise of Islam to 1750. Cambridge: Cambridge University Press.

K. N. Chaudhuri. 1989/90. “Indian History and the Indian Ocean (Professor K. N. Chaudhuri Interviewed by Ranabir Chakrabarti).” Calcutta Historical Journal. 14 (1-2) (Jul 1989-Jun 1990): 78-83.

K. N. Chaudhuri. 1990. Asia before Europe: Economy and civilisation of the Indian Ocean from the Rise of Islam to 1750. Cambridge: Cambridge University Press.

Ashin Das Gupta and M. N. Pearson, editors. 1987. India and the Indian Ocean. Calcutta: Oxford University Press.

J. C. van Leur. 1955. Indonesian Trade and Society: Essays in Asian Social and Economic History. The Hague: W. Van Hoeve.

Scott Levi. Forthcoming. The Indian Diaspora in Central Asia and its Trade, 1550-1900. Leiden: E.J. Brill.

Om Prakash. 1985. Dutch East India Company and the Economy of Bengal, 1630-1720. Princeton: Princeton University Press.

W. R. Scott. 1910. Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720, 3 vols. Cambridge: Cambridge University Press.

Niels Steensgaard. 1973. Carracks, Caravans and Companies: the Structural Crisis in the European-Asian Trade in the Early Seventeenth Century. Lund: Studentlitteratur.

George Stigler. 1968. Organization of Industry. Chicago: University of Chicago Press.

Sanjay Subrahmanyam. 1990. Merchants, Markets, and the State in Early Modern India. Delhi: Oxford University Press.

Jean Tirole. 1989. Theory of Industrial Organization. Cambridge: MIT Press.

Reviews of The Trading World of Asia:

S. Ambirajan. 1981. Australian Economic History Review. XXI (1) (March): 77-79.

Philip D. Curtin. 1980. Journal of Modern History. 52 (3) (September): 506-508.

Morris D. Morris. 1980. Journal of Asian Studies. 39 (2) (February): 388-390.

Om Prakash. 1980. Indian Economic and Social History Review. XVII (I) (January-March):139-142.

T. Raychaudhuri. 1980. Economic Journal. 90 (358) (June): 433-435.

Henry G. Roseveare. 1980. “The East India Trade.” Journal of Imperial and Commonwealth History. VIII (2) (January): 131-134.

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Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Asia
Time Period(s):18th Century

Nonprofits and Government: Collaboration and Conflict

Author(s):Boris, Elizabeth T.
Steuerle, C. Eugene
Reviewer(s):Goldin, Milton

Published by EH.NET (July 1999)

Elizabeth T. Bor is and C. Eugene Steuerle. Nonprofits and Government:

Collaboration and Conflict. Washington, D.C.: The Urban Press, 1999.

xii + 383pp. Tables, notes, bibliographies, index. $57.50 (cloth), ISBN

0-87766-687-5; $29.50 (paper), ISBN 0-87766-686-3.

Reviewed for H-Business and EH.NET by Milton Goldin, National Coalition of

Independent Scholars (NCIS).

The New Gospel of Wealth

Today, in the second Gilded Age, a hundred years after the first,

scholars at universities and think tanks have replaced clerics and muckraking

journalists as primary observers of America’s philanthropic system. And

government has replaced the private sector as financier of welfare services.

But no one has replaced the Reverend Walter Rauschenbusch, Lincoln Steffens,

Ida Tarbell, and others like them,

individuals who attempted to tie together charity, the generosity of the very

rich, social justice, and public outlays. Nor has any scholar emerged as a

latter-day Thorstein Veblen, the University of Chicago gadfly whose writings

discombobulated robber barons.

Nonprofits and Government, an Urban Institute tour de horizon of

philanthropy at the turn of the 20th century, consists of a foreword by William

Gorham, the institute’s president, an introduction by Elizabeth T. Boris,

director of the institute’s Center on Nonprofits and Philanthropy, and ten

essays by various scholars. As a summary of current relationships between

501(c)3 organizations and Washington, and as insight into who among savants

thinks what,

it is a must-read, not only for individuals who work in government, the media,

and nonprofits but for business historians who want to know where the economy

stands with respect to voluntary organizations.

Gorham writes that “there is a nonprofit organization to fill almost every

imaginable human need or interest…. Regardless of their individual origins,

these organizations create relationships and networks that connect people to

each other and enable them to work toward mutual goals” (p. xi). Four

paragraphs later and more expansive,

he tells us that “Nonprofit organizations have been called the glue that holds

civil society together.” This prepares the way for Boris’s comment that

“relationships such as those fostered by choral societies, bowling leagues,

and other community associations build the trust and cooperation that is

essential for the effective functioning of society,

politics, and [the] economy” (p. 18).

From that point, however, the text takes on a steely tone. Writers set about

demolishing some of our most treasured philanthropic understandings. If you

believe that corporations have a genuine interest in preserving traditional

American community values, consider Dennis R.

Young’s claim that despite “massive gifts” by George Soros and Ted

Turner, “corporate philanthropy generally is becoming more of an exercise in

strategic marketing and employee morale-building than [in]

corporate social responsibility” (p. 82). If you believe that Americans are

extraordinarily generous, consider C. Eugene Steuerle and Virginia A.

Hodgkinson’s view that “In 1996, charitable giving stood at 1.9 percent of

personal income, slightly [sic] below its post-1964 average of 2.3 percent . .

. .” And, given media stories about staggering sums raised, if you believe

that private giving pays for social services,

ponder the same two authors’ observation that nonprofits receive in donated

funds “about one-twelfth of the government’s social welfare spending” (p. 79).

So much for starters. Conservative writers fondly argue that cutting taxes

increases amounts raised for charity. But Alan J. Abramson, Lester M. Salamon,

and Steuerle tell us that “on balance, the overall thrust of tax policy [that

is, tax benefits for the very rich] in the 1980s and 1990s appears to have

weakened the financial incentive for charitable giving” (p. 121). The wealthy

“experienced sharp increases in the after-tax cost of giving between 1980 and

1994, when the after-tax price of giving $1 rose from 30 cents to 69 cents

between 1980 and 1991 and then fell back to about 60 cents in 1994 and beyond”

(p. 122). The result of this process was that the wealthy came to the belief

that it was better to create tax shelters than to seek deductions after making

charitable gifts.

In neither conservative

nor liberal camps do scholars question that tax exemptions provide nonprofits

with benefits that are denied for-profits.

Nonprofits get to keep nearly all the surplus they earn from a variety of

income-producing activities, ranging from fees for services,

to cost-plus programs on behalf of public agencies, to for-profit ventures.

The other side of the coin is that tax exemption means that government annually

certifies a nonprofit’s operations. (Which is actually less and less of a

problem, as the IRS keeps cutting the number of employees available to

investigate exempt organizations.)

These situations lead John H.

Goddeeris and Burton A. Weisbrod into one of the

most interesting discussions in the book, “Not for-Profit?

Conversions and Public Policy,” in

which they address the question, Why should a growing number of nonprofits,

particularly those in health care, want to convert to for-profit status, given

certain incomes from public funds and fees?

Part of the answer, they tell us, hinges on the “non-distribution constraint”

imposed on nonprofits; that is, the restriction prohibiting distributions of

profits or surpluses to managers and/or trustees. As early as 1983, the answer

also began to hinge on cut-offs of federal grants and loans for HMOs and the

removal of tax advantages for Blue Cross and Blue Shield companies. Insiders

considered the loss of these benefits intolerable to their personal financial

gain, if the nonprofit had accumulated valuable assets. Moreover, “As the

market for hospital services has become more price competitive and the level

of over-capacity more apparent, hospitals have come to view affiliation with

larger organizations as necessary for survival. The most attractive suitors

have often, though not always, been for-profits” (p

. 250).

How we got to where we are today and whose interests have been served during

the journey, subjects addressed in part in all the essays, are discussed by

Young in an awesomely-titled essay, “Complementary,

Supplementary, or Adversarial? A Theoretical and Historical Examination of

Nonprofit-Government Relations in the United States” (pp. 31-67).

Young writes that “public policymakers,” both on the left and on the right,

have “oversimplified” views of nonprofits, although of late there have been

improvements. Even dedicated Reaganites no longer argue that if government

pulls

out of welfare programs, nonprofits and volunteers will happily take over

responsibilities, using donated funds. On their part, liberals agree that the

centralized welfare state

should be dismantled to some degree and that local nonprofits should assume

more responsibility.

Young further suggests that differing understandings of philanthropy’s role

should not be surprising. Three theories of the role of voluntary organizations

in the national life, in some ways contradictory, have been operative since the

founding of the Republic. In a “supplementary model,” nonprofits fulfill a

demand for public goods left unsatisfied by government. In a “complementary

view,” nonprofits operate as partners with government, to deliver public

goods. And in an “adversarial view,”

nonprofits exist mainly to prod government into adjusting its policies to

provide public goods.

The problem is that Young’s explanation does not go far enough to address a

new trend, as the 20th century comes to an end. We are currently in the midst

of the greatest transfer of wealth in world history. Possibly between five and

six trillion dollars (no one knows for certain) is either already in, or en

route to, foundations,

charitable remainder trusts, and similar financial creations, dispatched by the

World War II generation and the first Baby Boomers to retire.

Unlike their predecessors during the first Gilded Age, these rich often have

little or no interest in philanthropy. Preservation of capital is not just

part of the story, it is very nearly all of the story. What will happen to the

philanthropic system as the rich park more and more of their assets in

tax-sheltered instruments is anyone’s guess. There is no discussion of this

development in Nonprofits and Government.

Subject(s):Markets and Institutions
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII