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

The Rise of the Western World: A New Economic History

Author(s):North, Douglass C.
Thomas, Robert Paul
Reviewer(s):Coelho, Philip R. P.

Project 2001: Significant Works in Economic History

North, Douglass C. and Robert Paul Thomas, The Rise of the Western World: A New Economic History. New York: Cambridge University Press, 1973. viii + 171 pp. ISBN: 0-521-29099-6.

Review Essay by Philip R. P. Coelho, Department of Economics, Ball State University. <>

New or Old Economic History? Incentives and Development

This is a landmark book on the impact of property rights on European economic development. Published over a quarter of a century ago, its stated goal is “… to suggest new paths for the study of European economic history rather than … either [a detailed and exhaustive study or a precise empirical test that are the] … standard formats” (p. vii). North and Thomas attempt to identify the elements that allowed the Western European economy to rise to affluence. Their argument is made transparent in Chapter One (Theory and Overview): the key to growth was and is an efficient economic system. Efficient in the sense that the system of property rights gives individuals incentives to innovate and produce, and, conversely inhibits those activities (rent-seeking, theft, arbitrary confiscation and/or excessive taxation) that reduce individual incentives. They argue that property rights are classic public goods because: (1) once a more efficient set of property rights is discovered the marginal cost of copying it is low (compared to the cost of discovering and developing it); (2) it is prohibitively expensive to prevent other political jurisdictions from emulating a more efficient set of property rights regardless of whether they contributed to their construction; (3) and finally, the idea of a set of property rights, like all ideas, is non-rival — we can all consume the same idea and the “stock” of the idea is not diminished. These public good aspects lead them to conclude that there may be under investment in the attempts to create more efficient sets of property rights because the jurisdiction that invests in the development of property rights pays the entire cost of their development but receives only benefits that accrue to its jurisdiction, while other jurisdictions can get the benefits without any of the developmental costs. Thus, the problems of public goods and the “free riders.”

Chapter Two (“An Overview”) sets the historical stage for their analysis. North and Thomas begin with tenth-century Europe and an examination of the classic feudal system. They contend that relatively low population densities and the absence of security (both economic and personal) led to a retreat from market exchange to one of self-sufficiency and to the development of feudalism. Protection was valuable and had to be paid for, but in the absence of markets it was paid for in kind rather than money. Since agricultural output could not be exchanged in the market (land) lords demanded labor services (dues) rather than output shares. Labor dues could be used to produce a more desirable set of consumables than output shares. Lacking market exchange, manorial labor was more fungible than agricultural output. The authors argue that from kings down to peasants, the absence of markets was the mid-wife to feudalism. The second prong of their thesis is that in feudalism, as in any societal arrangement, there existed a myriad of details, known as the custom of the manor that allowed the system to function. Once established, these customs became the set of property rights that molded the economic and personal relationships of feudalism.

As the centuries progressed populations grew and manorial economies replicated themselves. North and Thomas contend that land was available at the constant marginal cost (the cost of clearing land) up to the thirteenth century. At the end of this period diminishing returns to labor employed in agriculture manifested itself. The growth of population densities and the establishment of political order allowed markets to emerge. Diminishing returns and emergent markets gave feudal lords incentives to convert their serfs’ labor dues into fixed money payments. The lords were better off receiving a fixed payment rather than labor dues because the market price for labor was falling due to Malthusian diminishing returns to labor in agriculture. The commutation of labor services into money payments could not be reversed when labor became more valuable during the plagues of the fourteenth century. Amending the custom of the manor was subject to severe transactions costs, consequently by the sixteenth century servile labor in Western Europe was not viable.

Part Two (Chapters 3-7) presents evidence to buttress this thesis. Chapter 3 explores property rights in humans and land, Chapters 4 and 5 develop the frontier movement and the settling of land. Chapter 6 explores diminishing returns to agriculture in the thirteenth century, and Chapter 7 the devastation associated with the fourteenth century. Part Three of the book deals with the period 1500 to 1700 and covers the “unsuccessful” national economies of Spain and France and the successful ones of Holland and England. North and Thomas argue that inefficient sets of property rights hindered economic growth in Spain and France, while more efficient sets promoted the economic growth of England and Holland.

The paragraphs above are a rough sketch of the North-Thomas thesis on the growth of Western Europe. How well have the last 25 years of the twentieth century treated it, and how much consideration should it be given? The first question is relatively easy to answer. Texts and books in European economic development and history generally cite The Rise of the Western World, with the notable exceptions of David Landes and Rondo Cameron. In the academic literature it is frequently cited: The Social Science Citation Index for the years 1986-1990 gives the book about fifteen citations per year (68 total citations in the entire five year period), and for the last decade of the twentieth century (and subsequent to North winning the Nobel Prize in economics) citations rose to about twenty per year.1 But how big is that? It is larger than most, but not in the league of scholarship that alters the way a subject is considered. A relevant example is Ester Boserup’s The Conditions of Agricultural Growth that, for the same period (1986-90), was cited 158 times, or more than twice as frequently as North and Thomas. I believe the citation count assessment of the significance of this book is relatively accurate. The Rise of the Western World is an addition to the historiography of property rights, but it does not accomplish its stated goal: to explain the rise of the West. Furthermore there are significant gaps in its argument.

First, its reliance on Malthusian population theory may be misplaced. In 1966 the aforementioned Ester Boserup published her work The Conditions of Agricultural Growth (not cited in North and Thomas). From empirical evidence she argued that increasing populations led to the intensification of economic activities: From hunting and gathering, to a long-cycle agricultural rotation mixed in with hunting and gathering, to settled agriculture. In Boserup’s analysis output per man-year rises in agricultural societies relative to hunting and gathering societies, but output per hour devoted to the acquisition of food may have fallen. Boserup’s thesis is much more sophisticated than (and contradictory to) the simple Malthusian framework that North and Thomas rely upon. She points out that it is extraordinarily difficult to compare outputs in societies with different levels of production intensity. Population densities lead to different modes of production and entirely different societies. An increase in population density increases the range of productive activities that can be produced for market exchange, and as Adam Smith explains increased specialization leads to increased output and the size of the market limits specialization. North and Thomas recognize this interdependency explicitly. They state that increasing specialization due to increasing population densities may have partially offset Malthusian diminishing returns. How do they know it was a partial offset? The evidence they offer on diminishing returns and a Malthusian crisis in medieval England is primarily derived from the works of James E. Thorold Rogers, who investigated six centuries of wages and prices in England.2

As a source, Rogers is an excellent compilation of manorial roles and other data sources, however he is not a transparent writer and he is difficult to interpret. In volume one of A History of Agriculture and Prices in England (1866) he states, “… we may… conclude that the price of the service [wage labor], in so far as it was affected by competition, represents fully the economical conditions of supply and demand, and is interpreted by the evidence of prices” (p. 253). This may be interpreted to mean that wages are an accurate representation of the laborers’ incomes, but that does not seem to be what Rogers meant. Two pages later he writes that: “In many cases the labourer or artisan was fed. In this case, of course, he received lower wages. … At Southampton, the various artisans are almost invariably fed, … [In 1385] we read … of an allowance instead of food. As a rule, however, the wages paid are irrespective of any other arrangement. Sometimes, but very rarely, and only in the earlier part of the period, the labourer is paid in kind.” And in Six Centuries of Work and Wages (1884), Rogers indicates that feeding workers was considered routine (pp. 170, 328, 354-55, 510, 540-541, etc.).

I interpret Rogers to mean that in the early centuries of his study day laborers did not normally receive family food allowances, but that they were typically fed on the job. Given the nature of work (agricultural labor from shortly after sunrise to sunset) and medieval food preservation and preparation technology, not feeding workers would have forced them to devote significant amounts of time away from working to food preparation and to feeding themselves (just getting bread would be a formidable task given their work hours and the work hours of bakers). Besides being fed on the job laborers frequently had other perquisites such as gleaning, allotments of beer, and small amounts of land for individual agricultural activities (kitchen gardens). All these in-kind payments are mentioned in Rogers (1866) and are considered normal. North and Thomas base their work not only on the wage data from Rogers, but also on his price data for agricultural products.3 In order to determine real wages, money wages are divided by an index of agricultural prices.4 Notice that the numerator typically ignores payments in kind and the denominator is exclusively a food index. Medieval workers’ consumption bundles had a heavy food component, but if one is being partially paid in food and resources devoted to food (kitchen gardens), then real wage indexes that focus solely on the costs of food may be seriously distorted unless the income (both in money and in kind) elasticity for food is one and the overwhelming preponderance of the budget is devoted to food. Mildly put, the data that North and Thomas rely upon to show Malthusian diminishing returns are not entirely adequate to the task.

Other sources question the use of the Malthusian paradigm. James Z. Lee and Wang Feng unequivocally deny that Chinese agriculture from 1300 to 1800 experienced Malthusian crises. Similarly, Julian L. Simon disputed the empirical validity of the Malthusian model. Others question the North and Thomas view of medieval English agriculture. Gregory Clark questions the view of a primitive English agriculture running into diminishing returns in the early fourteenth century.5 Certainly the fourteenth-century plague was a disaster to the European economy, but it does not follow that the plagues that devastated it were direct consequences of Malthusian diminishing returns. More likely it was, as William McNeill hypothesized, a result of an integrated Old World economy that led to the introduction of a “new” pathogen to a dense, flea-ridden European population.6

So there are difficulties with North and Thomas’s belief that the diseases of the fourteenth and fifteenth centuries are a manifestation of declining living standards (Malthusianism). They do not consider that the plague may have been exogenous, that pathogens are subject to their own dynamics and evolution and not necessarily a result of human intervention.7 North and Thomas simply assert that the plague was a result of over population, diminishing returns, and declining living standards. But if that is so, why did the plague reoccur after population had declined and (according to the data they rely upon) wages had increased? And why did plague occur earlier — in the mid-sixth century? North and Thomas do not have answers.

There is a straightforward explanation to these questions that is grounded in epidemiology: It is that the plague was a “new” disease to fourteenth-century Europe and its relatively dense population resulted in high rates of infection and mortality. These rates decreased as immunities (both acquired and genetic) became more predominant in the populations of Europe. What has this to do with Malthus and diminishing returns? Nothing: The simple Malthusian doctrine correlating high death rates with low living standards is suspect. It assumes that diseases are a function of poverty while there is evidence that the causation runs from diseases to poverty, and it is contradicted by data which show areas with high money incomes (cities) having higher death rates than those areas with low money incomes (rural areas). Consequently any line of reasoning that relies upon the Malthusian doctrine, as does The Rise of the Western World, is suspect.

There are other flaws in their thesis, some minor, some major. A minor omission is that they do not specify why the servile labor force accepted the original commutation of labor services to money payments. According to their high transactions cost model, “the custom of the manor” would have made the initial negotiations prohibitively costly. A simple observation that personal freedom to the individual was worth more than the value of the money payments would correct this omission. And, such an observation would reinforce their claim that when the purchasing power of a unit of money fell (inflation) the lords were unable to switch back to servile labor.

A more significant difficulty with their thesis is their claim that while diminishing returns to labor existed in the countryside, urban areas had constant returns. These are inconsistent with declining real wages, because migration from village to town will prevent agricultural wages from falling.8 Another difficulty is their lack of knowledge of antiquity: They seem to believe that institutional innovations such as insurance and bills of exchange were medieval innovations, but these were known and used at least by the Hellenistic era, and the ancients developed many contractual forms that were resurrected and used again during the European Renaissance.9

So North and Thomas’s book is not without its flaws, but blemishes and all it still makes significant contributions in its emphasis on an efficient set of property rights as a necessary condition for economic development to take place. In this emphasis North and Thomas returned to the fundamentals of economics and its founding father, Adam Smith, who said: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice; all the rest being brought by the natural course of things.”

The Rise of the Western World is right to echo these sentiments. Since its publication in 1973 the modest increases in economic and personal freedom that the Chinese have experienced have led its population to a degree of affluence entirely unanticipated a quarter of a century ago. Similarly, the decline in law and order has bought economic and personal disasters to many in parts of Asia and Africa. The lesson seems a hard one to learn: the protection of the liberties of people to both their persons and properties is the most effective way to promote the general welfare in the long run. Short-run policies that restrict these liberties inevitably reduce welfare in both the short and long run. By focusing on this lesson in The Rise of the Western World, North and Thomas have done the profession and humanity a meritorious service.


1. Counting citations is a tricky business because a slight change in the citation can result in an entry separate from the main one. Thus D.C. North and R.P. Thomas may be counted differently from D. North and R. Thomas.

2. North and Thomas cite other evidence, but much of this is ultimately derived from Rogers’s work. For example E.H. Phelps Brown and Shelia Hopkins’s works on wages and prices are based on data gathered from Rogers.

3. North and Thomas rely on the Phelps Brown and Hopkins works (1955, 1956, 1957) on real wages whose data are derived from the wage and price data of Rogers.

4. “Index” may not be a completely accurate term because the index frequently contains only one commodity; then, to be specific, it is a wage series expressed in wheat units.

5. Clark (1991) using labor inputs in harvesting as a proxy for wheat yields finds little change in output per acre over the medieval era. He observes that: “Interestingly the labour input on reaping wheat from 1250 to 1450 seems to have risen little, implying a constancy of yields over this period. This is consistent with the work of Titow and of Farmer on the Winchester and Westminster estates over the medieval period. … Wheat yields were fairly constant over the medieval period, the population losses of the Black Death having little impact on yields” (p. 454, footnotes omitted).

In another article, Clark (1988) observes that relatively low yields per acre in medieval England could be attributed to the relatively high interest rates. Taken together these observations do not lend support to the thesis that medieval Europe was in a Malthusian crisis because, if it were so, we would expect to see declining mean output per unit of labor and increasing mean output per unit of land as diminishing returns makes labor relatively abundant and land relatively scarce. The opposite would occur if, as a result of the Black Death, labor became relatively scarce.

6. North and Thomas do not recognize that the plague may have been the result of increasing living standards. As incomes rose trade increased and disease pools in different regions became integrated. Mortal diseases newly introduced to an area frequently have a devastating impact on the native population. For more on this see McNeill.

7. Exogenous in the sense that the plague was not a disease endemic to fourteenth-century Europe, although, most likely, it had appeared in Europe in the first millennium CE; see J. C. Russell for further information.

8. For a complete specification of this model see Chambers and Gordon.

9. Edward F. Cohen argues and presents persuasive evidence that these institutional forms were abundant in fourth-century BC Athens.


Boserup, Ester. The Conditions of Agricultural Growth: The Economics of Agrarian Change under Population Pressure. Chicago: Aldine, 1965.

Cameron, Rondo. A Concise Economic History of the World. New York: Oxford University Press, 1989.

Clark, Gregory. “Yields per Acre in English Agriculture, 1250-1860: Evidence from Labour Inputs,” Economic History Review 44 (1991): 445-60.

Clark, Gregory. “The Costs of Capital and Medieval Agricultural Technique,” Explorations in Economic History 25 (1988): 265-94.

Chambers, Edward J. and Donald F. Gordon. “Primary Products and Economic Growth: An Empirical Measurement,” Journal of Political Economy 74 (1966): 315-32.

Cohen, Edward E. Athenian Economy and Society: A Banking Perspective. Princeton: Princeton University Press, 1992.

Lee, James Z. and Wang Feng. One Quarter of Humanity: Malthusian Mythology and Chinese Realities, 1700-2000. Cambridge, MA: Harvard University Press, 1999.

Landes, David S. The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor. New York: Norton, 1998.

McNeill, William H. Plagues and Peoples. New York: Anchor Books, 1976.

Phelps Brown, E. H. and Shelia V. Hopkins. “Seven Centuries of Building Wages,” Economica 22 (1955): 195-206.

Phelps Brown, E. H. and Shelia V. Hopkins. “Seven Centuries of the Prices of Consumables, Compared with Builders’ Wage-Rates,” Economica 23 (1956): 296-314.

Phelps Brown, E. H. and Shelia V. Hopkins. “Wage-Rates and Prices: Evidence for Population Pressure in the Sixteenth Century,” Economica 24 (1957): 289-306.

Rogers, James E. Thorold. Six Centuries of Work and Wages. New York: G.P. Putnam’s Sons, 1884.

Rogers, James E. Thorold. A History of Agriculture and Prices in England. Oxford: Clarendon Press, 1866.

Russell, Josiah C. “That Earlier Plague,” Demography 5 (1968): 174-84.

Simon, Julian L. The Economics of Population Growth. Princeton: Princeton University Press, 1977.

Simon, Julian L. Population and Development in Poor Countries: Selected Essays. Princeton: Princeton University Press, 1992.

Simon, Julian L. The Ultimate Resource 2. Princeton: Princeton University Press, 1998.

Simon, Julian L. and Herman Kahn (editors). The Resourceful Earth: A Response to Global 2000. New York: Oxford, 1984.

Philip R. P. Coelho has written on long-run economic growth (“An Examination into the Causes of Economic Growth,” Research in Law and Economics 1985) and is currently working on the impact of morbid diseases on economic history and growth (see: “Biology Disease and Economics: An Alternative History of Slavery in the American South,” with Robert A. McGuire, Journal of Bioeconomics Vol. 1, 1999; “Epidemiology and the Demographic Transition in the New World,” Health Transition Review, Vol. 7, 1997; and “African and European Bound Labor in the British New World: The Biological Consequences of Economic Choices” with Robert A. McGuire, The Journal of Economic History, Vol. 57, 1997.)


Subject(s):Servitude and Slavery
Geographic Area(s):Europe
Time Period(s):Medieval

The Rise of the Global Company: Multinationals and the Making of the Modern World

Author(s):Fitzgerald, Robert
Reviewer(s):Hannah, Leslie

Published by EH.Net (September 2016)

Robert Fitzgerald, The Rise of the Global Company: Multinationals and the Making of the Modern World. Cambridge: Cambridge University Press, 2015. xii + 622 pp., $30 (paperback), ISBN: 978-0-521-61496-2.

Reviewed for EH.Net by Leslie Hannah, London School of Economics.

This is a long-awaited magnum opus from a scholar whose encyclopedic knowledge of multinationals is well displayed in this volume.

It has two great strengths. The first is its coverage of the changing political contexts within which multinationals operated. Other studies are, of course, aware of the devastating effects of wars on (particularly German) multinationals, but no existing work ranges so confidently over the complexities nor adequately conveys the blindness with which participants at the time navigated their ways through the uncertainties created by expropriations and occupations. Those of us who have forgotten which politicians Lockheed bribed, the brand complications created by post-war splits, why the Japanese took over Germany’s Pacific colonies, or how the Kuwait Investment Office was viewed by western intelligence agencies, will find useful pointers to the relevant literature in the text and endnotes. His examples also raise some doubts in my mind as to whether the existing literature’s stress that governments are now more interventionist than in an earlier (supposedly laissez-faire) era is correct.

The second strength is the book’s eclecticism. Fitzgerald is, of course, familiar with the “Anglo-Saxon” country that dominated multinational investing in the nineteenth century (where he begins) and the larger one which dominates it in the twenty-first (where he ends). Yet he appears equally at home with the 1920s competition between the Banque de l’Indochine and Paribas, the extension of Canadian influence in the Caribbean, and Japanese multinationals’ weak modern risk management in Iran. For that reason this book could become a valued and much-thumbed addition to any business historian’s research bookshelf. An added attraction for that purpose (too often neglected in this age of internet searches of online publications) is its superb fifty–page index.

Unfortunately that is not how the publishers and/or author and/or editors have positioned the book. This is a volume in the Economic History Society’s series New Approaches to Economic and Social History, supposedly offering a “concise” survey for “advanced school students and undergraduate historians and economists.” Such words applied to this book risk prosecution under the UK Trade Descriptions Act. There is some attempt to summarize each chapter and sub-sections, but the treatment is far too detailed and unorganized for this purpose. Most undergraduates would find the multiplication of examples impenetrable and directionless and any professor would be doing students a grave disservice in recommending this as a textbook. It would be useful as supplementary reading to generate leads for an essay project (where it is richer in citation of contemporary sources and contains useful warnings against “present-mindedness” in Whiggish perspectives on the past), but Geoffrey Jones’ Multinationals and Global Capitalism, published by Oxford, would more suitably serve as the main course text.

Leslie Hannah lives in Tokyo and is Visiting Professor at the London School of Economics. He recently published (with Makoto Kasuya), “Twentieth Century Enterprise Forms: Japan in Comparative Perspective,” Enterprise & Society (2015).

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 (September 2016). All EH.Net reviews are archived at

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

The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War

Author(s):Gordon, Robert J.
Reviewer(s):Margo, Robert A.

Published by EH.Net (July 2016)

Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War.  Princeton, NJ: Princeton University Press, 2016. vii + 762 pp. $40 (cloth), ISBN: 978-0-691-14772-7.

Reviewed for EH.Net by Robert A. Margo, Department of Economics, Boston University.

This is the age of blockbuster books in economics. By any metric, Robert Gordon’s new tome qualifies.  It tackles a grand subject, the productivity slowdown, by placing the slowdown in the context of the historical evolution of the American standard of living.  Gordon, who is the Stanley G. Harris Professor in the Social Sciences at Northwestern University, needs no introduction, having long been one of the most famous macroeconomists on planet Earth.

The Rise and Fall of American Growth is divided into three parts.  Part One (chapters 2-9) examines various components of the standard of living, in levels and changes from 1870 to 1940.  Part Two (chapters 10-15) does the same from 1940 to the present, maintaining the same relative order of topics (e.g. transportation appears after housing in both parts).  Part Three (chapters 16-18) provides explanations and offers predictions up through 2040.  There are brief interludes (“Entre’acte”) between parts, a Postscript, and a detailed Data Appendix.

Chapter 1 is an overview of the focus, approach, and structure of the book.  Gordon’s focus is on the standard of living of American households from 1870 to the present.  The approach is both quantitative — familiar to economists — and qualitative — familiar to historians.  As already noted, the organization is symmetric — Part One considers the pre-World War II period, and Part Two, the post-war.  The fundamental point of the book is that that some post-1970 slowdown in growth was inevitable, because so much of what was revolutionary about technology in the first half of the twentieth century was revolutionary only once.

Chapter 2 draws a bleak picture of the standard of living ca. 1870, the dawn of Robert Gordon’s modern America.  From the standpoint of a household in 2016, conditions of life in 1870 would appear to be revolting.  The diet was terrible and monotonous to boot; homemade clothing was ill-fitting and crudely made; transportation was dependent principally on the horse, which generated phenomenal amounts of waste; indoor plumbing was all but non-existent; rural Americans lived their lives largely in isolation of the wider world.  In Gordon’s view, much of this is missing from conventional real GNP estimates.  Chapter 3 continues the initial story, focusing on changes in food and clothing consumption.  Gordon contends there was not much change in underlying quality but he argues that, by the 1920s, consumers were paying lower prices for food — having shifted to lower-priced sources (chain stores as opposed to country merchants) — and that most clothing was store-bought rather than homemade.

Chapter 4 studies housing quality.  As with other consumer goods, housing also improved sharply in quality from 1870 to 1940.  Gordon argues that much farm housing was poor in quality, while new urban housing was typically larger and more durably built.  Indoor plumbing, appliances and, ultimately, electrification dramatically enhanced the quality of life while people were indoors.  As elsewhere in the book, reference is made to hedonic estimates of the value of these improvements as revealed in higher rents. Chapter 5 details improvements in transportation between 1870 and 1940. These are grouped into three categories.  The first is improvement in inter-city and inter-regional transportation in rail.  This occurs chiefly through improvements in the density of lines and in the speed of transit. The second is intra-city which occurred with the adoption of the electric streetcar.  The third, and most important arguably, is the internal combustion engine and its use in the automobile (and bus).  Gordon especially highlights improvements in the quality of automobiles, noting that the car is not reflected in standard price indices until the middle of the Great Depression.

Chapter 6 details advances in communication from 1870 to 1940.  By current standards, the relevant changes — the telegraph, telephone, the phonograph, and the radio — might not seem like much but from the point of view of a household in 1870, these technologies enabled Americans to dramatically reduce their isolation.  As Gordon points out, one could phone a neighbor to see if she had a cup of sugar rather than visit in person, or listen to Enrico Caruso’s voice on the phonograph if it were not possible to hear him in concert.  The radio brought millions of Americans into the national conversation, whether it was to hear one of Franklin Roosevelt’s fireside chats or listen to a baseball game.  Chapter 7 discusses improvements in health and mortality from 1870 to 1940 which, according to Gordon, were unprecedented.  After summarizing these, he turns to causes, chief among which are improved urban sanitation, clean water, and uncontaminated milk.   Gordon also highlights improvements in medical knowledge, particularly the diffusion (and understanding) of the germ theory of disease.  Chapter 8 studies changes in the quality of work from 1870 to 1940.  These changes were wholly for the better, according to Gordon.  Work became less dangerous, more interesting, and more rewarding in terms of real wages.  Most importantly, there was less working per se, as weekly hours fell, freeing up time for leisure activity.  There was a marked reduction in child labor, as children spent more of their time in school, particularly at older ages in high school.   This was also the period leading up, as Claudia Goldin has told us, to the “Quiet Revolution” in the labor force participation of married women, which was to increase substantially after World War II. Credit and insurance, private and social, is the topic of Chapter 9.  The ability to better smooth consumption and also insure against calamity are certainly improvements in living standards that are not captured by standard GNP price deflators.  Initially the shift of households from rural to urban areas arguably coincided with a decrease in consumer credit but by the 1920s credit was on the rise due to several innovations previously documented by economic historians such as Martha Olney.   Households were also better able to obtain insurance of various types (e.g. life, fire, automobile); in particular, loans against life insurance were frequently used as a source for a down payment on a house or car.  Government contributed by expanding social insurance and other programs that helped reduced systemic risks.

Chapter 10 begins the second part of the book, which focuses on the period from 1940 to the present.  As noted, the topic order of Part Two is the same as Part One, so Chapter 10 focuses on food, clothing, and shelter.  Gordon considers the changes in quality in these dimensions of the standard of living to be less monumental than as occurred before World War II.  For example, frozen food became a ubiquitous option after World War II but this change is far less important than the pre-1940 improvement in the milk supply.  Quantitatively, perhaps the most important change was a reduction in relative food prices which, predictably, led to increase in the quantity demanded.  Calories jumped, and so did obesity and many related health problems.  For clothing, the chief difference is in the diversity of styles and, as with food, a sharp reduction in relative price holding quality constant.  In Chapter 11 Gordon notes that automobiles continued to improve in quality after World War II, mostly in terms of amenities and gas mileage; and their usefulness as transportation improved with the building of the interstate highway system.  Gordon is less sanguine about air transportation, arguing that quality of the travel experience deteriorated after deregulation which was not offset by reductions in relative prices.  For housing, the major changes was suburbanization and a concomitant increase in square footage.  The early postwar period witnessed some sharp improvements in the quality of basic household appliances, and somewhat later, the widespread diffusion of air conditioning and microwaves.

Chapter 12 focuses on media and entertainment post-1940.  Certain older forms of entertainment gave way to television, the initial benefits of which were followed by steady improvements in the quality of transmission and reception.  Similarly, there were sharp improvements in the various platforms for listening to music, with substantial advances in recording technology and delivery — the 78 gave way to the LP to the CD to music streaming and YouTube.  The technology to deliver entertainment also delivered the news in ever greater quantity (quality is in the eye of the beholder, I suppose).  Americans today are connected almost immediately to every part of the world, a level of communications unthinkable a century ago.  A surprisingly brief Chapter 13, recounts the history of the modern computer.  There is no way to tell this history without emphasizing just how unprecedented the improvements have been, from the very first post-war computers to today’s laptops and supercomputers.  Moore’s Law, understandably, takes center stage, followed by the Internet and e-commerce.   Gordon has a few negative things to say about the worldwide web, but the main act — why haven’t computers led a revolution in productivity — is saved for later in the book.

Chapter 14 continues the story of health improvements to the present day.  As everyone knows, the U.S. health care system changed markedly after World War II, in terms of delivery of services, organization, and payment schemes.  Great advances were made in cardiovascular care and treatment of infectious disease through the use of antibiotics.   There were also advances in cancer treatment, mostly achieved by the 1970s; the subsequent “war” on cancer has not been as successful.  Most of the benefits were achieved through diffusion of public health and expansion of health knowledge in the general public (e.g. the harmful effects of smoking).  Since 1970 the health care system has shifted to more expensive, capital intensive treatments primarily provided in hospitals that have led to an inexorable growth in medical care’s share of GNP, increases that most scholars agree exceed any improvements in health outcomes.  The chapter concludes with a mixed assessment of Obamacare.  Chapter 15, on the labor force, is also rather short for its subject matter.  Gordon recounts the major changes in the structure and composition of work since World War II.  Again, it is a familiar tale — improved working conditions due to the shift towards the service sector and “indoor” jobs; rising labor force participation for married women; rising educational attainment, at least until recently; and the retirement revolution.  Your faithful reviewer gets a shout-out in a brief discussion of the “Great Compression” of the 1940s; my collaborator in that work, Claudia Goldin (and her collaborator, Lawrence Katz) gets much more attention for her scholarly contributions on the subject matter of Chapter 15, understandably so.

Part Three addresses explanations for the time series pattern in the standard of living.  Chapter 16 focuses on the first half of the twentieth century, which experienced a marked jump in total factor productivity (TFP) growth and the standard of living.  Gordon considers several explanations, dismissing two prominent ones — education and urbanization — right out of the gate.   In paeans to Paul David and Alex Field, he argues that the speed-up in TFP growth can be attributed to the eventual diffusion of key inventions of the “Second” industrial revolution, such as electricity; to the New Deal; and, finally, to World War II.  Chapters 17 and 18 tackle the disappointing performance of TFP growth and the standard of living in the last several decades of U.S. economic history.  Despite remarkable accomplishments in science and technology the impact on average living standards has been small, compared with the 1920-70 period.  Rising inequality since 1970, which can be tied in part to skill-biased technical change, has made matters worse, as did the Great Recession.  While Gordon is not all doom and gloom, he definitely falls on the pessimist side of the optimist-pessimist spectrum — his prediction for labor productivity growth over the 2015-40 period is 1.2 percent per year, a full third lower than the observed rate of growth from 1970 to 2014.

I think it is next to impossible to write a blockbuster economics book without it being a mixed bag in some way or other.  Gordon’s is no exception.  On the plus side, the book is well written, and one can only be in awe of Gordon’s mastery of the factual history of the American standard of living.  We all know macroeconomists who dabble in the past.  Gordon is no dabbler.  One can find interesting ideas for future (professional-level) research in every chapter — graduate students in search of topics for second year or job market papers, take note.  Many previous reviewers have chided Gordon for his pessimistic assessment of future prospects.  Of course, no one knows the future, and that includes Gordon.  It is certainly possible that he will be wrong about productivity growth over the next quarter-century — but I for one will be surprised if his prediction is off by, say, an order of magnitude.

I am less sanguine about the mixed qualitative-quantitative method of the book.  I gave up reading the history-of-technology-as-written-by-historians-of-technology a long time ago because it was just one-damn-invention-after-another.  At the end of a typical article recounting the history of improvements in, say, food processing, I was supposed to conclude that no amount of money would get me to travel back in the past before said improvements took place — except I never did reach this conclusion, knowing it to be fundamentally wrong.  Despite references to hedonic estimation, TFP, and the like, in the end Gordon’s book reads very much like conventional history of technology.  More than a half century ago Robert Fogel showed how one could quantify the social savings of a particular invention, thereby truly advancing scholarly knowledge of the treatment effects. Yet Railroads and American Economic Growth is not even cited in Gordon’s bibliography, let alone discussed in the text.  If one’s focus is the aggregate, I suppose a Fogelian approach is impossible — there are too many inventions, and (presumably) an adding-up problem to boot.  What exactly, though, do we learn from going back and forth between quantitative TFP and qualitative one-damn-invention-after-another? I’m not sure.  There’s the rub, or rather, the tradeoff.

Criticisms aside, if you are into economics blockbusters, The Rise and Fall of American Growth belongs on your bookshelf, next to Piketty and the like.  Just be sure it is a heavy-duty bookshelf.

Robert A. Margo’s Economic History Association presidential address, “Obama, Katrina, and the Persistence of Racial Inequality,” was published in the Journal of Economic History in June 2016.

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 (July 2016). All EH.Net reviews are archived at

Subject(s):Economic Development, Growth, and Aggregate Productivity
History of Technology, including Technological Change
Household, Family and Consumer History
Living Standards, Anthropometric History, Economic Anthropology
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Coordination in Transition: The Netherlands and the World Economy, 1950-2010

Author(s):Touwen, Jeroen
Reviewer(s):van den Berg, Annette

Published by EH.Net (August 2015)

Jeroen Touwen, Coordination in Transition: The Netherlands and the World Economy, 1950-2010. Leiden: Brill, 2014. xiv + 385 pp. $154 (hardcover), ISBN: 978-90-04-27255-2.

Reviewed for EH.Net by Annette van den Berg, School of Economics, Utrecht University.

One of the great debates of the late twentieth century has been around the well-known study Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (VoC) by Peter Hall and David Soskice, in which developed countries are characterized as either a Liberal Market Economy (LME) or a Coordinated Market Economy (CME), based on five interrelated criteria (spheres). Many scholars have applied the VoC approach since then — including economic historians — trying to reconcile the rather static nature of the approach with a historical, more dynamic analysis. Jeroen Touwen (lecturer in Economic and Social History at Leiden University, and the scientific director of the N.W. Posthumus Institute) adds to this line of research, by applying VoC to the case of the Netherlands after World War II in a careful, critical manner. This has resulted in an impressive and voluminous book of which the principal title, Coordination in Transition, neatly captures the key theme: How did a typical CME react to the structural changes as a result of ongoing globalization (influenced by trade liberalization and technological developments, foremost in information and communications technology), causing a shift to a market-based and knowledge-based economy? One of the new contributions of this book is that it also analyzes recent economic history of the Netherlands, in contrast with most other Dutch studies that only treat the twentieth century.

The Netherlands makes for an interesting case because it is seen as a successful and hybrid CME, with a liberal tradition in business relations as in Anglo-American countries; a strong welfare state like in Scandinavia; and a high degree of coordination similar to Germany. Also readers with no particular interest in the Dutch case (or those who think they already know the country, for that matter) will find this book worthwhile to read, as each chapter sets out with a broader treatment of theoretical considerations before analyzing the Netherlands, each time accompanied by a comparison with several other western OECD countries; and as the author makes relevant statements about (developments of) LMEs and CMEs in general. In so doing, he uses theoretical concepts from several socio-political fields of science, and of many statistical sources, thereby providing the reader with ample information and guidance for further research. The large number of interesting footnotes and references underline the thoroughness and dedication with which the book was written.

In my view, Chapter 2 is the most innovative part of the book because here the author comes up with a novel view on how the original, static VoC framework can accommodate for changes through time by adding a temporal dimension and by focusing on the central concept of non-market coordination, which not only encompasses state-induced regulation, but all kinds of information exchange and negotiation between different stakeholders operating at various levels in the economy. He argues that CMEs, despite all having become more liberal in reaction to structural change, remained characterized by a high degree of deliberative institutions (although often in an adjusted form). Hence, whereas Hall and Soskice theorized that due to institutional complementarities, deregulation of financial markets could “snowball into changes in other spheres as well,” possibly causing a break-up of CMEs, Touwen contends that the overall convergence to the LME did not take place, for which he provides plentiful evidence in the subsequent four chapters.

The limited space in this review does not allow me to elaborate on these chapters in depth. In a nutshell, in all of them Dutch postwar economic history is analyzed by focusing, in succession, on the business system, labor relations, the welfare state and economic policy. As these concern strongly overlapping topics an inevitable disadvantage thereof is that the same themes are addressed several times (be it from different perspectives), which is somewhat tiresome if one would read the whole book in one go. On the other hand, each chapter comes up with additional information and interesting details, thereby delivering further building blocks for the main message of the book: when faced by shocks and external threats, almost in all time periods (except during the polarized 1970s) the Dutch responded gradually but nevertheless adequately via an intricate system of coordination in all five distinguished spheres of the economy (in industrial relations, information sharing with employees, corporate governance, inter-firm networks, and vocational training). Although a deliberate choice of the author, it is a missed opportunity not to elaborate on this last-mentioned sphere, for reasons not explicitly mentioned.  Here and there he just touches upon this important topic, while a bit more comprehensive discussion thereof would have made the application of VoC to the Dutch case complete.

The book clearly describes how non-market coordination in the Netherlands originated in the interwar years and how it developed thereafter. At first this occurred in great harmony under guidance of the state (demand-side, Keynesian policy) in order to restore international competitiveness, culminating in the so-called Golden Years (1950s-1960s). There was close collaboration between government, employer associations and unions at all levels. During the stagflation period of the 1970s unemployment rose, labor relations hardened and the government failed to cut spending. Finally, forced by the structural changes in the world economy, by 1982 the sense of urgency was strong enough for all parties to switch to a more liberal, supply-side economic policy. Wage restraints were accepted in return for the creation of jobs, which were often part-time and temporary. The labor market thus became more flexible. Although this whole process coincided with a drastic reform of the welfare state, it was also accompanied by an active labor market policy, preventing segregation of the labor market as well as a rise in income inequality. So, “more market” went hand in hand with sustained coordination. Addressing the most recent time period, the financial crisis of 2007-10 clearly demonstrates the negative consequences of introducing too much free market, and underscores the continued need for coordination and government regulation. Touwen describes the success of the Dutch CME in terms of “managed liberalization under the wing of consultation.” The ability of non-market coordination to accommodate change forms the connecting thread.

Annette van den Berg (lecturer at Utrecht University School of Economics) is the author (together with Erik Nijhof) of “Variations of Coordination: Labour Relations in the Netherlands” in: K. Sluyterman (ed.), Varieties of Capitalism and Business History. The Dutch Case (Routledge, 2015) and (together with John Groenewegen and Antoon Spithoven) of Institutional Economics. An Introduction (Palgrave Macmillan, 2010). Her email address is

Copyright (c) 2015 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 2015). All EH.Net reviews are archived at

Subject(s):Economic Planning and Policy
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

Financial Crises, 1929 to the Present

Author(s):Hsu, Sara
Reviewer(s):Wheelock, David C.

Published by EH.Net (November 2014)

Sara Hsu, Financial Crises, 1929 to the Present. Cheltenham, UK: Edward Elgar, 2013. v + 178 pp. $100 (cloth), ISBN: 978-0-85793-342-3.

Reviewed for EH.Net by David C. Wheelock, Federal Reserve Bank of St. Louis.

In Financial Crises, 1929 to the Present, Sara Hsu of the State University of New York, New Paltz, offers a concise history of several of the world’s major financial crises — from the Great Depression to the subprime mortgage crisis of 2007-08 and European debt crisis of 2009-10.

Financial crises are not easy to define precisely, except perhaps in the context of a stylized model, and different authors have used a variety of quantitative measures to identify and measure the severity of crises. In the first chapter of the book, Hsu explains how different authors define financial crises, focusing especially on the ideas of Hyman Minsky and Charles Kindleberger. Hsu provides neither a precise theoretical nor a quantitative definition of a financial crisis, but aligns herself with Minsky in concluding that unregulated financial systems of capitalist economies are inherently prone to instability and crises with potentially severe macroeconomic repercussions: “Hyman Minsky was right in the sense that given free rein, capitalism has created instability and unanticipated crises” (p. 146).

After a brief summary of how the global financial system has evolved since the 1930s, subsequent chapters review the histories of individual crises, beginning with the Great Depression. Hsu follows John Kenneth Galbraith in tracing the origins of the Great Depression to Wall Street speculation and attributes the eventual market crash to heightened uncertainty and a global credit crunch associated with French claims on British gold and the introduction of the Young Plan in 1929. Although she acknowledges the decline in the money stock and deflation that took hold after the crash, Hsu rejects the view of Friedman and Schwartz (1963) that banking panics and a contracting money supply caused the Great Depression, favoring instead Ben Bernanke’s (1983) emphasis on the nonmonetary effects that financial crises had on the economy.

The Great Depression led to major changes in the regulation of U.S. banks and financial markets, as well as disintegration of the international gold standard and the imposition of capital and exchange controls around the world. Controls became universal during World War II and remained in place for several years after the war under the post-war Bretton Woods system of fixed exchange rates. Hsu nicely summarizes key features of the Bretton Woods System and its breakdown in the 1970s in the book’s third chapter.
The remaining chapters summarize major financial crises, beginning with the debt crises of emerging market economies in the 1980s. Hsu explains how many emerging market economies had borrowed heavily to support economic growth when commodity prices were rising in the 1970s, only to experience difficulty servicing their debts and obtaining new loans when commodity prices fell after the Federal Reserve tightened monetary policy and the U.S. economy went into recession in the early 1980s. This chapter has an especially good summary of how the debt crisis unfolded in different countries and how lenders, governments, and the IMF responded.

Hsu next discusses several crises that occurred in the 1990s, including the Western European exchange rate crisis, Nordic banking crises, Japanese real estate collapse and subsequent “lost decade,” Mexican debt crisis, and Asian financial crisis. A subsequent chapter describes the Russian and Brazilian financial crises of 1998 and the Argentinian crisis of 2000. Like many others, Hsu is highly critical of the “conditionality” requirements imposed by the IMF on nations in crisis. For example, she argues that “The IMF program for Korea went beyond measures needed to resolve the crisis … and, destructively, called for even wider opening(!) of Korea’s capital and current accounts” (p. 91).

The penultimate chapter of the book focuses on the subprime mortgage crisis and recession of 2007-08, which originated in the United States but was felt around the world, and the European debt crisis that emerged in 2009-10. For Hsu, “the crisis showed that all financial markets are unstable and require constant supervision and regulation” (p. 129). She blames “excessive overleveraging” of subprime assets in the form of opaque financial instruments created by a largely unregulated and unsupervised banking system and the trading of those securities “over the counter” rather than through organized and regulated exchanges. She argues that much of the government’s response to the crisis, such as the Troubled Asset Relief Program, was flawed and failed to halt the crisis.

The final chapter considers alternative policies for preventing future crises and for containing and resolving any crises that might occur. Hsu is generally supportive of capital controls, macro-prudential bank regulations, and countercyclical fiscal and monetary policy, as well as greater coordination of policies across countries. Indeed, she argues that “The preeminence of country sovereignty and competitiveness over global financial stability ensures that fault lines will exist and expand, and that crises will continue to occur. Should country priorities shift en masse from economic growth to economic and financial stability, there is a much greater probability that future financial crises might be prevented” (p. 146).

The book could serve as a supplement for undergraduate courses in economic history, international finance, and macroeconomics or as a reference for anyone wishing summaries of the key events and issues surrounding particular crises. However, the book might hold less appeal for courses in U.S. economic history because it does not cover several noteworthy episodes of financial instability in the United States, such as the savings and loan crisis of the 1980s. Further, readers interested in more theoretical explanations of the causes and effects of financial crises or those interested in the interplay of political and economic forces that shape the financial regulatory environment and can promote instability and crises even in highly regulated financial systems, as discussed recently by Charles Calomiris and Stephen Haber (2014), will want to look elsewhere.


Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review 73(3), June 1983, pp. 257-76.

Calomiris, Charles W. and Stephen H. Haber. Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton: Princeton University Press, 2014.

Friedman, Milton and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

David C. Wheelock researches U.S. financial and monetary history. His recent publications include (with Michael D. Bordo), “The Promise and Performance of the Federal Reserve as Lender of Last Resort,” in M.D. Bordo and W. Roberds, editors, The Origins, History, and Future of the Federal Reserve: A Return to Jekyll Island. Cambridge University Press, 2013.

Copyright (c) 2014 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (November 2014). 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):20th Century: Pre WWII
20th Century: WWII and post-WWII

Fragile by Design: The Political Origins of Banking Crises and Scarce Credit

Author(s):Calomiris, Charles W.
Haber, Stephen H.
Reviewer(s):Rockoff, Hugh

Published by EH.Net (September 2014)

Charles W. Calomiris and Stephen H. Haber, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit.  Princeton, NJ: Princeton University Press, 2014.  xi + 570 pp. $35 (cloth), ISBN: 978-0-691-15524-1.

Reviewed for EH.Net by Hugh Rockoff, Department of Economics, Rutgers University.

Charles W. Calomiris and Stephen H. Haber, two of America’s leading financial historians, have written an ambitious and in my view a largely successful book to provide an explanation for the political economy of banking through history and across nations. The central question is why some banking systems provide both abundant credit and financial stability over long periods while others, including unfortunately the financial system of the United States, fail to do so.


Calomiris and Haber develop their analytic framework in chapters 1 through 3. They do so in words. There are no equations to deter the mathematically challenged and prevent their book from reaching a wide audience. Their main point is that banking systems are always and everywhere a political construct: the outcome of what they call the “game of bank bargains.” The players in this game are the government, the public, and various interest groups including, of course, bankers and would be bankers. Governments want the revenues that can be extracted from the banking system and political support. Interests groups in turn want favors from the banking system, typically cheaper credit. The public wants abundant credit and a stable banking system. The outcome of the game of bank bargains depends on the underlying political system. The most important distinction is between democracies and autocracies.  In some democracies, but by no means all, the outcome of the game of bank bargains is a system that provides stable and abundant credit. A democratic government must provide a system that works in some measure for the general public if it is to stay in power. Sometimes, however, the tendency for the game of bank bargains to end favorably in democracies is undermined by what Calomiris and Haber refer to as populism and in particular agrarian populism. To secure the support of agricultural interests governments may impose restrictions on banks — restrictions on where they can locate, who they can lend to, how much they can charge on loans, on when and how much they can collect on debts, and so on. These restrictions may benefit the agrarian interests that sought them while reducing the overall supply of credit and the stability of the system. But an alliance with agrarians may help the ruling party to stay in power. The story with autocratic governments is different. Here there is a tendency for the government to extract as much revenue as possible from the banking system, even at the cost of the overall growth and stability of the economy.

This thesis (which is developed in considerably more detail) is illustrated with historical studies of banking in three democracies, Britain, the United States and Canada, and two autocracies (during much of their history) Mexico and Brazil, with briefer looks at other countries. Britain is covered in chapters 4 and 5. There is a great deal of historical material in these chapters. Along the way one learns about the gradual evolution of democracy in Britain, the disruptive economic and financial effects of wars, and the gradual and fluctuating transformation of the banking system from one at the service of the state to one responsive to the private sector. Professors of economic history may find themselves skipping parts of the narrative here, but the non-specialist can learn a great deal by reading straight through. In general, the earlier history will be less likely to provoke controversy than the more recent history. Perhaps it is simply the clarity of hindsight. Their story of how Britain relied on inflationary finance during the Napoleonic wars, for example, will raise few eyebrows. The authors’ apparent enthusiasm for Margaret Thatcher’s economic revolution (pp. 147-48) is likely to meet more resistance. The recent crisis, unfortunately, is not analyzed in detail. We learn that British banks were vulnerable to an international crisis because of the boom in the housing market and the high leverage of the banks, but not how these vulnerabilities were the outcome of the game of bank bargains.

The American experience is covered in chapters 6 through 8. Here they address one of the great mysteries of financial history: Why has the United States, a world leader in business, education, and technology lurched from one financial crisis to another through so much of its history? The answer for Calomiris and Haber is, to simplify a complex argument, agrarian populism. Indeed, chapter 6 is called “Crippled by Populism: U.S. Banking from Colonial Times to 1990.” The key for Calomiris and Haber is that farmers, particularly prosperous farmers, did better with local unit banks than they would have with a system of nationwide branch banking. In the short run the rates influential farmers paid might have been higher than they would have been with a nationwide branch banking system, but these farmers knew that the local bank would always be willing to lend to them, even in hard times, because it had no alternatives. The populists, who drew their strength from farmers, then formed an alliance with the unit bankers. Deposit insurance is an important outcome of that alliance. It was pushed by the populists as a protection for the common man, but helped make the unit banks competitive with the large urban banks. The resulting system, with its myriad of local unit banks, was “fragile by design.” Eventually, however, the system of unit banks was broken because of the declining economic role and political power of agriculture.

The crisis of 2008 in the United States is covered in chapters 7 and 8. As with the case of Britain their account of recent events will be more controversial than their account of earlier periods. Chapter 7, “The New U.S. Bank Bargain: Megabanks, Urban Activists, and the Erosion of Mortgage Standards” describes the origins of the subprime mortgage mania. The story they tell draws on a number of accounts, for example Raghuram Rajan (2011), but it fits well with their earlier emphasis on political bargains. As Calomiris and Haber see it, the crisis began with a bargain between regional banks seeking permission from regulators to merge and urban activists seeking credit for people who were too poor to qualify for home mortgages under traditional standards.  By making subprime loans the banks got the approval of activist groups which in turn meant approval by regulators for mergers — the banks were being good citizens — and the activist groups got what they thought they wanted, more credit for low income borrowers. But that was just the beginning. Fannie Mae and Freddie Mac were drawn into the coalition and then subprime loan originators such as Countrywide. Politicians benefitted directly through campaign contributions, and indirectly because they could claim to be helping the urban poor without having to levy higher taxes on the middle class.

Chapter 9 then attacks the question of why regulators didn’t force financial institutions to hold capital appropriate for the risks they were taking. In the opinion of Calomiris and Haber that would have been the key to preventing the inevitable losses on bad loans from becoming a crisis. They argue against the view that the problem was deregulation, particularly the often cited removal of the separation of commercial banking from investment banking that had been in place since the1930s. Here I was completely persuaded, although to be honest, this was my belief going in. Ending the separation of commercial banking and investment banking they show, permitted mergers and conversions that helped ameliorate the crisis. The real problem was that prudential regulators didn’t do their job of demanding capital to match risky lending. In part, the reason they failed was that raising capital requirements would have discouraged subprime lending and that would have meant taking on a powerful political coalition. Not all readers will be convinced that higher capital ratios would have prevented the crisis, but most will agree that this was a part of the story.

In chapter 9 Calomiris and Haber turn from the bad boy, the United States, to the good boy, Canada. Although there have been bank failures in Canada, including large institutions, there has never been a financial crisis, not even during the Great Depression. Why? The answer, according to Calomiris and Haber, is a system of large banks with nationwide branching systems, and the resulting efficiency and diversification of risk. That happy outcome was the result of the authority to charter banks being located, from the very beginning, at the national level. I found few things to disagree with in their discussion of Canada and the contrast with the U.S. Michael Bordo, Angela Redish, and I reach a similar conclusion in a paper forthcoming in the Economic History Review.

In section three, chapters 10 through 13, Calomiris and Haber turn from democracies to authoritarian regimes. Here, not surprisingly, things turn out worse than in the democracies. Chapters 10 and 11 describe the history of banking in Mexico. Haber has written extensively about Mexico and these chapters are wonderfully detailed. Here I will just summarize a few observations that are particularly striking. Under General Porfirio Diaz (1877-1911) the banking system was controlled by favored industrialists closely tied to the government. The industrialists benefitted and the government benefitted by extracting revenues from the banking system, but the resulting system failed to provide abundant credit to fuel widespread economic development. It provided, however, at least a modicum of stability.  During the period of the Mexican Civil War (1911-1929), the banking system deteriorated as rival warlords tried to extract resources from banks in regions they controlled. Under the Partido Revolucionario Institucional (PRI), the government established investment banks that helped finance the coalition that supported this authoritarian regime. Commercial banking remained depressed, even when compared to the Diaz era.

Chapter 11 covers Mexico after 1982, a tumultuous period. Budget problems led to reliance on inflationary finance that undermined the banking system and support for the PRI. This was followed by a misguided privatization of the banking system, with the purpose of raising revenue for the government, a run up of bank credit, and finally a crash and a bailout that created further political problems. This story sounds much like the story of the savings banks in the United States. Since the bailout, a new partnership has arisen between the government and foreign banks that have entered to fill the void left by the collapse of the older system. Although Calomiris and Haber see some positives in the new system, they point out that the amount of bank credit relative to GDP — their favorite measure of the abundance of bank credit — was about the same in 2010 as it was in 1910.

Chapters 12 and 13 cover Brazil. Chapter 12 covers the period up to 1889, and chapter 13, the period after, focusing on the transition to democracy. Much of Brazil’s financial history was characterized by heavy reliance on an inflation tax. Weak autocratic regimes couldn’t tax the wealthy oligarchs who supported them. An inflation tax was the easiest alternative. The transition to democracy has, after many steps forward and backward, produced a system that is more responsive to the general interests of Brazil. Even left-of-center governments, however, have faced the problem that it is hard to tax the wealthy elite in Brazil because of their high international mobility. Calomiris and Haber end on a cautiously optimistic note, but warn that populism in Brazil, like populism in the United States, will produce a banking system that subsidizes influential interest groups at the expense of the public.

Chapter 14 looks briefly at banking in other countries – via cross country empirical studies, and short narrative histories of China, Germany, Japan, and Chile — to test the viability of the conclusions reached on the basis of the detailed case studies. Again the ability of Calomiris and Haber to master and organize a huge amount of material is impressive.

Chapter 15, the concluding chapter, wrestles with the dispiriting implication of their argument that has been growing in the background since the first chapter. If banking is always and everywhere the result of a “game of bank bargains” played by the government and powerful interest groups, what role is there for ideas? Can an economist or historian make a difference? Calomiris and Haber struggle mightily to end on an upbeat note. They argue, for one thing, that there are windows of opportunity: economic crises so severe that people are willing to turn to someone with a new set of ideas. They suggest Alexander Hamilton and Margaret Thatcher as examples. But as these examples illustrate, most of the time economists and financial historians are likely to be chroniclers of events rather than makers of history.


Calomiris and Haber blame America’s banking troubles before 1990 on “agrarian populism” and its support for unit banking. But I think there was another, albeit related, factor that needs to be added to complete story. After all, although unit banks were popular in some parts of the United States, Americans often showed themselves willing to support branch banking. Before the Civil War many southern states, as Calomiris and Haber note, had branch banking systems (pp. 171-73). And Ohio, Indiana, and Iowa had mutual support systems that Calomiris and Haber (pp.174-75) celebrate. The unique weakness of the American banking system was that branching, even when permitted, ended through much of our history at the state line. But why were state governments able to keep their control over banking for so long? Support for state control of banking was an outcome of the larger battle between the states and the federal government for power. And that battle, of course, was to a great extent about race: the South was always the strongest advocate of state power. Keeping the right to charter and regulate banks at the state level, in other words, was simply one more battle in an ongoing war. The fight over the Second Bank of the United States is a good example. The bill to recharter the Bank passed the House and Senate only to be vetoed by Andrew Jackson. That vote, in itself, shows that there was strong support for nationwide branch banking. Recall that the Second Bank was not simply a banker’s bank on the Federal Reserve model. The Second Bank had branches in all parts of the country that made commercial loans. This was by any definition nationwide branch banking. Was there any opposition to rechartering the Second bank? Or was it just Andrew Jackson who was opposed? New England, the Western States, even the slave states that would remain within the Union in the Civil War all voted to recharter in both the House and Senate. The future Confederate States were different. With the exception of Louisiana, they voted overwhelmingly against recharter (Wilburn 1967, 9). Racism and populism, tragically, became entwined in the South. But the battle over states’ rights and racism, I believe, needs to be brought into the story as one of the reasons for the long delay in the adoption of nationwide branch banking. Racism also helps explain the desire in the United States to find a way to help poor people that did not involve higher taxes and transfers that Calomiris and Haber discuss when they explain the origins of the subprime crisis.

Calomiris and Haber use the term populism to refer simply to all politicians and parties who put great store in the will of the common man. By their definition Thomas Jefferson, Andrew Jackson, Abraham Lincoln, and William Jennings Bryan (p. 150) were all populists. But what about populism more narrowly: the People’s Party and its charismatic leader William Jennings Bryan? The Bryanites, as Calomiris and Haber point out, eventually supported deposit insurance which protected private unit banks. But the main goals of the populists, as can be seen in their party platforms, were nationalist and socialist, which would have ultimately undermined the local unit banks. The populists wanted to end the National banking system and replace its bond-backed currency with fiat paper issued by the federal government. They wanted a postal savings system to provide a safe haven for the deposits of farmers and the urban poor, and they wanted the federal government to provide low interest rate loans to farmers by issuing paper money based on deposits of excess grain: the subtreasury plan.  These goals were all achieved in some measure: the postal savings system was established in 1910, the Federal Reserve with its government-issued currency in 1913, and various agricultural programs that provided federal loans to farmers were enacted in the 1920s and 1930s.

Finally, I would add that Calomiris and Haber focus on only two outcomes for the banking system: abundant credit and stability. These are clearly the most important. Much of the support for unit banking, however, was based on other considerations. One argument, although I have never seen much evidence for it, was that locally owned banks provided and continue to provide credit differently from branches of large national chains. Local bankers know the background of potential borrowers. So a borrower with a sterling character but few assets to put up as collateral would be more likely to get a loan from a locally-owned bank than from a branch of a big chain. There was also the stability and continuity of the local community to think about. A local bank, it might be argued, would be more likely to provide ongoing community leadership than a branch filled with managers hoping to be promoted to the main office in New York or San Francisco as soon as possible. Perhaps it was all a fiction — Jimmy Stewart in It’s A Wonderful Life — but nevertheless it’s a possibility that we shouldn’t dismiss out of hand. Economic progress is not just about real GDP per capita.

Bottom line

This is a beautifully-written book. Calomiris and Haber are always thoughtful, always clear, and they have an eye for the telling metaphor and the thought-provoking fact.  More importantly, the book reflects the authors’ mastery of a vast amount of material on the history of banking. No one will be persuaded by all of their analyses, and there will be some pushback when it comes to their analyses of more recent and controversial events. Nevertheless, Fragile by Design is a must-read for economic historians, a book to be put on the shelf with O.M.W. Sprague’s History of Crises under the National Banking System, Bray Hammond’s Banks and Politics in America from the Revolution to the Civil War, and similar classics.


Bordo, Michael, Angela Redish, and Hugh Rockoff (forthcoming), “Why Didn’t Canada Have a Banking Crisis in 2008 (or in 1930, or 1907, or . . .)?” Economic History Review.

Hammond, Bray (1957), Banks and Politics in America from the Revolution to the Civil War, Princeton: Princeton University Press.

Rajan, Raghuram G. (2011), Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton: Princeton University Press.

Sprague, O. M. W. (1910), History of Crises under the National Banking System, Washington: Govt. Print. Office.

Wilburn, Jean Alexander (1967), Biddle’s Bank: The Crucial Years, New York: Columbia University Press.

Hugh Rockoff’s most recent book is America’s Economic Way of War: War and the U.S. Economy from the Spanish-American War to the Persian Gulf War. New York: Cambridge University Press, 2012.

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

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Asia
Latin America, incl. Mexico and the Caribbean
North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

U.S. Economy in World War I

Hugh Rockoff, Rutgers University

Although the United States was actively involved in World War I for only nineteen months, from April 1917 to November 1918, the mobilization of the economy was extraordinary. (See the chronology at the end for key dates). Over four million Americans served in the armed forces, and the U.S. economy turned out a vast supply of raw materials and munitions. The war in Europe, of course, began long before the United States entered. On June 28, 1914 in Sarajevo Gavrilo Princip, a young Serbian revolutionary, shot and killed Austrian Archduke Franz Ferdinand and his wife Sophie. A few months later the great powers of Europe were at war.

Many Europeans entered the war thinking that victory would come easily. Few had the understanding shown by a 26 year-old conservative Member of Parliament, Winston Churchill, in 1901. “I have frequently been astonished to hear with what composure and how glibly Members, and even Ministers, talk of a European War.” He went on to point out that in the past European wars had been fought by small professional armies, but in the future huge populations would be involved, and he predicted that a European war would end “in the ruin of the vanquished and the scarcely less fatal commercial dislocation and exhaustion of the conquerors.”[1]

Reasons for U.S. Entry into the War

Once the war began, however, it became clear that Churchill was right. By the time the United States entered the war Americans knew that the price of victory would be high. What, then, impelled the United States to enter? What role did economic forces play? One factor was simply that Americans generally – some ethnic minorities were exceptions – felt stronger ties to Britain and France than to Germany and Austria. By 1917 it was clear that Britain and France were nearing exhaustion, and there was considerable sentiment in the United States for saving our traditional allies.

The insistence of the United States on her trading rights was also important. Soon after the war began Britain, France, and their allies set up a naval blockade of Germany and Austria. Even food was contraband. The Wilson Administration complained bitterly that the blockade violated international law. U.S. firms took to using European neutrals, such as Sweden, as intermediaries. Surely, the Americans argued, international law protected the right of one neutral to trade with another. Britain and France responded by extending the blockade to include the Baltic neutrals. The situation was similar to the difficulties the United States experienced during the Napoleonic wars, which drove the United States into a quasi-war against France, and to war against Britain.

Ultimately, however, it was not the conventional surface vessels used by Britain and France to enforce its blockade that enraged American opinion, but rather submarines used by Germany. When the British (who provided most of the blockading ships) intercepted an American ship, the ship was escorted into a British port, the crew was well treated, and there was a chance of damage payments if it turned out that the interception was a mistake. The situation was very different when the Germans turned to submarine warfare. German submarines attacked without warning, and passengers had little chance of to save themselves. To many Americans this was a brutal violation of the laws of war. The Germans felt they had to use submarines because their surface fleet was too small to defeat the British navy let alone establish an effective counter-blockade.

The first submarine attack to inflame American opinion was the sinking of the Lusitania in May 1915. The Lusitania left New York with a cargo of passengers and freight, including war goods. When the ship was sunk over 1150 passengers were lost including 115 Americans. In the months that followed further sinkings brought more angry warnings from President Wilson. For a time the Germans gave way and agreed to warn American ships before sinking them and to save their passengers. In February 1917, however, the Germans renewed unrestricted submarine warfare in an attempt to starve Britain into submission. The loss of several U.S. ships was a key factor in President Wilson’s decision to break diplomatic relations with Germany and to seek a declaration of war.

U.S. Entry into the War and the Costs of Lost Trade

From a crude dollar-and-cents point of view it is hard to justify the war based on the trade lost to the United States. U.S. exports to Europe rose from $1.479 billion dollars in 1913 to $4.062 billion in 1917. Suppose that the United States had stayed out of the war, and that as a result all trade with Europe was cut off. Suppose further, that the resources that would have been used to produce exports for Europe were able to produce only half as much value when reallocated to other purposes such as producing goods for the domestic market or exports for non-European countries. Then the loss of output in 1917 would have been $2.031 billion per year. This was about 3.7 percent of GNP in 1917, and only about 6.3 percent of the total U.S. cost of the war.[2]

On March 21, 1918 the Germans launched a massive offensive on the Somme battlefield and successfully broke through the Allied lines. In May and early June, after U.S. entry into the war, the Germans followed up with fresh attacks that brought them within fifty miles of Paris. Although a small number of Americans participated it was mainly the old war: the Germans against the British and the French. The arrival of large numbers of Americans, however, rapidly changed the course of the war. The turning point was the Second Battle of the Marne fought between July 18 and August 6. The Allies, bolstered by significant numbers of Americans, halted the German offensive.

The initiative now passed to the Allies. They drove the Germans back in a series of attacks in which American troops played an increasingly important role. The first distinctively American offensive was the battle of the St. Mihiel Salient fought from September 12 to September 16, 1918; over half a million U.S. troops participated. The last major offensive of the war, the Meuse-Argonne offensive, was launched on September 26, with British, French, and American forces attacking the Germans on a broad front. The Germans now realized that their military situation was deteriorating rapidly, and that they would have to agree to end to the fighting. The Armistice occurred on November 11, 1918 – at the eleventh hour, of the eleventh day, of the eleventh month.

Mobilizing the Economy

The first and most important mobilization decision was the size of the army. When the United States entered the war, the army stood at 200,000, hardly enough to have a decisive impact in Europe. However, on May 18, 1917 a draft was imposed and the numbers were increased rapidly. Initially, the expectation was that the United States would mobilize an army of one million. The number, however, would go much higher. Overall some 4,791,172 Americans would serve in World War I. Some 2,084,000 would reach France, and 1,390,000 would see active combat.

Once the size of the Army had been determined, the demands on the economy became obvious, although the means to satisfy them did not: food and clothing, guns and ammunition, places to train, and the means of transport. The Navy also had to be expanded to protect American shipping and the troop transports. Contracts immediately began flowing from the Army and Navy to the private sector. The result, of course, was a rapid increase in federal spending from $477 million in 1916 to a peak of $8,450 million in 1918. (See Table 1 below for this and other data on the war effort.) The latter figure amounted to over 12 percent of GNP, and that amount excludes spending by other wartime agencies and spending by allies, much of which was financed by U.S. loans.

Table 1
Selected Economic Variables, 1916-1920
1916 1917 1918 1919 1920
1. Industrial production (1916 =100) 100 132 139 137 108
2. Revenues of the federal government (millions of dollars) $930 2,373 4,388 5,889 6,110
3. Expenditures of the federal government (millions of dollars) $1,333 7,316 15,585 12,425 5,710
4. Army and Navy spending (millions of dollars) $477 3,383 8,580 6,685 2,063
5. Stock of money, M2 (billions of dollars) $20.7 24.3 26.2 30.7 35.1
6. GNP deflator (1916 =100) 100 120 141 160 185
7. Gross National Product (GNP) (billions of dollars) $46.0 55.1 69.7 77.2 87.2
8. Real GNP (billions of 1916 dollars) $46.0 46.0 49.6 48.1 47.1
9. Average annual earnings per full-time manufacturing employee (1916 dollars) $751 748 802 813 828
10. Total labor force (millions) 40.1 41.5 44.0 42.3 41.5
11. Military personnel (millions) .174 .835 2.968 1.266 .353
Sources by row:

1. Miron and Romer (1990, table 2).

2-3. U.S. Bureau of the Census (1975), series Y352 and Y457.

4. U.S. Bureau of the Census (1975), series Y458 and Y459. The estimates are the average for fiscal year t and fiscal year t+1.

5. Friedman and Schwartz (1970, table 1, June dates).

6-8. Balke and Gordon (1989, table 10, pp. 84-85).The original series were in 1982 dollars.

9. U.S. Bureau of the Census (1975), series D740.

10-11. Kendrick (1961, table A-VI, p. 306; table A-X, p. 312).

Although the Army would number in the millions, raising these numbers did not prove to be an unmanageable burden for the U.S economy. The total labor force rose from about 40 million in 1916 to 44 million in 1918. This increase allowed the United States to field a large military while still increasing the labor force in the nonfarm private sector from 27.8 million in 1916 to 28.6 million in 1918. Real wages rose in the industrial sector during the war, perhaps by six or seven percent, and this increase combined with the ease of finding work was sufficient to draw many additional workers into the labor force.[3] Many of the men drafted into the armed forces were leaving school and would have been entering the labor force for the first time in any case. The farm labor force did drop slightly from 10.5 million in 1916 to 10.3 million workers in 1918, but farming included many low-productivity workers and farm output on the whole was sustained. Indeed, the all-important category of food grains showed strong increases in 1918 and 1919.

Figure 1 shows production of steel ingots and “total industrial production” – an index of steel, copper, rubber, petroleum, and so on – monthly from January 1914 through 1920.[4] It is evident that the United States built up its capacity to turn out these basic raw materials during the years of U.S. neutrality when Britain and France were its buying supplies and the United States was beginning its own tentative build up. The United States then simply maintained the output of these materials during the years of active U.S. involvement and concentrated on turning these materials into munitions.[5]

Figure 1

Steel Ingots and Total Industrial Production, 1914-1920

Prices on the New York Stock Exchange, shown in Figure 2, provide some insight into what investors thought about the strength of the economy during the war era. The upper line shows the Standard and Poor’s/Cowles Commission Index. The lower line shows the “real” price of stocks – the nominal index divided by the consumer price index. When the war broke out the New York Stock Exchange was closed to prevent panic selling. There are no prices for the New York Stock Exchange, although a lively “curb market” did develop. After the market reopened it rose as investors realized that the United States would profit as a neutral. The market then began a long slide that began when tensions between the United States and Germany rose at the end of 1916 and continued after the United States entered the war. A second, less rise began in the spring of 1918 when an Allied victory began to seem possible. The increase continued and gathered momentum after the Armistice. In real terms, however, as shown by the lower line in the figure, the rise in the stock market was not sufficient to offset the rise in consumer prices. At times one hears that war is good for the stock market, but the figures for World War I, as the figures for other wars, tell a more complex story.[6]

Figure 2

The Stock Market, 1913-1920

Table 2 shows the amounts of some of the key munitions produced during the war. During and after the war critics complained that the mobilization was too slow. American troops, for example, often went into battle with French artillery, clearly evidence, the critics implied, of incompetence somewhere in the supply chain. It does take time, however, to convert existing factories or build new ones and to work out the details of the production and distribution process. The last column of Table 2 shows peak monthly production, usually October 1918, at an annual rate. It is obvious that by the end of the war the United States was beginning to achieve the “production miracle” that occurred in World War II. When Franklin Roosevelt called for 50,000 planes in World War II, his demand was seen as an astounding exercise in bravado. Yet when we look at the last column of the table we see that the United States was hitting this level of production for Liberty engines by the end World War I. There were efforts during the war to coordinate Allied production. To some extent this was tried – the United States produced much of the smokeless powder used by the Allies – but it was always clear that the United States wanted its own army equipped with its own munitions.

Table 2
Production of Selected Munitions in World War I
Munition Total Production Peak monthly production at an annual rate
Rifles 3,550,000 3,252,000
Machine guns 226,557 420,000
Artillery units 3,077 4,920
Smokeless powder (pounds) 632,504,000 n.a.
Toxic Gas (tons) 10,817 32,712
De Haviland-4 bombers 3,227 13,200
Liberty airplane engines 13,574 46,200
Source: Ayres (1919, passim)

Financing the War

Where did the money come from to buy all these munitions? Then as now there were, the experts agreed, three basic ways to raise the money: (1) raising taxes, (2) borrowing from the public, and (3) printing money. In the Civil War the government had had simply printed the famous greenbacks. In World War I it was possible to “print money” in a more roundabout way. The government could sell a bond to the newly created Federal Reserve. The Federal Reserve would pay for it by creating a deposit account for the government, which the government could then draw upon to pay its expenses. If the government first sold the bond to the general public, the process of money creation would be even more roundabout. In the end the result would be much the same as if the government had simply printed greenbacks: the government would be paying for the war with newly created money. The experts gave little consideration to printing money. The reason may be that the gold standard was sacrosanct. A financial policy that would cause inflation and drive the United States off the gold standard was not to be taken seriously. Some economists may have known the history of the greenbacks of the Civil War and the inflation they had caused.

The real choice appeared to be between raising taxes and borrowing from the public. Most economists of the World War I era believed that raising taxes was best. Here they were following a tradition that stretched back to Adam Smith who argued that it was necessary to raise taxes in order to communicate the true cost of war to the public. During the war Oliver Morton Sprague, one of the leading economists of the day, offered another reason for avoiding borrowing. It was unfair, Sprague argued, to draft men into the armed forces and then expect them to come home and pay higher taxes to fund the interest and principal on war bonds. Most men of affairs, however, thought that some balance would have to be struck between taxes and borrowing. Treasury Secretary William Gibbs McAdoo thought that financing about 50 percent from taxes and 50 percent from bonds would be about right. Financing more from taxes, especially progressive taxes, would frighten the wealthier classes and undermine their support for the war.

In October 1917 Congress responded to the call for higher taxes with the War Revenue Act. This act increased the personal and corporate income tax rates and established new excise, excess-profit, and luxury taxes. The tax rate for an income of $10,000 with four exemptions (about $140,000 in 2003 dollars) went from 1.2 percent in 1916 to 7.8 percent. For incomes of $1,000,000 the rate went from 10.3 percent in 1916 to 70.3 percent in 1918. These increase in taxes and the increase in nominal income raised revenues from $930 million in 1916 to $4,388 million in 1918. Federal expenditures, however, increased from $1,333 million in 1916 to $15,585 million in 1918. A huge gap had opened up that would have to be closed by borrowing.

Short-term borrowing was undertaken as a stopgap. To reduce the pressure on the Treasury and the danger of a surge in short-term rates, however, it was necessary to issue long-term bonds, so the Treasury created the famous Liberty Bonds. The first issue was a thirty-year bond bearing a 3.5% coupon callable after fifteen years. There were three subsequent issues of Liberty Bonds, and one of shorter-term Victory Bonds after the Armistice. In all, the sale of these bonds raised over $20 billion dollars for the war effort.

In order to strengthen the market for Liberty Bonds, Secretary McAdoo launched a series of nationwide campaigns. Huge rallies were held in which famous actors, such as Charlie Chaplin, urged the crowds to buy Liberty Bonds. The government also enlisted famous artists to draw posters urging people to purchase the bonds. One of these posters, which are widely sought by collectors, is shown below.

But Mother Had Done Nothing Wrong, Had She, Daddy?

Louis Raemaekers. After a Zeppelin Raid in London: “But Mother Had Done Nothing Wrong, Had She, Daddy?” Prevent this in New York: Invest in Liberty Bonds. 19″ x 12.” From the Rutgers University Library Collection of Liberty Bond Posters.

Although the campaigns may have improved the morale of both the armed forces and the people at home, how much the campaigns contributed to expanding the market for the bonds is an open question. The bonds were tax-exempt – the exact degree of exemption varied from issue to issue – and this undoubtedly made them attractive to investors in high tax brackets. Indeed, the Treasury was criticized for imposing high marginal taxes with one hand, and then creating a loophole with the other. The Federal Reserve also bought many of the bonds creating new money. Some of this new “highpowered money” augmented the reserves of the commercial banks which allowed them to buy bonds or to finance their purchase by private citizens. Thus, directly or indirectly, a good deal of the support for the bond market was the result of money creation rather than savings by the general public.

Table 3 provides a rough breakdown of the means used to finance the war. Of the total cost of the war, about 22 percent was financed by taxes and from 20 to 25 percent by printing money, which meant that from 53 to 58 percent was financed through the bond issues.

Table 3
Financing World War I, March 1917-May 1919
Source of finance Billions of Dollars Percent (M2) Percent (M4)
Taxation and nontax receipts 7.3 22 22
Borrowing from the public 24 58 53
Direct money creation 1.6 5 5
Indirect money creation (M2) 4.8 15
Indirect money creation (M4) 6.6 20
Total cost of the war 32.9 100 100
Note: Direct money creation is the increase in the stock of high-powered money net of the increase in monetary gold. Indirect money creation is the increase in monetary liabilities not matched by the increase in high-powered money.

Source: Friedman and Schwartz (1963, 221)

Heavy reliance on the Federal Reserve meant, of course, that the stock of money increased rapidly. As shown in Table 1, the stock of money rose from $20.7 billion in 1916 to $35.1 billion in 1920, about 70 percent. The price level (GDP deflator) increased 85 percent over the same period.

The Government’s Role in Mobilization

Once the contracts for munitions were issued and the money began flowing, the government might have relied on the price system to allocate resources. This was the policy followed during the Civil War. For a number of reasons, however, the government attempted to manage the allocation of resources from Washington. For one thing, the Wilson administration, reflecting the Progressive wing of the Democratic Party, was suspicious of the market, and doubted its ability to work quickly and efficiently, and to protect the average person against profiteering. Another factor was simply that the European belligerents had adopted wide-ranging economic controls and it made sense for the United States, a latecomer, to follow suit.

A wide variety of agencies were created to control the economy during the mobilization. A look at four of the most important – (1) the Food Administration, (2) the Fuel Administration, (3) the Railroad Administration, and (4) the War Industries Board – will suggest the extent to which the United States turned away from its traditional reliance on the market. Unfortunately, space precludes a review of many of the other agencies such as the War Shipping Board, which built noncombatant ships, the War Labor Board, which attempted to settle labor disputes, and the New Issues Committee, which vetted private issues of stocks and bonds.

Food Administration

The Food Administration was created by the Lever Food and Fuel Act in August 1917. Herbert Hoover, who had already won international fame as a relief administrator in China and Europe, was appointed to head it. The mission of the Food Administration was to stimulate the production of food and assure a fair distribution among American civilians, the armed forces, and the Allies, and at a fair price. The Food Administration did not attempt to set maximum prices at retail or (with the exception of sugar) to ration food. The Act itself set what then was a high minimum price for wheat – the key grain in international markets – at the farm gate, although the price would eventually go higher. The markups of processors and distributors were controlled by licensing them and threatening to take their licenses away if they did not cooperate. The Food Administration then attempted control prices and quantities at retail through calls for voluntary cooperation. Millers were encouraged to tie the sale of wheat flour to the sale of less desirable flours – corn meal, potato flour, and so on – thus making a virtue out of a practice that would have been regarded as a disreputable evasion of formal price ceilings. Bakers were encouraged to bake “Victory bread,” which included a wheat-flour substitute. Finally, Hoover urged Americans to curtail their consumption of the most valuable foodstuffs: there were, for example, Meatless Mondays and Wheatless Wednesdays.

Fuel Administration

The Fuel Administration was created under the same Act as the Food Administration. Harry Garfield, the son of President James Garfield, and the President of Williams College, was appointed to head it. Its main problem was controlling the price and distribution of bituminous coal. In the winter of 1918 a variety of factors combined to cause a severe coal shortage that forced school and factory closures. The Fuel Administration set the price of coal at the mines and the margins of dealers, mediated disputes in the coalfields, and worked with the Railroad Administration (described below) to reduce long hauls of coal.

Railroad Administration

The Wilson Administration nationalized the railroads and put them under the control of the Railroad Administration in December of 1917, in response to severe congestion in the railway network that was holding up the movement of war goods and coal. Wilson’s energetic Secretary of the Treasury (and son-in-law), William Gibbs McAdoo, was appointed to head it. The railroads would remain under government control for another 26 months. There has been considerable controversy over how well the system worked under federal control. Defenders of the takeover point out that the congestion was relieved and that policies that increased standardization and eliminated unnecessary competition were put in place. Critics of the takeover point to the large deficit that was incurred, nearly $1.7 billion, and to the deterioration of the capital stock of the industry. William J. Cunningham’s (1921) two papers in the Quarterly Journal of Economics, although written shortly after the event, still provide one of the most detailed and fair-minded treatments of the Railroad Administration.

War Industries Board

The most important federal agency, at least in terms of the scope of its mission, was the War Industries Board. The Board was established in July of 1917. Its purpose was no less than to assure the full mobilization of the nation’s resources for the purpose of winning the war. Initially the Board relied on persuasion to make its orders effective, but rising criticism of the pace of mobilization, and the problems with coal and transport in the winter of 1918, led to a strengthening of its role. In March 1918 the Board was reorganized, and Wilson placed Bernard Baruch, a Wall Street investor, in charge. Baruch installed a “priorities system” to determine the order in which contracts could be filled by manufacturers. Contracts rated AA by the War Industries Board had to be filled before contracts rated A, and so on. Although much hailed at the time, this system proved inadequate when tried in World War II. The War Industries Board also set prices of industrial products such as iron and steel, coke, rubber, and so on. This was handled by the Board’s independent Price Fixing Committee.

It is tempting to look at these experiments for clues on how the economy would perform under various forms of economic control. It is important, however, to keep in mind that these were very brief experiments. When the war ended in November 1918 most of the agencies immediately wound up their activities. Only the Railroad Administration and the War Shipping Board continued to operate. The War Industries Board, for example, was in operation only for a total of sixteen months; Bernard Baruch’s tenure was only eight months. Obviously only limited conclusions can be drawn from these experiments.

Costs of the War

The human and economic costs of the war were substantial. The death rate was high: 48,909 members of the armed forces died in battle, and 63,523 died from disease. Many of those who died from disease, perhaps 40,000, died from pneumonia during the influenza-pneumonia epidemic that hit at the end of the war. Some 230,074 members of the armed forces suffered nonmortal wounds.

John Maurice Clark provided what is still the most detailed and thoughtful estimate of the cost of the war; a total amount of about $32 billion. Clark tried to estimate what an economist would call the resource cost of the war. For that reason he included actual federal government spending on the Army and Navy, the amount of foreign obligations, and the difference between what government employees could earn in the private sector and what they actually earned. He excluded interest on the national debt and part of the subsidies paid to the Railroad Administration because he thought they were transfers. His estimate of $32 billion amounted to about 46 percent of GNP in 1918.

Long-run Economic Consequences

The war left a number of economic legacies. Here we will briefly describe three of the most important.

The finances of the federal government were permanently altered by the war. It is true that the tax increases put in place during the war were scaled back during the 1920s by successive Republican administrations. Tax rates, however, had to remain higher than before the war to pay for higher expenditures due mainly to interest on the national debt and veterans benefits.

The international economic position of the United States was permanently altered by the war. The United States had long been a debtor country. The United States emerged from the war, however, as a net creditor. The turnaround was dramatic. In 1914 U.S investments abroad amounted to $5.0 billion, while total foreign investments in the United States amounted to $7.2 billion. Americans were net debtors to the tune of $2.2 billion. By 1919 U.S investments abroad had risen to $9.7 billion, while total foreign investments in the United States had fallen to $3.3 billion: Americans were net creditors to the tune of $6.4 billion.[7] Before the war the center of the world capital market was London, and the Bank of England was the world’s most important financial institution; after the war leadership shifted to New York, and the role of the Federal Reserve was enhanced.

The management of the war economy by a phalanx of Federal agencies persuaded many Americans that the government could play an important positive role in the economy. This lesson remained dormant during the 1920s, but came to life when the United States faced the Great Depression. Both the general idea of fighting the Depression by creating federal agencies and many of the specific agencies and programs reflected precedents set in Word War I. The Civilian Conservation Corps, a Depression era agency that hired young men to work on conservation projects, for example, attempted to achieve the benefits of military training in a civilian setting. The National Industrial Recovery Act reflected ideas Bernard Baruch developed at the War Industries Board, and the Agricultural Adjustment Administration hearkened back to the Food Administration. Ideas about the appropriate role of the federal government in the economy, in other words, may have been the most important economic legacy of American involvement in World War I.

Chronology of World War I
June Archduke Franz Ferdinand is shot.
August Beginning of the war.
May Sinking of the Lusitania. War talk begins in the United States.
June National Defense Act expands the Army
February Germany renews unrestricted submarine warfare.
U.S.S. Housatonic sunk.
U.S. breaks diplomatic relations with Germany
April U.S. declares war.
May Selective Service Act
June First Liberty Loan
July War Industries Board
August Lever Food and Fuel Control Act
October War Revenue Act
November Second Liberty Loan
December Railroads are nationalized.
January Maximum prices for steel
March Bernard Baruch heads the War Industries Board
Germans begin massive offensive on the western front
May Third Liberty Loan
First independent action by the American Expeditionary Force
June Battle of Belleau Wood – the first sizable U.S. action
July Second Battle of the Marne – German offensive stopped
September 900,000 Americans in the Battle of Meuse-Argonne
October Fourth Liberty Loan
November Armistice

References and Suggestions for Further Reading

Ayres, Leonard P. The War with Germany: A Statistical Summary. Washington DC: Government Printing Office. 1919.

Balke, Nathan S. and Robert J. Gordon. “The Estimation of Prewar Gross National Product: Methodology and New Evidence.” Journal of Political Economy 97, no. 1 (1989): 38-92.

Clark, John Maurice. “The Basis of War-Time Collectivism.” American Economic Review 7 (1917): 772-790.

Clark, John Maurice. The Cost of the World War to the American People. New Haven: Yale University Press for the Carnegie Endowment for International Peace, 1931.

Cuff, Robert D. The War Industries Board: Business-Government Relations during World War I. Baltimore: Johns Hopkins University Press, 1973.

Cunningham, William J. “The Railroads under Government Operation. I: The Period to the Close of 1918.” Quarterly Journal of Economics 35, no. 2 (1921): 288-340. “II: From January 1, 1919, to March 1, 1920.” Quarterly Journal of Economics 36, no. 1. (1921): 30-71.

Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Friedman, Milton, and Anna J. Schwartz. Monetary Statistics of the United States: Estimates, Sources, and Methods. New York: Columbia University Press, 1970.

Gilbert, Martin. The First World War: A Complete History. New York: Henry Holt, 1994.

Kendrick, John W. Productivity Trends in the United States. Princeton: Princeton University Press, 1961.

Koistinen, Paul A. C. Mobilizing for Modern War: The Political Economy of American Warfare, 1865-1919. Lawrence, KS: University Press of Kansas, 1997.

Miron, Jeffrey A. and Christina D. Romer. “A New Monthly Index of Industrial Production, 1884-1940.” Journal of Economic History 50, no. 2 (1990): 321-37.

Rockoff, Hugh. Drastic Measures: A History of Wage and Price Controls in the United States. New York: Cambridge University Press, 1984.

Rockoff, Hugh. “Until It’s Over, Over There: The U.S. Economy in World War I.” National Bureau of Economic Research, Working Paper w10580, 2004.

U.S. Bureau of the Census. Historical Statistics of the United States, Colonial Times to 1970, Bicentennial Edition. Washington, DC: Government Printing Office, 1975.


[1] Quoted in Gilbert (1994, 3).

[2] U.S. exports to Europe are from U.S. Bureau of the Census (1975), series U324.

[3] Real wages in manufacturing were computed by dividing “Hourly Earnings in Manufacturing Industries” by the Consumer Price Index (U.S. Bureau of the Census 1975, series D766 and E135).

[4] Steel ingots are from the National Bureau of Economic Research, macrohistory database, series m01135a, Total Industrial Production is from Miron and Romer (1990), Table 2.

[5] The sharp and temporary drop in the winter of 1918 was due to a shortage of coal.

[6] The chart shows end-of-month values of the S&P/Cowles Composite Stock Index, from Global Financial Data: To get real prices I divided this index by monthly values of the United States Consumer Price Index for all items. This is available as series 04128 in the National Bureau of Economic Research Macro-Data Base available at

[7] U.S. investments abroad (U.S. Bureau of the Census 1975, series U26); Foreign investments in the U.S. (U.S.

Citation: Rockoff, Hugh. “US Economy in World War I”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL

Banking in the Western U.S.

Lynne Pierson Doti, Chapman University

Banking in the western United States has had a distinctive history, marked by a great variety of banking arrangements and generally loose regulation.

California Banks in the Gold Rush Era

In the early frontier years, private individuals and outposts of the Hudson Bay Company and other trading companies provided banking services. As states west of the Mississippi began developing after the 1840s, capital flowed fairly readily from the east coast and also from foreign sources. This is particularly true of California. Gold was discovered in early 1848, and the population exploded. San Francisco and Sacramento quickly became cities. By 1852, numerous banks representing investors from St. Louis, Boston, New York and even other countries were operating in San Francisco. Lazard Freres, a French bank, has remained there to the present time. St. Louis, an earlier financial center of the west, and New York banks were well represented until the mid-1850s, when a bank panic forced the reevaluation of distant branches or subsidiaries. As California grew, spurred at first by gold production and then by the Nevada silver discoveries in the1860s, San Francisco became the financial center of the western states.

One of the largest banks in California in the 1850s was started by D.O. Mills, a young New York bank employee who came to California to mine gold. Soon tiring of mining, he opened a mercantile establishment in Sacramento. Mills began storing gold for the miners, and later began buying gold and issuing notes that circulated as money. Within a few years he changed the sign on his building from “store” to “bank.” The Bank of D.O. Mills survived into the 1920s. Merchants started many early western banks in just this manner, since the lack of regulation or enforcement meant that potential depositors needed the security of a trusted, widely respected individual. A previous business often was the route to this trust.

Although the character of the individuals in control was of foremost importance, housing the bank in a solid structure also reassured customers. Because depositors worried about “wildcat banks” which accepted deposits, then relocated far away to discourage withdrawals, it was hard to gather deposits without proof of stability. So the bank was often the most solid structure in town. Although there are a few spectacular instances of bankers leaving town with deposits, the system generally worked extremely well with minimal regulation.

Large Banks Come to Dominate in the Late 1800s

Just as a few New York banks dominated financial markets on the east coast, a few large San Francisco banks — created first by the “Silver Kings” made rich by the Virginia City, Nevada mines, then by the railroad barons — dominated the West Coast financial world in the late 1800s. For example, in 1865, William Ralston started the Bank of California, which quickly branched into Nevada, and then Oregon and other western states. As in the case of New York City’s large banks, correspondent relationships with smaller banks and direct deposits and loans in larger amounts from customers located far from the bank’s offices allowed the Bank of California to become important throughout the far west.

Although, the western bank network still had many ties to the East at the end of the nineteenth century, the lag between the east coast and west coast in financial crises was still a few years. For example, in 1893, New York experienced a panic where customers rushed to withdraw their funds, fearing that the banks would fail. The New York panic spread quickly to the other east coast banks, but reached San Francisco only in 1895.

A. P. Giannini and Branch Banking

By 1930, A.P. Giannini was the most powerful financier in the Western U.S. He had started his first bank, the Bank of Italy, in 1905 to appeal to the Italian immigrants of North Beach in San Francisco. Having many connections and having learned about customer service in the produce industry helped him turn the setback of the 1906 earthquake into an advantage. As the city burned, Giannini loaded the contents of his safe into a produce wagon and relocated. While some other bankers waited in frustration for their safes to cool enough to open, Giannini was making loans. Perhaps this impressed upon him the benefits of diverse locations. Diversification meant that if business was bad in one area, it might be better in another. He opened his first branch in 1907 in the Mission district of San Francisco. After 1915 he began to add new offices and buy other banks at a rate that became alarming to rival banks.

Giannini was a pioneer of branch banking, maneuvering around state and federal regulators to eventually establish over one thousand branches in California. He dreamed of a bank with branches around the world, but it did not occur in his lifetime. However, his banking system, consolidated in 1930 as Bank of America, N.T. and S.A., moved from California into neighboring states in the 1970s and (along with Citibank of New York) created the pressure that eventually lead to interstate branching in the 1990s. The 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act allowed banks to combine across state lines. Bank of America was purchased by Nationsbank of North Carolina in 1999, creating a truly national bank using the name “Bank of America.”

Restrictions on Branch Banking

Although California regulators, undoubtedly spurred on by rival bankers, tried to confine Giannini’s operations to a small geographic area in the 1920s, they never actually banned branch banking for state-chartered banks. This was atypical, even in the less regulated west. National banks were banned from opening branches under the National Banking Act of 1864, confirming the general attitude, carefully cultivated by local monopolist bankers, that branching only existed to drain funds from the countryside to finance growth in the cities.

Among the western states Texas, Oregon, Washington, Utah, Colorado, New Mexico and Idaho had severe restrictions on branching and only reduced or removed these limits during the Depression, when acquisition by a stronger bank became the only alternative to failure for many rural banks. Also, it became clear that the banks with branches were surviving much better than the unit banks (those with only one location). Nevada, Idaho, Oregon and Washington removed most of their onerous restrictions on branching during the 1930s, but Texas, Wyoming, Montana, New Mexico and Colorado remained almost entirely branchless until late in the twentieth century. Colorado was the last of the fifty states to allow branch banking. In the states where branch banking was limited, the number of small banks grew as the economy grew, but many failed in bad times.

Methods of Avoiding Branch Banking Restrictions

Mergers and chain banking were substitutes for branch banking and their formation came in waves generated by economic or technological change. The first merger movement came in the mid-1890s in Portland, Denver, Seattle and Salt Lake City, when many banks experienced problems due to the panic. Another wave of mergers came in the 1920s, inspired by Giannini’s expansion (though still limited in unit banking states). Chain banking — common ownership of several legally independent banks — was another way to achieve diversification without branching. In Nevada, George Wingfield built a chain of twelve banks starting in 1908 as part of his business empire. However, low prices for wool put a majority of his customers in trouble and the banks were permanently closed in 1933. The chain system survived, however. The three Walker brothers started chain banks in Utah in 1859, which survived until their acquisition by another chain system in the1950s. First Interstate Bank, in spite of the common name for all its banks, was a chain of twenty-one banks in eleven western states, all owned by First Interstate Bancorporation. Joe Pinola, chairman of the chain, created the appearance of one bank operating in several states fifteen years before it became legal to actually have a single bank operating across state lines.

Developments after World War II

World War II brought population increases for the western states and many of the military personnel and workers in war industries settled permanently in the west after the war. The increases in population occurred disproportionately in the suburbs. A rash of new banks, and new branches, followed. Deposit insurance enacted in the 1930s now replaced the need for reassuring edifices and bank buildings acquired a new, often inexpensive demeanor. Drive-in banking facilities became common. Treats provided for the children and, sometimes, the dogs confined to the car were almost a requirement.

During the Depression and World War II, Giannini continued his expansion. To facilitate diversification he created Transamerica Corporation as a holding company for Bank of America, several insurance companies and about two hundred other banks. In 1948, the Securities and Exchange Commission and the Federal Reserve Board charged Transamerica with monopolizing western banking. In 1952, Transamerica won the case, but the attention precipitated the Bank Holding Company Act of 1956, which made bank holding companies subject to the same restrictions in crossing state lines as individual banks. Transamerica sold off its banks and remained a powerhouse in the insurance industry into the twenty-first century.

Savings and Loan Failures

In the mid 1980s into the mid 1990s, a large number of savings and loan institutions failed, and because California and Texas were among the states with the largest numbers of these institutions, they produced some notable disasters. Sharply rising interest rates and changing regulations brought on this national phenomenon. Established institutions with large long-term loans on the books at low interest rates could not attract deposits without paying high interest rates. As the real estate market had escalated in the west in the postwar period, the western banks and savings and loans had proportionately larger amounts of the low interest loans. They became desperate to find a way to increase their earnings. Many of them ventured into unfamiliar territory, including auto loans, business lending and real estate development. California’s Columbia Savings and Loan, for example, tried investing in high-interest, high-risk (junk) bonds in a spectacularly unsuccessful quest for high earnings. Unscrupulous businessmen, who manipulated insurance guarantees to make large profits at little risk to themselves, purchased some weak banks. One of the most notorious of the villains of the disaster, Charles Keating, purchased California’s Lincoln Savings & Loan. He expanded the bank by offering high interest rates on large deposits, and later by selling bonds to confused retirees to replace these deposits. The funds were invested in several of Keating’s own projects, including an extravagant hotel in Arizona. Contributions to several Congressmen and taxpayer insured losses that totaled about $2 billion made Keating a notorious national figure.

California had the most losses in the savings and loan industry of any state, but Arizona and Colorado were also high. The problem worsened as troubled banks tried to unload repossessed real estate. The federal government ultimately paid the bill to bail out depositors, and established the Resolution Trust Corporation (RTC) to absorb the real estate holdings of failed institutions.


Banking in the American west has often been innovative. The more varied, but generally lower, level of regulation has allowed various banking experiments to run in the west. These innovations have often shaped national legislation and produced models eventually followed by many eastern states. The less stringent legal environment has produced the best and the worst banking in the nation, but has also shaped banking in the rest of the country and in the rest of the world.


Doti, Lynne Pierson. “Banking in California: Some Evidence on Structure 1878-1905.” Ph.D. dissertation, University of California, Riverside, 1978.

Doti, Lynne Pierson. “Banking in California: The First Branching Era.” Journal of the West 23, no. 2 (April 1984): 65-71.

Doti, Lynne Pierson and Larry Schweikart. Banking in the American West: From Gold Rush to Deregulation. Norman, OK: University of Oklahoma Press, 1991.

Doti, Lynne Pierson. “Nationwide Branching: Some Lessons from California.” Essays in Economic and Business History 9 (May 1991): 141 -161.

Doti, Lynne Pierson and Larry Schweikart. California Bankers, 1848-1993. Needham Heights, MA: Ginn Press, 1994.

Schweikart, Larry. A History of Banking in Arizona. Tucson: University of Arizona Press, 1982.

Schweikart, Larry, editor. Encyclopedia of American Business History and Biography.: Banking and Finance, 1913-1989. New York: Facts on File, 1990.

Citation: Doti, Lynne. “Banking in the Western US”. EH.Net Encyclopedia, edited by Robert Whaples. June 10, 2003. URL

US Banking History, Civil War to World War II

Richard S. Grossman, Wesleyan University

The National Banking Era Begins, 1863

The National Banking Acts of 1863 and 1864

The National Banking era was ushered in by the passage of the National Currency (later renamed the National Banking) Acts of 1863 and 1864. The Acts marked a decisive change in the monetary system, confirmed a quarter-century-old trend in bank chartering arrangements, and also played a role in financing the Civil War.

Provision of a Uniform National Currency

As its original title suggests, one of the main objectives of the legislation was to provide a uniform national currency. Prior to the establishment of the national banking system, the national currency supply consisted of a confusing patchwork of bank notes issued under a variety of rules by banks chartered under different state laws. Notes of sound banks circulated side-by-side with notes of banks in financial trouble, as well as those of banks that had failed (not to mention forgeries). In fact, bank notes frequently traded at a discount, so that a one-dollar note of a smaller, less well-known bank (or, for that matter, of a bank at some distance) would likely have been valued at less than one dollar by someone receiving it in a transaction. The confusion was such as to lead to the publication of magazines that specialized in printing pictures, descriptions, and prices of various bank notes, along with information on whether or not the issuing bank was still in existence.

Under the legislation, newly created national banks were empowered to issue national bank notes backed by a deposit of US Treasury securities with their chartering agency, the Department of the Treasury’s Comptroller of the Currency. The legislation also placed a tax on notes issued by state banks, effectively driving them out of circulation. Bank notes were of uniform design and, in fact, were printed by the government. The amount of bank notes a national bank was allowed to issue depended upon the bank’s capital (which was also regulated by the act) and the amount of bonds it deposited with the Comptroller. The relationship between bank capital, bonds held, and note issue was changed by laws in 1874, 1882, and 1900 (Cagan 1963, James 1976, and Krooss 1969).

Federal Chartering of Banks

A second element of the Act was the introduction bank charters issued by the federal government. From the earliest days of the Republic, banking had been considered primarily the province of state governments.[1] Originally, individuals who wished to obtain banking charters had to approach the state legislature, which then decided if the applicant was of sufficient moral standing to warrant a charter and if the region in question needed an additional bank. These decisions may well have been influenced by bribes and political pressure, both by the prospective banker and by established bankers who may have hoped to block the entry of new competitors.

An important shift in state banking practice had begun with the introduction of free banking laws in the 1830s. Beginning with laws passed in Michigan (1837) and New York (1838), free banking laws changed the way banks obtained charters. Rather than apply to the state legislature and receive a decision on a case-by-case basis, individuals could obtain a charter by filling out some paperwork and depositing a prescribed amount of specified bonds with the state authorities. By 1860, over one half of the states had enacted some type of free banking law (Rockoff 1975). By regularizing and removing legislative discretion from chartering decisions, the National Banking Acts spread free banking on a national level.

Financing the Civil War

A third important element of the National Banking Acts was that they helped the Union government pay for the war. Adopted in the midst of the Civil War, the requirement for banks to deposit US bonds with the Comptroller maintained the demand for Union securities and helped finance the war effort.[2]

Development and Competition with State Banks

The National Banking system grew rapidly at first (Table 1). Much of the increase came at the expense of the state-chartered banking systems, which contracted over the same period, largely because they were no longer able to issue notes. The expansion of the new system did not lead to the extinction of the old: the growth of deposit-taking, combined with less stringent capital requirements, convinced many state bankers that they could do without either the ability to issue banknotes or a federal charter, and led to a resurgence of state banking in the 1880s and 1890s. Under the original acts, the minimum capital requirement for national banks was $50,000 for banks in towns with a population of 6000 or less, $100,000 for banks in cities with a population ranging from 6000 to 50,000, and $200,000 for banks in cities with populations exceeding 50,000. By contrast, the minimum capital requirement for a state bank was often as low as $10,000. The difference in capital requirements may have been an important difference in the resurgence of state banking: in 1877 only about one-fifth of state banks had a capital of less than $50,000; by 1899 the proportion was over three-fifths. Recognizing this competition, the Gold Standard Act of 1900 reduced the minimum capital necessary for national banks. It is questionable whether regulatory competition (both between states and between states and the federal government) kept regulators on their toes or encouraged a “race to the bottom,” that is, lower and looser standards.

Table 1: Numbers and Assets of National and State Banks, 1863-1913

Number of Banks Assets of Banks ($millions)
National Banks State Banks National Banks State Banks
1863 66 1466 16.8 1185.4
1864 467 1089 252.2 725.9
1865 1294 349 1126.5 165.8
1866 1634 297 1476.3 154.8
1867 1636 272 1494.5 151.9
1868 1640 247 1572.1 154.6
1869 1619 259 1564.1 156.0
1870 1612 325 1565.7 201.5
1871 1723 452 1703.4 259.6
1872 1853 566 1770.8 264.5
1873 1968 277 1851.2 178.9
1874 1983 368 1851.8 237.4
1875 2076 586 1913.2 395.2
1876 2091 671 1825.7 405.9
1877 2078 631 1774.3 506.9
1878 2056 510 1770.4 388.8
1879 2048 648 2019.8 427.6
1880 2076 650 2035.4 481.8
1881 2115 683 2325.8 575.5
1882 2239 704 2344.3 633.8
1883 2417 788 2364.8 724.5
1884 2625 852 2282.5 760.9
1885 2689 1015 2421.8 802.0
1886 2809 891 2474.5 807.0
1887 3014 1471 2636.2 1003.0
1888 3120 1523 2731.4 1055.0
1889 3239 1791 2937.9 1237.3
1890 3484 2250 3061.7 1374.6
1891 3652 2743 3113.4 1442.0
1892 3759 3359 3493.7 1640.0
1893 3807 3807 3213.2 1857.0
1894 3770 3810 3422.0 1782.0
1895 3715 4016 3470.5 1954.0
1896 3689 3968 3353.7 1962.0
1897 3610 4108 3563.4 1981.0
1898 3582 4211 3977.6 2298.0
1899 3583 4451 4708.8 2707.0
1900 3732 4659 4944.1 3090.0
1901 4165 5317 5675.9 3776.0
1902 4535 5814 6008.7 4292.0
1903 4939 6493 6286.9 4790.0
1904 5331 7508 6655.9 5244.0
1905 5668 8477 7327.8 6056.0
1906 6053 9604 7784.2 6636.0
1907 6429 10761 8476.5 7190.0
1908 6824 12062 8714.0 6898.0
1909 6926 12398 9471.7 7407.0
1910 7145 13257 9896.6 7911.0
1911 7277 14115 10383 8412.0
1912 7372 14791 10861.7 9005.0
1913 7473 15526 11036.9 9267.0

Source: U.S. Department of the Treasury. Annual Report of the Comptroller of the Currency (1931), pp. 3, 5. State bank columns include data on state-chartered commercial banks and loan and trust companies.

Capital Requirements and Interest Rates

The relatively high minimum capital requirement for national banks may have contributed to regional interest rate differentials in the post-Civil War era. The period from the Civil War through World War I saw a substantial decline in interregional interest rate differentials. According to Lance Davis (1965), the decline in difference between regional interest rates can be explained by the development and spread of the commercial paper market, which increased the interregional mobility of funds. Richard Sylla (1969) argues that the high minimum capital requirements established by the National Banking Acts represented barriers to entry and therefore led to local monopolies by note-issuing national banks. These local monopolies in capital-short regions led to the persistence of interest rate spreads.[3] (See also James 1976b.)

Bank Failures

Financial crises were a common occurrence in the National Banking era. O.M.W. Sprague (1910) classified the main financial crises during the era as occurring in 1873, 1884, 1890, 1893, and 1907, with those of 1873, 1893, and 1907 being regarded as full-fledged crises and those of 1884 and 1890 as less severe.

Contemporary observers complained of both the persistence and ill effects of bank failures under the new system.[4] The number and assets of failed national and non-national banks during the National Banking era is shown in Table 2. Suspensions — temporary closures of banks unable to meet demand for their liabilities — were even higher during this period.

Table 2: Bank Failures, 1865-1913

Number of Failed Banks Assets of Failed Banks ($millions)
National Banks Other Banks National Banks Other banks
1865 1 5 0.1 0.2
1866 2 5 1.8 1.2
1867 7 3 4.9 0.2
1868 3 7 0.5 0.2
1869 2 6 0.7 0.1
1870 0 1 0.0 0.0
1871 0 7 0.0 2.3
1872 6 10 5.2 2.1
1873 11 33 8.8 4.6
1874 3 40 0.6 4.1
1875 5 14 3.2 9.2
1876 9 37 2.2 7.3
1877 10 63 7.3 13.1
1878 14 70 6.9 26.0
1879 8 20 2.6 5.1
1880 3 10 1.0 1.6
1881 0 9 0.0 0.6
1882 3 19 6.0 2.8
1883 2 27 0.9 2.8
1884 11 54 7.9 12.9
1885 4 32 4.7 3.0
1886 8 13 1.6 1.3
1887 8 19 6.9 2.9
1888 8 17 6.9 2.8
1889 8 15 0.8 1.3
1890 9 30 2.0 10.7
1891 25 44 9.0 7.2
1892 17 27 15.1 2.7
1893 65 261 27.6 54.8
1894 21 71 7.4 8.0
1895 36 115 12.1 11.3
1896 27 78 12.0 10.2
1897 38 122 29.1 17.9
1898 7 53 4.6 4.5
1899 12 26 2.3 7.8
1900 6 32 11.6 7.7
1901 11 56 8.1 6.4
1902 2 43 0.5 7.3
1903 12 26 6.8 2.2
1904 20 102 7.7 24.3
1905 22 57 13.7 7.0
1906 8 37 2.2 6.6
1907 7 34 5.4 13.0
1908 24 132 30.8 177.1
1909 9 60 3.4 15.8
1910 6 28 2.6 14.5
1911 3 56 1.1 14.0
1912 8 55 5.0 7.8
1913 6 40 7.6 6.2

Source: U.S. Department of the Treasury. Annual Report of the Comptroller of the Currency (1931), pp. 6, 8.

The largest number of failures occurred in the years following the financial crisis of 1893. The number and assets of national and non-national bank failures remained high for four years following the crisis, a period which coincided with the free silver agitation of the mid-1890s, before returning to pre-1893 levels. Other crises were also accompanied by an increase in the number and assets of bank failures. The earliest peak during the national banking era accompanied the onset of the crisis of 1873. Failures subsequently fell, but rose again in the trough of the depression that followed the 1873 crisis. The panic of 1884 saw a slight increase in failures, while the financial stringency of 1890 was followed by a more substantial increase. Failures peaked again following several minor panics around the turn of the century and again at the time of the crisis of 1907.

Among the alleged causes of crises during the national banking era were that the money supply was not sufficiently elastic to allow for seasonal and other stresses on the money market and the fact that reserves were pyramided. That is, under the National Banking Acts, a portion of banks’ required reserves could be held in national banks in larger cities (“reserve city banks”). Reserve city banks could, in turn, hold a portion of their required reserves in “central reserve city banks,” national banks in New York, Chicago, and St. Louis. In practice, this led to the build-up of reserve balances in New York City. Increased demands for funds in the interior of the country during the autumn harvest season led to substantial outflows of funds from New York, which contributed to tight money market conditions and, sometimes, to panics (Miron 1986).[5]

Attempted Remedies for Banking Crises

Causes of Bank Failures

Bank failures occur when banks are unable to meet the demands of their creditors (in earlier times these were note holders; later on, they were more often depositors). Banks typically do not hold 100 percent of their liabilities in reserves, instead holding some fraction of demandable liabilities in reserves: as long as the flows of funds into and out of the bank are more or less in balance, the bank is in little danger of failing. A withdrawal of deposits that exceeds the bank’s reserves, however, can lead to the banks’ temporary suspension (inability to pay) or, if protracted, failure. The surge in withdrawals can have a variety of causes including depositor concern about the bank’s solvency (ability to pay depositors), as well as worries about other banks’ solvency that lead to a general distrust of all banks.[6]


Bankers and policy makers attempted a number of different responses to banking panics during the National Banking era. One method of dealing with panics was for the bankers of a city to pool their resources, through the local bankers’ clearinghouse and to jointly guarantee the payment of every member banks’ liabilities (see Gorton (1985a, b)).

Deposit Insurance

Another method of coping with panics was deposit insurance. Eight states (Oklahoma, Kansas, Nebraska, Texas, Mississippi, South Dakota, North Dakota, and Washington) adopted deposit insurance systems between 1908 and 1917 (six other states had adopted some form of deposit insurance in the nineteenth century: New York, Vermont, Indiana, Michigan, Ohio, and Iowa). These systems were not particularly successful, in part because they lacked diversification: because these systems operated statewide, when a panic fell full force on a state, deposit insurance system did not have adequate resources to handle each and every failure. When the agricultural depression of the 1920s hit, a number of these systems failed (Federal Deposit Insurance Corporation 1988).

Double Liability

Another measure adopted to curtail bank risk-taking, and through risk-taking, bank failures, was double liability (Grossman 2001). Under double liability, shareholders who had invested in banks that failed were liable to lose not only the money they had invested, but could be called on by a bank’s receiver to contribute an additional amount equal to the par value of the shares (hence the term “double liability,” although clearly the loss to the shareholder need not have been double if the par and market values of shares were different). Other states instituted triple liability, where the receiver could call on twice the par value of shares owned. Still others had unlimited liability, while others had single, or regular limited, liability.[7] It was argued that banks with double liability would be more risk averse, since shareholders would be liable for a greater payment if the firm went bankrupt.

By 1870, multiple (i.e., double, triple, and unlimited) liability was already the rule for state banks in eighteen states, principally in the Midwest, New England, and Middle Atlantic regions, as well as for national banks. By 1900, multiple liability was the law for state banks in thirty-two states. By this time, the main pockets of single liability were in the south and west. By 1930, only four states had single liability.

Double liability appears to have been successful (Grossman 2001), at least during less-than-turbulent times. During the 1890-1930 period, state banks in states where banks were subject to double (or triple, or unlimited) liability typically undertook less risk than their counterparts in single (limited) liability states in normal years. However, in years in which bank failures were quite high, banks in multiple liability states appeared to take more risk than their limited liability counterparts. This may have resulted from the fact that legislators in more crisis-prone states were more likely to have already adopted double liability. Whatever its advantages or disadvantages, the Great Depression spelled the end of double liability: by 1941, virtually every state had repealed double liability for state-chartered banks.

The Crisis of 1907 and Founding of the Federal Reserve

The crisis of 1907, which had been brought under control by a coalition of trust companies and other chartered banks and clearing-house members led by J.P. Morgan, led to a reconsideration of the monetary system of the United States. Congress set up the National Monetary Commission (1908-12), which undertook a massive study of the history of banking and monetary arrangements in the United States and in other economically advanced countries.[8]

The eventual result of this investigation was the Federal Reserve Act (1913), which established the Federal Reserve System as the central bank of the US. Unlike other countries that had one central bank (e.g., Bank of England, Bank of France), the Federal Reserve Act provided for a system of between eight and twelve reserve banks (twelve were eventually established under the act, although during debate over the act, some had called for as many as one reserve bank per state). This provision, like the rejection of the first two attempts at a central bank, resulted, in part, from American’s antipathy towards centralized monetary authority. The Federal Reserve was established to manage the monetary affairs of the country, to hold the reserves of banks and to regulate the money supply. At the time of its founding each of the reserve banks had a high degree of independence. As a result of the crises surrounding the Great Depression, Congress passed the Banking Act of 1935, which, among other things, centralized Federal Reserve power (including the power to engage in open market operations) in a Washington-based Board of Governors (and Federal Open Market Committee), relegating the heads of the individual reserve banks to a more consultative role in the operation of monetary policy.

The Goal of an “Elastic Currency”

The stated goals of the Federal Reserve Act were: ” . . . to furnish an elastic currency, to furnish the means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.” Furnishing an “elastic currency” was important goal of the act, since none of the components of the money supply (gold and silver certificates, national bank notes) were able to expand or contract particularly rapidly. The inelasticity of the money supply, along with the seasonal fluctuations in money demand had led to a number of the panics of the National Banking era. These panic-inducing seasonal fluctuations resulted from the large flows of money out of New York and other money centers to the interior of the country to pay for the newly harvested crops. If monetary conditions were already tight before the drain of funds to the nation’s interior, the autumnal movement of funds could — and did –precipitate panics.[9]

Growth of the Bankers’ Acceptance Market

The act also fostered the growth of the bankers’ acceptance market. Bankers’ acceptances were essentially short-dated IOUs, issued by banks on behalf of clients that were importing (or otherwise purchasing) goods. These acceptances were sent to the seller who could hold on to them until they matured, and receive the face value of the acceptance, or could discount them, that is, receive the face value minus interest charges. By allowing the Federal Reserve to rediscount commercial paper, the act facilitated the growth of this short-term money market (Warburg 1930, Broz 1997, and Federal Reserve Bank of New York 1998). In the 1920s, the various Federal Reserve banks began making large-scale purchases of US Treasury obligations, marking the beginnings of Federal Reserve open market operations.[10]

The Federal Reserve and State Banking

The establishment of the Federal Reserve did not end the competition between the state and national banking systems. While national banks were required to be members of the new Federal Reserve System, state banks could also become members of the system on equal terms. Further, the Federal Reserve Act, bolstered by the Act of June 21, 1917, ensured that state banks could become member banks without losing any competitive advantages they might hold over national banks. Depending upon the state, state banking law sometimes gave state banks advantages in the areas of branching,[11] trust operations,[12] interlocking managements, loan and investment powers,[13] safe deposit operations, and the arrangement of mergers.[14] Where state banking laws were especially liberal, banks had an incentive to give up their national bank charter and seek admission to the Federal Reserve System as a state member bank.

McFadden Act

The McFadden Act (1927) addressed some of the competitive inequalities between state and national banks. It gave national banks charters of indeterminate length, allowing them to compete with state banks for trust business. It expanded the range of permissible investments, including real estate investment and allowed investment in the stock of safe deposit companies. The Act greatly restricted the ability of member banks — whether state or nationally chartered — from opening or maintaining out-of-town branches.

The Great Depression: Panic and Reform

The Great Depression was the longest, most severe economic downturn in the history of the United States.[15] The banking panics of 1930, 1931, and 1933 were the most severe banking disruption ever to hit the United States, with more than one quarter of all banks closing. Data on the number of bank suspensions during this period is presented in Table 3.

Table 3: Bank Suspensions, 1921-33

Number of Bank Suspensions
All Banks National Banks
1921 505 52
1922 367 49
1923 646 90
1924 775 122
1925 618 118
1926 976 123
1927 669 91
1928 499 57
1929 659 64
1930 1352 161
1931 2294 409
1932 1456 276
1933 5190 1475

Source: Bremer (1935).

Note: 1933 figures include 4507 non-licensed banks (1400 non-licensed national banks). Non-licensed banks consist of banks operating on a restricted basis or not in operation, but not in liquidation or receivership.

The first banking panic erupted in October 1930. According to Friedman and Schwartz (1963, pp. 308-309), it began with failures in Missouri, Indiana, Illinois, Iowa, Arkansas, and North Carolina and quickly spread to other areas of the country. Friedman and Schwartz report that 256 banks with $180 million of deposits failed in November 1930, while 352 banks with over $370 million of deposits failed in the following month (the largest of which was the Bank of United States which failed on December 11 with over $200 million of deposits). The second banking panic began in March of 1931 and continued into the summer.[16] The third and final panic began at the end of 1932 and persisted into March of 1933. During the early months of 1933, a number of states declared banking holidays, allowing banks to close their doors and therefore freeing them from the requirement to redeem deposits. By the time President Franklin Delano Roosevelt was inaugurated on March 4, 1933, state-declared banking holidays were widespread. The following day, the president declared a national banking holiday.

Beginning on March 13, the Secretary of the Treasury began granting licenses to banks to reopen for business.

Federal Deposit Insurance

The crises led to the implementation of several major reforms in banking. Among the most important of these was the introduction of federal deposit insurance under the Banking (Glass-Steagall) Act of 1933. Originally an explicitly temporary program, the Act established the Federal Deposit Insurance Corporation (the FDIC was made permanent by the Banking Act of 1935); insurance became effective January 1, 1934. Member banks of the Federal Reserve (which included all national banks) were required to join FDIC. Within six months, 14,000 out of 15,348 commercial banks, representing 97 percent of bank deposits had subscribed to federal deposit insurance (Friedman and Schwartz, 1963, 436-437).[17] Coverage under the initial act was limited to a maximum of $2500 of deposits for each depositor. Table 4 documents the increase in the limit from the act’s inception until 1980, when it reached its current $100,000 level.

Table 4: FDIC Insurance Limit

1934 (January) $2500
1934 (July) $5000
1950 $10,000
1966 $15,000
1969 $20,000
1974 $40,000
1980 $100,000

Additional Provisions of the Glass-Steagall Act

An important goal of the New Deal reforms was to enhance the stability of the banking system. Because the involvement of commercial banks in securities underwriting was seen as having contributed to banking instability, the Glass-Steagall Act of 1933 forced the separation of commercial and investment banking.[18] Additionally, the Acts (1933 for member banks, 1935 for other insured banks) established Regulation Q, which forbade banks from paying interest on demand deposits (i.e., checking accounts) and established limits on interest rates paid to time deposits. It was argued that paying interest on demand deposits introduced unhealthy competition.

Recent Responses to New Deal Banking Laws

In a sense, contemporary debates on banking policy stem largely from the reforms of the post-Depression era. Although several of the reforms introduced in the wake of the 1931-33 crisis have survived into the twenty-first century, almost all of them have been subject to intense scrutiny in the last two decades. For example, several court decisions, along with the Financial Services Modernization Act (Gramm-Leach-Bliley) of 1999, have blurred the previously strict separation between different financial service industries (particularly, although not limited to commercial and investment banking).


The Savings and Loan crisis of the 1980s, resulting from a combination of deposit insurance-induced moral hazard and deregulation, led to the dismantling of the Depression-era Federal Savings and Loan Insurance Corporation (FSLIC) and the transfer of Savings and Loan insurance to the Federal Deposit Insurance Corporation.

Further Reading

Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression.” American Economic Review 73 (1983): 257-76.

Bordo, Michael D., Claudia Goldin, and Eugene N. White, editors. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Chicago: University of Chicago Press, 1998.

Bremer, C. D. American Bank Failures. New York: Columbia University Press, 1935.

Broz, J. Lawrence. The International Origins of the Federal Reserve System. Ithaca: Cornell University Press, 1997.

Cagan, Phillip. “The First Fifty Years of the National Banking System: An Historical Appraisal.” In Banking and Monetary Studies, edited by Deane Carson, 15-42. Homewood: Richard D. Irwin, 1963.

Cagan, Phillip. The Determinants and Effects of Changes in the Stock of Money. New York: National Bureau of Economic Research, 1065.

Calomiris, Charles W. and Gorton, Gary. “The Origins of Banking Panics: Models, Facts, and Bank Regulation.” In Financial Markets and Financial Crises, edited by Glenn R. Hubbard, 109-73. Chicago: University of Chicago Press, 1991.

Davis, Lance. “The Investment Market, 1870-1914: The Evolution of a National Market.” Journal of Economic History 25 (1965): 355-399.

Dewald, William G. “ The National Monetary Commission: A Look Back.”

Journal of Money, Credit and Banking 4 (1972): 930-956.

Eichengreen, Barry. “Mortgage Interest Rates in the Populist Era.” American Economic Review 74 (1984): 995-1015.

Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, Oxford: Oxford University Press, 1992.

Federal Deposit Insurance Corporation. “A Brief History of Deposit Insurance in the United States.” Washington: FDIC, 1998.

Federal Reserve. The Federal Reserve: Purposes and Functions. Washington: Federal Reserve Board, 1994.

Federal Reserve Bank of New York. U.S. Monetary Policy and Financial Markets.

New York, 1998.

Friedman, Milton and Anna J. Schawtz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Goodhart, C.A.E. The New York Money Market and the Finance of Trade, 1900-1913. Cambridge: Harvard University Press, 1969.

Gorton, Gary. “Bank Suspensions of Convertibility.” Journal of Monetary Economics 15 (1985a): 177-193.

Gorton, Gary. “Clearing Houses and the Origin of Central Banking in the United States.” Journal of Economic History 45 (1985b): 277-283.

Grossman, Richard S. “Deposit Insurance, Regulation, Moral Hazard in the Thrift Industry: Evidence from the 1930s.” American Economic Review 82 (1992): 800-821.

Grossman, Richard S. “The Macroeconomic Consequences of Bank Failures under the National Banking System.” Explorations in Economic History 30 (1993): 294-320.

Grossman, Richard S. “The Shoe That Didn’t Drop: Explaining Banking Stability during the Great Depression.” Journal of Economic History 54, no. 3 (1994): 654-82.

Grossman, Richard S. “Double Liability and Bank Risk-Taking.” Journal of Money, Credit, and Banking 33 (2001): 143-159.

James, John A. “The Conundrum of the Low Issue of National Bank Notes.” Journal of Political Economy 84 (1976a): 359-67.

James, John A. “The Development of the National Money Market, 1893-1911.” Journal of Economic History 36 (1976b): 878-97.

Kent, Raymond P. “Dual Banking between the Two Wars.” In Banking and Monetary Studies, edited by Deane Carson, 43-63. Homewood: Richard D. Irwin, 1963.

Kindleberger, Charles P. Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books, 1978.

Krooss, Herman E., editor. Documentary History of Banking and Currency in the United States. New York: Chelsea House Publishers, 1969.

Minsky, Hyman P. Can ‘It” Happen Again? Essays on Instability and Finance. Armonk, NY: M.E. Sharpe, 1982.

Miron , Jeffrey A. “Financial Panics, the Seasonality of the Nominal Interest Rate, and the Founding of the Fed.” American Economic Review 76 (1986): 125-38.

Mishkin, Frederic S. “Asymmetric Information and Financial Crises: A Historical Perspective.” In Financial Markets and Financial Crises, edited by R. Glenn Hubbard, 69-108. Chicago: University of Chicago Press, 1991.

Rockoff, Hugh. The Free Banking Era: A Reexamination. New York: Arno Press, 1975.

Rockoff, Hugh. “Banking and Finance, 1789-1914.” In The Cambridge Economic History of the United States. Volume 2. The Long Nineteenth Century, edited by Stanley L Engerman and Robert E. Gallman, 643-84. New York: Cambridge University Press, 2000.

Sprague, O. M. W. History of Crises under the National Banking System. Washington, DC: Government Printing Office, 1910.

Sylla, Richard. “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1863-1913.” Journal of Economic History 29 (1969): 657-686.

Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: Norton, 1976.

Temin, Peter. Lessons from the Great Depression. Cambridge: MIT Press, 1989.

Warburg,. Paul M. The Federal Reserve System: Its Origin and Growth: Reflections and Recollections, 2 volumes. New York: Macmillan, 1930.

White, Eugene N. The Regulation and Reform of American Banking, 1900-1929. Princeton: Princeton University Press, 1983.

White, Eugene N. “Before the Glass-Steagall Act: An Analysis of the Investment Banking Activities of National Banks.” Explorations in Economic History 23 (1986) 33-55.

White, Eugene N. “Banking and Finance in the Twentieth Century.” In The Cambridge Economic History of the United States. Volume 3. The Twentieth Century, edited by Stanley L.Engerman and Robert E. Gallman, 743-802. New York: Cambridge University Press, 2000.

Wicker, Elmus. The Banking Panics of the Great Depression. New York: Cambridge University Press, 1996.

Wicker, Elmus. Banking Panics of the Gilded Age. New York: Cambridge University Press, 2000.

[1] The two exceptions were the First and Second Banks of the United States. The First Bank, which was chartered by Congress at the urging of Alexander Hamilton, in 1791, was granted a 20-year charter, which Congress allowed to expire in 1811. The Second Bank was chartered just five years after the expiration of the first, but Andrew Jackson vetoed the charter renewal in 1832 and the bank ceased to operate with a national charter when its 20-year charter expired in 1836. The US remained without a central bank until the founding of the Federal Reserve in 1914. Even then, the Fed was not founded as one central bank, but as a collection of twelve regional reserve banks. American suspicion of concentrated financial power has not been limited to central banking: in contrast to the rest of the industrialized world, twentieth century US banking was characterized by large numbers of comparatively small, unbranched banks.

[2] The relationship between the enactment of the National Bank Acts and the Civil War was perhaps even deeper. Hugh Rockoff suggested the following to me: “There were western states where the banking system was in trouble because the note issue was based on southern bonds, and people in those states were looking to the national government to do something. There were also conservative politicians who were afraid that they wouldn’t be able to get rid of the greenback (a perfectly uniform [government issued wartime] currency) if there wasn’t a private alternative that also promised uniformity…. It has even been claimed that by setting up a national system, banks in the South were undermined — as a war measure.”

[3] Eichengreen (1984) argues that regional mortgage interest rate differentials resulted from differences in risk.

[4] There is some debate over the direction of causality between banking crises and economic downturns. According to monetarists Friedman and Schwartz (1963) and Cagan (1965), the monetary contraction associated with bank failures magnifies real economic downturns. Bernanke (1983) argues that bank failures raise the cost of credit intermediation and therefore have an effect on the real economy through non-monetary channels. An alternative view, articulated by Sprague (1910), Fisher (1933), Temin (1976), Minsky (1982), and Kindleberger (1978), maintains that bank failures and monetary contraction are primarily a consequence, rather than a cause, of sluggishness in the real economy which originates in non-monetary sources. See Grossman (1993) for a summary of this literature.

[5] See Calomiris and Gorton (1991) for an alternative view.

[6] See Mishkin (1991) on asymmetric information and financial crises.

[7] Still other states had “voluntary liability,” whereby each bank could choose single or double liability.

[8] See Dewald (1972) on the National Monetary Commission.

[9] Miron (1986) demonstrates the decline in the seasonality of interest rates following the founding of the Fed.

[10] Other Fed activities included check clearing.

[11] According to Kent (1963, pp. 48), starting in 1922 the Comptroller allowed national banks to open “offices” to receive deposits, cash checks, and receive applications for loans in head office cities of states that allowed state-chartered banks to establish branches.

[12] Prior to 1922, national bank charters had lives of only 20 years. This severely limited their ability to compete with state banks in the trust business. (Kent 1963, p. 49)

[13] National banks were subject to more severe limitations on lending than most state banks. These restrictions included a limit on the amount that could be loaned to one borrower as well as limitations on real estate lending. (Kent 1963, pp. 50-51)

[14] Although the Bank Consolidation Act of 1918 provided for the merger of two or more national banks, it made no provision for the merger of a state and national bank. Kent (1963, p. 51).

[15] References touching on banking and financial aspects of the Great Depression in the United States include Friedman and Schwartz (1963), Temin (1976, 1989), Kindleberger (1978), Bernanke (1983), Eichangreen (1992), and Bordo, Goldin, and White (1998).

[16] During this period, the failures of the Credit-Anstalt, Austria’s largest bank, and the Darmstädter und Nationalbank (Danat Bank), a large German bank, inaugurated the beginning of financial crisis in Europe. The European financial crisis led to Britain’s suspension of the gold standard in September 1931. See Grossman (1994) on the European banking crisis of 1931. The best source on the gold standard in the interwar years is Eichengreen (1992).

[17] Interestingly, federal deposit insurance was made optional for savings and loan institutions at about the same time. The majority of S&L’s did not elect to adopt deposit insurance until after 1950. See Grossman (1992).

[18] See, however, White (1986) for

Citation: Grossman, Richard. “US Banking History, Civil War to World War II”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL

World Insurance: The Evolution of a Global Risk Network

Reviewer(s):Clark, Geoffrey

Published by EH.Net (August 2013)
Peter Borscheid and Niels Viggo Haueter, editors, World Insurance: The Evolution of a Global Risk Network. Oxford: Oxford University Press, 2012. xvi + 729 pp. $180 (hardcover), ISBN: 978-0-19-65796-4.

Reviewed for EH.Net by Geoffrey Clark, Department of History, State University of New York at Potsdam.

This massive volume on the spread and integration of insurance services internationally comes on the heels of two much less comprehensive collections of essays about insurance globalization during the past two centuries.[1]? Those earlier studies were self-consciously pioneering efforts to descry the contours of a convoluted and sprawling historical landscape that scholars had scarcely explored hitherto. Now, with the appearance of World Insurance: The Evolution of a Global Risk Network, the development and diffusion of insurance worldwide has received a definitive, although hardly final, treatment. For the first time, historians working across a range of subjects from finance and economic modernization to social welfare and even religion have access to a systematic account of how the insurance industry has transformed the risk environment faced by billions around the world and how that process has knit together the economies and fortunes of far flung societies and cultures.

That said, few readers will possess the fortitude to read this book cover to cover, an expectation that the editors wisely seem to have anticipated in their format. Peter Borscheid provides an admirably concise summary of the overarching themes in a general introduction, which is followed by six parts successively devoted to Europe, North America, Sub-Saharan Africa, the Middle East and Northern Africa, the Far East and Pacific, and Latin American and Caribbean. Each of those regional sections begins with another of Borscheid?s introductory overviews, followed by a number of essays focused on specific countries. This organization allows readers to easily survey the broad features of the international insurance business or to bore down into the experience of one region or nation. The geographical coverage is not uniform ? nor could it possibly be given the fact that in the modern era insurance services radiated largely from the UK and were taken up earliest and most strongly in Europe and North America. The vast disparities in global wealth and insurance penetration that persist to the present are reflected narratively in the eight chapters that cover individual European countries while only one chapter examines the national history of sub-Saharan nations, namely the quite exceptional case of South Africa. That telltale gap is also illustrated in Borscheid?s astonishing observation that (leaving South Africa aside) the total of insurance premiums currently paid in all of sub-Saharan Africa is just 1.5 times that spent in tiny Liechtenstein (p. 324).

One of the central themes running through the essays of World Insurance, and forcefully argued by Borscheid, is that the spread of insurance around the globe was closely tied to the migration of Europeans themselves rather than simply to the export of the insurance idea alone. In the nineteenth and early twentieth centuries insurance services were focused mainly on the property and lives of Europeans settled abroad. As late as 1950, to cite an extreme example, 99 percent of insurance policyholders in Ethiopia were foreign residents (p. 316). These essays offer several explanations for the slow adoption of the insurance habit by indigenous peoples. Widespread poverty in many regions simply made insurance policies unaffordable, while the persistence of community- and kin-based networks of mutual aid reduced the need for European-style insurance facilities. On the other hand, as G. Balachandran points out, colonial prejudices made Western insurers wary of extending insurance coverage to native populations. One insurance trade journal from 1891 objected that Indians were bad risks because they were prone to early death and were difficult to identify positively, a fact that invited fraud since ?as a rule, the native is … devoid of moral sense in the matter of truth? (p. 447). Finally, religious scruples have sometimes prevented the acceptance of insurance, especially in conservative Arabian Peninsula, because Sharia law does not recognize insurance contracts and forbids speculation on human life. In a move reminiscent of earlier European attempts to circumvent prohibitions on usury, insurers in Muslim lands have devised Takaful, a mutualized form of insurance that is Sharia-compliant.
Although one of the stated aims of World Insurance is to provide a cultural context to the rapid spread of insurance around the world (p. 1), the preponderance of attention is given to the economic and political dimensions of that development. The first wave of insurance globalization was carried out in the era of high liberalism as European powers established underwriting facilities in settler enclaves and then began to cultivate a local market in fire, property and casualty, and to a much lesser extent, life insurance. Towards the close of the nineteenth century European countries began to erect protectionist barriers to foreign insurers, a move replicated in following decades by Asian, African, and Latin American nations, who variously imposed reserve requirements, currency regulations, and discriminatory taxes on foreign companies in order to prevent capital outflows and to foster domestic insurance industries. In many cases these efforts succeeded in cultivating a home market, but at a price: many entrants into these fledgling markets were undercapitalized and poorly managed, prompting governments both in Europe and around the world to initiate periodic regulatory shakeouts of weak companies. In any case, the extent to which national insurance markets could truly be isolated from the global economy was limited by the excess risks ceded by domestic insurers to international reinsurers like Swiss Re (the company that, not coincidentally, sponsored this historical study of insurance internationalization). This protectionist era came to an end in the 1980s and 90s with the inauguration of what Jer?nia Pons Pons describes as the second wave of insurance globalization, which involved a relaxation of restrictions on foreign insurers; a string of mergers, acquisitions, and the creation of foreign subsidiaries; and the realization of greater efficiencies as the result of keener competition.
Opportunities for the spread of insurance have also fluctuated with the ebb and flow of programs either to socialize or to privatize insurance risks. The creation of the Soviet Union and the People?s Republic of China furnish the most dramatic examples of the wholesale transfer of insurance services to state control. But whether done in the name of socialism, fascism, social democracy, or anti-colonial nationalism, the assumption by the state of responsibility for the provision of health care and pensions, or compensation for losses due to fire, flood, or loss of life, all diminished or eliminated the latitude of insurance businesses operating across national boundaries. The recent return to an emphasis on less regulated private enterprise in providing insurance cover, as well as the more integrated delivery of financial services exemplified by bancassurance, is just the latest swing of the pendulum toward private control, now in the guise of multinational corporate power and a neo-liberal ideology. Whether the post-2008 financial debacle will induce a return to a more stringent regulatory environment and a new generation of statist approaches to insurance is a question that must await a sequel to Borscheid and Haueter?s imposing and standard-setting World Insurance.

1. Peter Borscheid and Robin Pearson, editors, Internationalisation and Globalisation of the Insurance Industry in the 19th and 20th Centuries (Marburg: Philipps-University, 2007); Robin Pearson, editor, The Development of International Insurance (London: Pickering & Chatto, 2010).

Geoffrey Clark is Professor of History at the State University of New York at Potsdam. He is the author of Betting on Lives: The Culture of Life Insurance in England, 1695-1775 and co-editor of The Appeal of Insurance. He is working on a study of slavery insurance in the late medieval Mediterranean.

Copyright (c) 2013 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 2013). All EH.Net reviews are archived at

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