is owned and operated by the Economic History Association
with the support of other sponsoring organizations.

The Economic History of the Fur Trade: 1670 to 1870

Ann M. Carlos, University of Colorado
Frank D. Lewis, Queen’s University


A commercial fur trade in North America grew out of the early contact between Indians and European fisherman who were netting cod on the Grand Banks off Newfoundland and on the Bay of Gaspé near Quebec. Indians would trade the pelts of small animals, such as mink, for knives and other iron-based products, or for textiles. Exchange at first was haphazard and it was only in the late sixteenth century, when the wearing of beaver hats became fashionable, that firms were established who dealt exclusively in furs. High quality pelts are available only where winters are severe, so the trade took place predominantly in the regions we now know as Canada, although some activity took place further south along the Mississippi River and in the Rocky Mountains. There was also a market in deer skins that predominated in the Appalachians.

The first firms to participate in the fur trade were French, and under French rule the trade spread along the St. Lawrence and Ottawa Rivers, and down the Mississippi. In the seventeenth century, following the Dutch, the English developed a trade through Albany. Then in 1670, a charter was granted by the British crown to the Hudson’s Bay Company, which began operating from posts along the coast of Hudson Bay (see Figure 1). For roughly the next hundred years, this northern region saw competition of varying intensity between the French and the English. With the conquest of New France in 1763, the French trade shifted to Scottish merchants operating out of Montreal. After the negotiation of Jay’s Treaty (1794), the northern border was defined and trade along the Mississippi passed to the American Fur Company under John Jacob Astor. In 1821, the northern participants merged under the name of the Hudson’s Bay Company, and for many decades this merged company continued to trade in furs. Finally, in the 1990s, under pressure from animal rights groups, the Hudson’s Bay Company, which in the twentieth century had become a large Canadian retailer, ended the fur component of its operation.

Figure 1
Hudson’s Bay Company Hinterlands
 Hudson's Bay Company Hinterlands (map)

Source: Ray (1987, plate 60)

The fur trade was based on pelts destined either for the luxury clothing market or for the felting industries, of which hatting was the most important. This was a transatlantic trade. The animals were trapped and exchanged for goods in North America, and the pelts were transported to Europe for processing and final sale. As a result, forces operating on the demand side of the market in Europe and on the supply side in North America determined prices and volumes; while intermediaries, who linked the two geographically separated areas, determined how the trade was conducted.

The Demand for Fur: Hats, Pelts and Prices

However much hats may be considered an accessory today, they were for centuries a mandatory part of everyday dress, for both men and women. Of course styles changed, and, in response to the vagaries of fashion and politics, hats took on various forms and shapes, from the high-crowned, broad-brimmed hat of the first two Stuarts to the conically-shaped, plainer hat of the Puritans. The Restoration of Charles II of England in 1660 and the Glorious Revolution in 1689 brought their own changes in style (Clarke, 1982, chapter 1). What remained a constant was the material from which hats were made – wool felt. The wool came from various animals, but towards the end of the fifteenth century beaver wool began to be predominate. Over time, beaver hats became increasingly popular eventually dominating the market. Only in the nineteenth century did silk replace beaver in high-fashion men’s hats.

Wool Felt

Furs have long been classified as either fancy or staple. Fancy furs are those demanded for the beauty and luster of their pelt. These furs – mink, fox, otter – are fashioned by furriers into garments or robes. Staple furs are sought for their wool. All staple furs have a double coating of hair with long, stiff, smooth hairs called guard hairs which protect the shorter, softer hair, called wool, that grows next to the animal skin. Only the wool can be felted. Each of the shorter hairs is barbed and once the barbs at the ends of the hair are open, the wool can be compressed into a solid piece of material called felt. The prime staple fur has been beaver, although muskrat and rabbit have also been used.

Wool felt was used for over two centuries to make high-fashion hats. Felt is stronger than a woven material. It will not tear or unravel in a straight line; it is more resistant to water, and it will hold its shape even if it gets wet. These characteristics made felt the prime material for hatters especially when fashion called for hats with large brims. The highest quality hats would be made fully from beaver wool, whereas lower quality hats included inferior wool, such as rabbit.

Felt Making

The transformation of beaver skins into felt and then hats was a highly skilled activity. The process required first that the beaver wool be separated from the guard hairs and the skin, and that some of the wool have open barbs, since felt required some open-barbed wool in the mixture. Felt dates back to the nomads of Central Asia, who are said to have invented the process of felting and made their tents from this light but durable material. Although the art of felting disappeared from much of western Europe during the first millennium, felt-making survived in Russia, Sweden, and Asia Minor. As a result of the Medieval Crusades, felting was reintroduced through the Mediterranean into France (Crean, 1962).

In Russia, the felting industry was based on the European beaver (castor fiber). Given their long tradition of working with beaver pelts, the Russians had perfected the art of combing out the short barbed hairs from among the longer guard hairs, a technology that they safeguarded. As a consequence, the early felting trades in England and France had to rely on beaver wool imported from Russia, although they also used domestic supplies of wool from other animals, such rabbit, sheep and goat. But by the end of the seventeenth century, Russian supplies were drying up, reflecting the serious depletion of the European beaver population.

Coincident with the decline in European beaver stocks was the emergence of a North American trade. North American beaver (castor canadensis) was imported through agents in the English, French and Dutch colonies. Although many of the pelts were shipped to Russia for initial processing, the growth of the beaver market in England and France led to the development of local technologies, and more knowledge of the art of combing. Separating the beaver wool from the felt was only the first step in the felting process. It was also necessary that some of the barbs on the short hairs be raised or open. On the animal these hairs were naturally covered with keratin to prevent the barbs from opening, thus to make felt, the keratin had to be stripped from at least some of the hairs. The process was difficult to refine and entailed considerable experimentation by felt-makers. For instance, one felt maker “bundled [the skins] in a sack of linen and boiled [them] for twelve hours in water containing several fatty substances and nitric acid” (Crean, 1962, p. 381). Although such processes removed the keratin, they did so at the price of a lower quality wool.

The opening of the North American trade not only increased the supply of skins for the felting industry, it also provided a subset of skins whose guard hairs had already been removed and the keratin broken down. Beaver pelts imported from North America were classified as either parchment beaver (castor sec – dry beaver), or coat beaver (castor gras – greasy beaver). Parchment beaver were from freshly caught animals, whose skins were simply dried before being presented for trade. Coat beaver were skins that had been worn by the Indians for a year or more. With wear, the guard hairs fell out and the pelt became oily and more pliable. In addition, the keratin covering the shorter hairs broke down. By the middle of the seventeenth century, hatters and felt-makers came to learn that parchment and coat beaver could be combined to produce a strong, smooth, pliable, top-quality waterproof material.

Until the 1720s, beaver felt was produced with relatively fixed proportions of coat and parchment skins, which led to periodic shortages of one or the other type of pelt. The constraint was relaxed when carotting was developed, a chemical process by which parchment skins were transformed into a type of coat beaver. The original carrotting formula consisted of salts of mercury diluted in nitric acid, which was brushed on the pelts. The use of mercury was a big advance, but it also had serious health consequences for hatters and felters, who were forced to breathe the mercury vapor for extended periods. The expression “mad as a hatter” dates from this period, as the vapor attacked the nervous systems of these workers.

The Prices of Parchment and Coat Beaver

Drawn from the accounts of the Hudson’s Bay Company, Table 1 presents some eighteenth century prices of parchment and coat beaver pelts. From 1713 to 1726, before the carotting process had become established, coat beaver generally fetched a higher price than parchment beaver, averaging 6.6 shillings per pelt as compared to 5.5 shillings. Once carotting was widely used, however, the prices were reversed, and from 1730 to 1770 parchment exceeded coat in almost every year. The same general pattern is seen in the Paris data, although there the reversal was delayed, suggesting slower diffusion in France of the carotting technology. As Crean (1962, p. 382) notes, Nollet’s L’Art de faire des chapeaux included the exact formula, but it was not published until 1765.

A weighted average of parchment and coat prices in London reveals three episodes. From 1713 to 1722 prices were quite stable, fluctuating within the narrow band of 5.0 and 5.5 shillings per pelt. During the period, 1723 to 1745, prices moved sharply higher and remained in the range of 7 to 9 shillings. The years 1746 to 1763 saw another big increase to over 12 shillings per pelt. There are far fewer prices available for Paris, but we do know that in the period 1739 to 1753 the trend was also sharply higher with prices more than doubling.

Table 1
Price of Beaver Pelts in Britain: 1713-1763
(shillings per skin)

Year Parchment Coat Averagea Year Parchment Coat Averagea
1713 5.21 4.62 5.03 1739 8.51 7.11 8.05
1714 5.24 7.86 5.66 1740 8.44 6.66 7.88
1715 4.88 5.49 1741 8.30 6.83 7.84
1716 4.68 8.81 5.16 1742 7.72 6.41 7.36
1717 5.29 8.37 5.65 1743 8.98 6.74 8.27
1718 4.77 7.81 5.22 1744 9.18 6.61 8.52
1719 5.30 6.86 5.51 1745 9.76 6.08 8.76
1720 5.31 6.05 5.38 1746 12.73 7.18 10.88
1721 5.27 5.79 5.29 1747 10.68 6.99 9.50
1722 4.55 4.97 4.55 1748 9.27 6.22 8.44
1723 8.54 5.56 7.84 1749 11.27 6.49 9.77
1724 7.47 5.97 7.17 1750 17.11 8.42 14.00
1725 5.82 6.62 5.88 1751 14.31 10.42 12.90
1726 5.41 7.49 5.83 1752 12.94 10.18 11.84
1727 7.22 1753 10.71 11.97 10.87
1728 8.13 1754 12.19 12.68 12.08
1729 9.56 1755 12.05 12.04 11.99
1730 8.71 1756 13.46 12.02 12.84
1731 6.27 1757 12.59 11.60 12.17
1732 7.12 1758 13.07 11.32 12.49
1733 8.07 1759 15.99 14.68
1734 7.39 1760 13.37 13.06 13.22
1735 8.33 1761 10.94 13.03 11.36
1736 8.72 7.07 8.38 1762 13.17 16.33 13.83
1737 7.94 6.46 7.50 1763 16.33 17.56 16.34
1738 8.95 6.47 8.32

a A weighted average of the prices of parchment, coat and half parchment beaver pelts. Weights are based on the trade in these types of furs at Fort Albany. Prices of the individual types of pelts are not available for the years, 1727 to 1735.

Source: Carlos and Lewis, 1999.

The Demand for Beaver Hats

The main cause of the rising beaver pelt prices in England and France was the increasing demand for beaver hats, which included hats made exclusively with beaver wool and referred to as “beaver hats,” and those hats containing a combination of beaver and a lower cost wool, such as rabbit. These were called “felt hats.” Unfortunately, aggregate consumption series for the eighteenth century Europe are not available. We do, however, have Gregory King’s contemporary work for England which provides a good starting point. In a table entitled “Annual Consumption of Apparell, anno 1688,” King calculated that consumption of all types of hats was about 3.3 million, or nearly one hat per person. King also included a second category, caps of all sorts, for which he estimated consumption at 1.6 million (Harte, 1991, p. 293). This means that as early as 1700, the potential market for hats in England alone was nearly 5 million per year. Over the next century, the rising demand for beaver pelts was a result of a number factors including population growth, a greater export market, a shift toward beaver hats from hats made of other materials, and a shift from caps to hats.

The British export data indicate that demand for beaver hats was growing not just in England, but in Europe as well. In 1700 a modest 69,500 beaver hats were exported from England and almost the same number of felt hats; but by 1760, slightly over 500,000 beaver hats and 370,000 felt halts were shipped from English ports (Lawson, 1943, app. I). In total, over the seventy years to 1770, 21 million beaver and felt hats were exported from England. In addition to the final product, England exported the raw material, beaver pelts. In 1760, £15,000 in beaver pelts were exported along with a range of other furs. The hats and the pelts tended to go to different parts of Europe. Raw pelts were shipped mainly to northern Europe, including Germany, Flanders, Holland and Russia; whereas hats went to the southern European markets of Spain and Portugal. In 1750, Germany imported 16,500 beaver hats, while Spain imported 110,000 and Portugal 175,000 (Lawson, 1943, appendices F & G). Over the first six decades of the eighteenth century, these markets grew dramatically, such that the value of beaver hat sales to Portugal alone was £89,000 in 1756-1760, representing about 300,000 hats or two-thirds of the entire export trade.

European Intermediaries in the Fur Trade

By the eighteenth century, the demand for furs in Europe was being met mainly by exports from North America with intermediaries playing an essential role. The American trade, which moved along the main water systems, was organized largely through chartered companies. At the far north, operating out of Hudson Bay, was the Hudson’s Bay Company, chartered in 1670. The Compagnie d’Occident, founded in 1718, was the most successful of a series of monopoly French companies. It operated through the St. Lawrence River and in the region of the eastern Great Lakes. There was also an English trade through Albany and New York, and a French trade down the Mississippi.

The Hudson’s Bay Company and the Compagnie d’Occident, although similar in title, had very different internal structures. The English trade was organized along hierarchical lines with salaried managers, whereas the French monopoly issued licenses (congés) or leased out the use of its posts. The structure of the English company allowed for more control from the London head office, but required systems that could monitor the managers of the trading posts (Carlos and Nicholas, 1990). The leasing and licensing arrangements of the French made monitoring unnecessary, but led to a system where the center had little influence over the conduct of the trade.

The French and English were distinguished as well by how they interacted with the Natives. The Hudson’s Bay Company established posts around the Bay and waited for the Indians, often middlemen, to come to them. The French, by contrast, moved into the interior, directly trading with the Indians who harvested the furs. The French arrangement was more conducive to expansion, and by the end of the seventeenth century, they had moved beyond the St. Lawrence and Ottawa rivers into the western Great Lakes region (see Figure 1). Later they established posts in the heart of the Hudson Bay hinterland. In addition, the French explored the river systems to the south, setting up a post at the mouth of the Mississippi. As noted earlier, after Jay’s Treaty was signed, the French were replaced in the Mississippi region by U.S. interests which later formed the American Fur Company (Haeger, 1991).

The English takeover of New France at the end of the French and Indian Wars in 1763 did not, at first, fundamentally change the structure of the trade. Rather, French management was replaced by Scottish and English merchants operating in Montreal. But, within a decade, the Montreal trade was reorganized into partnerships between merchants in Montreal and traders who wintered in the interior. The most important of these arrangements led to the formation of the Northwest Company, which for the first two decades of the nineteenth century, competed with the Hudson’s Bay Company (Carlos and Hoffman, 1986). By the early decades of the nineteenth century, the Hudson’s Bay Company, the Northwest Company, and the American Fur Company had, combined, a system of trading posts across North America, including posts in Oregon and British Columbia and on the Mackenzie River. In 1821, the Northwest Company and the Hudson’s Bay Company merged under the name of the Hudson’s Bay Company. The Hudson’s Bay Company then ran the trade as a monopsony until the late 1840s when it began facing serious competition from trappers to the south. The Company’s role in the northwest changed again with the Canadian Confederation in 1867. Over the next decades treaties were signed with many of the northern tribes forever changing the old fur trade order in Canada.

The Supply of Furs: The Harvesting of Beaver and Depletion

During the eighteenth century, the changing technology of felt production and the growing demand for felt hats were met by attempts to increase the supply of furs, especially the supply of beaver pelts. Any permanent increase, however, was ultimately dependent on the animal resource base. How that base changed over time must be a matter of speculation since no animal counts exist from that period; nevertheless, the evidence we do have points to a scenario in which over-harvesting, at least in some years, gave rise to serious depletion of the beaver and possibly other animals such as marten that were also being traded. Why the beaver were over-harvested was closely related to the prices Natives were receiving, but important as well was the nature of Native property rights to the resource.

Harvests in the Fort Albany and York Factory Regions

That beaver populations along the Eastern seaboard regions of North America were depleted as the fur trade advanced is widely accepted. In fact the search for new sources of supply further west, including the region of Hudson Bay, has been attributed in part to dwindling beaver stocks in areas where the fur trade had been long established. Although there has been little discussion of the impact that the Hudson’s Bay Company and the French, who traded in the region of Hudson Bay, were having on the beaver stock, the remarkably complete records of the Hudson’s Bay Company provide the basis for reasonable inferences about depletion. From 1700 there is an uninterrupted annual series of fur returns at Fort Albany; the fur returns from York Factory begin in 1716 (see Figure 1).

The beaver returns at Fort Albany and York Factory for the period 1700 to 1770 are described in Figure 2. At Fort Albany the number of beaver skins over the period 1700 to 1720 averaged roughly 19,000, with wide year-to-year fluctuations; the range was about 15,000 to 30,000. After 1720 and until the late 1740s average returns declined by about 5,000 skins, and remained within the somewhat narrower range of roughly 10,000 to 20,000 skins. The period of relative stability was broken in the final years of the 1740s. In 1748 and 1749, returns increased to an average of nearly 23,000. Following these unusually strong years, the trade fell precipitously so that in 1756 fewer than 6,000 beaver pelts were received. There was a brief recovery in the early 1760s but by the end decade trade had fallen below even the mid-1750s levels. In 1770, Fort Albany took in just 3,600 beaver pelts. This pattern – unusually large returns in the late 1740s and low returns thereafter – indicates that the beaver in the Fort Albany region were being seriously depleted.

Figure 2
Beaver Traded at Fort Albany and York Factory 1700 – 1770

Source: Carlos and Lewis, 1993.

The beaver returns at York Factory from 1716 to 1770, also described in Figure 2, have some of the key features of the Fort Albany data. After some low returns early on (from 1716 to 1720), the number of beaver pelts increased to an average of 35,000. There were extraordinary returns in 1730 and 1731, when the average was 55,600 skins, but beaver receipts then stabilized at about 31,000 over the remainder of the decade. The first break in the pattern came in the early 1740s shortly after the French established several trading posts in the area. Surprisingly perhaps, given the increased competition, trade in beaver pelts at the Hudson’s Bay Company post increased to an average of 34,300, this over the period 1740 to 1743. Indeed, the 1742 return of 38,791 skins was the largest since the French had established any posts in the region. The returns in 1745 were also strong, but after that year the trade in beaver pelts began a decline that continued through to 1770. Average returns over the rest of the decade were 25,000; the average during the 1750s was 18,000, and just 15,500 in the 1760s. The pattern of beaver returns at York Factory – high returns in the early 1740s followed by a large decline – strongly suggests that, as in the Fort Albany hinterland, the beaver population had been greatly reduced.

The overall carrying capacity of any region, or the size of the animal stock, depends on the nature of the terrain and the underlying biological determinants such as birth and death rates. A standard relationship between the annual harvest and the animal population is the Lotka-Volterra logistic, commonly used in natural resource models to relate the natural growth of a population to the size of that population:
F(X) = aX – bX2, a, b > 0 (1)

where X is the population, F(X) is the natural growth in the population, a is the maximum proportional growth rate of the population, and b = a/X, where X is the upper limit to population size. The population dynamics of the species exploited depends on the harvest each period:

DX = aX – bX2- H (2)

where DX is the annual change in the population and H is the harvest. The choice of parameter a and maximum population X is central to the population estimates and have been based largely on estimates from the beaver ecology literature and Ontario provincial field reports of beaver densities (Carlos and Lewis, 1993).

Simulations based on equation 2 suggest that, until the 1730s, beaver populations remained at levels roughly consistent with maximum sustained yield management, sometimes referred to as the biological optimum. But after the 1730s there was a decline in beaver stocks to about half the maximum sustained yield levels. The cause of the depletion was closely related to what was happening in Europe. There, buoyant demand for felt hats and dwindling local fur supplies resulted in much higher prices for beaver pelts. These higher prices, in conjunction with the resulting competition from the French in the Hudson Bay region, led the Hudson’s Bay Company to offer much better terms to Natives who came to their trading posts (Carlos and Lewis, 1999).

Figure 3 reports a price index for furs at Fort Albany and at York Factory. The index represents a measure of what Natives received in European goods for their furs. At Fort Albany, fur prices were close to 70 from 1713 to 1731, but in 1732, in response to higher European fur prices and the entry of la Vérendrye, an important French trader, the price jumped to 81. After that year, prices continued to rise. The pattern at York Factory was similar. Although prices were high in the early years when the post was being established, beginning in 1724 the price settled down to about 70. At York Factory, the jump in price came in 1738, which was the year la Vérendrye set up a trading post in the York Factory hinterland. Prices then continued to increase. It was these higher fur prices that led to over-harvesting and, ultimately, a decline in beaver stocks.

Figure 3
Price Index for Furs: Fort Albany and York Factory, 1713 – 1770

Source: Carlos and Lewis, 2001.

Property Rights Regimes

An increase in price paid to Native hunters did not have to lead to a decline in the animal stocks, because Indians could have chosen to limit their harvesting. Why they did not was closely related their system of property rights. One can classify property rights along a spectrum with, at one end, open access, where anyone can hunt or fish, and at the other, complete private property, where a sole owner has full control over the resource. Between, there are a range of property rights regimes with access controlled by a community or a government, and where individual members of the group do not necessarily have private property rights. Open access creates a situation where there is less incentive to conserve, because animals not harvested by a particular hunter will be available to other hunters in the future. Thus the closer is a system to open access the more likely it is that the resource will be depleted.

Across aboriginal societies in North America, one finds a range of property rights regimes. Native Americans did have a concept of trespass and of property, but individual and family rights to resources were not absolute. Sometimes referred to as the Good Samaritan principle (McManus, 1972), outsiders were not permitted to harvest furs on another’s territory for trade, but they were allowed to hunt game and even beaver for food. Combined with this limitation to private property was an Ethic of Generosity that included liberal gift-giving where any visitor to one’s encampment was to be supplied with food and shelter.

Why a social norm such as gift-giving or the related Good Samaritan principle emerged was due to the nature of the aboriginal environment. The primary objective of aboriginal societies was survival. Hunting was risky, and so rules were put in place that would reduce the risk of starvation. As Berkes et al.(1989, p. 153) notes, for such societies: “all resources are subject to the overriding principle that no one can prevent a person from obtaining what he needs for his family’s survival.” Such actions were reciprocal and especially in the sub-arctic world were an insurance mechanism. These norms, however, also reduced the incentive to conserve the beaver and other animals that were part of the fur trade. The combination of these norms and the increasing price paid to Native traders led to the large harvests in the 1740s and ultimately depletion of the animal stock.

The Trade in European Goods

Indians were the primary agents in the North American commercial fur trade. It was they who hunted the animals, and transported and traded the pelts or skins to European intermediaries. The exchange was a voluntary. In return for their furs, Indians obtained both access to an iron technology to improve production and access to a wide range of new consumer goods. It is important to recognize, however, that although the European goods were new to aboriginals, the concept of exchange was not. The archaeological evidence indicates an extensive trade between Native tribes in the north and south of North America prior to European contact.

The extraordinary records of the Hudson’s Bay Company allow us to form a clear picture of what Indians were buying. Table 2 lists the goods received by Natives at York Factory, which was by far the largest of the Hudson’s Bay Company trading posts. As is evident from the table, the commercial trade was more than in beads and baubles or even guns and alcohol; rather Native traders were receiving a wide range of products that improved their ability to meet their subsistence requirements and allowed them to raise their living standards. The items have been grouped by use. The producer goods category was dominated by firearms, including guns, shot and powder, but also includes knives, awls and twine. The Natives traded for guns of different lengths. The 3-foot gun was used mainly for waterfowl and in heavily forested areas where game could be shot at close range. The 4-foot gun was more accurate and suitable for open spaces. In addition, the 4-foot gun could play a role in warfare. Maintaining guns in the harsh sub-arctic environment was a serious problem, and ultimately, the Hudson’s Bay Company was forced to send gunsmiths to its trading posts to assess quality and help with repairs. Kettles and blankets were the main items in the “household goods” category. These goods probably became necessities to the Natives who adopted them. Then there were the luxury goods, which have been divided into two broad categories: “tobacco and alcohol,” and “other luxuries,” dominated by cloth of various kinds (Carlos and Lewis, 2001; 2002).

Table 2
Value of Goods Received at York Factory in 1740 (made beaver)

We have much less information about the French trade. The French are reported to have exchanged similar items, although given their higher transport costs, both the furs received and the goods traded tended to be higher in value relative to weight. The Europeans, it might be noted, supplied no food to the trade in the eighteenth century. In fact, Indians helped provision the posts with fish and fowl. This role of food purveyor grew in the nineteenth century as groups known as the “home guard Cree” came to live around the posts; as well, pemmican, supplied by Natives, became an important source of nourishment for Europeans involved in the buffalo hunts.

The value of the goods listed in Table 2 is expressed in terms of the unit of account, the made beaver, which the Hudson’s Bay Company used to record its transactions and determine the rate of exchange between furs and European goods. The price of a prime beaver pelt was 1 made beaver, and every other type of fur and good was assigned a price based on that unit. For example, a marten (a type of mink) was a made beaver, a blanket was 7 made beaver, a gallon of brandy, 4 made beaver, and a yard of cloth, 3? made beaver. These were the official prices at York Factory. Thus Indians, who traded at these prices, received, for example, a gallon of brandy for four prime beaver pelts, two yards of cloth for seven beaver pelts, and a blanket for 21 marten pelts. This was barter trade in that no currency was used; and although the official prices implied certain rates of exchange between furs and goods, Hudson’s Bay Company factors were encouraged to trade at rates more favorable to the Company. The actual rates, however, depended on market conditions in Europe and, most importantly, the extent of French competition in Canada. Figure 3 illustrates the rise in the price of furs at York Factory and Fort Albany in response to higher beaver prices in London and Paris, as well as to a greater French presence in the region (Carlos and Lewis, 1999). The increase in price also reflects the bargaining ability of Native traders during periods of direct competition between the English and French and later the Hudson’s Bay Company and the Northwest Company. At such times, the Native traders would play both parties off against each other (Ray and Freeman, 1978).

The records of the Hudson’s Bay Company provide us with a unique window to the trading process, including the bargaining ability of Native traders, which is evident in the range of commodities received. Natives only bought goods they wanted. Clear from the Company records is that it was the Natives who largely determined the nature and quality of those goods. As well the records tell us how income from the trade was being allocated. The breakdown differed by post and varied over time; but, for example, in 1740 at York Factory, the distribution was: producer goods – 44 percent; household goods – 9 percent; alcohol and tobacco – 24 percent; and other luxuries – 23 percent. An important implication of the trade data is that, like many Europeans and most American colonists, Native Americans were taking part in the consumer revolution of the eighteenth century (de Vries, 1993; Shammas, 1993). In addition to necessities, they were consuming a remarkable variety of luxury products. Cloth, including baize, duffel, flannel, and gartering, was by far the largest class, but they also purchased beads, combs, looking glasses, rings, shirts, and vermillion among a much longer list. Because these items were heterogeneous in nature, the Hudson’s Bay Company’s head office went to great lengths to satisfy the specific tastes of Native consumers. Attempts were also made, not always successfully, to introduce new products (Carlos and Lewis, 2002).

Perhaps surprising, given the emphasis that has been placed on it in the historical literature, was the comparatively small role of alcohol in the trade. At York Factory, Native traders received in 1740 a total of 494 gallons of brandy and “strong water,” which had a value of 1,976 made beaver. More than twice this amount was spent on tobacco in that year, nearly five times was spent on firearms, twice was spent on cloth, and more was spent on blankets and kettles than on alcohol. Thus, brandy, although a significant item of trade, was by no means a dominant one. In addition, alcohol could hardly have created serious social problems during this period. The amount received would have allowed for no more than ten two-ounce drinks per year for the adult Native population living in the region.

The Labor Supply of Natives

Another important question can be addressed using the trade data. Were Natives “lazy and improvident” as they have been described by some contemporaries, or were they “industrious” like the American colonists and many Europeans? Central to answering this question is how Native groups responded to the price of furs, which began rising in the 1730s. Much of the literature argues that Indian trappers reduced their effort in response to higher fur prices; that is, they had backward-bending supply curves of labor. The view is that Natives had a fixed demand for European goods that, at higher fur prices, could be met with fewer furs, and hence less effort. Although widely cited, this argument does not stand up. Not only were higher fur prices accompanied by larger total harvests of furs in the region, but the pattern of Native expenditure also points to a scenario of greater effort. From the late 1730s to the 1760s, as the price of furs rose, the share of expenditure on luxury goods increased dramatically (see Figure 4). Thus Natives were not content simply to accept their good fortune by working less; rather they seized the opportunity provided to them by the strong fur market by increasing their effort in the commercial sector, thereby dramatically augmenting the purchases of those goods, namely the luxuries, that could raise their living standards.

Figure 4
Native Expenditure Shares at York Factory 1716 – 1770

Source: Carlos and Lewis, 2001.

A Note on the Non-commercial Sector

As important as the fur trade was to Native Americans in the sub-arctic regions of Canada, commerce with the Europeans comprised just one, relatively small, part of their overall economy. Exact figures are not available, but the traditional sectors; hunting, gathering, food preparation and, to some extent, agriculture must have accounted for at least 75 to 80 percent of Native labor during these decades. Nevertheless, despite the limited time spent in commercial activity, the fur trade had a profound effect on the nature of the Native economy and Native society. The introduction of European producer goods, such as guns, and household goods, mainly kettles and blankets, changed the way Native Americans achieved subsistence; and the European luxury goods expanded the range of products that allowed them to move beyond subsistence. Most importantly, the fur trade connected Natives to Europeans in ways that affected how and how much they chose to work, where they chose to live, and how they exploited the resources on which the trade and their survival was based.


Berkes, Fikret, David Feeny, Bonnie J. McCay, and James M. Acheson. “The Benefits of the Commons.” Nature 340 (July 13, 1989): 91-93.

Braund, Kathryn E. Holland.Deerskins and Duffels: The Creek Indian Trade with Anglo-America, 1685-1815. Lincoln: University of Nebraska Press, 1993.

Carlos, Ann M., and Elizabeth Hoffman. “The North American Fur Trade: Bargaining to a Joint Profit Maximum under Incomplete Information, 1804-1821.” Journal of Economic History 46, no. 4 (1986): 967-86.

Carlos, Ann M., and Frank D. Lewis. “Indians, the Beaver and the Bay: The Economics of Depletion in the Lands of the Hudson’s Bay Company, 1700-1763.” Journal of Economic History 53, no. 3 (1993): 465-94.

Carlos, Ann M., and Frank D. Lewis. “Property Rights, Competition and Depletion in the Eighteenth-Century Canadian Fur Trade: The Role of the European Market.” Canadian Journal of Economics 32, no. 3 (1999): 705-28.

Carlos, Ann M., and Frank D. Lewis. “Property Rights and Competition in the Depletion of the Beaver: Native Americans and the Hudson’s Bay Company.” In The Other Side of the Frontier: Economic Explorations in Native American History, edited by Linda Barrington, 131-149. Boulder, CO: Westview Press, 1999.

Carlos, Ann M., and Frank D. Lewis. “Trade, Consumption, and the Native Economy: Lessons from York Factory, Hudson Bay.” Journal of Economic History61, no. 4 (2001): 465-94.

Carlos, Ann M., and Frank D. Lewis. “Marketing in the Land of Hudson Bay: Indian Consumers and the Hudson’s Bay Company, 1670-1770.” Enterprise and Society 2 (2002): 285-317.

Carlos, Ann and Nicholas, Stephen. “Agency Problems in Early Chartered Companies: The Case of the Hudson’s Bay Company.” Journal of Economic History 50, no. 4 (1990): 853-75.

Clarke, Fiona. Hats. London: Batsford, 1982.

Crean, J. F. “Hats and the Fur Trade.” Canadian Journal of Economics and Political Science 28, no. 3 (1962): 373-386.

Corner, David. “The Tyranny of Fashion: The Case of the Felt-Hatting Trade in the Late Seventeenth and Eighteenth Centuries.” Textile History 22, no.2 (1991): 153-178.

de Vries, Jan. “Between Purchasing Power and the World of Goods: Understanding the Household Economy in Early Modern Europe.” In Consumption and the World of Goods, edited by John Brewer and Roy Porter, 85-132. London: Routledge, 1993.

Ginsburg Madeleine. The Hat: Trends and Traditions. London: Studio Editions, 1990.

Haeger, John D. John Jacob Astor: Business and Finance in the Early Republic. Detroit: Wayne State University Press, 1991.

Harte, N.B. “The Economics of Clothing in the Late Seventeenth Century.” Textile History 22, no. 2 (1991): 277-296.

Heidenreich, Conrad E., and Arthur J. Ray. The Early Fur Trade: A Study in Cultural Interaction. Toronto: McClelland and Stewart, 1976.

Helm, Jane, ed. Handbook of North American Indians 6, Subarctic. Washington: Smithsonian, 1981.

Innis, Harold. The Fur Trade in Canada (revised edition). Toronto: University of Toronto Press, 1956.

Krech III, Shepard. The Ecological Indian: Myth and History. New York: Norton, 1999.

Lawson, Murray G. Fur: A Study in English Mercantilism. Toronto: University of Toronto Press, 1943.

McManus, John. “An Economic Analysis of Indian Behavior in the North American Fur Trade.” Journal of Economic History 32, no.1 (1972): 36-53.

Ray, Arthur J. Indians in the Fur Trade: Their Role as Hunters, Trappers and Middlemen in the Lands Southwest of Hudson Bay, 1660-1870. Toronto: University of Toronto Press, 1974.

Ray, Arthur J. and Donald Freeman. “Give Us Good Measure”: An Economic Analysis of Relations between the Indians and the Hudson’s Bay Company before 1763. Toronto: University of Toronto Press, 1978.

Ray, Arthur J. “Bayside Trade, 1720-1780.” In Historical Atlas of Canada 1, edited by R. Cole Harris, plate 60. Toronto: University of Toronto Press, 1987.

Rich, E. E. Hudson’s Bay Company, 1670 – 1870. 2 vols. Toronto: McClelland and Stewart, 1960.

Rich, E.E. “Trade Habits and Economic Motivation among the Indians of North America.” Canadian Journal of Economics and Political Science 26, no. 1 (1960): 35-53.

Shammas, Carole. “Changes in English and Anglo-American Consumption from 1550-1800.” In Consumption and the World of Goods, edited by John Brewer and Roy Porter, 177-205. London: Routledge, 1993.

Wien, Thomas. “Selling Beaver Skins in North America and Europe, 1720-1760: The Uses of Fur-Trade Imperialism.” Journal of the Canadian Historical Association, New Series 1 (1990): 293-317.

Citation: Carlos, Ann and Frank Lewis. “Fur Trade (1670-1870)”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL

The European Guilds: An Economic Analysis

Author(s):Ogilvie, Sheilagh
Reviewer(s):de Vries, Jan

Published by EH.Net (March 2019)

Sheilagh Ogilvie, The European Guilds: An Economic Analysis. Princeton, NJ: Princeton University Press, 2019. xvi + 645 pp. $40 (hardcover), ISBN: 978-0-691-13754-4.

Reviewed for EH.Net by Jan de Vries, Department of History, University of California at Berkeley.

Europe’s craft guilds have been a topic of interest to scholars for a very long time. When the Classical economists condemned them and the French revolutionaries set about abolishing them everywhere they seized power, Europe’s craft guilds, which had then functioned in nearly all of urban Europe for some eight hundred years, came into bad odor: they became the poster child for ancien régime economic privilege and oppression. Later, institutional economists of the “German Historical School” and many historians came to the defense of the old guild regime. Something that had helped organize economic life for so long, that gave manual workers — some of them — a political voice, and that embodied the “spirit” of an economic epoch deserves to be understood on its own terms.

Over the past century or so economists have become less interested in the “spirit” of economic epochs and most social historians became disabused of any romantic notions they may have nurtured about guild members, who were, after all, petty commodity producers, if not actual capitalists. But the beginning of a new millennium brought with it a renewed appreciative interest in guilds. The new institutionalism cast the guilds’ seemingly self-serving actions in a new light, a light that revealed clever solutions to various forms of market failure, particularly in the realm of technical innovation and human capital formation. The guilds were back: instead of being a disreputable relic of the old regime, they now looked like pathfinders for the great divergence.

Sheilagh Ogilvie, Professor of Economic History at the University of Cambridge, has now written a book that intends to bring this most recent flirtation to an end. The European Guilds is a comprehensive study of craft guilds in Europe as a whole. Its foundation is a database of guild actions drawn primarily from the vast secondary literature on guilds, which mostly focus on individual trades or single towns. Ogilvie’s database is primarily qualitative in character: describing guild policy on a particular issue, such as ordinances defining formal guild power in a town, the observations of an outsider concerning guild behavior, etc. But the database also includes quantitative elements: the number of guilds and their members, the price of guild membership, litigation expenses, license payments, etc. Altogether, her database includes 12,051 quantitative and 5,333 qualitative observations drawn from twenty-three modern European countries beginning with the eleventh century and continuing until the last European guilds were abolished in the late nineteenth century.

The database is the foundation of this study. Every aspect of guild behavior Ogilvie addressed is analyzed on the basis of the relevant database elements. Thus, she has 706 discrete observations concerning guilds and innovation, 4919 observations that address barriers to entry to guild membership, etc. The observations as a whole are fairly well distributed across space and time, although nearly half come from the Low Countries and German-speaking Europe. Ogilvie is attentive to possible over- and under-representation problems, but there remains the problem of the nature of the observations themselves. Some record historical events, others are prescriptive statements (rules, pronouncements), yet others are claims of interested parties. Is there a secure way of converting such a mixture of observations into a conclusive statement of guild behavior? Ogilvie’s approach is to rely on the sheer number of observations available to her and, in most cases, on what she sees as the unambiguous answers her database gives to the questions she puts to it.

For, make no mistake, guilds were, first and last, institutions designed to redistribute resources to their members at the expense of society at large (p. 80). They were employer associations, “steely and implacable” in their seeking after rents (p. 210) that endured for so long because guilds succeeded in sharing enough of their rents with those who held political power to buy their protection (p. 581). That is, guilds were not primarily “private order” institutions that generalized trust, built social capital and enriched civil society. They were what Adam Smith said they were: conspiracies against the public, abetted in their pursuit of private gain by public power.

Ogilvie makes this case systematically. Chapter by chapter, she reviews the collusive ties of guilds to governmental authorities, the barriers to entry erected by guilds, their manipulation of markets, their discriminatory policies regarding women and an array of religious and ethnic groups. With few exceptions, guilds acted to restrict membership, monopolize production, exploit suppliers and hired labor, and exclude women.

Scholars who speak well of guilds usually concede their monopolistic, corporatist character, but point to redeeming virtues: they uphold quality standards, enable investments in human capital via apprenticeship, and even stimulate innovation by providing a non-patent based incentive structure. Certainly the most interesting chapters of the book tackle these themes. Ogilvie’s database arms her with example after example to show that guilds were, after all, irredeemable. Their quality controls served themselves, not consumers; apprenticeship had little to do with guilds (and was hardly necessary to the acquisition of skill in most trades); and innovation was only tolerated by guilds when it served the members’ interests. This last claim may seem like a significant concession, but Ogilvie sees it as one more confirmation of the myopic focus of guild activity.

The many thousands of guilds that existed from about 1100 to at least the 1790s imposed a deadweight loss on the European economies, a loss that continued unabated throughout this long period. But, was this loss large or small? After all, no economic era is without its rent-seeking institutions, corrupt governments and feckless regulators. Is there a profession or industry in the United States that does not seek to maintain entry barriers, define self-serving quality standards, and buy the favor of politicians? Did the rent seeking of the craft guilds exceed the endemic background rent seeking that is, arguably, part of the human condition?

The organization of Ogilvie’s study does not lend itself to providing an answer to this question since she pools her data to generate a group portrait of “The European Guild.” Only in the final chapter of this exhaustive study does she turn to a comparative approach. Were guilds less noxious in some places, or in some branches of industry, than in others? Did the severity of rent seeking correlate with overall economic performance? While Ogilvie does not consider industry differences, she does seek to distinguish broad European zones of strong, average, and weak guilds. Her database reveals the German, Nordic, and Iberian lands to have had the strongest, most objectionable, guilds, while the Low Countries and Britain had the weakest. There, either the state or the town magistrates limited guild power more consistently than elsewhere in Europe.

Ogilvie then compares the GDP estimates available for these European countries and finds that Britain and the Low Countries performed better, overall, than the other regions of Europe. This, she suggests, is the measure of the difference that guild power could make.

This analysis is brief, highly aggregated, dependent on weak data, and, unfortunately, not terribly convincing. Northwestern Europe in the early modern era differed from the rest of Europe in so many dimensions that an assertion that the line of causation should run from weak guilds to faster GDP growth is, at the very least, premature.

The European Guilds is a learned and comprehensive study of an institution that stood at the heart of the European non-agricultural economy for over seven centuries. Its strength is, however, also a weakness. The guild is analyzed at a high level of abstraction, the wealth of detailed examples notwithstanding. This aids in drawing generalizations about guild intentions and behavior; but it limits the examination of the guilds within the larger economies in which they functioned. The final chapter hints at these issues, but it is far less fully developed than the rest of this volume. Instead of closing a debate, Ogilvie has, I believe, reinvigorated one. Her new book will be the necessary starting point for anyone wishing to pursue the matter further.

Jan de Vries is the Sidney Hellman Ehrman Professor of History and Economics, Emeritus, at the University of California at Berkeley. He is the author, among other works, of The Industrious Revolution (Cambridge, 2008) and The Price of Bread: Regulating the Market in the Dutch Republic (Cambridge, 2019).

Copyright (c) 2019 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 ( Published by EH.Net (March 2019). All EH.Net reviews are archived at

Subject(s):Business History
Industry: Manufacturing and Construction
Markets and Institutions
Geographic Area(s):Europe
Time Period(s):Medieval
16th Century
17th Century
18th Century

The Development Dilemma: Security, Prosperity, and a Return to History

Author(s):Bates, Robert H.
Reviewer(s):McGuirk, Eoin

Published by EH.Net (July 2018)

Robert H. Bates, The Development Dilemma: Security, Prosperity, and a Return to History. Princeton: Princeton University Press, 2017. xii + 188 pp. $28 (hardcover), ISBN: 978-0-691-16735-0.

Reviewed for EH.Net by Eoin McGuirk, Department of Economics, Yale University.

In The Development Dilemma, Robert Bates (Harvard) addresses a fundamental question on the political economy of development: when is power used to foster economic growth? His approach is shaped by the idea that, in order to study the development process, it is unwise to limit one’s analysis to countries that are yet to develop. With this in mind, he turns to early modern Europe for illustrative case studies. From similar beginnings following the fall of Rome, England and France embarked on divergent paths that left the former on the cusp of the Great Transformation and the latter mired in violence. Bates attributes this divergence to the use of power: in England, regional interests were aligned with the center; in France, they were not. These competing interests created a trade-off between development and political stability in France that was not present to the same extent in England. Drawing lessons from this historical comparison, Bates revisits his fieldwork in Kenya and Zambia, where, he argues, colonial intrusions generated political environments more akin to medieval France than to medieval England.

The foundation of Bates’ argument lies in what he calls the “fundamental tension” between security and prosperity — a theory of development that puts power and coercion at the center of the development process. He begins with a Malthusian setting: agrarian societies are destined to be poor, owing to the diminishing marginal returns to land, and poor societies are destined to be agrarian, owing to Engel’s law. To escape this trap, families must either migrate in search of better land or specialize and trade. This produces the first dilemma: once families begin to accumulate wealth in this manner, they in turn attract the specter of violent appropriation from other families. As long as private families control both production and coercion, therefore, society’s choice is one between poverty and security on the one hand, or wealth and violence on the other.

This tension was evident as England and France recovered following the fall of Rome. In France, the emerging rural elite sought to concentrate their landholdings into estates that would pass only to the eldest surviving male. The growth of prosperity was thus accompanied by a new class of younger, unmarried warriors with little stake in social order. The violence, extortion and fear that they generated ultimately led families to recruit their own armed companies in response, giving rise to the “era of the chatelain,” characterized by growing prosperity and conflict in the countryside. Over time, this outbreak of violence was met by a demand for peace and the successful attempt to centralize the means of coercion by the church and the royal family. Power would be vested in their hands, and the private use of violence would be outlawed.

A similar process took hold in twelfth century England. Following his death in 1135, the battle to succeed Henry I exacerbated existing tensions over land in the countryside. This pattern of conflict resulted in “The Anarchy” — a period in which private armies were established and violence spread throughout the country. When the Angevins eventually captured the throne, the new monarch, Henry II, sought to secure his possessions by enacting statutes that prohibited private acts of violence. As in France, such acts were to be deemed crimes against the political community.

A second tension emerges at this point in Bates’ model. In theory, removing the means of coercion from rival families ought to lay the groundwork for private investment and the pursuit of prosperity. The problem, of course, is that any central authority that has the power to secure property also has the power to seize it. Here, the fates of England and France diverged. While the Norman conquest of England resulted in a relatively unified political class under William, by contrast the regions of France were both culturally and economically distinct under the House of Capet. Facing diverse and powerful families, the Capetians “assembled” rather than seized France. In this environment, political expediency meant placating diverse interests rather than pursuing common goals.

Bates argues that these contrasting terrains shaped political behavior in a manner that would have profound and lasting effects. This is best illustrated by the development of their respective public finance systems. In England, landowners and merchants were willing to provide tax revenues to finance wars in return for political influence. As a result, the entire political class had a shared interest in both military victory and policies that facilitated private enterprise. From these origins also emerged a tax infrastructure that would underpin state capacity into the future. In France, competing interests undermined any attempt to foster cohesion. Under Charles V, for example, vulnerable duchies from the west were willing for pay for military protection while those from Paris were not. In return for political quiescence, kings in France were therefore apt to exchange private privileges to regional families — such as exemptions from taxes — rather than orchestrate collective agreements in the name of the national interest. In many instances, the authority to collect taxes on behalf of the center was devolved to the regions themselves, who, Bates notes, tended to underreport their collections and inflate their costs.

Bates provides further enriching examples of how these contrasting political landscapes determined the use of power in both countries. By the end of the eighteenth century, England strode toward the Great Transformation while the French monarchy descended into predation, violence and state failure.

The central tenet of Bates’ analysis is that lessons for contemporary development can be drawn from these historical case studies. To this end, he introduces his considerable expertise on the political economy of development in twentieth century Africa. European colonization, he argues, created fractured, decentralized states throughout the continent that resembled medieval France. First, the crude imposition of arbitrary borders threw together large numbers of ethnically, culturally and regionally diverse groups into the same polity; second, European colonial powers found it more profitable to govern by “indirect rule,” whereby the national interest was relegated in favor of placating regional leaders to ensure political stability; and third, the investments made by European settlers served to exacerbate regional inequalities rather than promote broad-based development.

To illustrate the effect of this political environment on the subsequent use of power, Bates focuses on post-independence Kenya and Zambia, and their first presidents, Jomo Kenyatta and Kenneth Kaunda. Both had to consolidate the support of their core constituencies: the Central Province for Kenyatta and the United National Independence Party for Kaunda; both had to garner the support of competing interests beyond their core: the Rift Valley for Kenyatta and the Copperbelt for Kaunda; and both altered the rules of the game upon their failure to ensure political stability through legitimate means. The result in both countries was an era of authoritarianism, corruption and violence.

This is a beautifully written book that will add much to the scholarly discourse on the origins of comparative development. By looking to medieval Europe for insights on contemporary development, it presents a rare and valuable analysis that has important lessons for all readers. While the core argument is provocative — that there exists a trade-off between economic growth and political stability in polities with incongruent regional interests — it is refreshing to note that there is much in the state-of-the-art empirical literature that aligns well with its implications (e.g., see Michalopoulos and Papaioannou, 2016; Alesina, Michalopoulos and Papaioannou, 2016; and Burgess, Jedwab, Miguel, Morjaria and Padro i Miquel, 2015).

Ultimately, like all grand theories in development, this book raises several interesting questions for future scholarship: How can the low-income countries of today escape the trade-off between growth and stability? Is it better to sacrifice scale economies in the name of secession, or it is better to invest in nation building? And if national unity is indeed a first order condition for development, then why is Kenya richer than neighboring Tanzania, where a common identity has been carefully fostered since independence? The Development Dilemma will inspire political economists to tackle questions such as these for years to come. It is an essential addition to a paramount research agenda.


Alberto Alesina, Stelios Michalopoulos and Elias Papaioannou, 2016. “Ethnic Inequality.” Journal of Political Economy, 124 (2): 428-88.

Robin Burgess, Remi Jedwab, Edward Miguel, Ameet Morjaria, and Gerard Padró i Miquel. 2015. “The Value of Democracy: Evidence from Road Building in Kenya.” American Economic Review, 105 (6): 1817-51.

Stelios Michalopoulos and Elias Papaioannou, 2016. “The Long-Run Effects of the Scramble for Africa.” American Economic Review, 106 (7): 1802-48.

Eoin McGuirk is a Postdoctoral Associate the Department of Economics and the Economic Growth Center at Yale University. He will join the Department of Economics at Tufts University as an Assistant Professor in 2019.

Copyright (c) 2018 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 ( Published by EH.Net (July 2018). All EH.Net reviews are archived at

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Government, Law and Regulation, Public Finance
Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):Medieval
16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Dividends of Development: Securities Markets in the History of U.S. Capitalism, 1866-1922

Author(s):O’Sullivan, Mary A.
Reviewer(s):Moen, Jon

Published by EH.Net (June 2018)

Mary A. O’Sullivan, Dividends of Development: Securities Markets in the History of U.S. Capitalism, 1866-1922. New York: Oxford University Press, 2016. xvii + 384 pp. $90 (hardback), ISBN: 978-0-19-958444-4.

Reviewed for EH.Net by Jon Moen, Department of Economics, University of Mississippi.

Mary Sullivan provides a marvelous narrative covering the development of U.S. securities markets between 1866 and 1922. A major point of the book is that by looking at the historical development of U.S. securities markets through a modern, theoretical lens — one emphasizing risk sharing and the efficient allocation of financial capital — one misses much of the interplay between the productive and financial sectors in U.S. economic development. She argues that up until World War I railroad stocks dominated trading on the New York Stock Exchange in markets that were much deeper and more liquid than those for industrial stocks. One reason for this was that most industrial concerns could finance out of retained earnings, with equity issues being used more for consolidations and mergers, not long-term capital investments. This was in sharp contrast to the London Stock Exchange, where industrial securities traded widely. The dominance of railroad securities is not all that puzzling, given the immense expansion of the U.S. rail network as the country and agriculture expanded westward.

Sullivan presents her story with an enjoyable set of tables and graphs mixed together with detailed case studies and highly focused analyses of specific historical episodes. While the narrative is dense and heavily referenced, it nevertheless holds the reader’s attention. Chapter one is an extended survey of the development of U.S. securities markets. In it she argues that markets advanced in fits and starts in contrast to a more Whiggish view of the evolution of securities markets. Chapter two examines the attempts to get American brewing stocks listed on the London Stock Exchange. The volatility of the brewing stocks, not the failure of promoters or the London Stock Exchange, appears to have been the reason that they did not find a market in the U.K. This bred a further lack of interest in other American industrial stocks being promoted in the U.K. Chapter three discusses how poorly developed accounting practices and low standards for access to the New York Stock Exchange hindered the demand for industrial securities in the U.S. Chapter four begins the analysis of the role of the call loan market in the market for industrial securities around the turn of the century, and action in the call loan market becomes an important sub-plot for the remainder of the book. Chapter five highlights the role of mining stocks, particularly those of copper concerns, in fomenting the panic of 1907. It also restates the destabilizing role of the call loan market on the stock market. Chapters six and seven cover the reaction of Wall Street to the Panic of 1907 and the rise of proposals for a formal lender of last resort, culminating in the Aldrich Plan and the Federal Reserve Act. They also review the findings of the Pujo Committee’s investigation into the “money trust” on Wall Street, and O’Sullivan concludes that J.P. Morgan and his colleagues had much less control over credit than has been popularly believed. Chapter eight discusses how World War I dramatically altered U.S. markets for industrial securities, making them deep and liquid.

Her main conclusion is that the development U.S. securities markets in the later nineteenth century had not matched that of the productive sector. In particular, it was the nature of the growth in the productive sector that affected how financial markets evolved. Certainly, the dominance of railroad securities affected the development of financial markets. But the structure of the banking industry in the U.S. was also unique in comparison to Europe, and it could be argued that it was not as advanced as in Europe as well. Paul Warburg knew this, James Stillman’s protests notwithstanding. The U.S. had unit banking on top of a dual banking system, as Eugene White has carefully documented. There was also no formal lender of last resort, and a good deal of the later part of the book examines the roles of the National Monetary Commission and the Pujo Committee hearings in the push towards what became the Federal Reserve System. Furthermore, there was no significant secondary market for commercial paper in the U.S., an issue that came up regularly in the debates over currency reform. These independent topics are discussed accurately and at some length in the book, but I am not quite sure how they then relate to the issue of the development of securities markets in the U.S. Nevertheless, O’Sullivan’s depiction of the U.S. securities markets developing in fits and starts seems quite accurate.

The call loan market gets a lot of coverage in the book, and it should because the infamous pyramiding of reserves under National Banking tended to accumulate reserves in New York national banks. Without an active secondary market in commercial paper, the call loan market was about the only liquid outlet for these reserves that were needed to be available to banks on short term notice. The Panic of 1907 revealed the peril of inadvertently linking the payments system to capital markets through call loans. But what could have been an alternative to the call loan market in the U.S.? Perhaps more comparison with British and European financial markets would clarify this issue. Even with the advent of the Federal Reserve System, the call loan market did not go away. And it reappeared with a vengeance in October, 1929.

Dividends of Development is an important addition to the literature on securities markets and to the development of financial markets in general in the U.S. I view it as a useful guide for further research.

Jon Moen is Chair and Associate Professor in the Economics Department at the University of Mississippi. He has studied the Bank Panic of 1907 and its role in the founding of the Federal Reserve System. He currently is examining the limited role of the New York Clearing House as a lender of last during the National Banking Era.

Copyright (c) 2018 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 ( Published by EH.Net (June 2018). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII

Measuring Wellbeing: A History of Italian Living Standards

Author(s):Vecchi, Giovanni
Reviewer(s):Focacci, Chiara Natalie
Incerpi, Andrea
Ramazzotti, Andrea
Pala, Giovanni Maria
Molteni, Marco

Published by EH.Net (July 2017)

Giovanni Vecchi, Measuring Wellbeing: A History of Italian Living Standards. New York: Oxford University Press, 2017. xvii + 645 pp., $99 (hardback), ISBN: 978-0-19-994459-0.

Reviewed for EH.Net by Chiara Natalie Focacci, Andrea Incerpi, Marco Molteni, Giovanni Maria Pala, and Andrea Ramazzotti.

Measuring Wellbeing offers a multidimensional, quantitative analysis of Italian living standards from the country’s unification in 1861 to the present day. In doing so, it goes beyond the misleading identification of living standards with strictly monetary indexes, broadening the focus to include measures of physical wellbeing and social indicators.  Giovanni Vecchi collaborates with eighteen scholars from a range of universities and research institutions to take stock of the latest research in their areas. Each chapter deals with a different dimension of wellbeing and is co-authored by Vecchi and other economic historians. All chapters include an appendix on sources and methodology. The book presents new as well as pre-existing estimates of welfare indicators at the national and regional level, and — when possible — puts these in international perspective. Many of the estimates are drawn from Vecchi’s previous book, In Ricchezza e in Povertà (2011). Measuring Wellbeing expands on and brings to the international audience the work done for the Italian edition.

As stated in the introduction, the book is not intended as a definitive work. It is instead a landmark which organizes for the reader the research conducted so far. It is a meticulous attempt to provide scholars with a sound, heterogeneous picture of the latest knowledge on the evolution of Italian living standards. Nonetheless, the book refrains from dealing with the “deep” causes underlying the measures it surveys. In this sense, it is conceived as a methodological work and a platform for future research.

The book has two souls. It will interest the Italianist as both an accessible introduction and an authoritative reference on living standards in Italy from a quantitative perspective. Equally though it should appeal to scholars interested in Italy as a case study for the analysis of wellbeing. It deals with the issues in a clear (at times pedagogical) way, making this book an ideal starting point even for students outside the boundaries of economics eager to approach the issue of living standards rigorously.

Perhaps Vecchi’s most significant contribution regards the innovative method of exploiting historical household budgets as a micro-data source to study poverty and inequality. Historical application of this approach was pioneered in Rossi, Vecchi and Toniolo (2001); a more recent assessment can be found in A’Hearn, Amendola and Vecchi (2016). The chapter on “Household Budgets” (chapter 13, whose coauthor is Stefano Chianese) presents a collection of almost 20,000 Italian household budgets from 1861 to present. This collection is part of the larger Historical Household Budgets Project (HHB:

The Italian Household Budgets Database (IHBD) includes both the typical statistics and surveys produced by institutions such as ISTAT (Italian Statistical Office) or the Bank of Italy, and documents from family archives, trade unions, cultural institutions, and personnel records of public and private employers. In the database, proper historical household budgets are also combined, controversially but interestingly, with so-called “synthetic,” hypothetical households. In addition to earnings and expenses, these sources provide micro-evidence also on other socio-demographic characteristics. The problem of such an ad hoc collection not being a representative sample is addressed using post-stratification techniques and census data to weigh observations appropriately.

IHBD is then employed as a basis for estimating monetary indicators of the distribution of wellbeing, such as inequality (chapter 8; with Nicola Amendola) and poverty (chapter 9; with Amendola and Fernando Salsano). Historical household budgets are also used in developing a novel indicator of vulnerability (chapter 11; with Mariacristina Rossi and Lucia Latino), assessing “how the living conditions of the Italians have been – and are still – conditioned by the presence of risk and uncertainty” (p. 416), i.e. the risk of falling into poverty.

Among other monetary indicators, the authors reconstruct national and regional estimates of income (chapter 7; with Alessandro Brunetti and Emanuele Felice), and wealth (chapter 10; with Luigi Cannari and Giovanni D’Alessio). A chapter on the cost of living (chapter 14; with Amendola) problematizes the issue of temporal as well as spatial price differences in a historical perspective, emphasizing how good price indexes are essential to getting accurate monetary indicators — especially in countries like Italy where regional disparities are substantial.

Producing original estimates or linking existing but scattered series, the authors address physical wellbeing by analyzing nutrition (chapter 1; with Marina Sorrentino), height (chapter 2; with Brian A’Hearn), and health (chapter 3, with Vincenzo Atella and Silvia Francisci). To further investigate non-monetary dimensions, the authors consider education (chapter 5; with A’Hearn), migration (chapter 6; with Matteo Gomellini and Cormac Ó Grada) and the human development index (chapter 12; with Amendola and Giacomo Gabbuti). An original exploration of child labor is provided in Chapter 4 (with Francesco Cinnirella and Gianni Toniolo).

Remarkably, the fourteen chapters are preceded by an introduction but not followed by a conclusion summarizing the main findings and trends. The work is indeed a kaleidoscope, from which no mosaic emerges: the tiles are given, but their arrangement is left to the interpretation and judgment of the reader. A reason for this choice can be discerned in the chapter on the Human Development Index. In this “non-conclusive conclusion,” a one-dimensional synthesis of wellbeing is strongly rejected by the authors, who regard a reductive summary of the complex picture of Italian living standards in the long run as both impractical and undesirable. This approach is at the same time the strongest and weakest point of the book.

One of the factors that makes it hard to give a summary overview of Italian living standards in historical perspective is the issue of regional disparities. Monetary indicators all reflect the long-lasting divide between the North and the South of the country. The chapter on income assesses the prevalence of the North-South divide relative to region-specific determinants of geographic variation since the 1930s, and identifies a short-lived period of convergence starting in the 1950s and driven by publicly funded development projects. Regional polarization looms large over inequality, poverty risk, the distribution of wealth, and the dynamics of vulnerability. At first glance, lagging regions appear to have fared better on non-monetary dimensions of wellbeing, as convergence was stronger for key indicators such as life expectancy and infant mortality. Closer scrutiny reveals that convergence, though real, was slow and subject to setbacks and reversals. The chapter on height provides a particularly close examination of the persistence of regional divides in a context of general progress. The analysis delivers a nuanced picture, where local economic conditions prevail over the efforts of national policymaking.

The book also casts light on the understudied effects of industrialization on the living standards of the Italians. Although they maintain a certain reticence, the authors argue that Italian industrialization was relatively benign. Such conclusion is sustained by findings presented throughout the book. For instance, after discussing alternative strategies, Vecchi, Amendola and Salsano settle on an Orshansky-type poverty line, which is absolute, but adapts to a changing economic and social context. On this basis they estimate a remarkable series of absolute poverty incidence for the whole post-unification period, finding that poverty fell almost continuously, except for short-lived spells that do not coincide with the decades of stronger industrialization. Moreover, the authors estimate that the growth effect almost always favored “a reduction in poverty,” while “the variations in income redistribution have always had an adverse effect on absolute poverty” (p. 368): the “growth effect” has largely offset this “inequality effect.”[1]. A “benign” industrialization also appears in the anthropometric data, as the average stature of the Italian population “never experience[d] any falls” (p. 58), which might be expected in “industrializing areas undergoing rapid urbanization” (p. 59). As a final example, child labor — whose incidence was extremely high in 1881 – “dropped quite sharply during the first stages of industrialisation (1881-1911)” (p. 154) and again during the “economic miracle” (from the 1950s to the mid 1960s), a pattern which contrasts with recent findings on other European countries.

Another general conclusion that seems to emerge is that the achievements of the past should not be taken for granted. On a number of indicators documented in the book (e.g. child labor, income, inequality) recent years have witnessed a partial reversal of the remarkable leaps forward of the post-war “Golden Age.” However, as the authors claim in the closing of the chapter on income: “caution is the watchword, here, since we lack a suitable temporal perspective in order to judge whether the malaise is temporary (albeit prolonged), reversible, or irreparable” (p. 289).

Vecchi’s Measuring Wellbeing is a brave study attempting to fill the gap within the Italian economic history literature on quantifying living standards. The concept of wellbeing is presented as multifaceted and the book also explores non-orthodox dimensions. Unfortunately, it is difficult for the reader to reach an all-embracing conclusion (especially without background knowledge of Italian history), but this is not the authors’ final aim, and this shortcoming is compensated by the relevant methodological contributions that this book presents. This is an innovative and important work and ought to interest both economists and historians — not necessarily just “Italianists.” With regards to Italy, it will soon become the standard reference on the topic of wellbeing, providing scholars with a springboard for their present and future research.


As defined by the authors, “The first is interpreted as the variation in poverty that would be observed if there were no variation in income distribution during the period concerned; the second effect is interpreted as the variation in poverty that would be observed if average income did not vary during the period” (p. 368).


Brian A’Hearn, Nicola Amendola, and Giovanni Vecchi. 2016.  “On Historical Household Budgets,” Rivista di Storia Economica, issue 2: 137-76.

Nicola Rossi, Gianni Toniolo, and Giovanni Vecchi. 2001.  “Is the Kuznets Curve Still Alive? Evidence from Italian Household Budgets, 1881-1961,” Journal of Economic History, 61 (4): 904-25.

Giovanni Vecchi. 2011.  In Ricchezza e in povertà: il benessere degli italiani dall’Unità a oggi. Bologna, Italy: Il Mulino.

The authors of this review are students in the graduate program in Economic and Social History at the University of Oxford.

Copyright (c) 2017 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 ( Published by EH.Net (July 2017). All EH.Net reviews are archived at

Subject(s):Education and Human Resource Development
Historical Demography, including Migration
Household, Family and Consumer History
Income and Wealth
Labor and Employment History
Living Standards, Anthropometric History, Economic Anthropology
Geographic Area(s):Europe
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Oxford Handbook of Banking and Financial History

Editor(s):Cassis, Youssef
Grossman, Richard S.
Schenk, Catherine R.
Reviewer(s):Neal, Larry

Published by EH.Net (July 2017)

Youssef Cassis, Richard S. Grossman, and Catherine R. Schenk, editors, The Oxford Handbook of Banking and Financial History. Oxford: Oxford University Press, 2016. xviii + 537 pp., $160 (hardcover), ISBN: 978-0-19-965862-6.

Reviewed for EH.Net by Larry Neal, Department of Economics, University of Illinois at Urbana-Champaign (emeritus).

The global financial crisis that began in 2007-08 and continued to rattle the Eurozone countries after 2010 has certainly been good for the market for financial history.  The Oxford Handbook of Banking and Financial History is clearly a response to these events.  In their introductory chapter, the editors set out their ambitious agenda, which is to deal with the individual parts of our modern complex financial system and trace how each has evolved over time.  Each chapter ends with some insight into how the current turmoil in global banking and finance might affect part of the global financial system. This broad-ranging approach is very much in keeping with current analysis by policy economists, who have become very sensitive to how our financial system intertwines banks, which specialize in particular niches of the economy; shadow banks, which innovate to find new niches; money markets, which deal with short-term finance; capital markets, which provide long-term finance; and regulators, who attempt to oversee the operation of the financial system for the interest of the public (or the government).  The editors’ goal is to provide anyone concerned with a particular aspect of the financial system an authoritative treatment by an acknowledged expert that is clearly written for the non-specialist combined with a useful bibliography to follow up particular aspects.

The Oxford Handbook is organized into four parts: Part I, Thematic Issues, deals explicitly with the problems that the editors confronted at the outset: how have historians approached the issues in financial history (Youssef Cassis); how have economists dealt with the issues that interest them (John D. Turner); and how have policy makers tried to apply lessons from history for promoting economic development (Gerard Caprio, Jr.).  To pay due attention to historical contingency, economic analysis, and policy relevance in each of the following chapters is, indeed, a daunting task for each author.

Part II, Financial Institutions, takes up these challenges by separating out several categories of distinctly different institutions, a useful distinction too often overlooked in practice and one that illustrates nicely the complexity of any financial system.  Youssef Cassis’s “Private Banks and Private Banking” begins with the initial role models for banks, from their origins in kinship networks in Renaissance Italy to today’s Swiss managers of private wealth.  Gararda Westerhuis’s “Commercial Banking: Changing Interactions between Banks, Markets, Industry, and State” follows by dealing with the nineteenth-century spread of industrialization globally, which led to the rise of universal banks.  By the end of the twentieth century, however, it appeared that commercial banks might be in “a state of terminal decline.” (See Raghuram Rajan, 1998, “The Past and Future of Commercial Banking Viewed through an Incomplete Contracts Lens,” Journal of Money, Credit, and Banking. 30(3), 524.)  The financial crisis of 2008 led many observers to push for a separation of investment and commercial banking once again in the interest of financial stability.  Westerhuis goes on to distinguish the motives for establishing market-based systems (U.S. and England) versus bank-based systems (Germany and Japan).  She posits that the two paths diverged early on due to the differences in government control over banks and then the role played by banks in financing industrialization for follower countries, such as Germany and Japan.  Oddly missing from her overview is any consideration of the experience of Scottish banking, which developed joint-stock banks with national branches early in the eighteenth century.  Only after the financial crisis of 1825 did the English care to look seriously at the Scottish example for improving their commercial banking system!  Further, joint-stock banks did not disappear in the U.S. during the “free banking” period as she asserts. While they were confined within state boundaries, limitations on branching within a state varied considerably.  The wide range of experiments undertaken by various states has stimulated a growing and interesting literature among U.S. scholars, largely omitted from her bibliography.

Caroline Fohlin’s “A Brief History of Investment Banking from Medieval Times to the Present” takes up the most challenging role of banks, how to transform short-term liabilities into long-term assets.  Rather than taking specific organizational forms, she prefers to analyze investment banks as a set of services that help finance the long-term capital needs of business and governments. After briefly looking at merchant banks from medieval times to the early nineteenth century, this loose definition requires her to take up individual countries one by one during the nineteenth century.  Sections follow that deal with England, the European continent, Belgium and the Netherlands, France, Germany, Austria and Switzerland, Italy, Japan, and the United States. Each section highlights the differences in organizational structures created to accomplish basically the same goals, helping governments promote industrialization.  The twentieth century presents more interesting differences, essentially due to the ways various governments regulated, deregulated, and then re-regulated from the 1920s to the present.  She concludes, “even well-known investment banking names that have endured over the centuries bear little resemblance to their ancestors” (p. 159).

Christopher Kobrak’s “From Multinational to Transnational Banking” takes up the complex transformations of the world’s leading banks by size as they successively internalized their international operations.  The availability of huge advances in information technology combined with increasing opportunities for re-allocating domestic savings across foreign investments provided the basis for the growth of today’s megabanks.  Oddly, however, Kobrak takes as archetypes of the new transnational bank two of the worst performers after 2008 — Deutsche Bank and Citibank.  Relying on their respective annual reports in 2007-2010, he touts each of them as “market players” rather than staid fiduciary agents, lauding their scale and scope of activities that are only vaguely related to financial intermediation associated with banks “lending long, while borrowing short.” He dispassionately notes that three-quarters of Deutsche Bank’s two trillion euros in assets in 2007 were securities held for trading, and 40 percent were financial derivatives (p. 183), without disparaging the obvious omission of fiduciary responsibility. Citibank, similarly, by 2007 had “invested huge resources in creating an internal market, in essence warehousing securities and derivatives to build hedged positions and for future sale” (p. 182). All these intra-bank holdings of assets and liabilities enabled such banks to make a lot of money by proprietary trading that remained unobserved by regulators or by publicly accessible financial markets.  He refrains from criticizing the model developed by these two megabanks, each of which has suffered huge losses and justified public acrimony since 2008, confining himself to the anodyne remark that “megabanks may be forced, as they have many times in the past, to find an intertwined institutional and organizational adaptation more sustainable in the modern social order” (p. 185)!

R. Daniel Wadhwani’s “Small-Scale Credit Institutions: Historical Perspectives on Diversity in Financial Intermediation” concludes Part II by lumping together a motley assortment of credit cooperatives, savings banks, industrial banks, pawn shops, and savings and loans associations.  Wadhwani argues their cumulative size makes their impact on their respective economics arguably as great or greater than that made by the commercial, investment, and public banks dealt with in the previous chapters.  Their common origin across many cultures and through past millennia he finds in the ubiquitous presence of ROSCAs (rotating savings and credit associations).  Beginning with small kinship groups desiring to pool their limited resources to enable individual members to acquire a desired goal, perhaps a piece of land, a dwelling, livestock, or even the means to migrate somewhere else for employment, ROSCAs often provide a basis for transition to the more modern forms of intermediation.  These include savings banks, credit cooperatives, and savings and loans, with each evolving quite differently depending on local circumstances.  Critical to their evolution historically is the role of government, whether as regulator (restricting competition), competitor (postal savings banks), or customer (providing sovereign debt as risk-free asset).  The theoretical economic bases for their evolution and persistence are robust, both for their monitoring capability and for their local knowledge of investment possibilities.  Nevertheless, Wadhwani calls attention to more post-modern “theories” that favor the creation of supportive narratives when cultures confront changes in economic regimes.

Part III, Financial Markets, begins with Stefano Battilossi’s “Money Markets,” which emphasizes the importance of access to outside liquidity for banks when they face unanticipated shocks either for increased loans or increased withdrawals of deposits.  Further, Battilossi argues that a key lesson learned by banking theorists and practitioners in the nineteenth century, namely that money markets are essential for a smooth working of the economy but are inherently unstable, was lost over the course of the twentieth century.  The success of the Bank of England in stabilizing the money market at the center of the global economy of the nineteenth century, he argues, was due to a complex combination of close monitoring by the Bank of England and cartel complicity by the major joint-stock banks, each with extensive branching networks domestically and overseas.  U.S. efforts to imitate the British example after creation of the Federal Reserve System in 1913 failed due to irreconcilable differences in institutional structures between the two banking systems and their respective central banks.  It took over a century and a half for the Bank of England to learn how to avoid being a dealer of last resort, a role that the Federal Reserve System in the U.S. had to undertake in the 2008 crisis, and which it has not yet been able to relinquish.  Readers are left to draw the implications for the future of the global financial system for themselves!

Ranald C. Michie’s “Securities Markets” lays out convincingly and clearly the importance of securities markets for a successful financial system.  Divisibility and transferability of a security expands greatly the potential customer base, adding the virtue of diversity in demands for liquidity among the creditors as well.   He distinguishes clearly between “Primary Securities Markets” and “Secondary Securities Markets,” showing their interdependence in layman’s terms.  “Stock Exchanges” provide the effective linkage between the two levels of markets, but fall prey in turn to problems either of monopoly pricing or government repression. His exposition of the underlying theory of securities markets provides the structure for his narrative that follows. From “Early Developments in Securities Markets,” which only mentions briefly the roles of informal markets in the speculative booms of 1720, Michie insists on focusing on the nineteenth century, starting with the London Stock Exchange in 1801.  It’s unfortunate that he ignores recent work on the Amsterdam stock market, (e.g., Lodewijk Petram, The World’s First Stock Exchange, New York: Columbia University Press, 2014), or early work by this reviewer on the precedents for the London Stock Exchange (Larry Neal, The Rise of Financial Capitalism, New York: Cambridge University Press, 1990).  Committed to the importance of formal structures for modern stock exchanges, however, Michie takes up their rise in the advanced capitalist economies of the nineteenth century and then their eclipse from 1914 to 1975.  Thanks to the exigencies of war finance from World War I through the Cold War, stock markets seemed to “appear somewhat irrelevant in a world dominated by governments and banks” (p. 253)  “The Era of Global Banks” did not come to an end in 2008, however, but what had ended was the “self-regulation that had contributed so much to the attractions of stocks and bonds to governments, businesses, and investors through the reduction or elimination of counterparty risk and price manipulation and the certainty that sales and purchases could be made as and when required” (p. 258).  Big banks are bad once again!

Moritz Schularick’s “International Capital Flows” is the most quantitative and instructive of the chapters, as he summarizes succinctly in nine brief tables and one graph, the levels of international capital flows over the nineteenth and twentieth centuries, their size relative to Gross Domestic Product, and the main sending countries and main receiving countries over time.  In sum, rich countries invested in poor countries in the nineteenth century, when international capital flows were highest relative to GDP, and the rich continued to invest in poor countries even when capital flows were severely constrained during the period 1914-1975.  But after the collapse of Bretton Woods, when international capital flows rose sharply once again, the result has been for poor countries to invest in rich countries.  Further, when capital does flow suddenly to emerging economies, financial crises often follow when the flow tapers off, undoing whatever economic advance may have occurred.

Youssef Cassis’s “International Financial Centres” concludes the coverage of financial markets by analyzing the recurring features of international financial centers that lead to their persistence over time.  The physical layout of the dominant cities, the combination of functions they perform (government, communications, education, as well as trade and finance), and their organization may change as the technology of transport, communications, and information change, but, Cassis argues, the network externalities created by the concentration of so much expertise in one location make the existing centers hard to replace.

Part IV, Financial Regulation, takes up the most vexing questions for policy makers, starting with Angela Redish’s “Monetary Systems.”  Redish begins with the complexity of metallic currencies with coins minted in varying combinations of copper, silver, and gold in early modern Europe, and deftly reviews the causes that concerned European policy makers as they sought to maintain coins with fixed legal tender values, whether minted in any or a combination of the three precious metals.  Basically, their concerns were the same as today, “whether nominal change can have real consequence for the balance of trade or level of economic activity?” (p. 327).  Redish goes on to trace out the academic literature that has dealt with the Emergence of the Gold Standard, the Latin Monetary Union, the Cross of Gold, the Classical Gold Standard, and the Good Housekeeping Seal of Approval, highlighting the controversies that have arisen under each rubric.  Next, she divides the End of the Gold Standard into the First World War and the Interwar Period, Bretton Woods and European Monetary Arrangements, and the End of Bretton Woods and the Rise of the Euro.  Reproducing faithfully the graph produced by Eichengreen and Sachs to show that countries that stayed committed to the gold standard after 1929 suffered in terms of industrial production relative to those that devalued, she doesn’t point out that the outliers of Germany and Belgium are readily explained by mistaking their formal exchange rate regimes with the ones they followed in practice (Germany using bilateral trade agreements to increase industrial exports while keeping the nominal exchange rate fixed, and Belgium reducing its nominal exchange rate while being forced to maintain existing trade agreements with France).  She concludes with a brief discussion of both inflation targeting under fiat currency regimes and the rise of crypto currencies such as Bitcoin, Her conclusion is merely that “money is information, a method to enable multilateral clearing of myriad transactions.  It would be surprising if the digital revolution did not lead to a revolution in how this information is managed” (p. 339).

Forrest Capie’s “Central Banking” takes up the baton passed on by Redish to provide a brief synopsis of the issues confronting central banks as they have increasingly taken control of the supply of money over the past two or more centuries.  Monetary stability, their prime responsibility, can be assessed in terms of price stability, but financial stability, which has become a major concern, he notes is more difficult to assess, much less to sustain.  Central bank independence, however defined, does seem to correlate with monetary and price stability, which shows that policy lessons have been learned successfully on that score.  Continued independence of central banks, however, hinges very much on attaining and then sustaining financial stability.  This task, very much underway now among the world’s central banks, 174 at last count, may require expanding their role to include financial regulation as well as oversight of the banking system.

Harold James’s “International Cooperation and Central Banks” makes an interesting argument that central banks in their pursuit of the goal of monetary stability naturally tend to cooperate with other central banks internationally, but without need for formal mechanisms.  Cooperation can then be merely discursive, as it was during the classical gold standard.  Financial crises, however, often do call for international cooperation, but cooperation is difficult, perhaps impossible, to sustain given the priority of strictly national policy concerns.  Large countries, needed to make cooperative efforts successful, are the most reluctant to join in cooperative efforts.  His examples cover episodes during the classical gold standard, the interwar period, the brief Bretton Woods period, and the ongoing travail of the euro-system, which he concludes is “the global test case for both the possibilities and the limits of central bank action” (p. 391). In an interesting aside, he explains why the Bank for International Settlements was resuscitated to manage the European Payments Union in the 1950s.  Top U.S. officials were wary of using the newly-established International Monetary Fund because its staff were largely protégés of Harry Dexter White, then under suspicion as a possible Russian agent!

Catherine Schenk and Emmanuel Mourlon-Droul’s “Bank Regulation and Supervision” develops a sub-theme to the arguments presented by Harold James, namely the recurring problems of regulatory competition, moral hazard, and regulatory capture.   Essentially, “[r]eputation and private information are key bank assets in a market with information asymmetry, but this complicates the ability to engage in transparent prudential supervision” (p. 396).  The U.S. stands out for having the most complicated and unwieldy array of conflicted regulatory agencies, summarized in Table 17.1.  The authors conclude, as do Charles Calomiris and Stephen Haber (Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, Princeton, NJ: 2014), that it is no accident that Canada and the UK, with more coherent approaches to bank regulation have had fewer banking crises.  Much of the remaining chapter focuses on China and the successive efforts of China’s rulers to establish, then regulate, a banking system to enable industrialization and modernization, concluding, perhaps prematurely, that China managed to reduce the problem of non-performing loans after their peak in 2000.  The difficulties of deciding where to locate the regulator of the banking system are highlighted by tracing the successive efforts of the U.S., then the UK to find an ex post regulatory solution to the problems of recurring financial crises.  The efforts of the Basel Committee, established after the collapse of the Bretton Woods System, are described in the context of the European Union’s efforts to move toward regulatory cooperation within a more limited scope of international cooperation.  Prospects for success on that score are still very much in doubt.

Laure Quennouelle-Corre’s “State and Finance” takes a step back to look at the origins of the ongoing dilemma for the Eurozone of the interaction between governments’ sovereign debt and financial fragility of their banks.  The recurring differences between France and the other members of the European Union form the backdrop for his rambling notes on the interactions of private and public financial institutions, ending with the observation that France alone has had to deal with the European Union’s pro-market ideology versus the French tradition of state intervention.

Part V, Financial Crises, opens with Richard Grossman’s “Banking Crises,” which reprises the standard story of boom-bust cycles, exacerbated when new opportunities for speculative investments open up (first globalization after 1848; second globalization after 1979; post-war adjustments after WWI) but then moderated under strict regulation (capital controls, interest rate restrictions from 1945-71).  In his perspective, the Eurozone crisis fits the boom-bust pattern first described by D. Morier Evans in 1859 (The History of the Commercial Crisis, 1857-58, and the Stock Exchange Panic of 1859, New York: Augustus M. Kelley, 1969).

Peter Temin’s “Currency Crises: From Andrew Jackson to Angela Merkel” takes up the international aspect of the boom-bust paradigm by extending it into national decisions about setting the exchange rate with foreign trading partners and possible investors. To bolster his long-standing conviction that most, if not all, banking crises are really currency crises at heart, he lays out in detail the open macro-economy model developed by Trevor Swan. Swan’s diagram relates a country’s domestic level of production to its real exchange rate.  Internal balance is maintained if production rises with the real exchange rate, while external balance requires the real exchange rate to fall when production increases. The model leads to dire consequences for a country if it does not succeed in maintaining both internal balance (matching domestic investment with domestic supplies of savings) and external balance (matching capital account flows with offsetting trade balances) simultaneously.  Either excessive inflation or long-term unemployment occurs whenever imbalances are sustained due to misguided government policy.  Banking crises then arise as the necessary outcome of such policy failures by governments. The historical evidence to support Temin’s argument starts with Andrew Jackson and the crisis of 1837 in the U.S., continues through the Great Depression in the U.S. in the 1930s, not to mention the concurrent crisis in Germany, and concludes with the ongoing Eurozone crisis, all basically due to misguided political leaders, as named in his sub-title.

Juan H. Flores Zendejas’s “Capital Markets and Sovereign Defaults: A Historical Perspective” concludes the Oxford Handbook.  The first global financial market, arising with the collapse of the Spanish Empire in Latin America after the Napoleonic Wars, saw various devices to cope with the recurring problem of governments defaulting on the sovereign bonds they issued for whatever reason, usually to fight a war or quell a revolution.  Flores recounts the success of the London Stock Exchange in bringing governments to heel if they wanted access to British savers. The monitoring capabilities of the leading merchant bankers, especially the Barings and Rothschilds, put their imprimatur on bonds issued through their firms.  Twentieth century regulatory restrictions on these leading investment banks by their host governments, however, have limited the effectiveness of their “branding” and their intrusive follow-up in monitoring the finances of their customer governments.  Flores casts some doubt as well on the effectiveness of the Council of Foreign Bondholders in the nineteenth century.  He could also have challenged the effectiveness of international financial control committees that served as the model for the League of Nations Financial Commission after World War I if he had cited the recent work of Coskun Tuncer (Sovereign Debt and International Financial Control, The Middle East and the Balkans, 1870-1914, London: Palgrave Macmillan, 2015).  Flores concludes in general that governments that avoided defaulting in times of general crisis did so because they had been excluded from the earlier expansion of international credit.

All in all, the editors did get the compilation in print still in time to be useful for anyone concerned with how the ongoing financial crisis of the early twenty-first century will play out.  Specialists in each topic, however, may be disappointed in the necessary brevity of treatment, not to mention absence of references to their own work, particularly if they worry most about the future of the U.S. financial system.

Larry Neal is the author of A Concise History of International Finance: From Babylon to Bernanke, Cambridge: Cambridge University Press, 2015

Copyright (c) 2017 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 ( Published by EH.Net (July 2017). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Slavery’s Capitalism: A New History of American Economic Development

Editor(s):Beckert, Sven
Rockman, Seth
Reviewer(s):Wright, Gavin

Published by EH.Net (March 2017)

Sven Beckert and Seth Rockman, editors, Slavery’s Capitalism: A New History of American Economic Development.  Philadelphia: University of Pennsylvania Press, 2016.  viii + 406 pp. $40 (cloth), ISBN: 978-0-8122-4841-8.

Reviewed for EH.Net by Gavin Wright, Department of Economics, Stanford University.

In case any economic historian has been asleep or on Mars for the past three years, you may want to know that the economics-of-slavery culture wars have broken out again.  Though only a pale shadow of the dust-up we had back in the 1970s, the aggressive assertions of the “new history of capitalism” regarding the centrality of slavery for U.S. economic development, and critiques of this work by economic historians, have generated much commotion in academic circles, including numerous review articles and a lengthy survey in The Chronicle of Higher Education (December 8, 2016). The present volume is a manifesto of sorts for the slavery wing of the NHC insurgency, originating in a conference at Brown University (co-sponsored by Harvard) in 2011.

The claims of the editors for the new history of capitalism and slavery are not modest.  The opening sentence of the Introduction reads: “During the eighty years between the American Revolution and the Civil War, slavery was indispensable to the economic development of the United States” (p. 1).  They acknowledge that “the argument is more easily asserted than substantiated” (p. 3), but this cautionary note does not deter them from announcing the “impossibility of understanding the nation’s spectacular pattern of economic development without situating slavery front and center” (p. 27).  The publisher’s summary of the book (presumably approved by the editors) deploys even more extravagant language, declaring that the book “identifies slavery as the primary force driving key innovations in entrepreneurship, finance, accounting, management, and political economy,” “the originating catalyst for the Industrial Revolution and modern capitalism” (University of Pennsylvania Press web site).

Having thus allowed the editors to dig their own rhetorical graves, let me urge economic history readers not to overreact to the bluster and bombast.  After decades of untouchability, the new interest in economic aspects of slavery on the part of younger scholars is a good thing, an opportunity for cross-disciplinary learning and cooperation.  Scholars from different disciplines will inevitably differ in their framing of the issues, their choice of language and styles of historical writing, but there is no deep reason here for an ideological Great Divergence regarding slavery.  Suffice it to say here that virtually none of the claims in the preceding paragraph are supported in any substantial way by the research presented in the volume. But most of the writers do not seem committed to this agenda anyway.  It is unfortunate that historians pursuing original inquiries on slavery-related topics have been persuaded to present their work as apparent disciples of a militant insurgency.  But there is no intellectual gain in recasting this historical project as a team sport.

Putting the editors’ introduction aside, only the chapter by Edward E. Baptist stands out for tendentious claims in support of a preconceived agenda.  Here Baptist is somewhat defensive, his book having been roundly criticized by Alan Olmstead and Paul Rhode for inventing the term “pushing system,” neglecting improvements in cotton varieties, and misusing historical sources, including the WPA slave narratives.  But this does not stop Baptist from adding a few more half-baked morsels to his mélange.  Among many candidates, most irksome to this reviewer is this one: “The three million white people in the cotton states were per capita the richest people in the United States, and probably the richest group of people of that size in the world” (p. 36). A footnote cites James Huston’s Calculating the Value of the Union (the whole book) and p. 87 of Robert Fogel’s Without Consent or Contract.  The statement gets the population wrong, conflates wealth with income, ignores the widening gap between slave owners and non-owners, and aggregates real and slave property.  To be sure, the value of slave property was very real to the owners. The essential point is that the South was the wealthiest region in the nation when slave values are included, but the poorest when they are not.  (See Gavin Wright, Slavery and American Economic Development, p. 60.)  This deficiency, coupled with the failure to invest in education and infrastructure — not the purported decline in plantation productivity (p. 43) — explains the emergence of southern economic backwardness when slavery was abolished.

Because the Baptist debate is ongoing, it will not be pursued further here.  Following my own injunction to accentuate the positive, let me recommend the chapters by Caitlin Rosenthal on accounting practices on slave plantations; by Daina Ramey Berry on attitudes toward life and death in the shadow of slave markets; by Calvin Schermerhorn on the entwining of financial and mercantile interests in the coastwise slave trade; by Craig Steven Wilder on the role of slavery in financing Catholic colleges in the Age of Revolution; by Alfred L. Brophy on “proslavery instrumentalism” in legal thought; and by Andrew Shankman on Matthew Carey’s embrace of slavery in formulating his Whig political economy for the nation.  Independent scholar Bonnie Martin has performed extraordinary labor compiling records on slave mortgages from county deed books, and here she adds 10,000 additional loans to her previous collection (Journal of Southern History, November 2010).  One hopes that these data will at some point be put to use by economic historians.  Here, unfortunately, Martin struggles to draw interesting conclusions from her evidence.  She suggests that “an image of capitalistic sophistication … runs counter to the traditional assumptions about the economy of the South,” (p. 119) appending a footnote including no less than three books by the current reviewer.  Since none of these books advance any claims about the “lack of sophistication in the southern economy” — quite the contrary — one can only conclude that the author is grasping for straws.

Let me call particular attention to the chapters by Daniel B. Rood and by John Majewski, which should be read conjointly.  Rood writes about the slave-using wheat farms of Virginia, building on his earlier article on that topic (Journal of American History, June 2014).  The particular focus here is the invention of the reaper by Cyrus McCormick on his father’s wheat farm in the Shenandoah Valley.  The reaper’s Virginia origins are well-known to economic historians, but Rood asks us to see this “quintessentially American machine as a Creole artifact, a tropical technology, and, more than anything, a product of Atlantic slavery” (p. 87).   According to Rood’s account, pressure to mechanize came from a premium on speed in marketing, which arose as planters sought the patronage of new mills in Richmond, producing flour for the Brazilian market.  Rood is persuasive in describing the “pools of expertise and the plantation laboratory” (p. 94) in Virginia, including the contribution of skilled slaves.  (Oddly, there is no citation to Charles Dew’s Bond of Iron [1994], which discusses Virginia’s skilled slave machinists in considerable detail.)  What he does not come to grips with is the fact that the reaper did not diffuse rapidly in Virginia, which McCormick largely abandoned after 1845, moving into what he knew to be a more promising market for mechanical implements in the Midwest.  Obed Hussey, McCormick’s arch-rival in mechanical reaping, had been there all along.

Majewski, the only card-carrying economic historian in the group, also shows the compatibility between slavery and a “thriving, diversified economy,” (p. 279) focusing on what he calls the Limestone South, a fertile alfisol area encompassing Kentucky’s Bluegrass region, Virginia’s Shenandoah Valley, and Tennessee’s Nashville Basin.  According to Majewski, the decisive feature differentiating the Limestone South from the free states was the absence of support for public schools, a consequence of slaveholders’ stranglehold on state politics.  Majewski argues that this stark difference in access to educational opportunity helps to explain northern opposition to the expansion of slavery.  He quotes Abraham Lincoln: “Free Labor insists on universal education,” but evidently the first step toward this goal was to keep large slaveholders out.

The book’s broad characterization of slave owners as calculating, acquisitive, financially sophisticated and linked to international networks, is not one that economic historians will be inclined to object to, in large part because we have been arguing along similar lines for decades.  The striking divergence between slave and free states, on the other hand, in the geography of settlement, population growth, urbanization, schooling, and politics (a partial list) cries out for more intensive study by historians of all types.  With only occasional exceptions, that major topic is largely missing from the volume under review.  One thing seems certain: calling one region or the other “capitalist” will not contribute much to historical understanding.

Gavin Wright is William Robertson Coe Professor of American Economic History Emeritus at Stanford University. His book, Sharing the Prize: The Economics of the Civil Rights Revolution in the American South, will be issued in paperback by Harvard University Press in the Fall of 2017.

Copyright (c) 2017 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 ( Published by EH.Net (March 2017). All EH.Net reviews are archived at

Subject(s):Servitude and Slavery
Geographic Area(s):North America
Time Period(s):19th Century

The Gunpowder Age: China, Military Innovation, and the Rise of the West in World History

Author(s):Andrade, Tonio
Reviewer(s):Eloranta, Jari

Published by EH.Net (February 2017)

Tonio Andrade, The Gunpowder Age: China, Military Innovation, and the Rise of the West in World History.  Princeton: Princeton University Press, 2016. ix + 432 pp. $40 (cloth), ISBN: 978-0-691-13597-7.

Reviewed for EH.Net by Jari Eloranta, Department of History, Appalachian State University.

The Gunpowder Age is a new elaborate volume on some of the key questions in world and economic history debates, namely the development of China, and to some degree Europe, in the long run, especially in the last five hundred years. Tonio Andrade, who is a professor of history at Emory University, has written a volume that cannot be overlooked in, for example, the so-called Great Divergence debate, which began with Kenneth Pomeranz’s work almost twenty years ago. Since then, economic historians have paid increasing attention to China, producing a lot of welcome scholarship on its long-run economic and social development, as well as tons of new data. Regardless, the debate over the timing and extent of China’s decline, vis-à-vis various parts of Europe, is still going strong. Scholars like Pomeranz, R. Bin Wong, Stephen Broadberry, Robert Allen, and others have weighed in, and the picture emerging from these debates is that China’s decline was probably apparent by the eighteenth century, at least in comparisons with the more affluent parts of Europe. Of course, there was also a great deal of divergence within Europe at the time, which complicates these comparisons.

Yet, Andrade’s work not only contributes to these debates, but also another huge issue in world (and economic) history, i.e. the introduction and use of gunpowder and the development of military supremacy in the early modern period. Andrade highlights the introduction of gunpowder and the technological advances made in both China and Europe, and he argues that China in fact continued to develop gunpowder technologies throughout this period of (relative) economic decline, even as late as the eighteenth century. Why then did China fail so spectacularly during the Opium Wars of the nineteenth century? His answer is that certain conditions failed to materialize in the Chinese case, for example the lack of continuous warfare and competition, which of course Europe experienced almost annually (as shown by Charles Tilly). In some ways, Andrade argues that some of China’s decline was not as noticeable or steep as we have assumed in the past. And it is here that he makes his greatest contribution to our understanding of long-run world history: China’s military development was simply on a different trajectory than in Europe. Europeans went further in developing cannons and handheld weapons, whereas the Chinese often favored rockets and alternative types of gunpowder weapons. In Europe, this manifested itself in “tournaments,” as Philip Hoffman has recently argued in Why Did Europe Conquer the World? (Princeton: Princeton University Press, 2015). Andrade also emphasizes other historical continuities in China’s recovery of superpower status at the end of the twentieth century, pointing to this past of military experimentation and deep understanding of military strategy. (One only needs to recall Sun Tzu to appreciate the long history.)

Andrade’s book is divided into four parts, plus the appendices and other extra material. Part I provides an introduction to the early history of Chinese warfare and military development. This section is mostly deep background to the main arguments of the book, and useful as a reminder of the conflicts that built and destroyed dynasties. Part II sets up the comparison between Europe and China in the early gunpowder age, and gives us a somewhat familiar story of the technological developments in weaponry, similar to Hoffman’s work. However, Chapter 6 is particularly interesting for economic historians in revealing some of the differences between European and Chinese priorities in warfare, in particular the use of cannons. Part III is more explicitly comparative and highlights how Europeans gained dominance in naval and other military weaponry. Part IV then discusses the nineteenth century superiority of the Europeans and how China attempted (actually quite successfully) to modernize their military after the defeats. Andrade then concludes with some broader ideas of China’s military, economic, and political development on the basis of these comparisons.

In general, this book is quite well researched and written, and it is a welcome addition to the new literature on China’s history, the Great Divergence, and the military development of the last 500 years. However, I have some reservations and modest criticisms of this volume. First, the Great Divergence debate is not covered very thoroughly in this book, especially the recent contributions made by many economic historians. I find this curious, but also somewhat predictable. World historians and economic historians still do not have enough common debates and discussions, and thus we often do not experience truly inter- or even intradisciplinary debates. Discussion of the timing and extent of China’s economic decline would have enriched the comparisons in the book. Second, on the same theme, Andrade does not reference some of the more interesting work done on conflicts and the role of governments in this period, for example by Mark Dincecco or David Stasavage. Military technologies are not only the outcome of conflicts, but also the changing role of the central government as well as revenue and spending patterns. Third, while Chapter 14 does discuss European navies, the role and cost of naval warfare, which is intricately linked to the European empire building projects, should have been discussed in a wider context — after all, many world historians ascribe the destruction of the Great Fleet in 1433 and the subsequent prohibition of trade as key moment in the Great Divergence. Andrade also fails to discuss enough the importance of the extensive training received by English seamen in the use of cannons and other gunpowder weapons, which gave them an advantage in the naval battles.

Finally, I would also like to mention that while the book does not make much use of quantitative data, there is an appendix of interesting new data, collected by the author, on the numbers of conflicts in China, in comparison with Europe. Andrade also compiles a data set on instances that warfare was referenced in Ming and Qing records.  This is a clever way of making some inroads into the mindset of the rulers of those dynasties. As we already know, for example the attitudes of Song and Ming rulers on the value of military service were very different — the former saw it as a dishonorable profession, which of course reflected on the quality of recruits and ultimately performance in the battlefield. This type of data is something that will surely also interest economic historians who are interested in broad comparisons between Europe and China in the early modern period.

In general, this is a well-written and careful analysis of an important topic, and the focus is explicitly comparative. While some of the chapters do not go deep enough into the comparisons, and some of the contributions made recently by economic historians are not always referenced here, this book is a welcome and worthwhile addition to the current literature on China, Europe, the Great Divergence, and the early modern military revolution. It should yield to interesting debates among world and economic historians in the near future — hopefully such debates will be visible enough in both fields, so we can have fruitful interactions similar to what followed Pomeranz’s early work in this area.

Jari Eloranta is Editor of monograph series Perspectives in Economic and Social History (Routledge).  He has written extensively on the history of military and government spending as well as conflicts, including a recent volume Economic History of Warfare and State Formation (Jari Eloranta, Eric Golson, Andrei Markevich, and Nikolaus Wolf editors, Springer: Tokyo, 2016).

Copyright (c) 2017 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 ( Published by EH.Net (February 2017). All EH.Net reviews are archived at

Subject(s):Military and War
Geographic Area(s):Asia
Time Period(s):Medieval
16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Taxing the Rich: A History of Fiscal Fairness in the United States and Europe

Author(s):Scheve, Kenneth
Stasavage, David
Reviewer(s):Poulson, Barry W.

Published by EH.Net (December 2016)

Kenneth Scheve and David Stasavage, Taxing the Rich: A History of Fiscal Fairness in the United States and Europe. Princeton: Princeton University Press, 2016.  xv + 266 pp. $30 (hardcover), ISBN: 978-0-691-16545-5.

Reviewed for EH.Net by Barry W. Poulson, Department of Economics, University of Colorado.

In this study Kenneth Scheve (Professor of Political Science at Stanford University) and David Stasavage (Professor of Politics at New York University) address an important question:  given evidence of increasing inequality in recent years, why is there not greater effort to tax the rich? To answer this question they survey the history of progressive taxation in twenty countries over the past two centuries, and the literature on taxation and the distribution of income and wealth.

Their evidence reveals an inverted-U curve for the average top marginal rates of income taxation in these countries in the twentieth century. Using evidence for the income share going to the top 0.01 percent of the income distribution, their evidence suggests an inverse relationship between the top rate of income taxation and the share of income received by the top income group.  They also find evidence of an inverted-U for average top rates of inheritance taxation in the twentieth century. Using evidence for the share of wealth owned by the top 1 percent of wealth holders, their evidence suggests an inverse relationship between the top rate of inheritance taxes and the share of wealth held by this wealthy group.

The authors maintain that higher tax rates on the rich were a form of compensatory taxation. Mass conscription during World War I and World War II imposed a heavy burden on citizens. The rich, as owners of most of the capital, captured extraordinary profits during these war years. Higher marginal tax rates on the rich compensated for this privileged position they enjoyed during the war, and the differential burdens imposed on citizens by mass conscription.

Their explanation for declining tax rates on the rich in the post-World War II period is the converse of this argument. Technological changes eliminated the requirement for massive conscription of citizens into the military. As countries relied on a voluntary army, this argument for compensatory taxation of the rich no longer held. Further, they find that other arguments for compensatory taxation of the rich based upon privilege or rent seeking are not persuasive. The authors conclude that current economic and political conditions are such that the compensatory compensation argument for taxing the rich is no longer valid.   The authors agree with Thomas Piketty that taxation of the rich and income inequality in the twentieth century were linked to war; but, they do not agree that this was a random process (Piketty 2014, Piketty and Saez 2007). They argue that taxation of the rich and trends in income inequality were driven by long-run trends involving international rivalries and technologies available for waging war.

My major concern with this study is that their analysis ignores fundamental issues in this debate, especially as it relates to tax and fiscal policy in the U.S. Their analysis is based on the ‘public interest theory’ of government; the assumption is that progressive taxation satisfies a norm of fairness or equality. The public choice literature provides an alternative explanation for the differential tax burdens imposed on the rich relative to the non-rich. If the preferences of elected officials differ from those of their constituents, self-interested politicians will attempt to minimize the political costs associated with raising a given budget or revenue, where political costs result from opposition to taxes by taxpayer interest groups. Politicians can minimize these costs by shifting the tax burden to citizen groups that are less sensitive or effective in influencing tax policy. The use of a specific tax or marginal tax rate will then depend upon this tax price defined in terms of political costs. Allan Meltzer and Scott Richard use this model to show why preferences of voters for taxes are ranked by income, and how extension of the franchise could lead to higher taxation and redistribution of income from rich to poor (Meltzer and Richard 1981). (Scheve and Stasavage refer to this literature in a footnote on page 220, but argue that there is no general theory supporting the argument.)

The public choice literature reveals a systematic bias toward increased spending and deficits. From this perspective, the challenge in democratic societies is to design fiscal rules and institutions to constrain the growth of government, and to allow the preferences of citizens to dominate those of their elected representatives. Progressive tax systems are analyzed within the context of these fiscal rules and institutions (Merrifield and Poulson 2016b).

After World War II, under the leadership of the U.S., industrialized countries successfully removed barriers to international trade and capital flows. This so called “Pax Americana” set the stage for rapid growth in international trade and the global economy. To compete in this new global economy countries significantly reduced tax burdens.

As Chris Edwards and Daniel Mitchell document, the tax reforms enacted in major competitors have left the U.S. behind (Edwards and Mitchell 2008). While the U.S. retains certain tax advantages, there are a growing number of disadvantages. Its top individual income tax rate is now about average compared to other OECD countries, although it kicks in at a higher income level than most countries, and thus penalizes fewer people. However, U.S. businesses are increasingly at a competitive disadvantage with respect to tax burdens when compared to businesses in other OECD countries. The U.S. now has the second highest corporate income tax rate, at 40 percent when calculating federal and state corporate income taxes. U.S. businesses face high business tax and compliance costs. American businesses face a tax penalty when they repatriate profits earned by their foreign subsidiaries. The U.S. has the eighth highest dividend tax rate, and the highest estate and inheritance tax rate among OECD countries. Finally, the U.S. has one of the highest tax rates in the world on corporate capital gains. Much of this tax burden on business is borne by workers in the form of lower wages and employment opportunities.

In contrast, the most successful OECD countries have enacted new fiscal rules to constrain the growth in government spending. John Merrifield and I document how new fiscal rules have enabled these countries to reduce taxes and borrowing. By the end of the twentieth century Switzerland and the Scandinavian countries imposed the lowest top income tax rates compared to other OECD countries; and these countries are successfully addressing unfunded liabilities in their entitlement programs (Merrifield and Poulson 2016a).

Fiscal rules in the U.S. have been relatively ineffective in constraining the growth in federal spending. For half a century rapid growth in federal spending has been accompanied by deficits and debt accumulation. With total debt now in excess of 20 trillion dollars, the U.S. is one of the most indebted countries in the OECD. The total debt burden as a share of GDP exceeds 100 percent, and is projected to grow even higher in coming decades under current law. Growing unfunded liabilities threaten the viability of federal entitlement programs. These flaws in tax and fiscal policy are causing a massive redistribution of income and wealth in the U.S (Merrifield and Poulson 2016b).


Chris Edwards and Daniel Mitchell. 2008. Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It. Cato Institute, Washington D.C.

Allan H. Meltzer and Scott F. Richard. 1981. “A Rational Theory of the Size of Government,” Journal of Political Economy 81: 914-927.

John Merrifield and Barry Poulson. 2016a. “Swedish and Swiss Fiscal Rule Outcomes Contain Key Lessons for the United States,” The Independent Review 21: 251-74.

John Merrifield and Barry Poulson. 2016b. Can the Debt Growth be Stopped? Rules Based Policy Options for Addressing the Federal Fiscal Crisis. New York, Lexington Books.

Thomas Piketty. 2014. Capital in the Twenty-First Century. Cambridge: Harvard University Press.

Thomas Piketty and Emmanuel Saez. 2007. “How Progressive is the U.S. Federal Tax System? A Historical and International Perspective,” Journal of Economic Perspectives 21: 3-24.

Copyright (c) 2016 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 ( Published by EH.Net (December 2016). All EH.Net reviews are archived at

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):Europe
North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Cambridge Economic History of Australia

Editor(s):Ville, Simon
Withers, Glenn
Reviewer(s):Harper, Ian

Published by EH.Net (August 2016)

Simon Ville and Glenn Withers, editors, The Cambridge Economic History of Australia. Port Melbourne: Cambridge University Press, 2015. xxi + 668 pp. £120/$180 (cloth), ISBN: 978-1-107-02949-1.

Reviewed for EH.Net by Ian Harper, Deloitte Access Economics.

Hot on the heels of Ian McLean’s magisterial Why Australia Prospered (2013) comes this edited volume of twenty-four chapters, each focused on different aspects of Australia’s remarkable economic history.  The 30-strong list of contributors contains the names of some of Australia’s most prominent economic historians and economists, as well as one or two scholars from abroad whose research interests include Australian economic history.

The chapters are grouped into six parts, ordered chronologically. Part 1 deals with the “framework” of Australian economic history, with chapters devoted to historiography, the drivers of economic growth since European settlement, and the analytical methods employed in Australian economic-historical research.

Part 2 contains a chapter each on the Aboriginal legacy and the convict economy. A distinctive and timely feature of this book is the attention given to the economic circumstances, experience and prospects of Australia’s Aboriginal people.  The economic contribution of the Australian Aborigines and their descendants was essentially ignored from European settlement in 1788 until the national census of 1971.  (The Constitutional amendment following the referendum of 1967 allowed Aborigines to be included for the first time.)  As a result, historical statistics on the level and growth of Australia’s population and GDP are distorted, most seriously before 1830, when the Indigenous population was many times larger than the European population by any sensible measure.

Part 3 covers the economic expansion of the Australian colonies from the early decades of the nineteenth century through to Federation in 1901.  Six chapters deal thematically with key dimensions of economic development, including technological change, skills development and migration, enterprise, infrastructure, urbanization and Australia’s peculiar experience of government-led economic development, so-called “colonial socialism.”

Part 4 deals with the emergence of a national economy following federation of the six former colonies at the turn of the twentieth century.  Again six chapters follow particular threads, including the development of national capital markets, the rise of manufacturing to counter the long quiescence of mining until the 1960s, the emergence of big business, the evolution of public policy, and the increasing dominance of the service sector as a share of national output and employment.

Part 5 focuses on the development of the “modern” Australian economy, essentially since 1945.  Three chapters deal, respectively, with the reorientation of Australia’s trade, investment and migration, first away from Great Britain towards the United States and more recently towards Asia, especially China; the microeconomic reform agenda of the 1980s and 1990s; and Australian macroeconomic policy since World War II.

The final part looks “backwards and to the future.” Chapter 21 (together with its Statistical Appendix) presents the longest consistent time series of economic data that are available on the Australian economy and cover the period 1800-2010.  The data relate to four broad themes of Australian economic development: scale of settlement, living standards, economic structure, and openness to the international economy.  Simple line graphs reveal important features of Australia’s economic experience over the long run that are easily overlooked or forgotten, including the remarkable consistency of Australia’s economic growth over time, including GDP per capita, and the marked reduction in economic volatility in the later decades of the twentieth century and into the twenty-first century compared with earlier times.

The three remaining chapters of Part 6 deal with Australia’s longstanding emphasis on egalitarian outcomes in the distribution of income and, to a lesser extent, wealth; the long-term environmental impact of Australia’s extractive primary industries, especially mining and pastoral agriculture; and the prospects for “closing the gap” between the currently divergent economic outcomes experienced by Australia’s Indigenous and non-Indigenous populations.  Chapter 24, which deals with this last topic, presents some remarkable evidence on the impact of recognizing native title to unalienated land following the passage of the Native Title Act 1993.  As the authors note (p. 549): “In aggregate it is possible that some form of land rights or native title might be recognised in more than 70 per cent of Australia, where more than 40 per cent of the Indigenous population currently resides. … This is an extraordinary turnaround from the mid-1960s when there was no recognition of land rights under Australian law.” Furthermore, they conclude that “the demographic survival of Indigenous people is more certain today than at any other time since 1788” (p. 554).

Edited collections are often of uneven quality and it can be difficult to sustain a consistent narrative.  In this case the editors are to be commended on both counts: the chapters are uniformly readable, informative and well documented; and while alternative perspectives are acknowledged in individual chapters, no two chapters jar in their interpretation of major developments or identification of dominant themes.  There is a consistent narrative which sustains the reader’s interest if the volume is read, as this reviewer did, from cover to cover.  Yet individual chapters stand alone and can be read profitably in any order according to interest.

One helpful feature is the conclusion provided at the end of each chapter summarizing the foregoing argument and evidence.  This serves as a ready means of grasping the key points or as an aid to recall when returning to particular chapters.  There are useful tables, charts and maps included throughout the volume in addition to the Statistical Appendix, and there are two indexes, one covering subjects and the other companies, as well as a comprehensive bibliography.

The publisher’s claim that this book represents “the definitive study of Australia’s economic past and present” may be a touch grandiose but there is no doubt that it is a work of formidable scholarship and an essential addition to the professional library of any economist with a serious interest in Australia’s economic development and prospects.

Ian Harper is Professor Emeritus of the University of Melbourne and a Senior Advisor to Deloitte Access Economics Pty Ltd. He recently co-wrote a report on the future of Australia’s cities and regions entitled, “The Purpose of Place: Reconsidered” ( Email:

Copyright (c) 2016 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 ( Published by EH.Net (August 2016). All EH.Net reviews are archived at

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Australia/New Zealand, incl. Pacific Islands
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII