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Banking Panics in the US: 1873-1933

Elmus Wicker, Indiana University

Prior to the passage of deposit insurance legislation in 1933 banking panics were a recurrent feature of U.S. banking history. Three phases of that panic experience can be identified depending upon the type of regulatory framework in place: the pre-Civil War era, the National Banking era, and the era of the Federal Reserve System. Federal regulation was absent in the antebellum period with panics in 1819, 1837, 1857 and incipient panics in 1860 and 1861. During the National Banking era, banking panics occurred in 1873, 1893, and 1907 with incipient panics in 1884 and 1890. After the Federal Reserve Act was passed in 1913, there were four full-scale banking panics, one in 1930, two in 1931, one in 1933 and a localized panic in Chicago in 1932. This article will examine post-Civil War banking panics only.

Panics as Financial Shocks

Banking panics belong to a general class of financial shocks, which include panics in the stock market, the foreign exchange market and the acceleration of commercial bankruptcies. Banking panics are only one type of financial shock and certainly not the most frequent.

A banking panic may be defined as a class of financial shocks whose origin can be found in any sudden and unanticipated revision of expectations of deposit loss where there is an attempt, usually unsuccessful, to convert checking deposits into currency. In the past banking panics were regarded as examples of irrational or inscrutable behavior. That has changed. More recently they have been treated as a rational depositor response to an asymmetric information deficit. This revival of interest in banking panic theory has renewed scholarly interest in what happened in specific panic episodes.

Banking panics may be local, regional or national in geographical incidence. However, that does not preclude the economic effects from being extended beyond local or regional boundaries. With the single exception of the 1893 panic, pre-1914 banking panics were restricted mainly to the New York money market with relatively few bank suspensions in the rest of the country. Yet there were nonnegligible national effects in some instances on the money stock. Effects of panics on expenditures and overall economic activity have been more difficult to measure.

Specific banking panics differed as to their origins, duration, the number and incidence of bank runs and bank failures, the response of the New York Clearing House (NYCH) in the earlier period and the Federal Reserve in the latter, and their real effects, if any. Each had its own signature, as it were, differentiating it from the others. With due respect to the differences one can attempt to construct a general profile of the panics’ main characteristics both during the national banking era and the Federal Reserve System.

Characteristics of Panics of the National Banking Era

During the National Banking era (1863-1913) episodes of banking panics were accompanied by money market stringency, a stock market collapse, loan and deposit contractions, runs on banks, bank failures, the issue of Clearing House certificates, and in the case of the three major banking panics the partial suspension of cash payment. The general public had little or no direct experience of bank runs and bank suspensions, for their numbers were small with one exception and were highly concentrated. The partial suspension of cash payment was more widely diffused and brought home to the many the realization of a banking panic. The proximate effects of partial suspension of cash payment included: 1) difficulties encountered by business firms in meeting payrolls, 2) dislocation of the domestic exchanges, 3) an increase in hoarding, and 4) the emergence of a currency premium. This disruption of the payments mechanism led to an increase in real transactions costs, temporary factory closings, layoffs, and the creation of currency substitutes. The domestic exchanges were disrupted because bankers were reluctant to make remittances. Failure to remit on time encouraged firms to demand cash payment, thereby reducing real transactions.

Characteristics of Panics of the Great Depression

The banking panics of the Great Depression differed from the pre-1914 panics in the following ways:
1. Unlike pre-1914 panics, there were multiple banking crises during the contraction phase of a single cycle from 1929-1933, at least two of which were region specific.
2. The “eye” of the crisis was no longer in the New York money market.
3. At least two of the insidious effects of the pre-1914 crises had been eliminated, spikes in the call money rates and serious stock market upheavals. The 1929 stock market collapse was not accompanied by a banking panic due to the quick action of the Federal Reserve Bank of New York.
4. Unlike pre-1914 banking panics, there was greater elasticity of the currency supply in response to the increased demands of the public. Federal Reserve notes expanded substantially in each of the four banking panics.
5. Except for 1933, banks did not suspend cash payment.

The significant fact about the Great Depression banking panics is the occurrence of multiple panics; there was a continuous deterioration of depositor confidence as revealed by the monthly data on currency in circulation seasonally adjusted. In neither 1930 nor 1931 did the ending of the banking crisis result in a return flow of currency. Deceleration of bank suspensions was not followed by dishoarding as in previous panics. During 1930 and 1931 banking panics, hoarding accelerated during the panic, leveled off at a higher plateau, and then resumed an upward thrust at the onset of the next shock to depositor confidence.

The Federal Reserve eliminated crises in the central money market by increasing the availability of reserves.

Bank Suspensions

One of the principal characteristics of banking panics is the increased number of bank runs and bank suspensions. The evidence does not permit an estimate of the number of all bank runs. Table 1 provides estimates of bank suspensions in each of the five banking disturbances of the national banking era and three of the four banking panics of the Great Depression. Estimates for 1933 are not included because of widespread bank holidays in the last week of February and March.

Table 1
Number of Bank Failures: National Banking Era and Great Depression

National Banking Era Great Depression
Panic Dates Number of Failures Panic Dates Number of Failures
September 1873 101 November-December 1930 806
May 1884 42 April-August 1931 573
November 1890 18 September-October 1931 827
May-August 1893 503 June-July 1932 283
October-December 1907 73 February-March 1933 bank holiday

Source: Wicker (2000), p. 143.

We cannot but be surprised at the smallness of the number of bank suspensions before 1914, the exception being 1893. The banking disturbances of 1884 and 1890 hardly qualify as banking panics, and I have excluded them. I prefer to label them incipient panics because they were forestalled by effective action of the NYCH.

Suspensions of the Great Depression

During the banking panics of 1930 and 1931 there was no uniform response across the twelve Federal Reserve Districts, whether measured by the bank suspension evidence or the loss of depositor confidence as reflected in Federal Reserve notes in circulation. These three (one in 1930 and two in 1931) banking panics were region specific inasmuch as at least one-half of the Districts had either fewer than 10 percent of the bank closings (1930) or there was little or no change in hoarding (April-August 1931).

Two out of every five closings during the 1930 panic were located in the St. Louis Federal Reserve District. Four Districts accounted for 80 percent of total bank suspensions, and slightly over one-half of the deposits of failed banks. Between April and August 1931, one-third of the bank suspensions were in the Chicago District. There was a mini panic in Chicago in June and a full-scale panic in Toledo in August. The Cleveland Federal Reserve District had two-thirds of the deposits of suspended banks. However, in six Districts there was little or no change in currency hoarding.

During the September-October crisis in 1931 three Districts, Chicago, Cleveland and Philadelphia accounted for two-thirds of the deposits of suspended banks and one-half of the increase in hoarding. Moreover, there was a high concentration of suspensions in three cities: Pittsburgh, Philadelphia, and Chicago.

Suspensions in the National Banking Era

The highest concentration of bank failures in 1873 was in three states: New York, Pennsylvania and Virginia with over 70 percent of all suspensions. There were serious city-wide bank runs in Augusta and Savannah, Georgia, Louisville, Charleston, South Carolina, Nashville and Knoxville, Tennessee and Petersburg and Richmond, Virginia. Unprecedented runs on banks occurred in June and July 1893. The distinctive characteristic of the July suspensions were city-wide panics in Kansas City, Kansas and Kansas City, Missouri, Denver, Louisville, Milwaukee, and Portland, Oregon. The closures in Kansas City, Denver, and Louisville accounted for one in four suspensions in the western states but nearly 70 percent of the liabilities of closed banks. The key to understanding what happened in July is what happened in these six cities.

The most surprising conclusion to emerge from the narrative of what happened in these six cities during July is the proportion of banks that suspended and resumed operations within three months. These banks appear to have been solvent at the time of closure. It is indeed striking that over 90 percent of the banks in Kansas City, Portland, Oregon and sixty-five percent in Louisville and Denver were solvent a the time of the bank runs!

The banking panic of 1907 was the most severe of the panics of the national banking era if measured solely by deposits of failed banks. Bank runs were long and persistent for some trust companies, but the overall number of suspensions remained small. Severity of Bank Suspensions

Table 2 attempts to measure the relative severity of bank suspensions during the two periods by showing the ratio of total bank suspensions to the total number of banks in existence at the beginning of each panic, 1873 and 1933 excepted.

Table 2
Total Bank Suspensions as a Percent of Total Number of Banks in Each of the Banking Crises, 1873- 1931

National Banking Era Great Depression
Panic Date Percentage Panic Date Percentage
1873 see note 1930 3.4%
1884 0.6% April-August 1931 2.95%
1890 0.15% September-October 1931 4.27%
1893 4.2%
1907 0.26%

Note: The number of state and national bank suspensions as a percentage of the total number state and national banks was 1.648% in 1873. I have not uncovered estimates of the total number of unincorporated banks for 1873. Source: Wicker (2000), p. 6.

There are no estimates of the total number of banks in 1873 and the estimates for 1933 are inflated by bank closings resulting from banking holidays. It is quite clear that bank suspensions in the national banking era were less severe, except for the banking panic of 1893. In 1884, 1890 and 1907, less than one percent of banks were suspended, whereas in the most severe panics the suspension rates were between 2.95% and 4.27%.

The NYCH and Panics during the National Banking Era

Structural weaknesses of the National Banking Act have been widely perceived as the fundamental cause of the panics of the national banking era. An inelastic currency supply, the pyramiding of reserves and fixed reserve requirements have borne a large share of the blame to the almost complete neglect of the behavior of the New York Clearing House. The NYCH had the power, the knowledge (at least initially) and the instruments to forestall banking panics. Both the size and distribution of the banking reserve among the NYCH banks was conducive to the recognition of the specific role played by the New York banks in the maintenance of banking stability. The ultimate banking reserve of the country was lodged in six or seven of the largest New York banks. The size of that reserve was greater than that held by any of Europe’s central banks. Learning how to use that reserve was the chief task of the NYCH during the national banking era. The Clearing House had two principal instruments for managing the reserve: the issue of clearing house certificates and reserve pooling. The NYCH had the authority whenever it deemed it necessary to equalize or pool the reserves of the NYCH banks by transferring funds of surplus banks to deficit banks. The significance of reserve pooling was clearly understood by a special committee headed by George S. Coe, President of the Exchange National Bank. The Committee issued a report in November 1873 that effectively made the case that banking panics could be averted if the NYCH exercised bold leadership and was fully prepared to use its power to achieve its objective, which, it did effectively in 1860 and 1861 and again in 1873 with less success. Thereafter that knowledge seems to have faded from the collective memory of the Clearing House.

Causes of Depression-era Panics

Structural weaknesses may have been less important in generating the banking panics of the national banking era than the behavior of the NYCH, but they did play a prominent role in generating the panics of the Great Depression. The creation of the Federal Reserve was supposed to have been a panacea for the prevention of banking panics, yet the worst banking panics in our banking history occurred thereafter. How was that possible? Did the fault lie in the legislation creating the Fed or was Fed leadership culpable? Friedman and Schwartz (1963) attempted to unlock this riddle in terms of personalities, but there is a compelling alternative, which they rejected, that deserves reconsideration. Structural weaknesses in the original Federal Reserve Act can explain equally well, if not better, why the Fed failed to prevent the panics of the Great Depression. There were at least three important structural flaws in the 1913 Federal Reserve Act: l) membership was not compulsory for all banks; it was mandatory for national banks and optional for state banks and trust companies thereby restricting access to the discount window; 2) paper eligible for discount by member banks was too narrowly defined; and 3) power was decentralized among the twelve Federal Reserve Banks and the Federal Reserve Board making consistent and effective policy action difficult. These combined structural weaknesses hindered policymakers’ efforts to respond quickly at the onset of banking panics. When four out of five bank suspensions during the three panics of 1930 and 1931 were nonmember banks, it is time to reconsider the membership question as a cause of the Great Depression panics.

Random Withdrawal Theory vs. Asymmetric Information Theory

Calomiris and Gorton (1991) have identified for purely expository purposes two rival theories of banking panics around which research has “coalesced.” One theory descends directly from the seminal work of Diamond and Dybvig (1983) and has been labeled the random withdrawal hypothesis. The other has a varied origin associated with, among others, Gorton (1987) and Jacklin and Bhattacharya (1988) and is referred to as the asymmetric information approach. The random withdrawal hypothesis attributes bank suspensions to bank illiquidity induced by a contagion of fear. The asymmetric information approach assigns a key role to bank insolvency induced by asset shocks due to weak management, fraud and malfeasance, or persistent adverse economic conditions in a particular sector. This classification does not preclude that both may be at work simultaneously

The historical evidence is ambiguous about the validity of the two hypotheses. Asset shocks were clearly dominant in some panics, for example 1873 and 1884. Contagion played a far more important role during 1893 and 1933. Saunders and Wilson (1993) found significant contagion effects for a sample of national bank failures for the period 1930-32. Generalization is simply not possible. Each panic must be considered on its own merits.

The banking panic of 1930 has had special significance among the panics of the Great Depression because of the causal role assigned to it by Friedman and Schwartz. They maintained that an autonomous disturbance in the currency-deposit ratio provoked a rash of bank suspensions that decreased the money stock, which, in turn, converted a mild recession into a major depression. To have exerted a causal role, panic-induced bank suspensions must have been exogenous, that is, independent of price changes, interest rates and income. Boughton and Wicker (1979 and 1984) demonstrated that interest rates and income were important determinants of the money stock. The finding that the currency-deposit ratio was interest sensitive was consistent with Temin’s (1976) view that causation went from income and interest rates to money, not vice versa. The evidence on the causal role of money remains controversial; the historical evidence has still to be reconciled with the econometric evidence.

Disappearance of Panics after 1933

The long era of banking disturbances finally ended in 1933 due partly to the introduction of deposit insurance, improved performance of the Federal Reserve, and a better understanding of the sources of systemic banking unrest. Knowledge alone, we have learned, is not a sufficient guarantee to forestall banking panics. Leadership and policymaker competence are important as well.

References

Boughton, James and Elmus Wicker. “The Behavior of the Currency-Deposit Ratio during the Great Depression.” Journal of Money, Credit, and Banking 11 (1979): 405-18.

Boughton, James and Elmus Wicker. “A Reply to Trescott.” Journal of Money, Credit, and Banking 16 (1984): 336-7.

Calomiris, Charles W. and Gary Gorton. “The Origins of Banking Panics: Models, Facts, and Bank Regulation.” In Financial Markets and Financial Crises, edited by R. Glenn Hubbard, 109-173. Chicago: University of Chicago Press, 1991.

Diamond, Douglas and Philip Dybvig. “Bank Runs, Liquidity, and Deposit Insurance.” Journal of Political Economy 91, no. 3 (1983): 401-19.

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

Gorton, Gary. “Bank Suspensions and Convertibility.” Journal of Political Economy 15 (1987): 177-93??

Jacklin, Charles J. and Sudipto Bhattacharya. “Distinguishing Panics and Information-based Bank Runs: Welfare and Policy Implications.” Journal of Political Economy 96, no. 3 (1988): 568-592.

Saunders, Anthony and Berry Wilson. “Contagious Bank Runs: Evidence from the 1929-1933 Period.” Journal of Financial Intermediation_ 5, no 4 (1996): 409-23

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

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.

Citation: Wicker, Elmus. “Banking Panics in the US: 1873-1933″. EH.Net Encyclopedia, edited by Robert Whaples. September 4, 2001. URL http://eh.net/encyclopedia/banking-panics-in-the-us-1873-1933/

Origins of Commercial Banking in the United States, 1781-1830

Robert E. Wright, University of Virginia

Early U.S. commercial banks were for-profit business firms, usually structured as joint-stock companies. Many, but by no means all, obtained corporate charters from their respective state legislatures. Although politically controversial, commercial banks, the number and assets of which grew quickly after 1800, played a key role in early U.S. economic growth.1 Commercial banks, savings banks, insurance companies and other financial intermediaries helped to fuel growth by channeling wealth from savers to entrepreneurs. Those entrepreneurs used the loans to increase the profitability of their businesses and hence the efficiency of the overall economy.

Description of the Early Commercial Banking Business

As financial intermediaries, commercial banks pooled the wealth of a large number of savers and lent fractions of that pool to a diverse group of enterprising business firms. The best way to understand how early commercial banks functioned is to examine a typical bank balance sheet.2 Banks essentially borrowed wealth from their liability holders and re-lent that wealth to the issuers of their assets. Banks profited from the difference between the cost of their liabilities and the net return from their assets.

Assets of a Typical Commercial Bank

A typical U.S. commercial bank in the late eighteenth and early nineteenth centuries owned assets such as specie, the notes and deposits of other banks, commercial paper, public securities, mortgages, and real estate. Investment in real estate was minimal, usually simply to provide the bank with an office in which to conduct business. Commercial banks used specie, i.e. gold and silver (usually minted into coins but sometimes in the form of bars or bullion), and their claims on other banks (notes and/or deposits) to pay their creditors (liability holders). They also owned public securities like government bonds and corporate equities. Sometimes they owned a small sum of mortgages, long-term loans collateralized by real property. Most bank assets, however, were discount loans collateralized by commercial paper, i.e. bills of exchange and promissory notes “discounted” at the bank by borrowers.

Discount Loans Described

Most bank loans were “discount” loans, not “simple” loans. Unlike a simple loan, where the interest and principal fall due when the loan matures, a discount requires only the repayment of the principal on the due date. That is because the borrower receives only the discounted present value of the principal at the time of the loan, not the full principal sum.

For example, with a simple loan of $100 at 6 percent interest, of exactly one year’s duration, the borrower receives $100 today and must repay the lender $106 in one year. With a discount loan, the borrower repays $100 at the end of the year but receives only $94.34 today.3

Commercial Bank Liabilities

Commercial banks acquired wealth to purchase assets by issuing several types of liabilities. Most early banks were joint-stock companies, so they issued equities (“stock”) in an initial public offering (IPO). Those common shares were not redeemable. In other words, stockholders could not demand that the bank exchange their shares for cash. Stockholders who wished to recoup their investments could do so only by selling their shares to other investors in the secondary “stock” market. Because its common shares were irredeemable, a bank’s “capital stock” was its most certain source of funds.

Holders of other types of bank liabilities, including banknotes and checking deposits, could redeem their claims during the issuing bank’s open hours of operation, which were typically four to six hours a day, Monday through Saturday. A holder of a deposit liability could “cash out” by physically withdrawing funds (in banknotes or specie) or by writing a check to a third party against his or her deposit balance. A holder of a banknote, an engraved promissory note payable to the bearer very similar to today’s Federal Reserve notes,4 could physically visit the issuing bank to redeem the sum printed on the note in specie or other current funds, at the holder’s option. Or, a banknote holder could simply use the notes as currency, to make retail purchases, repay debts, make loans, etc.

After selling its shares to investors, and perhaps attracting some deposits, early banks would begin to accept discount loan applications. Successful applicants would receive the loan as a credit in their checking accounts, in banknotes, in specie, or in some combination thereof. Those banknotes, deposits, and specie traveled from person to person to make purchases and remittances. Eventually, the notes and deposits returned to the bank of issue for payment.

Balance Sheet Management

Early banks had to manage their balance sheets carefully. They “failed” or “broke,” i.e. became legally insolvent, if they could not meet the demands of liability holders with prompt specie payment. Bankers, therefore, had to keep ample amounts of gold and silver in their banks’ vaults in order to remain in business. Because specie paid no interest, however, bankers had to be careful not to accumulate too much of the precious metals lest they sacrifice the bank’s profitability to its safety. Interest-bearing public securities, like U.S. Six Percent bonds, often served as “secondary reserves” that generated income but that bankers could quickly sell to raise cash, if necessary.

When bankers found that their reserves were declining too precipitously they slowed or stopped discounting until reserve levels returned to safe levels. Discount loans were not callable.5 Bankers therefore made discounts for short terms only, usually from a few days to six months. If the bank’s condition allowed, borrowers could negotiate a new discount to repay one coming due, effectively extending the term of the loan. If the bank’s condition precluded further extension of the loan, however, borrowers had to pay up or face a lawsuit. Bankers quickly learned to stagger loan due dates so that a steady stream of discounts was constantly coming up for renewal. In that way, bankers could, if necessary, quickly reduce the outstanding volume of discounts by denying renewals.

Reduction of Information Asymmetry

Early bankers maintained profitability by keeping losses from defaults less than the gains from interest revenues.6 They kept defaults at an acceptably low level by reducing what financial theorists call “information asymmetry.” The two major types of information asymmetry are adverse selection, which occurs before a contract is made, and moral hazard, which occurs after contract completion. The information is asymmetrical or unequal because loan applicants and borrowers naturally know more about their creditworthiness than lenders do. (More generally, sellers know more about their goods and services than buyers do.) Bankers, in other words, must create information about loan applicants and borrowers so that they can assess the risk of default and make a rational decision about whether to make or to continue a loan.

Adverse Selection

Adverse selection arises from the fact that risky borrowers are more eager for loans, especially at high interest rates, than safe borrowers. As Adam Smith put it, interest rates “so high as eight or ten per cent” attract only “prodigals and projectors, who alone would be willing to give this high interest.” “Sober people,” he continued, “who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition.”

Adverse selection is also known as the “lemons problem” because a classic example of it occurs in the unintermediated market for used cars. Potential buyers have difficulty discerning good cars, the “peaches,” from breakdown-prone cars, the “lemons.” Sellers naturally know whether their cars are peaches or lemons. So information about the car is asymmetrical — the seller knows the true value but the buyer does not. Potential buyers quite rationally offer the average market price for cars of a particular make, model, and mileage. An owner of a peach naturally scoffs at the average offer. A lemon owner, on the other hand, will jump at the opportunity to unload his heap for more than its real value. If we recall that borrowers are essentially sellers of securities called loans, the adverse selection problem in financial markets should be clear. Lenders that do not reduce information asymmetry will purchase only lemon-like loans because their offer of a loan at average interest will appear too dear to good borrowers but will look quite appealing to risky “prodigals and projectors.”

Moral Hazard

Moral hazard arises from the fact that people are basically self-interested. If given the opportunity, they will renege on contracts by engaging in risky activities with, or even outright stealing, lenders’ wealth. For instance, a borrower might decide to use a loan to try his luck at the blackjack table in Atlantic City rather than to purchase a computer or other efficiency-increasing tool for his business. Another borrower might have the means to repay the loan but default on it anyway so that she can use the resources to take a vacation to Aruba.

In order to reduce the risk of default due to information asymmetry, lenders must create information about borrowers. Early banks created information by screening discount applicants to reduce adverse selection and by monitoring loan recipients and requiring collateral to reduce moral hazard. Screening procedures included probing the applicant’s credit history and current financial condition. Monitoring procedures included the evaluation of the flow of funds through the borrower’s checking account and the negotiation of restrictive covenants specifying the uses to which a particular loan would be put. Banks could also require borrowers to post collateral, i.e. property they could seize in case of default. Real estate, slaves, co-signers, and financial securities were common forms of collateral.

A Short History of Early American Commercial Banks

Colonial Experiments

Colonial America witnessed the formation of several dozen “banks,” only a few of which were commercial banks. Most of the colonial banks were “land banks” that made mortgage loans. Additionally, many of them were government agencies and not businesses. All of the handful of colonial banks that could rightly be called commercial banks, i.e. that discounted short-term commercial paper, were small and short-lived. Some, like that of Alexander Cummings, were fraudulent. Others, like that of Philadelphia merchants Robert Morris and Thomas Willing, ran afoul of English laws and had to be abandoned.

The First U.S. Commercial Banks

The development of America’s commercial banking sector, therefore, had to await the Revolution. No longer blocked by English law, Morris, Willing, and other prominent Philadelphia merchants moved to establish a joint-stock commercial bank. The young republic’s shaky war finances added urgency to the bankers’ request to charter a bank, a request that Congress and several state legislatures soon accepted. By 1782, that new bank, the Bank of North America, had granted a significant volume of loans to both the public and private sectors. New Yorkers, led by Alexander Hamilton, and Bostonians, led by William Phillips, were not to be outdone and by early 1784 had created their own commercial banks. By the end of the eighteenth century, mercantile leaders in over a dozen other cities had also formed commercial banks. (See Table 1.)

Table 1:
Names, Locations, Charter or Establishment Dates, and Authorized Capitals of the First U.S. Commercial Banks, 1781-1799

Name Location Year of Charter (Year of Establishment) Authorized Capital (in U.S. dollars)
Bank of North America Philadelphia, Pennsylvania 1781*/1782/1786** $400,000 (increased to $2,000,000 in 1787)
The Bank of New York Manhattan, New York (1784) 1791 $1,000,000
The Massachusetts Bank Boston, Massachusetts 1784 $300,000
The Bank of Maryland Baltimore, Maryland 1790 $300,000
The Bank of the United States Philadelphia, Pennsylvania 1791* $10,000,000
The Bank of Providence Providence, Rhode Island 1791 $500,000
New Hampshire Bank Portsmouth, New Hampshire 1792 $200,000
The Bank of Albany Albany, New York 1792 $260,000
Hartford Bank Hartford, Connecticut 1792 $100,000
Union Bank New London, Connecticut 1792 $50,000-100,000
Union Bank Boston, Massachusetts 1792 $400,000-800,000
New Haven Bank New Haven, Connecticut 1792 $100,000 (increased to $400,000 in 1795)
Bank of Alexandria Alexandria, Virginia 1792 $150,000 (increased to $500,000 in 1795)
Essex Bank Salem, Massachusetts (1792) 1799 $100,000-400,000
Bank of Richmond Richmond, Virginia (1792) n/a
Bank of South Carolina Charleston, South Carolina (1792) 1801 $200,000
Bank of Columbia Hudson, New York 1793 $160,000
Bank of Pennsylvania Philadelphia, Pennsylvania 1793 $3,000,000
Bank of Columbia Washington, D.C. 1793 $1,000,000
Nantucket Bank Nantucket, Massachusetts 1795 $40,000-100,000
Merrimack Bank Newburyport, Massachusetts 1795 $70,000-150,000
Middletown Bank Middletown, Connecticut 1795 $100,000-400,000
Bank of Baltimore Baltimore, Maryland 1795 $1,200,000
Bank of Rhode Island Newport, Rhode Island 1795 $500,000
Bank of Delaware Wilmington, Delaware 1796 $500,000
Norwich Bank Norwich, Connecticut 1796 $75,000-200,000
Portland Bank Portland, Maine 1799 $300,000
Manhattan Company New York, New York 1799# $2,000,000

Source: Fenstermaker (1964); Davis (1917)

* = National charter.
** = The Bank of North America gained a second charter in 1786 after its original Pennsylvania state charter was revoked. Pennsylvania, Massachusetts, and New York chartered the bank in 1782.
# = This firm was chartered as a water utility company but began banking operations almost immediately.

Banking and Politics

The first U.S. commercial banks helped early national businessmen to overcome a “crisis of liquidity,” a classic postwar liquidity crisis caused by a shortage of cash, and an increased emphasis on the notion that “time is money.” Many colonists had been content to allow debts to remain unsettled for years and even decades. After experiencing the devastating inflation of the Revolution, however, many Americans came to see prompt payment of debts and strict performance of contracts as virtues. Banks helped to condition individuals and firms to the new, stricter business procedures.

Early U.S. commercial banks had political roots as well. Many Revolutionary elites saw banks, and other modern financial institutions, as a means of social control. The power vacuum left after the withdrawal of British troops and leading Loyalist families had to be filled, and many members of the commercial elite wished to fill it and to justify their control with an ideology of meritocracy. By providing loans to entrepreneurs based on the merits of their businesses, and not their genealogies, banks and other financial intermediaries helped to spread the notion that wealth and power should be allocated to the most able members of post-Revolutionary society, not to the oldest or best groomed families.

Growth of the Commercial Banking Sector

After 1800, the number, authorized capital, and assets of commercial banks grew rapidly. (See Table 2.) As early as 1820, the assets of U.S. commercial banks equaled about 50 percent of U.S. aggregate output, a figure that the commercial banking sectors of most of the world’s nations had not achieved by 1990.

Table 2:
Numbers, Authorized Capitals, and Estimated Assets of Incorporated U.S. Commercial Banks, 1800-1830

Year No. Banks Authorized Capital (in millions $U.S.) Estimated Assets (in millions $U.S.)
1800 29 27.42 49.74
1801 33 29.17 52.66
1802 36 30.03 50.00
1803 54 34.90 58.69
1804 65 41.17 67.07
1805 72 48.87 82.39
1806 79 51.34 94.11
1807 84 53.43 90.47
1808 87 51.49 92.04
1809 93 55.19 100.23
1810 103 66.19 108.87
1811 118 76.29 142.65
1812 143 84.49 161.89
1813 147 87.00 187.23
1814 202 110.02 233.53
1815 212 115.23 197.16
1816 233 158.98 270.30
1817 263 172.84 316.47
1818 339 195.31 331.41
1819 342 195.98 349.66
1820 328 194.60 341.42
1821 274 181.23 345.93
1822 268 177.53 307.86
1823 275 173.67 283.10
1824 301 185.75 328.16
1825 331 191.08 347.65
1826 332 190.98 349.60
1827 334 192.51 379.03
1828 356 197.41 344.56
1829 370 201.06 349.72
1830 382 205.40 403.45

Sources: For total banks and authorized bank capital, see Fenstermaker (1965). I added the Bank of the United States and the Second Bank of the United States to his figures. I estimated assets by multiplying the total authorized capital by the average ratio of actual capital to assets from a large sample of balance sheet data.

Commercial banks caused considerable political controversy in the U.S. As the first large, usually corporate, for-profit business firms, banks took the brunt of reactionary “agrarian” rhetoric designed to thwart, or at least slow down, the post-Revolution modernization of the U.S. economy. Early bank critics, however, failed to see that their own reactionary policies caused or exacerbated the supposed evils of the banking system.

For instance, critics argued that the lending decisions of early banks were politically-motivated and skewed in favor of rich merchants. Such was indeed the case. Overly stringent laws, usually championed by the agrarian critics themselves, forced bankers into that lending pattern. Many early bank charters forbade banks to raise additional equity capital or to increase interest rates above a low ceiling or usury cap, usually 6 percent per year. When market interest rates were above the usury cap, as they almost always were, banks were naturally swamped with discount applications. Forbidden by law to increase interest rates or to raise additional equity capital, banks were forced to ration credit. They naturally lent to the safest borrowers, those most known to the bank and those with the highest wealth levels.

Early banks were extremely profitable and therefore aroused considerable envy. Critics claimed that bank dividends greater than six percent were prima facie evidence that banks routinely made discounts at illegally high rates. In fact, banks earned more than they charged on discounts because they lent out more, often substantially more, than their capital base. It was not unusual, for example, for a bank with $1,000,000 equity capital to have an average of $2,000,000 on loan. The six percent interest on that sum would generate $120,000 of gross revenue, minus say $20,000 for operating expenses, leaving $100,000 to be divided among stockholders, a dividend of ten percent. More highly leveraged banks, i.e. banks with higher asset to capital ratios, could earn even more.

Early banks also caused considerable political controversy when they attempted to gain a charter, a special act of legislation that granted corporate privileges such as limited stockholder liability, the ability to sue in courts of law in the name of the bank, etc. Because early banks were lucrative, politicians and opposing interest groups fought each other bitterly over charters. Rival commercial factions sought to establish the first bank in emerging commercial centers while rival political parties struggled to gain credit for establishing new banking facilities. Politicians soon discovered that they could extract overt bonuses, taxes, and even illegal bribes from bank charter applicants. Again, critics unfairly blamed banks for problems over which bankers had little control.

The Economic Importance of Early U.S. Commercial Banks

Despite the efforts of a few critics, most Americans rejected anti-bank rhetoric and supported the controlled growth of the commercial banking sector. They did so because they understood what some modern economists do not, namely, that commercial banks helped to increase per capita aggregate output. Unfortunately, the discussion of banks’ role in economic growth has been much muddied by monetary issues. Banknotes circulated as cash, just as today’s Federal Reserve notes do. Most scholars, therefore, have concentrated on early banks’ role in the monetary system. In general, early banks caused the money supply to be procyclical. In other words, they made the money supply expand rapidly during business cycle “booms,” thereby causing inflation, and they made the money supply contract sharply during recessions, thereby causing ruinous price deflation.

The economic importance of early banks, therefore, lies not in their monetary role but in their capacity as financial intermediaries. At first glance, intermediation may seem a rather innocuous process — lenders are matched to borrowers. Upon further inspection, however, it is clear that intermediation is a crucial economic process. Economies devoid of financial intermediation, like those of colonial America, grow slowly because firms with profitable ideas find it difficult to locate financial backers. Without intermediaries, search costs, i.e. the costs of finding a counterparty, and information creation costs, i.e. the costs of reducing information asymmetry (adverse selection and moral hazard), are so high that few loans are made. Profitable ideas cannot be implemented and the economy stagnates.

Intermediaries reduce both search and information costs. Rather than hunt blindly for counterparties, for instance, both savers and entrepreneurs needed only to find the local bank, a major reduction in search costs. Additionally, banks, as large, specialized lenders, were able to reduce information asymmetry more efficiently than smaller, less-specialized lenders, like private individuals.

By lowering the total cost of borrowing, commercial banks increased the volume of loans made and hence the number of profitable ideas that entrepreneurs brought to fruition. Commercial banks, for instance, allowed firms to implement new technologies, to increase labor specialization, and to take advantage of economies of scale and scope. As those firms grew more profitable, they created new wealth, driving economic growth.

Additional Reading

Important recent books about early U.S. commercial banking include:

Bodenhorn, Howard. A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation-Building. New York: Cambridge University Press. 2000.

Cowen, David J. The Origins and Economic Impact of the First Bank of the United States, 1791-1797. New York: Garland Publishing, 2000.

Lamoreaux, Naomi. Insider Lending: Banks, Personal Connection, and Economic Development in Industrial New England. New York: Cambridge University Press, 1994.

Wright, Robert E. Origins of Commercial Banking in America, 1750-1800. Lanham, MD: Rowman & Littlefield. 2001.

Important recent overviews of the wider early U.S. financial sector are:

Perkins, Edwin J. American Public Finance and Financial Services, 1700-1815. Columbus: Ohio State University Press, 1994.

Sylla, Richard. “U.S. Securities Markets and the Banking System, 1790-1840.” Federal Reserve Bank of St. Louis Review 80 (1998): 83-104.

Wright, Robert. The Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets, 1780-1850. New York: Cambridge University Press. 2002.

Classic histories of early U.S. banks and banking include:

Cleveland, Harold van B., Thomas Huertas, et al. Citibank, 1812-1970. Cambridge: Harvard University Press, 1985.

Davis, Joseph S. Essays in the Earlier History of American Corporations. New York: Russell & Russell, 1917.

Eliason, Adolph O. “The Rise of Commercial Banking Institutions in the United States.” Ph.D., diss. University of Minnesota, 1901.

Fenstermaker, J. Van. The Development of American Commercial Banking: 1782-1837. Kent,Ohio: Kent State University, 1965.

Fenstermaker, J. Van and John E. Filer. “Impact of the First and Second Banks of the United States and the Suffolk System on New England Bank Money: 1791-1837.” Journal of Money, Credit and Banking 18 (1986): 28-40.

Gras, N. S. B. The Massachusetts First National Bank of Boston, 1784-1934. Cambridge: Harvard University Press, 1937.

Green, George. Finance and Economic Development in the Old South: Louisiana Banking, 1804-1861. Stanford: Stanford University Press, 1972.

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

Hedges, Joseph Edward. Commercial Banking and the Stock Market Before 1863. Baltimore: Johns Hopkins Press, 1938.

Hunter, Gregory. The Manhattan Company: Managing a Multi-Unit Corporation in New York, 1799-1842. New York: Garland Publishing, 1989.

Redlich, Fritz. The Molding of American Banking: Men and Ideas. New York. Johnson Reprint Corporation, 1968.

Schweikart, Larry. Banking in the American South from the Age of Jackson to Reconstruction. Baton Rouge: Louisiana State University Press, 1987.

Smith, Walter Buckingham. Economic Aspects of the Second Bank of the United States. Cambridge: Harvard University Press, 1953.

Wainwright, Nicholas B. History of the Philadelphia National Bank: A Century and a Half of Philadelphia Banking, 1803-1953. Philadelphia: Philadelphia National Bank, 1953.

1 Which is to say that they increased real per capita aggregate output. Aggregate output is the total dollar value of goods and services produced in a year. It can be measured in different ways, the two most widely used of which are Gross National Product (GNP) and Gross Domestic Product (GDP). The term per capita refers to the total population. Aggregate output may increase simply because of additional people, so economists must take population growth into consideration. Similarly, nominal aggregate output might increase simply because of price inflation. Real aggregate output means output adjusted to account for price changes (inflation or deflation). Real per capita aggregate output, therefore, measures the economy’s “size,” adjusting for changes in population and prices.

2 A balance sheet is simply a summary financial statement that lists what a firm owns (its assets) as well as what it owes (its liabilities).

3 Early bankers used the formula for present value familiar to us today: PV = FV/(1+i)n where PV = present value (sum received today), FV = future value (principal sum), i = annual interest rate, and n = the number of compounding periods, which in this example is one. So, PV = 100/1.06 = 94.3396 or $94.34.

4

5 In other words, banks could not demand early repayment from borrowers.

6In order to maintain bank revenues, bankers are willing, under competitive conditions, to take some risks and therefore to suffer some defaults. For example, making a simple year-long loan for $100 at 10 percent per annum, if the banker determines that the borrower represents, say, only a 5 percent chance of default, is clearly superior to not lending at all and foregoing the $10 interest revenue. Early U.S. banks, however, rarely faced such risk-return tradeoffs. Because the supply of bank loans was inadequate to meet the huge demand for bank loans, and because banks were constrained by usury law from raising their interest rates higher than certain low levels, usually around 6 to 7 percent, bankers could afford to lend to only the safest risks. Early bankers, in other words, usually faced the problem of too many good borrowers, not too few.

Citation: Wright, Robert. “Origins of Commercial Banking in the United States, 1781-1830″. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL
http://eh.net/encyclopedia/origins-of-commercial-banking-in-the-united-states-1781-1830/

Morris Plan Banks

Ronnie J. Phillips and David Mushinski, Colorado State University

Morris Plan banks were at the forefront of an explosion of consumer credit that started at the beginning of the second decade of the twentieth century and they became the prominent institution for providing consumer credit to the poor through the 1920s. At the time Morris Plan banks first appeared in 1910, few institutions existed for provision of consumer credit to low- and middle-income individuals. Aside from retailers, the primary provider of consumer credit to the poor was the loan shark. Other institutions designed to provide consumer credit were also being introduced at that time.

For example, credit unions, transplanted from Europe, were appearing. Against this backdrop, Morris Plan banks became the leading provider of consumer credit to the poor in the United States for two decades. By 1931, there were 109 Morris Plan banks operating in 142 cities with an annual volume of loans of about $220,000,000. (See chart above)

Morris’s Principles of Lending to the Poor

Morris Plan banks can be traced to the concerns of Arthur J. Morris. Mr. Morris, a Virginia lawyer, found it troubling that a securely employed workman, seeking a small loan, was denied access to credit from local banks and was forced to borrow from loan sharks. Morris thought that a country that denied bank loans to a large part of its population had a “weak spot” in its banking system. Morris then began a study of the various banking laws in the U.S. in the hopes that some type of “banking institution could be evolved that would correct the existing evils and supply credit to the needy” (Herzog 1928, 12-13). Morris’ study resulted in his establishing a set of principles for lending to the poor. Those principles were:

1. Character, plus earning power, is a proper basis of credit.
2. Loans made on this basis of credit must carry the privilege of repayment over a period long enough to match the earning power of the borrower.
3.Money so borrowed should always be for some constructive and useful purpose.

How Morris Plan Loans Worked

The formal lending process may be presented with an example. Consider a borrower who sought a $100 loan. An interest rate would be set and a fee deducted from this face value amount, perhaps $8 total ($6 interest, $2 fee). The borrower would then subscribe to $92 worth of what were called Class C installment certificates. The borrower did not directly pay back the loan, but rather over the course of the year purchased the Class C certificates. At the end of the loan period, the borrower exchanged the Class C certificates for cash to pay back the original loan. It is important to note that the loans were not secured with collateral. Instead, borrowers had to find two cosigners who were well acquainted with the borrower and who were of similar economic standing (i.e., they had similar and steady earning power).

The emergence of Morris Plan banks in the early twentieth century is an example of an institutional structure appearing organically in response to a perceived need and through the private sector to satisfy a consumer need. Unlike many modern institutions that provide micro-credit, Morris Plan banks developed as a profit-making institution within the private sector. They came into existence at a time when there were not adequate institutions to supply consumer credit to the poor and, within a matter of years, commercial banks had adopted their basic lending principles.

The Morris Plan lending structure would appear to have been devised by someone informed by recent studies of micro-credit institutions. The cosigner requirement of the lending structure imposed a type of joint liability which would induce responses that reduced the transaction costs associated with the lending process and alleviated adverse selection and enforcement problems which have been identified in the micro-credit literature as sources of credit market failures. Evidence supports the presence of these incentives in the Morris Plan lending structure.

The lending structure also appears to have been attuned to the unique nature of Americans generally. Indeed, the contrasting experiences of credit unions and Morris Plan banks during this period has lessons for the creation of financial institutions which supply micro-credit. In designing micro-credit institutions, lenders should consider the social and cultural context into which the institution is to be introduced. In the present context, the Morris Plan structure was more attuned to the individuality of typical Americans than were credit unions. Of course, this is a point that has not been lost on researchers in this area (e.g., Ghatak and Guinnane (1999), and Pickering and Mushinski (2001)).

Critics of the Morris Plan

It should also be noted that the Morris Plan was not without critics, especially from the Russell Sage Foundation which viewed the lending procedure to be misleading at best, and at worst, an attempt to defraud the borrowers. Hence, many viewed the profit-seeking Morris Plan institutions as little better, and in some respects worse, than loan-sharks.

The Decline of Morris Plan Banks

The demise of the Morris Plan institutions begins with the full recovery of banking after the Great Depression. By that time, however, the basic Morris Plan idea of providing small consumer loans to individuals had been fully incorporated into commercial bank lending practices. By 1924, commercial banks in New York began to offer small consumer loans. As bank charters were altered by states, and eventually by legislation at the Federal level, the size of consumer lending by Morris Plan banks was dwarfed by commercial banks that offered the additional convenience of accepting demand deposits. In addition, credit cards and consumer installment credit decreased the uniqueness and demand for loans from Morris Plan institutions. By the post-war period, the Morris Plan banks, though still active, were only a small segment of consumer lending. Today, there are still two chartered banks in the U.S. with Morris Plan in their name, but they are small community savings banks and no longer operating strictly on the Morris Plan principles.

References

Clark, Evans. Financing the Consumer. New York and London: Harper and Brothers Publishers, 1933. (Contains comparative data on consumer credit institutions as of the early 1930s.)

Ghatak, Maitreesh and Timothy W. Guinnane . “The Economics of Lending with Joint Liability: Theory and Practice.” Journal of Development Economics 60 (1999): 195-228.

Herzog, Peter W. The Morris Plan of Industrial Banking. A. W. Shaw Company: Chicago. 1928. (An early study of Morris Plan institutions.)

McBlair, Robert. The Morris Plan of Industrial Banking. Fidelity Corporation of America, 1913. (This publication reads much like a prospectus for potential investors in Morris Plan institutions.)

Mushinski, David and Ronnie J. Phillips. “Micro-credit.” In International Encyclopedia of Business and Management, 8 volumes, edited by Malcolm Warner. London: Thomson Learning, 2001.

Pickering, Kathleen and David Mushinski. “Cultural Aspects of Credit Institutions: Transplanting the Grameen Bank Credit Group Structure to the Pine Ridge Indian Reservation.” Journal of Economic Issues (2001): 459-467.

Robinson, Louis N. “The Morris Plan.” American Economic Review 21, no. 2 (1931): 222-235. (A fair but critical view of the Morris Plan institutions.)

Robinson, Louis N. and Rolf Nugent. Regulation of the Small Loan Business. New York: Russell Sage Foundation, 1935. (An important study of the regulation side of small loans.)

Saulnier, Raymond J. Industrial Banking Companies and Their Credit Practices. New York: National Bureau of Economic Research, 1940. (This study covers the years 1928-1939 and provides an analysis of post-Great Depression changes in Morris Plan and other industrial loan banks.)

Citation: Mushinski, David and Ronnie Phillips. “Morris Plan Banks”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL http://eh.net/encyclopedia/morris-plan-banks/

The First Bank of the United States

David Cowen

Birth of the Bank

In February 1791, the First Bank of the United States (1791-1811) received a unique national charter for twenty years. Alexander Hamilton’s brainchild, a semi-public national bank, was a crucial component in the building of the early U.S. economy. The Bank prospered for twenty years and performed traditional banking functions in exemplary fashion. With a main office in Philadelphia and eight branches nationwide to serve its customers, the Bank’s influence stretched along the entire Atlantic seaboard from Boston to Charleston and Savannah and westward along the Gulf Coast to New Orleans.

Hamilton’s Broad Economic Plan

When the Treasury Department was created by an Act of Congress in September 1789, President George Washington rewarded Hamilton with the post of Secretary. Hamilton quickly became the nation’s leading economic figure. When Congress asked Hamilton to submit an economic plan for the country, he was well prepared. The Secretary delivered several monumental state papers that forged the financial system for the nation: The Report on Public Credit (January 9, 1790), The Report on the Bank (December 13, 1790), The Establishment of a Mint (January, 1791), and The Report on Manufactures (December 5, 1791). Hamilton’s reports outlined the strategies that were part of a comprehensive Federalist economic and financial program. They included a sinking fund to extinguish the national debt and an excise tax to be collected on all distilled liquors.

A key component of Hamilton’s economic plan for the country was the national Bank, an institution that would safeguard all pecuniary transactions. The Bank would not only stimulate the economy but also enhance the shaky credit of the government. The English financial system, particularly the Bank of England, provided an important model for Hamilton.

The Bank’s Funding and Privileges

The Report on the Bank explained that the national Bank would be chartered for twenty years, during which time the Congress would agree not to establish another national bank. The seed capital would be $10 million: $8 million from private sources, and $2 million from the government. The Bank would have the right to issue notes or currency up to $10 million. The government would also pledge that the notes of the Bank would be unique in that they were valid for payments to the United States. In short, the notes would be suitable for payment of taxes, a feature that would provide the Bank with a strong advantage over its competitors.

The national Bank would confer many benefits on the government including a ready source of loans, a principal depository for federal monies that were transferable from city to city without charge, and a clearing agent for payments on the national debt. The government, as the largest stockholder, would share in the profits, but have no direct participation in the management.

Debate over Establishment of the Bank

The Bank bill was introduced into Congress on December 13, 1790, passed the Senate on January 20, 1791, the House on February 8, 1791, and therefore was forwarded to President Washington for his signature. It was unclear whether Washington would sign the bill into law. Powerful forces led by James Madison, Thomas Jefferson and the Attorney General, Edmund Randolph, argued to Washington that the Constitution had not granted the government the power to incorporate a Bank and therefore he should not sign the bill.

Washington Accepts Hamilton’s View on Implied Powers

Washington showed Hamilton the opposition’s argument and asked him to prepare a document explaining why he should sign the bill. The pressure was therefore on Hamilton to produce a flawless retort. His reply to Washington has been christened as the benchmark of a broad interpretation of the Constitution. Hamilton turned the tables on his opposition. If Thomas Jefferson, James Madison and Edmund Randolph argued that the power to incorporate was not available unless explicitly prescribed by the Constitution, then Alexander Hamilton retorted that a power was not unavailable unless so stated in the Constitution. Washington accepted Hamilton’s logic and signed the bill on February 25, 1791 to create the national Bank.

Most important, however, was not the political infighting, but rather that Hamilton’s view holding that implied governmental powers were a viable part of the Constitution had carried the day. Hamilton had accomplished his aim: his detractors defeated; his economic approach adopted. In the ensuing years the Bank of the United States occupied center stage of the American financial system.

Life of the Bank

Initial Stock Offering

On July 4, 1791, in the largest initial stock offering the country had ever witnessed, investors displayed confidence in the new funding system by scooping up $8 million in Bank of United States stock with unprecedented alacrity. Many notable members of the Congress were purchasers. Prices of receipts for the right to buy stock (i.e. not the stock itself), know as scripts, were driven from an initial offering price of $25 to the unsustainable height of over $300, and then tumbled to $150 within days, causing alarm in the markets. Secretary Hamilton calmed the storm much as a modern central banker would have by using public money to directly purchase government securities. However, the script bubble led many to blame the Bank for such rabid speculations.

Bank Branches

In the fall of 1791 the new stockholders met in Philadelphia to choose board members and decide on rules and regulations. While the Bank would be headquartered in Philadelphia, the stockholders clamored for and received branches, with four opening in Baltimore, Boston, Charleston, and New York in 1792, and eventually four more in Norfolk (1800), Washington (1802), Savannah (1802) and New Orleans (1805). The branches were of great concern to the existing state banks, which viewed the national Bank as a competitive threat.

The Bank’s First President and Cashiers

Thomas Willing accepted the title of president of the Bank and remained in that position until 1807. Willing possessed strong credentials as he had been president of the Bank of North America, Mayor of Philadelphia, the Secretary to the Congress of delegates at Albany, and a Judge of the Supreme court of Pennsylvania. As the day-to- day manager, the role of bank cashier was also important. At the head office in Philadelphia, John Kean was appointed the cashier; however, the most noteworthy was George Simpson, who held the post from 1795-1811.

The Bank’s Roles in the Economy

On December 12, 1791, the Bank opened for business in Philadelphia. The customers were merchants, politicians, manufacturers, landowners, and most importantly, the government of the United States. The Banks notes circulated countrywide and therefore infused a safe medium of paper money into the economy for business transactions. The sheer volume of deposits, loans, transfers and payments conducted by the Bank throughout the country made it far and away the single largest enterprise in the fledgling nation. Profits, however, were moderate during the operation of the Bank because its directors opted for stability over risk taking.

The Bank and the “Panic of 1792″

The Bank had an enormous impact on the economy within two months of opening its doors for business by flooding the market with its discounts (loans) and banknotes and then sharply reversing course and calling in many of the loans. Although the added liquidity initially helped push a rising securities market higher, the subsequent drain caused the very first U.S. securities market crash by forcing speculators to sell their stocks. The largest speculator caught in the financial crisis was William Duer. When he went insolvent in March 1792, the markets were temporarily paralyzed. This so-called “Panic of 1792″ was short lived as again Secretary Hamilton (as in the previous year during the script bubble) injected funds by buying securities directly and on behalf of the sinking fund. Yet incidents like the Panic of 1792 and the script bubble would be remembered for many years by opponents of the Bank who were still in steadfast opposition to the Hamilton inspired institution.

The Bank’s Business with the National Government

The rest of Bank years were never as tumultuous as the events surrounding the Panic of 1792. Rather during its twenty-year lifespan the Bank performed many mundane pecuniary functions for its customers. The largest customer, the government, had many notable interactions with the Bank. One of the highlights of the relationship was the Bank’s efficient managing of the government’s fiscal affairs with respect to the Louisiana Purchase in 1803. In its earlier days, the Bank had lent heavily to its largest customer. By the end of 1795 the Bank had lent the government over $6 million, or 60% of its capital. At this point Willing and the other directors became alarmed and demanded the Government repay part of its loan. Since Government credit was still weak, the Treasury resorted to selling shares of its Bank stock. The sales began in 1796 and ended in 1802. With the proceeds from the sales of stock, the government repaid the Bank.

Central Banking Functions of the Bank

The Bank performed certain functions that today are associated with central banking. First, the Bank attempted to regulate state banks by curtailing those that had overissued their bank notes. Second, the Bank, in coordination with the Treasury department, discussed economic conditions and attempted to promote the safety of the entire credit system. Third, while the Philadelphia board gave each branch autonomy respecting lending to individuals, the Bank tried to coordinate aggregate policy changes, whether a loosening or tightening of lending credit, across the entire network of branches.

Death of the Bank

The anti-Bank forces had remained steadfast in their opposition to the Bank since its inception in 1791. By the time of the renewal debate in Congress, the Federalists were no longer in control. The Democrats now held the majority and were ready to act against the Federalist conceived institution. The opponents of the Bank included Henry Clay, William Branch Giles and Vice-President George Clinton. The Federalists supported renewal and were joined by two notable Democrats who crossed party lines, Treasury Secretary Albert Gallatin, who believed in the usefulness of the institution, and then President Madison, who had switched camps with respect to the Bank issue because he believed the matter had been settled by precedent.

Complaints about the Bank

The opponents charged that because three-fourths of the ownership of the stock was held by foreigners, that the Bank was under their direct influence. The charge was false, as foreigners were prohibited from electing directors. The opposition also charged that the Bank was concealing profits, operating in a mysterious fashion, unconstitutional, and simply a tool for loaning money to the Government.

Rechartering Suffers a Narrow Defeat in Congress

Although the charter did not expire until March 4, 1811, the renewal process commenced in the House on March 28, 1808 and in the Senate on April 20, 1808. The matter developed slowly and was referred to Secretary Gallatin for an opinion. On March 3, 1809 Gallatin communicated his beliefs to the House that the Bank charter should be renewed. The matter returned to the House on January 29, 1810 for Committee debate. On February 19th, the committee recommended in favor of renewing the charter and sent the bill to the floor of the House. Floor debate opened on April 13th, and the bill was stopped dead in its tracks. Stockholders resubmitted the bill on December 10th, and despite an intense three-month debate, the bill was killed. The vote in each section of the Congress was incredibly close. The bill was defeated in the House by a 65 to 64 margin on January 24, 1811, and in the Senate was deadlocked at 17 on February 20th before Vice-President Clinton, an enemy of both Madison and Gallatin, broke the tie with a negative vote. The Bank of the United States closed its doors on March 3, 1811.

The Bank and the Debate over Central Government Power

The reason the Bank lost its charter had precious little to do with banking. When charter renewal debate transpired in 1811 banking on the whole was flourishing. The Bank was born, lived, and eventually died a victim of politics. The Bank has been remembered not for what occurred during its operation — stimulating business, infusing safe paper money into the economy, supporting the credit of the country and national government, and with the Treasury department regulating the financial arena — but rather for what occurred during the stormy debates at its birth and death. The death of the Bank was another chapter in an ongoing debate between the early leaders of the country who were split between those who preferred a weak central government on the one hand and those who desired a strong central government on the other.

The chartering of a national economic institution, a Bank of the United States, marks the take-off of the Federalist financial revolution that began several years earlier with the signing of the Constitution. The political die of the United States was cast with that document, and by 1792 the economic base of Federalism was in place, first with the Federal funding of national and state war debts, and second, with a sound national Bank in place to give coherence to the developing U.S. financial system.

Further Reading:

Bowling, Kenneth R. “The Bank Bill, the Capital City and President Washington.” Capital Studies 1, no. 1 (1972).

Cowen, David J. “The First Bank of the United States and the Securities Market Crash of 1792.” Journal of Economic History 60, no. 4 (2000).

Cowen, David J. _The Origins and Economic Impact of the First Bank of the United States, 1791-1797_. New York: Garland Publishing, 2000.

Dewey, Davis Rich and John Thom Holdsworth. The First and Second Banks of the United States. Washington, D.C.: Government Printing Office, 1910.

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

Klubes, Benjamin. “The First Federal Congress and the First National Bank: A Case Study in Constitutional History.” Journal of the Early American Republic10 (1990).

McDonald, Forrest. “The Constitution and Hamiltonian Capitalism.” In How Capitalistic is the Constitution? Edited by Robert A. Goldwin and William A. Schambra. New York: American Enterprise Institute for Public Policy Research, 1982.

Perkins, Edwin. American Public Finance and Financial Services 1700-1815 Columbus: Ohio State University Press, 1994.

Redlich, Fritz. The Molding of American Banking. New York: Johnson Reprint Corporation, 1968.

St. Clair Clarke, M. and D. A. Hall. Legislative and Documentary History of the Bank of United States. Washington, D.C.: Gales and Seaton, 1832. Reprint. New York: Augustus M. Kelley Publishers, 1967.

Sylla, Richard. “U.S. Securities Markets and the Banking System, 1790-1840.” Federal Reserve Bank of St. Louis Review 80, no. 3 (1998).

Syrett, Harold, editor. The Papers of Alexander Hamilton. New York: Columbia University Press, 1961-87.

Wettereau, James O. “Branches of the First Bank of the United States.” Journal of Economic History 2 (1942).

Wettereau, James O. “New Light on the First Bank of the United States.” Pennsylvania Magazine of History and Biography 61 (1937).

Wettereau, James O. Statistical Records of the First Bank of the United States. New York: Garland Publishing, 1985.

Wettereau, James O. “The Oldest Bank Building in the United States.” Transactions of the American Philosophical Society 43, part 1, 1953.

Wright, Robert. Origins of Commercial Banking in America, 1750-1800. Lanham, MD: Rowman & Littlefield, 2001.

Wright, Robert. The Wealth of Nations Rediscovered: Integration and Expansion of the U.S. Financial Sector, 1780-1850. New York: Cambridge University Press, 2002.

Wright, Robert. “Thomas Willing (1731-1821): Philadelphia Financier and Forgotten Founding Father.” Pennsylvania History, Fall, 1996.

Citation: Cowen, David. “First Bank of the United States”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-first-bank-of-the-united-states/

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]

Clearinghouses

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
Source: http://www.fdic.gov/

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).

FSLIC

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. http://www.fdic.gov/bank/historical/brief/brhist.pdf

Federal Reserve. The Federal Reserve: Purposes and Functions. Washington: Federal Reserve Board, 1994. http://www.federalreserve.gov/pf/pdf/frspurp.pdf

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

New York, 1998. http://www.ny.frb.org/pihome/addpub/monpol/chapter2.pdf

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
http://eh.net/encyclopedia/us-banking-history-civil-war-to-world-war-ii/

Antebellum Banking in the United States

Howard Bodenhorn, Lafayette College

The first legitimate commercial bank in the United States was the Bank of North America founded in 1781. Encouraged by Alexander Hamilton, Robert Morris persuaded the Continental Congress to charter the bank, which loaned to the cash-strapped Revolutionary government as well as private citizens, mostly Philadelphia merchants. The possibilities of commercial banking had been widely recognized by many colonists, but British law forbade the establishment of commercial, limited-liability banks in the colonies. Given that many of the colonists’ grievances against Parliament centered on economic and monetary issues, it is not surprising that one of the earliest acts of the Continental Congress was the establishment of a bank.

The introduction of banking to the U.S. was viewed as an important first step in forming an independent nation because banks supplied a medium of exchange (banknotes1 and deposits) in an economy perpetually strangled by shortages of specie money and credit, because they animated industry, and because they fostered wealth creation and promoted well-being. In the last case, contemporaries typically viewed banks as an integral part of a wider system of government-sponsored commercial infrastructure. Like schools, bridges, road, canals, river clearing and harbor improvements, the benefits of banks were expected to accrue to everyone even if dividends accrued only to shareholders.

Financial Sector Growth

By 1800 each major U.S. port city had at least one commercial bank serving the local mercantile community. As city banks proved themselves, banking spread into smaller cities and towns and expanded their clientele. Although most banks specialized in mercantile lending, others served artisans and farmers. In 1820 there were 327 commercial banks and several mutual savings banks that promoted thrift among the poor. Thus, at the onset of the antebellum period (defined here as the period between 1820 and 1860), urban residents were familiar with the intermediary function of banks and used bank-supplied currencies (deposits and banknotes) for most transactions. Table 1 reports the number of banks and the value of loans outstanding at year end between 1820 and 1860. During the era, the number of banks increased from 327 to 1,562 and total loans increased from just over $55.1 million to $691.9 million. Bank-supplied credit in the U.S. economy increased at a remarkable annual average rate of 6.3 percent. Growth in the financial sector, then outpaced growth in aggregate economic activity. Nominal gross domestic product increased an average annual rate of about 4.3 percent over the same interval. This essay discusses how regional regulatory structures evolved as the banking sector grew and radiated out from northeastern cities to the hinterlands.

Table 1
Number of Banks and Total Loans, 1820-1860

Year Banks Loans ($ millions)
1820 327 55.1
1821 273 71.9
1822 267 56.0
1823 274 75.9
1824 300 73.8
1825 330 88.7
1826 331 104.8
1827 333 90.5
1828 355 100.3
1829 369 103.0
1830 381 115.3
1831 424 149.0
1832 464 152.5
1833 517 222.9
1834 506 324.1
1835 704 365.1
1836 713 457.5
1837 788 525.1
1838 829 485.6
1839 840 492.3
1840 901 462.9
1841 784 386.5
1842 692 324.0
1843 691 254.5
1844 696 264.9
1845 707 288.6
1846 707 312.1
1847 715 310.3
1848 751 344.5
1849 782 332.3
1850 824 364.2
1851 879 413.8
1852 913 429.8
1853 750 408.9
1854 1208 557.4
1855 1307 576.1
1856 1398 634.2
1857 1416 684.5
1858 1422 583.2
1859 1476 657.2
1860 1562 691.9

Sources: Fenstermaker (1965); U.S. Comptroller of the Currency (1931).

Adaptability

As important as early American banks were in the process of capital accumulation, perhaps their most notable feature was their adaptability. Kuznets (1958) argues that one measure of the financial sector’s value is how and to what extent it evolves with changing economic conditions. Put in place to perform certain functions under one set of economic circumstances, how did it alter its behavior and service the needs of borrowers as circumstances changed. One benefit of the federalist U.S. political system was that states were given the freedom to establish systems reflecting local needs and preferences. While the political structure deserves credit in promoting regional adaptations, North (1994) credits the adaptability of America’s formal rules and informal constraints that rewarded adventurism in the economic, as well as the noneconomic, sphere. Differences in geography, climate, crop mix, manufacturing activity, population density and a host of other variables were reflected in different state banking systems. Rhode Island’s banks bore little resemblance to those in far away Louisiana or Missouri, or even those in neighboring Connecticut. Each state’s banks took a different form, but their purpose was the same; namely, to provide the state’s citizens with monetary and intermediary services and to promote the general economic welfare. This section provides a sketch of regional differences. A more detailed discussion can be found in Bodenhorn (2002).

State Banking in New England

New England’s banks most resemble the common conception of the antebellum bank. They were relatively small, unit banks; their stock was closely held; they granted loans to local farmers, merchants and artisans with whom the bank’s managers had more than a passing familiarity; and the state took little direct interest in their daily operations.

Of the banking systems put in place in the antebellum era, New England’s is typically viewed as the most stable and conservative. Friedman and Schwartz (1986) attribute their stability to an Old World concern with business reputations, familial ties, and personal legacies. New England was long settled, its society well established, and its business community mature and respected throughout the Atlantic trading network. Wealthy businessmen and bankers with strong ties to the community — like the Browns of Providence or the Bowdoins of Boston — emphasized stability not just because doing so benefited and reflected well on them, but because they realized that bad banking was bad for everyone’s business.

Besides their reputation for soundness, the two defining characteristics of New England’s early banks were their insider nature and their small size. The typical New England bank was small compared to banks in other regions. Table 2 shows that in 1820 the average Massachusetts country bank was about the same size as a Pennsylvania country bank, but both were only about half the size of a Virginia bank. A Rhode Island bank was about one-third the size of a Massachusetts or Pennsylvania bank and a mere one-sixth as large as Virginia’s banks. By 1850 the average Massachusetts bank declined relatively, operating on about two-thirds the paid-in capital of a Pennsylvania country bank. Rhode Island’s banks also shrank relative to Pennsylvania’s and were tiny compared to the large branch banks in the South and West.

Table 2
Average Bank Size by Capital and Lending in 1820 and 1850 Selected States and Cities
(in $ thousands)

1820
Capital
Loans 1850 Capital Loans
Massachusetts $374.5 $480.4 $293.5 $494.0
except Boston 176.6 230.8 170.3 281.9
Rhode Island 95.7 103.2 186.0 246.2
except Providence 60.6 72.0 79.5 108.5
New York na na 246.8 516.3
except NYC na na 126.7 240.1
Pennsylvania 221.8 262.9 340.2 674.6
except Philadelphia 162.6 195.2 246.0 420.7
Virginia1,2 351.5 340.0 270.3 504.5
South Carolina2 na na 938.5 1,471.5
Kentucky2 na na 439.4 727.3

Notes: 1 Virginia figures for 1822. 2 Figures represent branch averages.

Source: Bodenhorn (2002).

Explanations for New England Banks’ Relatively Small Size

Several explanations have been offered for the relatively small size of New England’s banks. Contemporaries attributed it to the New England states’ propensity to tax bank capital, which was thought to work to the detriment of large banks. They argued that large banks circulated fewer banknotes per dollar of capital. The result was a progressive tax that fell disproportionately on large banks. Data compiled from Massachusetts’s bank reports suggest that large banks were not disadvantaged by the capital tax. It was a fact, as contemporaries believed, that large banks paid higher taxes per dollar of circulating banknotes, but a potentially better benchmark is the tax to loan ratio because large banks made more use of deposits than small banks. The tax to loan ratio was remarkably constant across both bank size and time, averaging just 0.6 percent between 1834 and 1855. Moreover, there is evidence of constant to modestly increasing returns to scale in New England banking. Large banks were generally at least as profitable as small banks in all years between 1834 and 1860, and slightly more so in many.

Lamoreaux (1993) offers a different explanation for the modest size of the region’s banks. New England’s banks, she argues, were not impersonal financial intermediaries. Rather, they acted as the financial arms of extended kinship trading networks. Throughout the antebellum era banks catered to insiders: directors, officers, shareholders, or business partners and kin of directors, officers, shareholders and business partners. Such preferences toward insiders represented the perpetuation of the eighteenth-century custom of pooling capital to finance family enterprises. In the nineteenth century the practice continued under corporate auspices. The corporate form, in fact, facilitated raising capital in greater amounts than the family unit could raise on its own. But because the banks kept their loans within a relatively small circle of business connections, it was not until the late nineteenth century that bank size increased.2

Once the kinship orientation of the region’s banks was established it perpetuated itself. When outsiders could not obtain loans from existing insider organizations, they formed their own insider bank. In doing so the promoters assured themselves of a steady supply of credit and created engines of economic mobility for kinship networks formerly closed off from many sources of credit. State legislatures accommodated the practice through their liberal chartering policies. By 1860, Rhode Island had 91 banks, Maine had 68, New Hampshire 51, Vermont 44, Connecticut 74 and Massachusetts 178.

The Suffolk System

One of the most commented on characteristic of New England’s banking system was its unique regional banknote redemption and clearing mechanism. Established by the Suffolk Bank of Boston in the early 1820s, the system became known as the Suffolk System. With so many banks in New England, each issuing it own form of currency, it was sometimes difficult for merchants, farmers, artisans, and even other bankers, to discriminate between real and bogus banknotes, or to discriminate between good and bad bankers. Moreover, the rural-urban terms of trade pulled most banknotes toward the region’s port cities. Because country merchants and farmers were typically indebted to city merchants, country banknotes tended to flow toward the cities, Boston more so than any other. By the second decade of the nineteenth century, country banknotes became a constant irritant for city bankers. City bankers believed that country issues displaced Boston banknotes in local transactions. More irritating though was the constant demand by the city banks’ customers to accept country banknotes on deposit, which placed the burden of interbank clearing on the city banks.3

In 1803 the city banks embarked on a first attempt to deal with country banknotes. They joined together, bought up a large quantity of country banknotes, and returned them to the country banks for redemption into specie. This effort to reduce country banknote circulation encountered so many obstacles that it was quickly abandoned. Several other schemes were hatched in the next two decades, but none proved any more successful than the 1803 plan.

The Suffolk Bank was chartered in 1818 and within a year embarked on a novel scheme to deal with the influx of country banknotes. The Suffolk sponsored a consortium of Boston bank in which each member appointed the Suffolk as its lone agent in the collection and redemption of country banknotes. In addition, each city bank contributed to a fund used to purchase and redeem country banknotes. When the Suffolk collected a large quantity of a country bank’s notes, it presented them for immediate redemption with an ultimatum: Join in a regular and organized redemption system or be subject to further unannounced redemption calls.4 Country banks objected to the Suffolk’s proposal, because it required them to keep noninterest-earning assets on deposit with the Suffolk in amounts equal to their average weekly redemptions at the city banks. Most country banks initially refused to join the redemption network, but after the Suffolk made good on a few redemption threats, the system achieved near universal membership.

Early interpretations of the Suffolk system, like those of Redlich (1949) and Hammond (1957), portray the Suffolk as a proto-central bank, which acted as a restraining influence that exercised some control over the region’s banking system and money supply. Recent studies are less quick to pronounce the Suffolk a successful experiment in early central banking. Mullineaux (1987) argues that the Suffolk’s redemption system was actually self-defeating. Instead of making country banknotes less desirable in Boston, the fact that they became readily redeemable there made them perfect substitutes for banknotes issued by Boston’s prestigious banks. This policy made country banknotes more desirable, which made it more, not less, difficult for Boston’s banks to keep their own notes in circulation.

Fenstermaker and Filer (1986) also contest the long-held view that the Suffolk exercised control over the region’s money supply (banknotes and deposits). Indeed, the Suffolk’s system was self-defeating in this regard as well. By increasing confidence in the value of a randomly encountered banknote, people were willing to hold increases in banknotes issues. In an interesting twist on the traditional interpretation, a possible outcome of the Suffolk system is that New England may have grown increasingly financial backward as a direct result of the region’s unique clearing system. Because banknotes were viewed as relatively safe and easily redeemed, the next big financial innovation — deposit banking — in New England lagged far behind other regions. With such wide acceptance of banknotes, there was no reason for banks to encourage the use of deposits and little reason for consumers to switch over.

Summary: New England Banks

New England’s banking system can be summarized as follows: Small unit banks predominated; many banks catered to small groups of capitalists bound by personal and familial ties; banking was becoming increasingly interconnected with other lines of business, such as insurance, shipping and manufacturing; the state took little direct interest in the daily operations of the banks and its supervisory role amounted to little more than a demand that every bank submit an unaudited balance sheet at year’s end; and that the Suffolk developed an interbank clearing system that facilitated the use of banknotes throughout the region, but had little effective control over the region’s money supply.

Banking in the Middle Atlantic Region

Pennsylvania

After 1810 or so, many bank charters were granted in New England, but not because of the presumption that the bank would promote the commonweal. Charters were granted for the personal gain of the promoter and the shareholders and in proportion to the personal, political and economic influence of the bank’s founders. No New England state took a significant financial stake in its banks. In both respects, New England differed markedly from states in other regions. From the beginning of state-chartered commercial banking in Pennsylvania, the state took a direct interest in the operations and profits of its banks. The Bank of North America was the obvious case: chartered to provide support to the colonial belligerents and the fledgling nation. Because the bank was popularly perceived to be dominated by Philadelphia’s Federalist merchants, who rarely loaned to outsiders, support for the bank waned.5 After a pitched political battle in which the Bank of North America’s charter was revoked and reinstated, the legislature chartered the Bank of Pennsylvania in 1793. As its name implies, this bank became the financial arm of the state. Pennsylvania subscribed $1 million of the bank’s capital, giving it the right to appoint six of thirteen directors and a $500,000 line of credit. The bank benefited by becoming the state’s fiscal agent, which guaranteed a constant inflow of deposits from regular treasury operations as well as western land sales.

By 1803 the demand for loans outstripped the existing banks’ supply and a plan for a new bank, the Philadelphia Bank, was hatched and its promoters petitioned the legislature for a charter. The existing banks lobbied against the charter, and nearly sank the new bank’s chances until it established a precedent that lasted throughout the antebellum era. Its promoters bribed the legislature with a payment of $135,000 in return for the charter, handed over one-sixth of its shares, and opened a line of credit for the state.

Between 1803 and 1814, the only other bank chartered in Pennsylvania was the Farmers and Mechanics Bank of Philadelphia, which established a second substantive precedent that persisted throughout the era. Existing banks followed a strict real-bills lending policy, restricting lending to merchants at very short terms of 30 to 90 days.6 Their adherence to a real-bills philosophy left a growing community of artisans, manufacturers and farmers on the outside looking in. The Farmers and Mechanics Bank was chartered to serve excluded groups. At least seven of its thirteen directors had to be farmers, artisans or manufacturers and the bank was required to lend the equivalent of 10 percent of its capital to farmers on mortgage for at least one year. In later years, banks were established to provide services to even more narrowly defined groups. Within a decade or two, most substantial port cities had banks with names like Merchants Bank, Planters Bank, Farmers Bank, and Mechanics Bank. By 1860 it was common to find banks with names like Leather Manufacturers Bank, Grocers Bank, Drovers Bank, and Importers Bank. Indeed, the Emigrant Savings Bank in New York City served Irish immigrants almost exclusively. In the other instances, it is not known how much of a bank’s lending was directed toward the occupational group included in its name. The adoption of such names may have been marketing ploys as much as mission statements. Only further research will reveal the answer.

New York

State-chartered banking in New York arrived less auspiciously than it had in Philadelphia or Boston. The Bank of New York opened in 1784, but operated without a charter and in open violation of state law until 1791 when the legislature finally sanctioned it. The city’s second bank obtained its charter surreptitiously. Alexander Hamilton was one of the driving forces behind the Bank of New York, and his long-time nemesis, Aaron Burr, was determined to establish a competing bank. Unable to get a charter from a Federalist legislature, Burr and his colleagues petitioned to incorporate a company to supply fresh water to the inhabitants of Manhattan Island. Burr tucked a clause into the charter of the Manhattan Company (the predecessor to today’s Chase Manhattan Bank) granting the water company the right to employ any excess capital in financial transactions. Once chartered, the company’s directors announced that $500,000 of its capital would be invested in banking.7 Thereafter, banking grew more quickly in New York than in Philadelphia, so that by 1812 New York had seven banks compared to the three operating in Philadelphia.

Deposit Insurance

Despite its inauspicious banking beginnings, New York introduced two innovations that influenced American banking down to the present. The Safety Fund system, introduced in 1829, was the nation’s first experiment in bank liability insurance (similar to that provided by the Federal Deposit Insurance Corporation today). The 1829 act authorized the appointment of bank regulators charged with regular inspections of member banks. An equally novel aspect was that it established an insurance fund insuring holders of banknotes and deposits against loss from bank failure. Ultimately, the insurance fund was insufficient to protect all bank creditors from loss during the panic of 1837 when eleven failures in rapid succession all but bankrupted the insurance fund, which delayed noteholder and depositor recoveries for months, even years. Even though the Safety Fund failed to provide its promised protections, it was an important episode in the subsequent evolution of American banking. Several Midwestern states instituted deposit insurance in the early twentieth century, and the federal government adopted it after the banking panics in the 1930s resulted in the failure of thousands of banks in which millions of depositors lost money.

“Free Banking”

Although the Safety Fund was nearly bankrupted in the late 1830s, it continued to insure a number of banks up to the mid 1860s when it was finally closed. No new banks joined the Safety Fund system after 1838 with the introduction of free banking — New York’s second significant banking innovation. Free banking represented a compromise between those most concerned with the underlying safety and stability of the currency and those most concerned with competition and freeing the country’s entrepreneurs from unduly harsh and anticompetitive restraints. Under free banking, a prospective banker could start a bank anywhere he saw fit, provided he met a few regulatory requirements. Each free bank’s capital was invested in state or federal bonds that were turned over to the state’s treasurer. If a bank failed to redeem even a single note into specie, the treasurer initiated bankruptcy proceedings and banknote holders were reimbursed from the sale of the bonds.

Actually Michigan preempted New York’s claim to be the first free-banking state, but Michigan’s 1837 law was modeled closely after a bill then under debate in New York’s legislature. Ultimately, New York’s influence was profound in this as well, because free banking became one of the century’s most widely copied financial innovations. By 1860 eighteen states adopted free banking laws closely resembling New York’s law. Three other states introduced watered-down variants. Eventually, the post-Civil War system of national banking adopted many of the substantive provisions of New York’s 1838 act.

Both the Safety Fund system and free banking were attempts to protect society from losses resulting from bank failures and to entice people to hold financial assets. Banks and bank-supplied currency were novel developments in the hinterlands in the early nineteenth century and many rural inhabitants were skeptical about the value of small pieces of paper. They were more familiar with gold and silver. Getting them to exchange one for the other was a slow process, and one that relied heavily on trust. But trust was built slowly and destroyed quickly. The failure of a single bank could, in a week, destroy the confidence in a system built up over a decade. New York’s experiments were designed to mitigate, if not eliminate, the negative consequences of bank failures. New York’s Safety Fund, then, differed in the details but not in intent, from New England’s Suffolk system. Bankers and legislators in each region grappled with the difficult issue of protecting a fragile but vital sector of the economy. Each region responded to the problem differently. The South and West settled on yet another solution.

Banking in the South and West

One distinguishing characteristic of southern and western banks was their extensive branch networks. Pennsylvania provided for branch banking in the early nineteenth century and two banks jointly opened about ten branches. In both instances, however, the branches became a net liability. The Philadelphia Bank opened four branches in 1809 and by 1811 was forced to pass on its semi-annual dividends because losses at the branches offset profits at the Philadelphia office. At bottom, branch losses resulted from a combination of ineffective central office oversight and unrealistic expectations about the scale and scope of hinterland lending. Philadelphia’s bank directors instructed branch managers to invest in high-grade commercial paper or real bills. Rural banks found a limited number of such lending opportunities and quickly turned to mortgage-based lending. Many of these loans fell into arrears and were ultimately written when land sales faltered.

Branch Banking

Unlike Pennsylvania, where branch banking failed, branch banks throughout the South and West thrived. The Bank of Virginia, founded in 1804, was the first state-chartered branch bank and up to the Civil War branch banks served the state’s financial needs. Several small, independent banks were chartered in the 1850s, but they never threatened the dominance of Virginia’s “Big Six” banks. Virginia’s branch banks, unlike Pennsylvania’s, were profitable. In 1821, for example, the net return to capital at the Farmers Bank of Virginia’s home office in Richmond was 5.4 percent. Returns at its branches ranged from a low of 3 percent at Norfolk (which was consistently the low-profit branch) to 9 percent in Winchester. In 1835, the last year the bank reported separate branch statistics, net returns to capital at the Farmers Bank’s branches ranged from 2.9 and 11.7 percent, with an average of 7.9 percent.

The low profits at the Norfolk branch represent a net subsidy from the state’s banking sector to the political system, which was not immune to the same kind of infrastructure boosterism that erupted in New York, Pennsylvania, Maryland and elsewhere. In the immediate post-Revolutionary era, the value of exports shipped from Virginia’s ports (Norfolk and Alexandria) slightly exceeded the value shipped from Baltimore. In the 1790s the numbers turned sharply in Baltimore’s favor and Virginia entered the internal-improvements craze and the battle for western shipments. Banks represented the first phase of the state’s internal improvements plan in that many believed that Baltimore’s new-found advantage resulted from easier credit supplied by the city’s banks. If Norfolk, with one of the best natural harbors on the North American Atlantic coast, was to compete with other port cities, it needed banks and the state required three of the state’s Big Six branch banks to operate branches there. Despite its natural advantages, Norfolk never became an important entrepot and it probably had more bank capital than it required. This pattern was repeated elsewhere. Other states required their branch banks to serve markets such as Memphis, Louisville, Natchez and Mobile that might, with the proper infrastructure grow into important ports.

State Involvement and Intervention in Banking

The second distinguishing characteristic of southern and western banking was sweeping state involvement and intervention. Virginia, for example, interjected the state into the banking system by taking significant stakes in its first chartered banks (providing an implicit subsidy) and by requiring them, once they established themselves, to subsidize the state’s continuing internal improvements programs of the 1820s and 1830s. Indiana followed such a strategy. So, too, did Kentucky, Louisiana, Mississippi, Illinois, Kentucky, Tennessee and Georgia in different degrees. South Carolina followed a wholly different strategy. On one hand, it chartered several banks in which it took no financial interest. On the other, it chartered the Bank of the State of South Carolina, a bank wholly owned by the state and designed to lend to planters and farmers who complained constantly that the state’s existing banks served only the urban mercantile community. The state-owned bank eventually divided its lending between merchants, farmers and artisans and dominated South Carolina’s financial sector.

The 1820s and 1830s witnessed a deluge of new banks in the South and West, with a corresponding increase in state involvement. No state matched Louisiana’s breadth of involvement in the 1830s when it chartered three distinct types of banks: commercial banks that served merchants and manufacturers; improvement banks that financed various internal improvements projects; and property banks that extended long-term mortgage credit to planters and other property holders. Louisiana’s improvement banks included the New Orleans Canal and Banking Company that built a canal connecting Lake Ponchartrain to the Mississippi River. The Exchange and Banking Company and the New Orleans Improvement and Banking Company were required to build and operate hotels. The New Orleans Gas Light and Banking Company constructed and operated gas streetlights in New Orleans and five other cities. Finally, the Carrollton Railroad and Banking Company and the Atchafalaya Railroad and Banking Company were rail construction companies whose bank subsidiaries subsidized railroad construction.

“Commonwealth Ideal” and Inflationary Banking

Louisiana’s 1830s banking exuberance reflected what some historians label the “commonwealth ideal” of banking; that is, the promotion of the general welfare through the promotion of banks. Legislatures in the South and West, however, never demonstrated a greater commitment to the commonwealth ideal than during the tough times of the early 1820s. With the collapse of the post-war land boom in 1819, a political coalition of debt-strapped landowners lobbied legislatures throughout the region for relief and its focus was banking. Relief advocates lobbied for inflationary banking that would reduce the real burden of debts taken on during prior flush times.

Several western states responded to these calls and chartered state-subsidized and state-managed banks designed to reinflate their embattled economies. Chartered in 1821, the Bank of the Commonwealth of Kentucky loaned on mortgages at longer than customary periods and all Kentucky landowners were eligible for $1,000 loans. The loans allowed landowners to discharge their existing debts without being forced to liquidate their property at ruinously low prices. Although the bank’s notes were not redeemable into specie, they were given currency in two ways. First, they were accepted at the state treasury in tax payments. Second, the state passed a law that forced creditors to accept the notes in payment of existing debts or agree to delay collection for two years.

The commonwealth ideal was not unique to Kentucky. During the depression of the 1820s, Tennessee chartered the State Bank of Tennessee, Illinois chartered the State Bank of Illinois and Louisiana chartered the Louisiana State Bank. Although they took slightly different forms, they all had the same intent; namely, to relieve distressed and embarrassed farmers, planters and land owners. What all these banks shared in common was the notion that the state should promote the general welfare and economic growth. In this instance, and again during the depression of the 1840s, state-owned banks were organized to minimize the transfer of property when economic conditions demanded wholesale liquidation. Such liquidation would have been inefficient and imposed unnecessary hardship on a large fraction of the population. To the extent that hastily chartered relief banks forestalled inefficient liquidation, they served their purpose. Although most of these banks eventually became insolvent, requiring taxpayer bailouts, we cannot label them unsuccessful. They reinflated economies and allowed for an orderly disposal of property. Determining if the net benefits were positive or negative requires more research, but for the moment we are forced to accept the possibility that the region’s state-owned banks of the 1820s and 1840s advanced the commonweal.

Conclusion: Banks and Economic Growth

Despite notable differences in the specific form and structure of each region’s banking system, they were all aimed squarely at a common goal; namely, realizing that region’s economic potential. Banks helped achieve the goal in two ways. First, banks monetized economies, which reduced the costs of transacting and helped smooth consumption and production across time. It was no longer necessary for every farm family to inventory their entire harvest. They could sell most of it, and expend the proceeds on consumption goods as the need arose until the next harvest brought a new cash infusion. Crop and livestock inventories are prone to substantial losses and an increased use of money reduced them significantly. Second, banks provided credit, which unleashed entrepreneurial spirits and talents. A complete appreciation of early American banking recognizes the banks’ contribution to antebellum America’s economic growth.

Bibliographic Essay

Because of the large number of sources used to construct the essay, the essay was more readable and less cluttered by including a brief bibliographic essay. A full bibliography is included at the end.

Good general histories of antebellum banking include Dewey (1910), Fenstermaker (1965), Gouge (1833), Hammond (1957), Knox (1903), Redlich (1949), and Trescott (1963). If only one book is read on antebellum banking, Hammond’s (1957) Pulitzer-Prize winning book remains the best choice.

The literature on New England banking is not particularly large, and the more important historical interpretations of state-wide systems include Chadbourne (1936), Hasse (1946, 1957), Simonton (1971), Spencer (1949), and Stokes (1902). Gras (1937) does an excellent job of placing the history of a single bank within the larger regional and national context. In a recent book and a number of articles Lamoreaux (1994 and sources therein) provides a compelling and eminently readable reinterpretation of the region’s banking structure. Nathan Appleton (1831, 1856) provides a contemporary observer’s interpretation, while Walker (1857) provides an entertaining if perverse and satirical history of a fictional New England bank. Martin (1969) provides details of bank share prices and dividend payments from the establishment of the first banks in Boston through the end of the nineteenth century. Less technical studies of the Suffolk system include Lake (1947), Trivoli (1979) and Whitney (1878); more technical interpretations include Calomiris and Kahn (1996), Mullineaux (1987), and Rolnick, Smith and Weber (1998).

The literature on Middle Atlantic banking is huge, but the better state-level histories include Bryan (1899), Daniels (1976), and Holdsworth (1928). The better studies of individual banks include Adams (1978), Lewis (1882), Nevins (1934), and Wainwright (1953). Chaddock (1910) provides a general history of the Safety Fund system. Golembe (1960) places it in the context of modern deposit insurance, while Bodenhorn (1996) and Calomiris (1989) provide modern analyses. A recent revival of interest in free banking has brought about a veritable explosion in the number of studies on the subject, but the better introductory ones remain Rockoff (1974, 1985), Rolnick and Weber (1982, 1983), and Dwyer (1996).

The literature on southern and western banking is large and of highly variable quality, but I have found the following to be the most readable and useful general sources: Caldwell (1935), Duke (1895), Esary (1912), Golembe (1978), Huntington (1915), Green (1972), Lesesne (1970), Royalty (1979), Schweikart (1987) and Starnes (1931).

References and Further Reading

Adams, Donald R., Jr. Finance and Enterprise in Early America: A Study of Stephen Girard’s Bank, 1812-1831. Philadelphia: University of Pennsylvania Press, 1978.

Alter, George, Claudia Goldin and Elyce Rotella. “The Savings of Ordinary Americans: The Philadelphia Saving Fund Society in the Mid-Nineteenth-Century.” Journal of Economic History 54, no. 4 (December 1994): 735-67.

Appleton, Nathan. A Defence of Country Banks: Being a Reply to a Pamphlet Entitled ‘An Examination of the Banking System of Massachusetts, in Reference to the Renewal of the Bank Charters.’ Boston: Stimpson & Clapp, 1831.

Appleton, Nathan. Bank Bills or Paper Currency and the Banking System of Massachusetts with Remarks on Present High Prices. Boston: Little, Brown and Company, 1856.

Berry, Thomas Senior. Revised Annual Estimates of American Gross National Product: Preliminary Estimates of Four Major Components of Demand, 1789-1889. Richmond: University of Richmond Bostwick Paper No. 3, 1978.

Bodenhorn, Howard. “Zombie Banks and the Demise of New York’s Safety Fund.” Eastern Economic Journal 22, no. 1 (1996): 21-34.

Bodenhorn, Howard. “Private Banking in Antebellum Virginia: Thomas Branch & Sons of Petersburg.” Business History Review 71, no. 4 (1997): 513-42.

Bodenhorn, Howard. A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation-Building. Cambridge and New York: Cambridge University Press, 2000.

Bodenhorn, Howard. State Banking in Early America: A New Economic History. New York: Oxford University Press, 2002.

Bryan, Alfred C. A History of State Banking in Maryland. Baltimore: Johns Hopkins University Press, 1899.

Caldwell, Stephen A. A Banking History of Louisiana. Baton Rouge: Louisiana State University Press, 1935.

Calomiris, Charles W. “Deposit Insurance: Lessons from the Record.” Federal Reserve Bank of Chicago Economic Perspectives 13 (1989): 10-30.

Calomiris, Charles W., and Charles Kahn. “The Efficiency of Self-Regulated Payments Systems: Learnings from the Suffolk System.” Journal of Money, Credit, and Banking 28, no. 4 (1996): 766-97.

Chadbourne, Walter W. A History of Banking in Maine, 1799-1930. Orono: University of Maine Press, 1936.

Chaddock, Robert E. The Safety Fund Banking System in New York, 1829-1866. Washington, D.C.: Government Printing Office, 1910.

Daniels, Belden L. Pennsylvania: Birthplace of Banking in America. Harrisburg: Pennsylvania Bankers Association, 1976.

Davis, Lance, and Robert E. Gallman. “Capital Formation in the United States during the Nineteenth Century.” In Cambridge Economic History of Europe (Vol. 7, Part 2), edited by Peter Mathias and M.M. Postan, 1-69. Cambridge: Cambridge University Press, 1978.

Davis, Lance, and Robert E. Gallman. “Savings, Investment, and Economic Growth: The United States in the Nineteenth Century.” In Capitalism in Context: Essays on Economic Development and Cultural Change in Honor of R.M. Hartwell, edited by John A. James and Mark Thomas, 202-29. Chicago: University of Chicago Press, 1994.

Dewey, Davis R. State Banking before the Civil War. Washington, D.C.: Government Printing Office, 1910.

Duke, Basil W. History of the Bank of Kentucky, 1792-1895. Louisville: J.P. Morton, 1895.

Dwyer, Gerald P., Jr. “Wildcat Banking, Banking Panics, and Free Banking in the United States.” Federal Reserve Bank of Atlanta Economic Review 81, no. 3 (1996): 1-20.

Engerman, Stanley L., and Robert E. Gallman. “U.S. Economic Growth, 1783-1860.” Research in Economic History 8 (1983): 1-46.

Esary, Logan. State Banking in Indiana, 1814-1873. Indiana University Studies No. 15. Bloomington: Indiana University Press, 1912.

Fenstermaker, J. Van. The Development of American Commercial Banking, 1782-1837. Kent, Ohio: Kent State University, 1965.

Fenstermaker, J. Van, and John E. Filer. “Impact of the First and Second Banks of the United States and the Suffolk System on New England Bank Money, 1791-1837.” Journal of Money, Credit, and Banking 18, no. 1 (1986): 28-40.

Friedman, Milton, and Anna J. Schwartz. “Has the Government Any Role in Money?” Journal of Monetary Economics 17, no. 1 (1986): 37-62.

Gallman, Robert E. “American Economic Growth before the Civil War: The Testimony of the Capital Stock Estimates.” In American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John Joseph Wallis, 79-115. Chicago: University of Chicago Press, 1992.

Goldsmith, Raymond. Financial Structure and Development. New Haven: Yale University Press, 1969.

Golembe, Carter H. “The Deposit Insurance Legislation of 1933: An Examination of its Antecedents and Purposes.” Political Science Quarterly 76, no. 2 (1960): 181-200.

Golembe, Carter H. State Banks and the Economic Development of the West. New York: Arno Press, 1978.

Gouge, William M. A Short History of Paper Money and Banking in the United States. Philadelphia: T.W. Ustick, 1833.

Gras, N.S.B. The Massachusetts First National Bank of Boston, 1784-1934. Cambridge, MA: Harvard University Press, 1937.

Green, George D. Finance and Economic Development in the Old South: Louisiana Banking, 1804-1861. Stanford: Stanford University Press, 1972.

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

Hasse, William F., Jr. A History of Banking in New Haven, Connecticut. New Haven: privately printed, 1946.

Hasse, William F., Jr. A History of Money and Banking in Connecticut. New Haven: privately printed, 1957.

Holdsworth, John Thom. Financing an Empire: History of Banking in Pennsylvania. Chicago: S.J. Clarke Publishing Company, 1928.

Huntington, Charles Clifford. A History of Banking and Currency in Ohio before the Civil War. Columbus: F. J. Herr Printing Company, 1915.

Knox, John Jay. A History of Banking in the United States. New York: Bradford Rhodes & Company, 1903.

Kuznets, Simon. “Foreword.” In Financial Intermediaries in the American Economy, by Raymond W. Goldsmith. Princeton: Princeton University Press, 1958.

Lake, Wilfred. “The End of the Suffolk System.” Journal of Economic History 7, no. 4 (1947): 183-207.

Lamoreaux, Naomi R. Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England. Cambridge: Cambridge University Press, 1994.

Lesesne, J. Mauldin. The Bank of the State of South Carolina. Columbia: University of South Carolina Press, 1970.

Lewis, Lawrence, Jr. A History of the Bank of North America: The First Bank Chartered in the United States. Philadelphia: J.B. Lippincott & Company, 1882.

Lockard, Paul A. Banks, Insider Lending and Industries of the Connecticut River Valley of Massachusetts, 1813-1860. Unpublished Ph.D. thesis, University of Massachusetts, 2000.

Martin, Joseph G. A Century of Finance. New York: Greenwood Press, 1969.

Moulton, H.G. “Commercial Banking and Capital Formation.” Journal of Political Economy 26 (1918): 484-508, 638-63, 705-31, 849-81.

Mullineaux, Donald J. “Competitive Monies and the Suffolk Banking System: A Contractual Perspective.” Southern Economic Journal 53 (1987): 884-98.

Nevins, Allan. History of the Bank of New York and Trust Company, 1784 to 1934. New York: privately printed, 1934.

New York. Bank Commissioners. “Annual Report of the Bank Commissioners.” New York General Assembly Document No. 74. Albany, 1835.

North, Douglass. “Institutional Change in American Economic History.” In American Economic Development in Historical Perspective, edited by Thomas Weiss and Donald Schaefer, 87-98. Stanford: Stanford University Press, 1994.

Rappaport, George David. Stability and Change in Revolutionary Pennsylvania: Banking, Politics, and Social Structure. University Park, PA: The Pennsylvania State University Press, 1996.

Redlich, Fritz. The Molding of American Banking: Men and Ideas. New York: Hafner Publishing Company, 1947.

Rockoff, Hugh. “The Free Banking Era: A Reexamination.” Journal of Money, Credit, and Banking 6, no. 2 (1974): 141-67.

Rockoff, Hugh. “New Evidence on the Free Banking Era in the United States.” American Economic Review 75, no. 4 (1985): 886-89.

Rolnick, Arthur J., and Warren E. Weber. “Free Banking, Wildcat Banking, and Shinplasters.” Federal Reserve Bank of Minneapolis Quarterly Review 6 (1982): 10-19.

Rolnick, Arthur J., and Warren E. Weber. “New Evidence on the Free Banking Era.” American Economic Review 73, no. 5 (1983): 1080-91.

Rolnick, Arthur J., Bruce D. Smith, and Warren E. Weber. “Lessons from a Laissez-Faire Payments System: The Suffolk Banking System (1825-58).” Federal Reserve Bank of Minneapolis Quarterly Review 22, no. 3 (1998): 11-21.

Royalty, Dale. “Banking and the Commonwealth Ideal in Kentucky, 1806-1822.” Register of the Kentucky Historical Society 77 (1979): 91-107.

Schumpeter, Joseph A. The Theory of Economic Development: An Inquiry into Profit, Capital, Credit, Interest, and the Business Cycle. Cambridge, MA: Harvard University Press, 1934.

Schweikart, Larry. Banking in the American South from the Age of Jackson to Reconstruction. Baton Rouge: Louisiana State University Press, 1987.

Simonton, William G. Maine and the Panic of 1837. Unpublished master’s thesis: University of Maine, 1971.

Sokoloff, Kenneth L. “Productivity Growth in Manufacturing during Early Industrialization.” In Long-Term Factors in American Economic Growth, edited by Stanley L. Engerman and Robert E. Gallman. Chicago: University of Chicago Press, 1986.

Sokoloff, Kenneth L. “Invention, Innovation, and Manufacturing Productivity Growth in the Antebellum Northeast.” In American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John Joseph Wallis, 345-78. Chicago: University of Chicago Press, 1992.

Spencer, Charles, Jr. The First Bank of Boston, 1784-1949. New York: Newcomen Society, 1949.

Starnes, George T. Sixty Years of Branch Banking in Virginia. New York: Macmillan Company, 1931.

Stokes, Howard Kemble. Chartered Banking in Rhode Island, 1791-1900. Providence: Preston & Rounds Company, 1902.

Sylla, Richard. “Forgotten Men of Money: Private Bankers in Early U.S. History.” Journal of Economic History 36, no. 2 (1976):

Temin, Peter. The Jacksonian Economy. New York: W. W. Norton & Company, 1969.

Trescott, Paul B. Financing American Enterprise: The Story of Commercial Banking. New York: Harper & Row, 1963.

Trivoli, George. The Suffolk Bank: A Study of a Free-Enterprise Clearing System. London: The Adam Smith Institute, 1979.

U.S. Comptroller of the Currency. Annual Report of the Comptroller of the Currency. Washington, D.C.: Government Printing Office, 1931.

Wainwright, Nicholas B. History of the Philadelphia National Bank. Philadelphia: William F. Fell Company, 1953.

Walker, Amasa. History of the Wickaboag Bank. Boston: Crosby, Nichols & Company, 1857.

Wallis, John Joseph. “What Caused the Panic of 1839?” Unpublished working paper, University of Maryland, October 2000.

Weiss, Thomas. “U.S. Labor Force Estimates and Economic Growth, 1800-1860.” In American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John Joseph Wallis, 19-75. Chicago: University of Chicago Press, 1992.

Whitney, David R. The Suffolk Bank. Cambridge, MA: Riverside Press, 1878.

Wright, Robert E. “Artisans, Banks, Credit, and the Election of 1800.” The Pennsylvania Magazine of History and Biography 122, no. 3 (July 1998), 211-239.

Wright, Robert E. “Bank Ownership and Lending Patterns in New York and Pennsylvania, 1781-1831.” Business History Review 73, no. 1 (Spring 1999), 40-60.

1 Banknotes were small demonination IOUs printed by banks and circulated as currency. Modern U.S. money are simply banknotes issued by the Federal Reserve Bank, which has a monopoly privilege in the issue of legal tender currency. In antebellum American, when a bank made a loan, the borrower was typically handed banknotes with a face value equal to the dollar value of the loan. The borrower then spent these banknotes in purchasing goods and services, putting them into circulation. Contemporary law held that banks were required to redeem banknotes into gold and silver legal tender on demand. Banks found it profitable to issue notes because they typically held about 30 percent of the total value of banknotes in circulation as reserves. Thus, banks were able to leverage $30 in gold and silver into $100 in loans that returned about 7 percent interest on average.

2 Paul Lockard (2000) challenges Lamoreaux’s interpretation. In a study of 4 banks in the Connecticut River valley, Lockard finds that insiders did not dominate these banks’ resources. As provocative as Lockard’s findings are, he draws conclusions from a small and unrepresentative sample. Two of his four sample banks were savings banks, which were designed as quasi-charitable organizations designed to encourage savings by the working classes and provide small loans. Thus, Lockard’s sample is effectively reduced to two banks. At these two banks, he identifies about 10 percent of loans as insider loans, but readily admits that he cannot always distinguish between insiders and outsiders. For a recent study of how early Americans used savings banks, see Alter, Goldin and Rotella (1994). The literature on savings banks is so large that it cannot be be given its due here.

3 Interbank clearing involves the settling of balances between banks. Modern banks cash checks drawn on other banks and credit the funds to the depositor. The Federal Reserve system provides clearing services between banks. The accepting bank sends the checks to the Federal Reserve, who credits the sending bank’s accounts and sends the checks back to the bank on which they were drawn for reimbursement. In the antebellum era, interbank clearing involved sending banknotes back to issuing banks. Because New England had so many small and scattered banks, the costs of returning banknotes to their issuers were large and sometimes avoided by recirculating notes of distant banks rather than returning them. Regular clearings and redemptions served an important purpose, however, because they kept banks in touch with the current market conditions. A massive redemption of notes was indicative of a declining demand for money and credit. Because the bank’s reserves were drawn down with the redemptions, it was forced to reduce its volume of loans in accord with changing demand conditions.

4 The law held that banknotes were redeemable on demand into gold or silver coin or bullion. If a bank refused to redeem even a single $1 banknote, the banknote holder could have the bank closed and liquidated to recover his or her claim against it.

5 Rappaport (1996) found that the bank’s loans were about equally divided between insiders (shareholders and shareholders’ family and business associates) and outsiders, but nonshareholders received loans about 30 percent smaller than shareholders. The issue remains about whether this bank was an “insider” bank, and depends largely on one’s definition. Any modern bank which made half of its loans to shareholders and their families would be viewed as an “insider” bank. It is less clear where the line can be usefully drawn for antebellum banks.

6 Real-bills lending followed from a nineteenth-century banking philosophy, which held that bank lending should be used to finance the warehousing or wholesaling of already-produced goods. Loans made on these bases were thought to be self-liquidating in that the loan was made against readily sold collateral actually in the hands of a merchant. Under the real-bills doctrine, the banks’ proper functions were to bridge the gap between production and retail sale of goods. A strict adherence to real-bills tenets excluded loans on property (mortgages), loans on goods in process (trade credit), or loans to start-up firms (venture capital). Thus, real-bills lending prescribed a limited role for banks and bank credit. Few banks were strict adherents to the doctrine, but many followed it in large part.

7 Robert E. Wright (1998) offers a different interpretation, but notes that Burr pushed the bill through at the end of a busy legislative session so that many legislators voted on the bill without having read it thoroughly

Citation: Bodenhorn, Howard. “Antebellum Banking in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL http://eh.net/encyclopedia/antebellum-banking-in-the-united-states/

The Economic History of Australia from 1788: An Introduction

Bernard Attard, University of Leicester

Introduction

The economic benefits of establishing a British colony in Australia in 1788 were not immediately obvious. The Government’s motives have been debated but the settlement’s early character and prospects were dominated by its original function as a jail. Colonization nevertheless began a radical change in the pattern of human activity and resource use in that part of the world, and by the 1890s a highly successful settler economy had been established on the basis of a favorable climate in large parts of the southeast (including Tasmania ) and the southwest corner; the suitability of land for European pastoralism and agriculture; an abundance of mineral wealth; and the ease with which these resources were appropriated from the indigenous population. This article will focus on the creation of a colonial economy from 1788 and its structural change during the twentieth century. To simplify, it will divide Australian economic history into four periods, two of which overlap. These are defined by the foundation of the ‘bridgehead economy’ before 1820; the growth of a colonial economy between 1820 and 1930; the rise of manufacturing and the protectionist state between 1891 and 1973; and the experience of liberalization and structural change since 1973. The article will conclude by suggesting briefly some of the similarities between Australia and other comparable settler economies, as well as the ways in which it has differed from them.

The Bridgehead Economy, 1788-1820

The description ‘bridgehead economy’ was used by one of Australia’s foremost economic historians, N. G. Butlin to refer to the earliest decades of British occupation when the colony was essentially a penal institution. The main settlements were at Port Jackson (modern Sydney, 1788) in New South Wales and Hobart (1804) in what was then Van Diemen’s Land (modern Tasmania). The colony barely survived its first years and was largely neglected for much of the following quarter-century while the British government was preoccupied by the war with France. An important beginning was nevertheless made in the creation of a private economy to support the penal regime. Above all, agriculture was established on the basis of land grants to senior officials and emancipated convicts, and limited freedoms were allowed to convicts to supply a range of goods and services. Although economic life depended heavily on the government Commissariat as a supplier of goods, money and foreign exchange, individual rights in property and labor were recognized, and private markets for both started to function. In 1808, the recall of the New South Wales Corps, whose officers had benefited most from access to land and imported goods (thus hopelessly entangling public and private interests), coupled with the appointment of a new governor, Lachlan Macquarie, in the following year, brought about a greater separation of the private economy from the activities and interests of the colonial government. With a significant increase in the numbers transported after 1810, New South Wales’ future became more secure. As laborers, craftsmen, clerks and tradesmen, many convicts possessed the skills required in the new settlements. As their terms expired, they also added permanently to the free population. Over time, this would inevitably change the colony’s character.

Natural Resources and the Colonial Economy, 1820-1930

Pastoral and Rural Expansion

For Butlin, the developments around 1810 were a turning point in the creation of a ‘colonial’ economy. Many historians have preferred to view those during the 1820s as more significant. From that decade, economic growth was based increasingly upon the production of fine wool and other rural commodities for markets in Britain and the industrializing economies of northwestern Europe. This growth was interrupted by two major depressions during the 1840s and 1890s and stimulated in complex ways by the rich gold discoveries in Victoria in 1851, but the underlying dynamics were essentially unchanged. At different times, the extraction of natural resources, whether maritime before the 1840s or later gold and other minerals, was also important. Agriculture, local manufacturing and construction industries expanded to meet the immediate needs of growing populations, which concentrated increasingly in the main urban centers. The colonial economy’s structure, growth of population and significance of urbanization are illustrated in tables 1 and 2. The opportunities for large profits in pastoralism and mining attracted considerable amounts of British capital, while expansion generally was supported by enormous government outlays for transport, communication and urban infrastructures, which also depended heavily on British finance. As the economy expanded, large-scale immigration became necessary to satisfy the growing demand for workers, especially after the end of convict transportation to the eastern mainland in 1840. The costs of immigration were subsidized by colonial governments, with settlers coming predominantly from the United Kingdom and bringing skills that contributed enormously to the economy’s growth. All this provided the foundation for the establishment of free colonial societies. In turn, the institutions associated with these — including the rule of law, secure property rights, and stable and democratic political systems — created conditions that, on balance, fostered growth. In addition to New South Wales, four other British colonies were established on the mainland: Western Australia (1829), South Australia (1836), Victoria (1851) and Queensland (1859). Van Diemen’s Land (Tasmania after 1856) became a separate colony in 1825. From the 1850s, these colonies acquired responsible government. In 1901, they federated, creating the Commonwealth of Australia.

Table 1
The Colonial Economy: Percentage Shares of GDP, 1891 Prices, 1861-1911

Pastoral Other rural Mining Manuf. Building Services Rent
1861 9.3 13.0 17.5 14.2 8.4 28.8 8.6
1891 16.1 12.4 6.7 16.6 8.5 29.2 10.3
1911 14.8 16.7 9.0 17.1 5.3 28.7 8.3

Source: Haig (2001), Table A1. Totals do not sum to 100 because of rounding.

Table 2
Colonial Populations (thousands), 1851-1911

Australia Colonies Cities
NSW Victoria Sydney Melbourne
1851 257 100 46 54 29
1861 669 198 328 96 125
1891 1,704 608 598 400 473
1911 2,313 858 656 648 593

Source: McCarty (1974), p. 21; Vamplew (1987), POP 26-34.

The process of colonial growth began with two related developments. First, in 1820, Macquarie responded to land pressure in the districts immediately surrounding Sydney by relaxing restrictions on settlement. Soon the outward movement of herdsmen seeking new pastures became uncontrollable. From the 1820s, the British authorities also encouraged private enterprise by the wholesale assignment of convicts to private employers and easy access to land. In 1831, the principles of systematic colonization popularized by Edward Gibbon Wakefield (1796-1862) were put into practice in New South Wales with the substitution of land sales for grants in order to finance immigration. This, however, did not affect the continued outward movement of pastoralists who simply occupied land where could find it beyond the official limits of settlement. By 1840, they had claimed a vast swathe of territory two hundred miles in depth running from Moreton Bay in the north (the site of modern Brisbane) through the Port Phillip District (the future colony of Victoria, whose capital Melbourne was marked out in 1837) to Adelaide in South Australia. The absence of any legal title meant that these intruders became known as ‘squatters’ and the terms of their tenure were not finally settled until 1846 after a prolonged political struggle with the Governor of New South Wales, Sir George Gipps.

The impact of the original penal settlements on the indigenous population had been enormous. The consequences of squatting after 1820 were equally devastating as the land and natural resources upon which indigenous hunter-gathering activities and environmental management depended were appropriated on a massive scale. Aboriginal populations collapsed in the face of disease, violence and forced removal until they survived only on the margins of the new pastoral economy, on government reserves, or in the arid parts of the continent least touched by white settlement. The process would be repeated again in northern Australia during the second half of the century.

For the colonists this could happen because Australia was considered terra nullius, vacant land freely available for occupation and exploitation. The encouragement of private enterprise, the reception of Wakefieldian ideas, and the wholesale spread of white settlement were all part of a profound transformation in official and private perceptions of Australia’s prospects and economic value as a British colony. Millennia of fire-stick management to assist hunter-gathering had created inland grasslands in the southeast that were ideally suited to the production of fine wool. Both the physical environment and the official incentives just described raised expectations of considerable profits to be made in pastoral enterprise and attracted a growing stream of British capital in the form of organizations like the Australian Agricultural Company (1824); new corporate settlements in Western Australia (1829) and South Australia (1836); and, from the 1830s, British banks and mortgage companies formed to operate in the colonies. By the 1830s, wool had overtaken whale oil as the colony’s most important export, and by 1850 New South Wales had displaced Germany as the main overseas supplier to British industry (see table 3). Allowing for the colonial economy’s growing complexity, the cycle of growth based upon land settlement, exports and British capital would be repeated twice. The first pastoral boom ended in a depression which was at its worst during 1842-43. Although output continued to grow during the 1840s, the best land had been occupied in the absence of substantial investment in fencing and water supplies. Without further geographical expansion, opportunities for high profits were reduced and the flow of British capital dried up, contributing to a wider downturn caused by drought and mercantile failure.

Table 3
Imports of Wool into Britain (thousands of bales), 1830-50

German Australian
1830 74.5 8.0
1840 63.3 41.0
1850 30.5 137.2

Source: Sinclair (1976), p. 46

When pastoral growth revived during the 1860s, borrowed funds were used to fence properties and secure access to water. This in turn allowed a further extension of pastoral production into the more environmentally fragile semi-arid interior districts of New South Wales, particularly during the 1880s. As the mobs of sheep moved further inland, colonial governments increased the scale of their railway construction programs, some competing to capture the freight to ports. Technical innovation and government sponsorship of land settlement brought greater diversity to the rural economy (see table 4). Exports of South Australian wheat started in the 1870s. The development of drought resistant grain varieties from the turn of the century led to an enormous expansion of sown acreage in both the southeast and southwest. From the 1880s, sugar production increased in Queensland, although mainly for the domestic market. From the 1890s, refrigeration made it possible to export meat, dairy products and fruit.

Table 4
Australian Exports (percentages of total value of exports), 1881-1928/29

Wool Minerals Wheat,flour Butter Meat Fruit
1881-90 54.1 27.2 5.3 0.1 1.2 0.2
1891-1900 43.5 33.1 2.9 2.4 4.1 0.3
1901-13 34.3 35.4 9.7 4.1 5.1 0.5
1920/21-1928/29 42.9 8.8 20.5 5.6 4.6 2.2

Source: Sinclair (1976), p. 166

Gold and Its Consequences

Alongside rural growth and diversification, the remarkable gold discoveries in central Victoria in 1851 brought increased complexity to the process of economic development. The news sparked an immediate surge of gold seekers into the colony, which was soon reinforced by a flood of overseas migrants. Until the 1870s, gold displaced wool as Australia’s most valuable export. Rural industries either expanded output (wheat in South Australia) or, in the case of pastoralists, switched production to meat and tallow, to supply a much larger domestic market. Minerals had been extracted since earliest settlement and, while yields on the Victorian gold fields soon declined, rich mineral deposits continued to be found. During the 1880s alone these included silver, lead and zinc at Broken Hill in New South Wales; copper at Mount Lyell in Tasmania; and gold at Charters Towers and Mount Morgan in Queensland. From 1893, what eventually became the richest goldfields in Australia were discovered at Coolgardie in Western Australia. The mining industry’s overall contribution to output and exports is illustrated in tables 1 and 4.

In Victoria, the deposits of easily extracted alluvial gold were soon exhausted and mining was taken over by companies that could command the financial and organizational resources needed to work the deep lodes. But the enormous permanent addition to the colonial population caused by the gold rush had profound effects throughout eastern Australia, dramatically accelerating the growth of the local market and workforce, and deeply disturbing the social balance that had emerged during the decade before. Between 1851 and 1861, the Australian population more than doubled. In Victoria it increased sevenfold; Melbourne outgrew Sydney, Chicago and San Francisco (see table 2). Significantly enlarged populations required social infrastructure, political representation, employment and land; and the new colonial legislatures were compelled to respond. The way this was played out varied between colonies but the common outcomes were the introduction of manhood suffrage, access to land through ‘free selection’ of small holdings, and, in the Victorian case, the introduction of a protectionist tariff in 1865. The particular age structure of the migrants of the 1850s also had long-term effects on the building cycle, notably in Victoria. The demand for housing accelerated during the 1880s, as the children of the gold generation matured and established their own households. With pastoral expansion and public investment also nearing their peaks, the colony experienced a speculative boom which added to the imbalances already being caused by falling export prices and rising overseas debt. The boom ended with the wholesale collapse of building companies, mortgage banks and other financial institutions during 1891-92 and the stoppage of much of the banking system during 1893.

The depression of the 1890s was worst in Victoria. Its impact on employment was softened by the Western Australian gold discoveries, which drew population away, but the colonial economy had grown to such an extent since the 1850s that the stimulus provided by the earlier gold finds could not be repeated. Severe drought in eastern Australia from the mid-1890s until 1903 caused the pastoral industry to contract. Yet, as we have seen, technological innovation also created opportunities for other rural producers, who were now heavily supported by government with little direct involvement by foreign investors. The final phase of rural expansion, with its associated public investment in rural (and increasingly urban) infrastructure continued until the end of the 1920s. Yields declined, however, as farmers moved onto the most marginal land. The terms of trade also deteriorated with the oversupply of several commodities in world markets after the First World War. As a result, the burden of servicing foreign debt rose once again. Australia’s position as a capital importer and exporter of natural resources meant that the Great Depression arrived early. From late 1929, the closure of overseas capital markets and collapse of export prices forced the Federal Government to take drastic measures to protect the balance of payments. The falls in investment and income transmitted the contraction to the rest of the economy. By 1932, average monthly unemployment amongst trade union members was over 22 percent. Although natural resource industries continued to have enduring importance as earners of foreign exchange, the Depression finally ended the long period in which land settlement and technical innovation had together provided a secure foundation for economic growth.

Manufacturing and the Protected Economy, 1891-1973

The ‘Australian Settlement’

There is a considerable chronological overlap between the previous section, which surveyed the growth of a colonial economy during the nineteenth century based on the exploitation of natural resources, and this one because it is a convenient way of approaching the two most important developments in Australian economic history between Federation and the 1970s: the enormous increase in government regulation after 1901 and, closely linked to this, the expansion of domestic manufacturing, which from the Second World War became the most dynamic part of the Australian economy.

The creation of the Commonwealth of Australia on 1 January 1901 broadened the opportunities for public intervention in private markets. The new Federal Government was given clearly-defined but limited powers over obviously ‘national’ matters like customs duties. The rest, including many affecting economic development and social welfare, remained with the states. The most immediate economic consequence was the abolition of inter-colonial tariffs and the establishment of a single Australian market. But the Commonwealth also soon set about transferring to the national level several institutions that different the colonies had experimented with during the 1890s. These included arrangements for the compulsory arbitration of industrial disputes by government tribunals, which also had the power to fix wages, and a discriminatory ‘white Australia’ immigration policy designed to exclude non-Europeans from the labor market. Both were partly responses to organized labor’s electoral success during the 1890s. Urban business and professional interests had always been represented in colonial legislatures; during the 1910s, rural producers also formed their own political parties. Subsequently, state and federal governments were typically formed by the either Australian Labor Party or coalitions of urban conservatives and the Country Party. The constituencies they each represented were thus able to influence the regulatory structure to protect themselves against the full impact of market outcomes, whether in the form of import competition, volatile commodity prices or uncertain employment conditions. The institutional arrangements they created have been described as the ‘Australian settlement’ because they balanced competing producer interests and arguably provided a stable framework for economic development until the 1970s, despite the inevitable costs.

The Growth of Manufacturing

An important part of the ‘Australian settlement’ was the imposition of a uniform federal tariff and its eventual elaboration into a system of ‘protection all round’. The original intended beneficiaries were manufacturers and their employees; indeed, when the first protectionist tariff was introduced in 1907, its operation was linked to the requirement that employers pay their workers ‘fair and reasonable wages’. Manufacturing’s actual contribution to economic growth before Federation has been controversial. The population influx of the 1850s widened opportunities for import-substitution but the best evidence suggests that manufacturing grew slowly as the industrial workforce increased (see table 1). Production was small-scale and confined largely to the processing of rural products and raw materials; assembly and repair-work; or the manufacture of goods for immediate consumption (e.g. soap and candle-making, brewing and distilling). Clothing and textile output was limited to a few lines. For all manufacturing, growth was restrained by the market’s small size and the limited opportunities for technical change it afforded.

After Federation, production was stimulated by several factors: rural expansion, the increasing use of agricultural machinery and refrigeration equipment, and the growing propensity of farm incomes to be spent locally. The removal of inter-colonial tariffs may also have helped. The statistical evidence indicates that between 1901 and the outbreak of the First World War manufacturing grew faster than the economy as a whole, while output per worker increased. But manufacturers also aspired mainly to supply the domestic market and expended increasing energy on retaining privileged access. Tariffs rose considerably between the two world wars. Some sectors became more capital intensive, particularly with the establishment of a local steel industry, the beginnings of automobile manufacture, and the greater use of electricity. But, except during the first half of the 1920s, there was little increase in labor productivity and the inter-war expansion of textile manufacturing reflected the heavy bias towards import substitution. Not until the Second World War and after did manufacturing growth accelerate and extend to those sectors most characteristic of an advance industrial economy (table 5). Amongst these were automobiles, chemicals, electrical and electronic equipment, and iron-and-steel. Growth was sustained during 1950s by similar factors to those operating in other countries during the ‘long boom’, including a growing stream of American direct investment, access to new and better technology, and stable conditions of full employment.

Table 5
Manufacturing and the Australian Economy, 1913-1949

1938-39 prices
Manufacturing share of GDP % Manufacturing annual rate of growth % GDP, annual rate of growth %
1913/14 21.9
1928/29 23.6 2.6 2.1
1948/49 29.8 3.4 2.2

Calculated from Haig (2001), Table A2. Rates of change are average annual changes since the previous year in the first column.

Manufacturing peaked in the mid-1960s at about 28 percent of national output (measured in 1968-69 prices) but natural resource industries remained the most important suppliers of exports. Since the 1920s, over-supply in world markets and the need to compensate farmers for manufacturing protection, had meant that virtually all rural industries, with the exception of wool, had been drawn into a complicated system of subsidies, price controls and market interventions at both federal and state levels. The post-war boom in the world economy increased demand for commodities, benefiting rural producers but also creating new opportunities for Australian miners. Most important of all, the first surge of breakneck growth in East Asia opened a vast new market for iron ore, coal and other mining products. Britain’s significance as a trading partner had declined markedly since the 1950s. By the end of the 1960s, Japan overtook it as Australia’s largest customer, while the United States was now the main provider of imports.

The mining bonanza contributed to the boom conditions experienced generally after 1950. The Federal Government played its part by using the full range of macroeconomic policies that were also increasingly familiar in similar western countries to secure stability and full employment. It encouraged high immigration, relaxing the entry criteria to allow in large numbers of southern Europeans, who added directly to the workforce, but also brought knowledge and experience. With state governments, the Commonwealth increased expenditure on education significantly, effectively entering the field for the first time after 1945. Access to secondary education was widened with the abandonment of fees in government schools and federal finance secured an enormous expansion of university places, especially after 1960. Some weaknesses remained. Enrolment rates after primary school were below those in many industrial countries and funding for technical education was poor. Despite this, the Australian population’s rising levels of education and skill continued to be important additional sources of growth. Finally, although government advisers expressed misgivings, industry policy remained determinedly interventionist. While state governments competed to attract manufacturing investment with tax and other incentives, by the 1960s protection had reached its highest level, with Australia playing virtually no part in the General Agreement on Tariffs and Trade (GATT), despite being an original signatory. The effects of rising tariffs since 1900 were evident in the considerable decline in Australia’s openness to trade (Table 6). Yet, as the post-war boom approached its end, the country still relied upon commodity exports and foreign investment to purchase the manufactures it was unable to produce itself. The impossibility of sustaining growth in this way was already becoming clear, even though the full implications would only be felt during the decades to come.

Table 6
Trade (Exports Plus Imports)
as a Share of GDP, Current Prices, %

1900/1 44.9
1928/29 36.9
1938/38 32.7
1964/65 33.3
1972/73 29.5

Calculated from Vamplew (1987), ANA 119-129.

Liberalization and Structural Change, 1973-2005

From the beginning of the 1970s, instability in the world economy and weakness at home ended Australia’s experience of the post-war boom. During the following decades, manufacturing’s share in output (table 7) and employment fell, while the long-term relative decline of commodity prices meant that natural resources could no longer be relied on to cover the cost of imports, let alone the long-standing deficits in payments for services, migrant remittances and interest on foreign debt. Until the early 1990s, Australia also suffered from persistent inflation and rising unemployment (which remained permanently higher, see chart 1). As a consequence, per capita incomes fluctuated during the 1970s, and the economy contracted in absolute terms during 1982-83 and 1990-91.

Even before the 1970s, new sources of growth and rising living standards had been needed, but the opportunities for economic change were restricted by the elaborate regulatory structure that had evolved since Federation. During that decade itself, policy and outlook were essentially defensive and backward looking, despite calls for reform and some willingness to alter the tariff. Governments sought to protect employment in established industries, while dependence on mineral exports actually increased as a result of the commodity booms at the decade’s beginning and end. By the 1980s, however, it was clear that the country’s existing institutions were failing and fundamental reform was required.

Table 7
The Australian Economy, 1974-2004

A. Percentage shares of value-added, constant prices

1974 1984 1994 2002
Agriculture 4.4 4.3 3.0 2.7
Manufacturing 18.1 15.2 13.3 11.8
Other industry, inc. mining 14.2 14.0 14.6 14.4
Services 63.4 66.4 69.1 71.1

B. Per capita GDP, annual average rate of growth %, constant prices

1973-84 1.2
1984-94 1.7
1994-2004 2.5

Calculated from World Bank, World Development Indicators (Sept. 2005).

Figure 1
Unemployment, 1971-2005, percent

Unemployment, 1971-2005, percent

Source: Reserve Bank of Australia (1988); Reserve Bank of Australia, G07Hist.xls. Survey data at August. The method of data collection changed in 1978.

The catalyst was the resumption of the relative fall of commodity prices since the Second World War which meant that the cost of purchasing manufactured goods inexorably rose for primary producers. The decline had been temporarily reversed by the oil shocks of the 1970s but, from the 1980/81 financial year until the decade’s end, the value of Australia’s merchandise imports exceeded that of merchandise exports in every year but two. The overall deficit on current account measured as a proportion of GDP also moved became permanently higher, averaging around 4.7 percent. During the 1930s, deflation had been followed by the further closing of the Australian economy. There was no longer much scope for this. Manufacturing had stagnated since the 1960s, suffering especially from the inflation of wage and other costs during the 1970s. It was particularly badly affected by the recession of 1982-83, when unemployment rose to almost ten percent, its highest level since the Great Depression. In 1983, a new federal Labor Government led by Bob Hawke sought to engineer a recovery through an ‘Accord’ with the trade union movement which aimed at creating employment by holding down real wages. But under Hawke and his Treasurer, Paul Keating — who warned colorfully that otherwise the country risked becoming a ‘banana republic’ — Labor also started to introduce broader reforms to increase the efficiency of Australian firms by improving their access to foreign finance and exposing them to greater competition. Costs would fall and exports of more profitable manufactures increase, reducing the economy’s dependence on commodities. During the 1980s and 1990s, the reforms deepened and widened, extending to state governments and continuing with the election of a conservative Liberal-National Party government under John Howard in 1996, as each act of deregulation invited further measures to consolidate them and increase their effectiveness. Key reforms included the floating of the Australian dollar and the deregulation of the financial system; the progressive removal of protection of most manufacturing and agriculture; the dismantling of the centralized system of wage-fixing; taxation reform; and the promotion of greater competition and better resource use through privatization and the restructuring of publicly-owned corporations, the elimination of government monopolies, and the deregulation of sectors like transport and telecommunications. In contrast with the 1930s, the prospects of further domestic reform were improved by an increasingly favorable international climate. Australia contributed by joining other nations in the Cairns Group to negotiate reductions of agricultural protection during the Uruguay round of GATT negotiations and by promoting regional liberalization through the Asia Pacific Economic Cooperation (APEC) forum.

Table 8
Exports and Openness, 1983-2004

Shares of total exports, % Shares of GDP: exports + imports, %
Goods Services
Rural Resource Manuf. Other
1983 30 34 9 3 24 26
1989 23 37 11 5 24 27
1999 20 34 17 4 24 37
2004 18 33 19 6 23 39

Calculated from: Reserve Bank of Australia, G10Hist.xls and H03Hist.xls; World Bank, World Development Indicators (Sept. 2005). Chain volume measures, except shares of GDP, 1983, which are at current prices.

The extent to which institutional reform had successfully brought about long-term structural change was still not clear at the end of the century. Recovery from the 1982-83 recession was based upon a strong revival of employment. By contrast, the uninterrupted growth experienced since 1992 arose from increases in the combined productivity of workers and capital. If this persisted, it was a historic change in the sources of growth from reliance on the accumulation of capital and the increase of the workforce to improvements in the efficiency of both. From the 1990s, the Australian economy also became more open (table 8). Manufactured goods increased their share of exports, while rural products continued to decline. Yet, although growth was more broadly-based, rapid and sustained (table 7), the country continued to experience large trade and current account deficits, which were augmented by the considerable increase of foreign debt after financial deregulation during the 1980s. Unemployment also failed to return to its pre-1974 level of around 2 percent, although much of the permanent rise occurred during the mid to late 1970s. In 2005, it remained 5 percent (Figure 1). Institutional reform clearly contributed to these changes in economic structure and performance but they were also influenced by other factors, including falling transport costs, the communications and information revolutions, the greater openness of the international economy, and the remarkable burst of economic growth during the century’s final decades in southeast and east Asia, above all China. Reform was also complemented by policies to provide the skills needed in a technologically-sophisticated, increasingly service-oriented economy. Retention rates in the last years of secondary education doubled during the 1980s, followed by a sharp increase of enrolments in technical colleges and universities. By 2002, total expenditure on education as a proportion of national income had caught up with the average of member countries of the OECD (Table 9). Shortages were nevertheless beginning to be experienced in the engineering and other skilled trades, raising questions about some priorities and the diminishing relative financial contribution of government to tertiary education.

Table 9
Tertiary Enrolments and Education Expenditure, 2002

Tertiary enrolments, gross percent Education expenditure as a proportion of GDP, percent
Australia 63.22 6.0
OECD 61.68 5.8
United States 70.67 7.2

Source: World Bank, World Development Indicators (Sept. 2005); OECD (2005). Gross enrolments are total enrolments, regardless of age, as a proportion of the population in the relevant official age group. OECD enrolments are for fifteen high-income members only.

Summing Up: The Australian Economy in a Wider Context

Virtually since the beginning of European occupation, the Australian economy had provided the original British colonizers, generations of migrants, and the descendants of both with a remarkably high standard of living. Towards the end of the nineteenth century, this was by all measures the highest in the world (see table 10). After 1900, national income per member of the population slipped behind that of several countries, but continued to compare favorably with most. In 2004, Australia was ranked behind only Norway and Sweden in the United Nation’s Human Development Index. Economic historians have differed over the sources of growth that made this possible. Butlin emphasized the significance of local factors like the unusually high rate of urbanization and the expansion of domestic manufacturing. In important respects, however, Australia was subject to the same forces as other European settler societies in New Zealand and Latin America, and its development bore striking similarities to theirs. From the 1820s, its economy grew as one frontier of an expanding western capitalism. With its close institutional ties to, and complementarities with, the most dynamic parts of the world economy, it drew capital and migrants from them, supplied them with commodities, and shared the benefits of their growth. Like other settler societies, it sought population growth as an end in itself and, from the turn of the nineteenth century, aspired to the creation of a national manufacturing base. Finally, when openness to the world economy appeared to threaten growth and living standards, governments intervened to regulate and protect with broader social objectives in mind. But there were also striking contrasts with other settler economies, notably those in Latin America like Argentina, with which it has been frequently compared. In particular, Australia responded to successive challenges to growth by finding new opportunities for wealth creation with a minimum of political disturbance, social conflict or economic instability, while sharing a rising national income as widely as possible.

Table 10
Per capita GDP in Australia, United States and Argentina
(1990 international dollars)

Australia United States Argentina
1870 3,641 2,457 1,311
1890 4,433 3,396 2,152
1950 7,493 9,561 4,987
1998 20,390 27,331 9,219

Sources: Australia: GDP, Haig (2001) as converted in Maddison (2003); all other data Maddison (1995) and (2001)

From the mid-twentieth century, Australia’s experience also resembled that of many advanced western countries. This included the post-war willingness to use macroeconomic policy to maintain growth and full employment; and, after the 1970s, the abandonment of much government intervention in private markets while at the same time retaining strong social services and seeking to improve education and training. Australia also experienced a similar relative decline of manufacturing, permanent rise of unemployment, and transition to a more service-based economy typical of high income countries. By the beginning of the new millennium, services accounted for over 70 percent of national income (table 7). Australia remained vulnerable as an exporter of commodities and importer of capital but its endowment of natural resources and the skills of its population were also creating opportunities. The country was again favorably positioned to take advantage of growth in the most dynamic parts of the world economy, particularly China. With the final abandonment of the White Australia policy during the 1970s, it had also started to integrate more closely with its region. This was further evidence of the capacity to change that allowed Australians to face the future with confidence.

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Citation: Attard, Bernard. “The Economic History of Australia from 1788: An Introduction”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL
http://eh.net/encyclopedia/the-economic-history-of-australia-from-1788-an-introduction/

Apprenticeship in the United States

Daniel Jacoby, University of Washington, Bothell

Once the principal means by which craft workers learned their trades, apprenticeship plays a relatively small part in American life today. The essence of this institution has always involved an exchange of labor for training, yet apprenticeship has been far from constant over time as its survival in the United States has required nearly continual adaptation to new challenges.

Four distinct challenges define the periods of major apprenticeship changes. The colonial period required the adaptation of Old World practices to New World contexts. In the era of the new republic, apprenticeship was challenged by the clash between traditional authority and the logic of expanding markets and contracts. The main concern after the Civil War was to find a training contract that could resolve the heightening tensions between organized labor and capital. Finally, in the modern era following World War I, industrialization’s skill-leveling effects constituted a challenge to apprenticeship against which it largely failed. Apprenticeship lost ground as schooling was instead increasingly sought as the vehicle for upward social mobility that offset the leveling effects of industrialization. After reviewing these episodes this essay concludes by speculating whether we are now in a new era of challenges that will reshape apprenticeship.

Apprenticeship came to American soil by way of England, where it was the first step on the road to economic independence. In England, master craftsmen hired apprentices in an exchange of training for service. Once their term of apprenticeship was completed, former apprentices traveled from employer to employer earning wages as journeymen. When, or if, they accumulated enough capital, journeymen set up shop as independent masters and became members of their craft guilds. These institutions had the power to bestow and withdraw rights and privileges upon their members, and thereby to regulate competition among themselves.

One major concern of the guilds was to prevent unrestricted trade entry and thus apprenticeship became the object of much regulation. Epstein (1998), however, argues that monopoly or rent-seeking activity (the deliberate production of scarcity) was only incidental to the guilds’ primary interest in supplying skilled workmen. To the extent that guilds successfully regulated apprenticeship in Britain, that pattern was less readily replicated in the Americas whose colonists came to exploit the bounty of natural resources under mercantilistic proscriptions that forbade most forms of manufacturing. The result was an agrarian society practically devoid of large towns and guilds. Absent these entities, the regulation of apprenticeship relied upon government actions that appear to have been become more pronounced towards the mid-eighteenth century. The passage of Britain’s 1563 Statute of Artificers involved government regulation in the Old World as well. However, as Davies (1956) shows, English apprenticeship was different in that craft guilds and their attendant traditions were more significant.

The Colonial Period

During the colonial period, the U.S was predominantly an agrarian society. As late as 1790 no city possessed a population in excess of 50,000. In 1740, the largest colonial city, Philadelphia, possessed 13,000 inhabitants. Even so, the colonies could not operate successfully without some skilled tradesmen in fields like carpentry, cordwaining (shoemaking), and coopering (barrel making). Neither the training of slaves, nor the immigration of skilled European workmen was sufficient to prevent labor short colonies from developing their own apprenticeship systems. No uniform system of apprenticeship developed because municipalities, and even states, lacked the authority either to enforce their rules outside their own jurisdictions or to restore distant runaways to their masters. Accordingly, apprenticeship remained a local institution.

Records from the colonial period are sparse, but both Philadelphia and Boston have preserved important evidence. In Philadelphia, Quimby (1963) traced official apprenticeship back, at least, to 1716. By 1745 the city had recorded 149 indentures in 33 crafts. The stock of apprentices grew more rapidly than did population and after an additional 25 years it had reached 537.

Quimby’s Colonial Philadelphia data indicate that apprenticeship typically consigned boys, aged 14 to 17, to serve their masters until their twenty-first birthdays. Girls, too, were apprenticed, but females comprised less than one-fifth of recorded indentures, most of whom were apprenticed to learn housewifery. One significant variation on the standard indenture involved the binding of parish orphans. Such paupers were usually indented to less remunerative trades, usually farming. Yet another variation involved the coveted apprenticeships with merchants, lawyers, and other professions. In these instances, parents usually paid masters beforehand to take their children.

Apprenticeship’s distinguishing feature was its contract of indenture, which elaborated the terms of the arrangement. This contract differed in two major ways from the contracts of indenture that bound immigrants. First, the apprenticeship contract involved young people and, as such, required the signature of their parents or guardians. Second, indentured servitude, which Galenson (1981) argues was adapted from apprenticeship, substituted Atlantic transportation for trade instruction in the exchange of a servant’s labor. Both forms of labor involved some degree of mutuality or voluntary agreement. In apprenticeship, however, legal or natural parents transferred legal authority over their child to another, the apprentice’s master, for a substantial portion of his or her youth. In exchange for rights to their child’s labor, parents were also relieved of direct responsibility for child rearing and occupational training. Thus the child’s consent could be of less consequence than that of the parents.

The articles of indenture typically required apprentices to serve their terms faithfully and obediently. Indentures commonly included clauses prohibiting specific behaviors, such a playing dice or fornication. Masters generally pledged themselves to raise, feed, lodge, educate, and train apprentices and then to provide “freedom dues” consisting of clothes, tools, or money once they completed the terms of their indentures. Parents or guardian were co-signatories of the agreements. Although practice in the American colonies is incompletely documented, we know that in Canada parents were held financially responsible to apprentice masters when their children ran away.

To enforce their contracts parties to the agreement could appeal to local magistrates. Problems arose for many reasons, but the long duration of the contract inevitably involved unforeseen contingencies giving rise to dissatisfactions with the arrangements. Unlike other simple exchanges of goods, the complications of child rearing inevitably made apprenticeship a messy concern.

The Early Republic

William Rorabaugh (1986) argues that the revolutionary era increased the complications inherent in apprenticeship. The rhetoric of independence could not be contained within the formal political realm involving relations between nations, but instead involved the interpersonal realms wherein the independence to govern one’s self challenged traditions of deference based upon social status. Freedom was increasingly equated with contractual relations and consent. However, exchange based on contract undermined the authority of masters. And so it was with servants and apprentices who, empowered by Republican ideology, began to challenge their masters conceiving themselves, not as willful children, but as free and independent citizens of the Revolution.

The revolutionary logic of contract ate away at the edges of the long-term apprenticeship relationship and such indentures became substantially less common in the first half of the nineteenth century. Gillian Hamilton (2000) has tested whether the decline in apprenticeship stemmed from problems in enforcing long-term contracts, or whether it was the result of a shift by employers to hire unskilled workers for factory work. While neither theory alone explains the decline in the stock of apprenticeship contracts, both demonstrate how emerging contractual relations undermined tradition by providing new choices. During this period she finds that masters began to pay their apprentices, that over time those payments rose more steeply with experience, and that indenture contracts were shortened, all of which suggest employers consciously patterned contracts to reduce the turnover that resulted when apprentices left for preferable situations. That employers increasingly preferred to be freed from the long-term obligations they owed their apprentices suggests that these responsibilities in loco parentis imposed burdens upon masters as well as apprentices. The payment of money wages reflected, in part, costs associated with their parental authorities that could now, more easily, be avoided in urban areas by shifting responsibilities back to youths and their parents.

Hamilton’s evidence comes from Montreal, where indentures were centrally recorded. While Canadian experiences differed in several identifiable ways from those in the United States, the broader trends she describes are consistent with those observed in the United States. In Frederick County Maryland, for example, Rorabaugh (1986) finds that the percentage of white males formally bound as apprentices fell from nearly 20% of boys aged 15 to 20 to less than 1% between 1800 and 1860. The U.S decline however, is more difficult to gage because informal apprenticeship arrangements that were not officially recorded appear to have risen. In key respects issues pertaining to the master’s authority remained an unresolved complication preventing a uniform apprenticeship system and encouraging informal apprenticeship arrangements into the period well after slavery was abolished.

Postbellum Period

While the Thirteenth Amendment to the U.S. Constitution in 1865 formally ended involuntary servitude, the boundary line between involuntary and voluntary contracts remained problematic, especially in regards to apprenticeship. Although courts explained that labor contracts enforced under penalty of imprisonment generally created involuntary servitude, employers explored contract terms that gave them unusual authority over their apprentices. States sometimes developed statutes to protect minors by prescribing the terms of legally enforceable apprenticeship indentures. Yet, doing so necessarily limited freedom of contract: making it difficult, if not impossible, to rearrange the terms of an apprenticeship agreement to fit any particular situation. Both the age of the apprentice and the length of the indenture agreement made the arrangement vulnerable to abuse. However, it proved extremely difficult for lawmakers to specify the precise circumstances warranting statutory indentures without making them unattractive. In good measure this was because representatives of labor and capital seldom agreed when it came to public policy regarding skilled employment. Yet, the need for some policy increased, especially after the labor scarcities created by the Civil War.

Companies, unions and governments all sought solutions to the shortages of skills caused by the Civil War. In Boston and Chicago, for example, women were recruited to perform skilled typography work that had previously been restricted to men. The Connecticut legislature authorized a new company to recruit and contract skilled workers from abroad. Other states either wrote new apprenticeship laws or experimented with new ways of training workers. The success of craft unionism was itself an indication of the dearth of organizations capable of implementing skill standards. Virtually any new action challenged the authority of either labor or capital, leading one or the other to contest them. Jacoby (1996) argues that the most important new strategy involved the introduction of short trade school courses intended to substitute for apprenticeship. Schooling fed employers’ hope that they might sidestep organized labor’s influence in determining the supply of skilled labor.

Independent of the expansion of schooling, issues pertaining to apprenticeship contract rights gained in importance. Firms like Philadelphia’s Baldwin Locomotive held back wages until contract completion in order to keep their apprentices with them. The closer young apprentices were bound to their employers, the less viable became organized labor’s demand to consult over or to unilaterally control the expansion or contraction of training. One-sided long-term apprenticeship contracts provided employers other advantages as well. Once under contract, competitors and unions could be legally enjoined for “enticing” their workers into breaking their contracts. Although employers rarely brought suit against each other for enticement of their apprentices, their associations, like the Metal Manufactures Association in Philadelphia, prevented apprentices from leaving one master for another by requiring consent and recommendation of member employers (Howell, 2000). Employer associations could, in this way, effectively blacklist union supporters and require apprentices to break strikes.

These employer actions did not occur in a vacuum. Many businessmen faulted labor for tying their hands when responding to increased demands for labor. Unions lost support among the working class when they restricted the number of apprentices an employer could hire. Such restrictions frequently involved ethnic, racial and gender preferences that locked minorities out of the well-paid crafts. Organized labor’s control was, nonetheless, less effective than it would have liked: It could not restrict non-union firms from taking on apprentices nor was it able to stem the flow of half-trained craftsmen from the small towns where apprenticeship standards were weak. Yet by fines, boycotts, and walkouts organized labor did intimidate workers and firms who disregarded their rules. Such actions failed to endear it to less skilled workers, who often regarded skilled unionists as a conservative aristocracy only slightly less onerous, if at all, than big business.

This weakness in labor’s support made it vulnerable to Colonel Richard T Auchmuty’s New York Trade School. Auchmuty’s school, begun in 1881, became the leading institution challenging labor’s control over its own supply. The school was designed and marketed as an alternative to apprenticeship and Auchmuty encouraged its use as a weapon in “the battle for the boys” waged by New York City Plumbers in 1886-87. Those years mark the starting point for a series of skirmishes between organized capital and labor in which momentum seesawed back and forth. Those battles encouraged public officials and educators to get involved. Where the public sector took greater interest in training, schooling more frequently supplemented, rather than replaced, on-the-job apprenticeship training. Public involvement also helped formalized the structure of trade learning in ways that apprenticeship laws had failed to do.

The Modern Era

In 1917, with the benefit of prior collaborations involving the public sector, a coalition of labor, business and social services secured passage of the Smith-Hughes Law to provide federal aid for vocational education. Despite this broad support, it is not clear that the bill would have passed had it not been for America’s entry into the First World War and the attendant priority for an increase in the supply of skilled labor. Prior to this law, demands for skilled labor had been partially muted by new mass production technologies and scientific management, both of which reduced industry’s reliance upon craft workers. War changed the equation.

Not only did war spur the Wilson administration into training more workers, it also raised organized labor’s visibility in industries, like shipbuilding, where it had previously been locked out. Under Smith-Hughes, cities as distant as Seattle and New York invited unions to join formal training partnerships. In the twenties, a number of schools systems provided apprentice extension classes where prior employment was made prerequisite, thereby limiting public apprenticeship support to workers who were already unionized. These arrangements made it easier for organized labor to control entry into the craft. This was most true in the building trades, where the unions remained well-organized throughout the twenties. However, in the twenties, the fast expanding factory sector more successfully reduced union influence. The largest firms, such as the General Electric Company, had long since set up their own non-union–usually informal–apprenticeship plans. Large firms able to provide significant employment security, like those that belonged to the National Association for Corporation Schools, typically operated in a union-free environment, which enabled them to establish training arrangements that were flexible and responsive to their needs.

The depression in the early thirties stopped nearly all training. Moreover, the prior industrial transformation shifted power within organized labor from the American Federation of Labor’s bedrock craft unions to the Congress of Industrial Organizations. With this change labor increasingly emphasized pay equality by narrowing skill differentials and accordingly de-emphasized training issues. Even so, by the late 1930s shortages of skilled workers were again felt that led to a national apprenticeship plan. Under the Fitzgerald Act (1937), apprenticeship standards were formalized in indentures that specified the kinds and quantity of training to be provided, as well as the responsibilities of joint labor-management apprenticeship committees. Standards helped minimize incentives to abuse low-wage apprentices through inadequate training and advancement. Nationally, however, the percentage of apprentices nationally remained very small, and overall young people increasingly chose formal education rather than apprenticeship to open opportunity. While the Fitzgerald Law worked to protect labor’s immediate interests, very few firms chose formal apprenticeships when less structured training relationships were possible.

This system persisted through the heyday of organized labor in the forties and fifties, but began to come undone in the late sixties and seventies, particularly when Civil Rights groups attacked the racial and gender discrimination too often used to ration scarce apprenticeship opportunities. Discrimination was sometimes passive, occurring as the result of preferential treatment extended to the sons and friends of craft workers, while in other instances it involved active and deliberate policies aimed at exclusion (Hill, 1968). Affirmative action accords and court orders have forced unions and firms to provide more apprenticeship opportunities for minorities.

Along with a declining influence of labor and civil rights organizations, work relations appear to have changed as we begin the new millennium. Forms of labor contracting that provide fewer benefits and security are on the rise. Incomes once again have become more stratified by education and skill levels, making them a much more important issue. Gary Becker’s (1964) work on human capital theory has encouraged businessmen and educators to rethink the economics of training and apprenticeship. Conceptualizing training as an investment, theory suggests that enforceable long-term apprenticeships enable employers to increase their investments in the skills of their workers. Binding indentures are rationalized as efficient devices to prevent youths from absconding with the capital employers have invested in them. Armed with this understanding, increasingly policy makers have permitted and encouraged arrangements that look more like older-style employer dominated apprenticeships. Whether this is the beginning of new era for apprenticeship, or merely a return to the prior battles over the abuses of one-sided employer control, only time will tell.

References and further reading:

Becker, Gary. Human Capital. Chicago: University of Chicago Press, 1964.

Davies, Margaret. The Enforcement of English Apprenticeship, 1563-1642. Cambridge, MA: Harvard University Press, 1956.

Douglas, Paul. American Apprenticeship and Industrial Education. New York: Columbia University Press, 1921.

Elbaum, Bernard. “Why Apprenticeship Persisted in Britain but Not in the United States.” Journal of Economic History 49 (1989): 337-49.

Epstein, S. R. “Craft Guilds, Apprenticeship and Technological Change in Pre-industrial Europe.” Journal of Economic History 58, no. 3 (1998): 684-713.

Galenson, David. White Servitude in Colonial America: An Economic Analysis. New York: Cambridge University Press, 1981.

Hamilton, Gillian. “The Decline of Apprenticeship in North America: Evidence from Montreal.” Journal of Economic History 60, no. 3, (2000): 627-664.

Harris, Howell John. Bloodless Victories: The Rise and Decline of the Open Shop Movement in Philadelphia; 1890-1940. New York: Cambridge University Press, 2000.

Hill, Herbert. “The Racial Practices of Organized Labor: The Contemporary Record.” In The Negro and The American Labor Movement, edited by Julius Jacobson. Garden City, New York: Doubleday Press, 1968.

Jacoby, Daniel. “The Transformation of Industrial Apprenticeship in the United States.” Journal of Economic History 52, no. 4 (1991): 887- 910.

Jacoby, Daniel. “Plumbing the Origins of American Vocationalism.” Labor History 37, no. 2 (1996): 235-272.

Licht, Walter. Getting Work: Philadelphia, 1840-1950. Cambridge, MA: Harvard University Press, 1992.

Quimby, Ian M.G. “Apprenticeship in Colonial Philadelphia.” Ph.D. Dissertation, University of Delaware, 1963.

Rorabaugh, William. The Craft Apprentice from Franklin to the Machine Age in America. New York: Oxford University Press, 1986.

Citation: Cuff, Timothy. “Historical Anthropometrics”. EH.Net Encyclopedia, edited by Robert Whaples. August 29, 2004. URL http://eh.net/encyclopedia/apprenticeship-in-the-united-states/

Historical Anthropometrics

Timothy Cuff, Westminster College

Historical anthropometrics is the study of patterns in human body size and their correlates over time. While social researchers, public health specialists and physical anthropologists have long utilized anthropometric measures as indicators of well-being, only within the past three decades have historians begun to use such data extensively. Adult stature is a cumulative indicator of net nutritional status over the growth years, and thus reflects command over food and access to healthful surroundings. Since expenditures for these items comprised such a high percentage of family income for historical communities, mean stature can be used to examine changes in a population’s economic circumstances over time and to compare the well-being of different groups with similar genetic height potential. Anthropometric measures are available for portions of many national populations as far back as the early 1700s. While these data often serve as complements to standard economic indicators, in some cases they provide the only means of assessing historical economic well-being, as “conventional” measures such as per capita GDP, wage and price indices, and income inequality measures have been notoriously spotty and problematic to develop. Anthropometric-based research findings to date have contributed to the scholarly debates over mortality trends, the nature of slavery, and the outcomes of industrialization and economic development. Height has been the primary indicator utilized to date. Other indicators include height-standardized weight indices, birth weight, and age at menarche. Potentially even more important, historical anthropometrics broadens the understanding of “well-being” beyond the one dimensional “ruler” of income, providing another lens through which the quality of historical life can be viewed.

This article:

  • provides a brief background of the field including a history of human body measurement and analysis and a description of the biological foundations for historical anthropometrics,
  • describes the current state of the field (along with methodological issues) and future directions, and
  • provides a selective bibliography.

Anthropometrics: Historical and Bio-Medical Background

The Evolution of Body Measurement and Analysis in Context

The measurement and description of the human form in the West date back to the artists of classical civilizations, but the rationale for systematic, large-scale body measurement and record keeping emerged out of the needs of early modern military organizations. By the mid-eighteenth century height commonly provided a means of classifying men into and of identifying them within military units and the procedures for measuring individuals entering military service were well established. The military’s need to identify recruits has provided most historical measurements of young men.

Scientific curiosity in the eighteenth century also spurred development of the first textbooks on human growth, although they were more concerned with growth patterns throughout life than with stature differences across groups or over time. In the nineteenth century class differences in height were easily observable in England. The moral outrage generated by the “tiny children” (Charles Dickens’ “Oliver Twists”) along with the view that medicine had a preventive as well as a curative function, meant that anthropometry was directed primarily at the poor, especially children toiling in the factories of English and French industrial cities. Later, fear in Britain over the “degeneration” of its men and their potential as an effective fighting force provided motivation for large-scale anthropometric surveys, as did efforts evolving out of the child-welfare movement. The early-twentieth century saw the establishment of a series of longitudinal population surveys (which follow individuals as they age) in North America and in Europe. In some cases this work was directed toward the generation of growth standards, while other efforts evaluated social-class differences among children. Such studies can be seen as transitional steps between contemporary and historical anthropometrics. Since the 1950s, anthropometry has been utilized for a variety of purposes in both the developed and underdeveloped world. Population groups have been measured in order to refine growth standards, to monitor the nutritional status of individuals and populations during famines and political disturbances, and to evaluate the effectiveness of economic development programs.

Anthropometric studies today can be classified as one of three types. Auxologists perform basic research, collecting body measurements over the human life cycle to further detail standards of physical development for twenty-first century populations. The second focus, a continuation of nineteenth century work, documents the living standards of children often supporting regulatory legislation or government aid policies. The third direction is historical anthropometrics. Economists, historians, and anthropologists specializing in this field seek to assess, in physical terms, the well-being of previous societies and the factors which influenced it.

Human Growth and Development: The Biological Foundations of Historical Anthropometrics

While historical anthropometric research is a relatively recent development, an extensive body of medical literature relating nutrition and epidemiological conditions to physical growth provides a strong theoretical underpinning. Bio-medical literature, along with the World Health Organization, describes mean stature as one of the best measures of overall health conditions within a society.

Final attained height and height by age both result from a complex interaction of genetic endowment and environmental effects. At the level of the individual, genetics is a strong but not exclusive influence on the determination of final height and of growth patterns. Genetics is most important when net nutrition is optimal. However, when evaluating differences among groups of people in sub-optimal nutritional circumstances environmental influences predominate.

The same nutritional regime can result in different final stature for particular individuals, because of genetic variation in the ability to continue growing in the face of adverse nutritional circumstances, epidemiological environments, or work requirements. However, the genetic height potential of most Europeans, Africans, and North Americans of European or African ancestry is comparable; i.e., under equivalent environmental circumstances the groups have achieved nearly identical mean adult stature. For example, in many parts of rural Africa, mean adult heights today are similar to those of Africans of 150 years ago, while well-fed urban Africans attain final heights similar to current-day Europeans and North Americans of European descent. Differences in nutritional status do result in wide variation in adult height even within populations of the same genetic make-up. For example, individuals from higher socio-economic classes tend to be taller than their lower class counterparts whether in impoverished third-world countries or in the developed nations.

Height is the most commonly utilized, but not the only, anthropometric indicator of nutritional status. The growth profile is another. Environmental conditions, while affecting the timing of growth (the ages at which accelerations and decelerations in growth rates occur), do not affect the overall pattern (the sequence in which growth/maturation events occur). The body seems to be self-stabilizing, postponing growth until caloric levels will support it and maintaining genetically programmed body proportions more rigidly than size potential. While final adult height and length of the growth period are not absolutely linked, populations which stop growing earlier usually, although not universally, end up being taller. Age at menarche, birth weight, and weight-for-height are also useful. Age at menarche (i.e. the first occurrence of menstruation) is not a measure of physical size, but of sexual maturation. Menarche generally occurs earlier among well-nourished women. Average menarcheal age in the developed West is about 13 years, while in the middle of the nineteenth century it was between 15 and 16 years among European women. Areas which have not experienced nutritional improvement over the past century have not witnessed decreases in the age at menarche. Infant birth weight, an indicator of long-term maternal nutritional status, is influenced by the mother’s diet, work intensity, quality of health care, maternal size and the number of children she has delivered, as well as the mother’s health practices. The level of economic inequality and social class status are also correlated with birth weight variation, although these variables reflect some of the factors noted above. However, because the mother’s diet and health status are such strong influences on birth weight, it provides another useful means of monitoring women’s well-being. Height-for-weight indices, particularly the body mass index (BMI), have seen some use by anthropometric historians. Contemporary bio-medical research which links BMI levels and mortality risk hints at the promise which this measure might hold for historians. However, the limited availability of weight measurements before the mid-nineteenth century will limit the studies which can be produced.

Improvements in net nutritional status, both across wide segments of the population in developed countries and within urban areas of less-developed countries (LDCs), are generally accepted as the most salient influence on growth patterns and final stature. The widely experienced improvement in net nutrition which was apparent in most of the developed world across most of the twentieth century and more recently in the “modern” sector of some LDCs has lead to a secular trend, the unidirectional trend toward greater stature and faster maturation. Before the twentieth century, height cycling without a distinct direction was the dominant historical pattern. (Two other sources of stature increase have been hypothesized but have garnered little support among the medical community: the increased practice of infantile smallpox vaccination and heterosis (hybrid vigor), i.e. varietal cross-breeding within a species which produces offspring who are larger or stronger than either parent.)

The Definition and Determination of Nutritional Status

“Nutritional status” is a term critical to an understanding of anthropometrics. It encompasses more than simply diet, i.e. the intake of calories and nutrients, and is thus distinct from the more common term “nutrition.” While nutrition refers to the quantity and quality of food inputs to the human biological system, it makes no reference to the amounts needed for healthy functioning resulting from nutrient demand placed on the individual. Nutritional status, or synonymously “net nutrition,” refers to the summing up of nutrient input and demand on those nutrients. While work intensity is the most obvious demand, it is just one of many. Energy is required to resist infection. Pregnancy adds caloric and nutrient demands, as does breast-feeding. Calories expended in any of these fashions are available neither for basal metabolism, nor for growth. The difference between nutrition and nutritional status/net nutrition is important for anthropometrics, because it is the latter, not the former, for which auxological measurements are a proxy.

Human biologists and medical scientists generally agree that within genetically similar populations net nutrition is the primary determinant of adult physical stature. Height, as Bielicki notes, is “socially induced variation.” Figure 1 indicates the numerous channels of influence on the final adult stature of any individual. Anthropometric indicators reflect the relative ease or difficulty of acquiring sufficient nutrients to provide for growth in excess of the immediate needs of the body. Nutritional status and physical stature clearly are composite measures of well-being linked to economic processes. However, the link is mediated through a variety of social circumstances, some volitional, others not. Hence, anthropometric historians must evaluate each situation within its own economic, cultural, and historical context.

In earlier societies, and in some less developed countries today, access to nutrients was determined primarily by control of arable land. As markets for food developed and urban living became predominant, for increasing percentages of the population, access to nutrients depended upon the ability to purchase food, i.e. on real income. Additionally, food allocation within the family is not determined by markets but by intra-household bargaining as well as by tastes and custom. For example, in some cultures households distribute food resources so as to ensure nutritional adequacy for those family members engaged in income or resource-generating activity in order to maximize earning power. The handful of studies which include historical anthropometric data for women reveal that stature trends by gender do not always move in concert. Rather, in periods of declining nutritional status, women often exhibited a reduction in stature levels before such changes appeared among males. This is somewhat paradoxical because biologists generally argue that women’s growth trajectories are more resistant to a diminution in nutritional status than are those of men. Though too little historical research has been done on this issue to speak with certainty, the pattern might imply that, in periods of nutritional stress, women bore the initial brunt of deprivation.

Other cultural practices, including the high status accorded to the use of certain foods, such as white flour, polished rice, tea or coffee may promote greater consumption of nutritionally less valuable foods among those able to afford them. This would tend to reduce the resultant stature differences by income. Access to nutrients also depends upon other individual choices. A small landholder might decide to market much of his farm’s high-value, high-protein meat and dairy products, reducing his family’s consumption of these nutritious food products in order to maximize money income. However, while material welfare would increase, biological welfare, knowingly or unknowingly, would decline.

Disease-exposure variation occurs as a result of some factors under the individual’s control and other factors which are determined at the societal level. Pathogen prevalence and potency and the level of community sanitation are critical factors which are not directly affected by individual decision making. However, housing and occupation are often individually chosen and do help to determine the extent of disease exposure. Once transportation improvements allow housing segregation based on socio-economic status to occur within large urban areas, residence location can become an important influence. However, prior to such, for example in mid-nineteenth century United States, urban childhood mortality levels were more influenced by the number of children in a family than by parental occupation or socio-economic status. The close proximity of the homes of the wealthy and the poor seems to have created a common level of exposure to infectious agents and equally poor sanitary conditions for children of all economic classes.

Work intensity, another factor determining nutritional status, is a function of the age at which youth enter the labor force, educational attainment, the physical exertion needed in a chosen occupation, and the level of technology. There are obvious feedback effects from current nutritional status to future nutritional status. A low level of nutritional status today might hinder full-time labor-force participation, and result in low incomes, poor housing, and substandard food consumption in subsequent periods as well, thereby reinforcing the cycle of nutritional inadequacy.

Historical Anthropometrics

Early Developments in the Field

Le Roy Ladurie’s studies of nineteenth-century French soldiers published in the late 1960s and early 1970s are recognized as the first works in the spirit of modern historical anthropometrics. He documented that stature among French recruits varied with their socio-economic characteristics. In the U.S., the research was carried forward in the late 1970s, much based on nineteenth-century records of U.S. slaves transported from the upper to the lower South. Studies of Caribbean slaves followed.

In the 1980s numerous anthropometric works were generated in connection with a National Bureau of Economic Research (NBER) directed study of American and European mortality trends from 1650 to the present, coordinated by Robert W. Fogel. Motivated in great part by the desire to evaluate Thomas McKeown’s hypothesis that improvements in nutrition were the critical component in mortality declines in the seventeenth through the nineteenth centuries, the project has lead to the creation of numerous large anthropometric data bases. These have been the starting point for the analysis of trends in physical stature and net nutritional status on both sides of the Atlantic. While most historical anthropometric studies published in the U.S. during the early and mid-1980s were either outgrowths of the NBER project or were conducted by students of Robert Fogel, such as Richard Steckel and John Komlos, mortality trends were no longer the sole focus of historical anthropometrics. Anthropometric statistics were used to analyze the effect of industrialization on the populations experiencing it, as well as the characteristics of slavery in the United States. The data sources were primarily military records or documents relating to slaves. As the 1980s became the 1990s the geographic range of stature studies moved beyond Europe and North American to include Asia, Australia, and Africa. Other data sources were utilized. These included records from schools and utopian communities, certificates of freedom for manumitted slaves, voter registration cards, newspaper advertisements for runaway slaves and indentured servants, insurance applications, and a variety of prison inmate records. The number of anthropometric historians also expanded considerably.

Findings to Date

Major achievements to date in historical anthropometrics include 1) the determination of the main outlines of the trend in physical stature in Europe and North America between the eighteenth and twentieth centuries, and 2) the emergence of several well-supported, although still debated, hypotheses pertaining to the relationship between height and the economic and social developments which accompanied modern economic growth in these centuries.

Historical research on human height has indicated how much healthier the New World environment was compared to that of Europe. Europeans who immigrated to North America, on average, obtained a net nutritional status far better than that which was possible for them to attain in their place of birth. Eighteenth century North Americans attained mean heights not achieved by Europeans until the twentieth century. The combination of lower population density, lower levels of income inequality, and greater food resources bestowed a great benefit upon those growing up in North America. This advantage is evident not only in adult heights but also in the earlier timing of the adolescent growth spurt, as well as the earlier attainment of final height.

Table 1
Mean Heights of Adult Males (in inches)

Table 1
Mean Heights of Adult Males (in inches)–>

North America Europe
European Ancestry African Ancestry Hungary England Sweden
1775 – 1783 1861 – 1865 1943 – 1944 1811 – 1861 1943 – 1944 1813 – 1835 1816 – 1821 1843 – 1886
68.1 68.5 68.1 67.0 67.9 64.2 65.8 66.3

Sources: U.S. whites, 1775-1783: Kenneth L. Sokoloff and Georgia C. Villaflor, “The Early Achievement of Modern Stature in America,” Social Science History 6 (1982): 453-481. U.S. whites, 1861-65: Robert Margo and Richard Steckel, “Heights of Native-Born Whites during the Antebellum Period,” Journal of Economic History 43 (1983): 167-174. U.S. whites and blacks, 1943-44: Bernard D. Karpinos, “Height and Weight of Selective Service Registrants Processed for Military Service during World War II,” Human Biology 40 (1958): 292-321, Table 5. U.S. blacks, 1811-1861: Robert Margo and Richard Steckel, “The Height of American Slaves: New Evidence on Slave Nutrition and Health,” Social Science History 6 (1982): 516-538, Table 1. Hungary: John Komlos. Nutrition and Economic Development in the Eighteenth Century Habsburg Monarchy, Princeton: Princeton University Press, 1989, Table 2.1, 57. Britain: Roderick Floud, Kenneth Wachter, and Annabel Gregory, Height, Health, and History: Nutritional Status in the United Kingdom, 1750-1980, Cambridge: Cambridge University Press, 1990, Table 4.1, 148. Sweden: Lars G. Sandberg and Richard Steckel, “Overpopulation and Malnutrition Rediscovered: Hard Times in 19th-Century Sweden,” Explorations in Economic History 25 (1988): 1-19, Table 2, 7.

Note: Dates refer to dates of measurement.

Stature Cycles in Europe and America

The early finding that there was not a unidirectional upward trend in stature since the 1700s startled researchers, whose expectations were based on recent experience. Extrapolating backward, Floud, Wachter, and Gregory note that such surprise was misplaced, for if the twentieth century’s rate of height increase had been occurring for several centuries, medieval Europeans would have been dwarfs or midgets. Instead, in Europe cycles in height were evident. Though smaller in amplitude than in Europe, stature cycling was a feature of the American experience, as well. At the time of the American Revolution, the Civil War, and World War II, the mean height of adult, native-born white males was a fraction over 68 inches (Table 1), but there was some variation in between these periods with a small decline in the years before the Civil War and perhaps another one from 1860 into the 1880s. Just before the turn of the twentieth century, mean stature began its relatively uninterrupted increase which continues to the present day. These findings are based primarily on military records drawn from the early national army, Civil War forces, West Point Cadets, and the Ohio National Guard, although other data sets show similar trends. The free black population seems to have experienced a downturn in physical stature very similar to that of whites in the pre-Civil War period. However, an exception to the antebellum diminution in nutritional status has been found among slave men.

Per Capita Income and Height

In addition to the cycling in height, anthropometric historians have documented that the intuitively anticipated positive correlation between mean height and per capita income holds at the national level in the twentieth century. Steckel has shown that, in cross-national comparison, the correlation between height and per capita income is as high as .84 to .90. However, since per capita income is highly correlated with a series of other variables that also affect height, the exact pathway through which income affects height is not fully clear. Among the factors which help to explain the variation are better diet, medicine, improvements in sanitary infrastructure, longer schooling, more sedentary life, and better housing. Intense work regimes and psycho-social stress, both of which affect growth negatively, might also be mitigated by greater per capita income. However, prior to the twentieth century the relationship between height and income was not monotonic. U.S. troops during the American Revolution were nearly as tall as U.S. soldiers sent to Europe and Japan in the 1940s, despite the fact that per capita income in the earlier period was substantially below that in the latter. Similarly, while per capita income in the U.S. in the late 1770s was below that of the British, the American troops had a height advantage of several inches over their British counterparts in the War of Independence.

Height and Income Inequality

The level of income inequality also has a powerful influence on mean heights. Steckel’s analysis of data for the twentieth century indicates that a 0.1 decrease in the Gini coefficient (indicating greater income equality) is associated with a gain in mean stature of about 3.7 cm (1.5 inches). In societies with great inequality, increases in per capita income have little effect on average stature if the gains accrue primarily to the wealthier segments of the society. Conversely, even without changes in average national per capita income, a reduction in inequality can have similar positive impact upon the stature and health of those at the lower rungs of the income ladder.

The high level of social inequality at the onset of modern economic growth in England is exemplified by the substantial disparity between the height of students of the Sandhurst Royal Military Academy, an elite institution, and the Marine Society, a home for destitute boys in London. The difference in mean height at age fourteen exceeded three inches in favor of the gentry. In some years the gap was even greater. Komlos has documented similar findings elsewhere: regardless of location, boys from “prestigious military schools in England, France, and Germany were much taller than the population at large.” A similar pattern existed in the nineteenth-century U.S. However, the social gap in the U.S. was miniscule compared to that prevailing in the Old World. Stature also varied by occupational groups. In eighteenth and nineteenth century Europe and North America, white collar and professional workers tended to be significantly taller than laborers and unskilled workers. However, farmers, being close to the source of nutrients and with fewer interactions with urban disease pools, tended to be the tallest, though their advantage disappeared by the twentieth century.

Regional and Rural-Urban Differences

Floud, Wachter, and Gregory have shown that, in early nineteenth century Britain, regional variation in stature dwarfed occupational differences. In 1815, Scotsmen, rural and urban, as well as the Irish, were about one-half an inch taller than the non-London urban English of the day. The rural English were slightly shorter, on average, than Englishmen born in small and medium sized towns. Londoners, however, had a mean height almost one-third of an inch less than other urban dwellers in England and more than three-quarters of an inch below the Irish or the Scots. A similar pattern held among convicts transported to New South Wales, Australia, except that the stature of the rural English was well above the average for all other English transported convicts. Floud, Wachter, and Gregory show a trend of convergence in height among these groups after 1800. The tendency for low population density rural areas in the nineteenth century to be home to the tallest individuals was apparent from the Habsburg Monarchy to Scotland, and in the remote northern regions of late nineteenth-century Sweden and Japan as well. In colonial America the rural-urban gradient did not exist. As cities grew, the rural born began to display a stature advantage over their urban brethren. This divergence persisted into the nineteenth century, and disappeared in the early twentieth century, when the urban-born gained a height advantage.

The Early-Industrial-Growth and Antebellum Puzzles

These patterns of stature variation have been put into a framework in both the European and the American contexts. Respectively they are known as the “early-industrial-growth puzzle” and the “Antebellum puzzle.” The commonality which has been identified is that in the early stages of industrialization and/or market integration, even with rising per capita incomes, the biological well-being of the populations undergoing such change does not, necessarily, improve immediately. Rather, for at least some portions of the population, biological well-being declined during this period of economic growth. Explanations for these paradoxes (or puzzles) are still being investigated and include: rising income inequality, the greater spread of disease through more thoroughly developed transportation and marketing systems and urban growth, the rising real price of food as population growth outstripped the agricultural system’s ability to provide, and the choice of farmers to market rather than consume high value/high protein crops.

Slave Heights

Research on slave heights has provided important insight into the living standards of these bound laborers. Large differences in stature have been documented between slaves on the North American mainland and those in the Caribbean. Adult mainland slaves, both women and men, were approximately two inches taller than those in the West Indies throughout the eighteenth and nineteenth centuries. Steckel argues that the growth pattern and infant mortality rates of U.S. slave children indicate that they were moderately to severely malnourished, with mean heights for four to nine year olds below the second percentile of modern growth standards and with mortality rates twice those estimated for the entire United States population. Although below the fifth percentile throughout childhood, as adults these slaves were relatively tall by nineteenth-century standards, reaching about the twenty-fifth percentile of today’s height distribution, taller than most European populations of the time.

Height’s Correlation with Other Biological Indicators

The evaluation of McKeown’s hypothesis that much of the modern decline in mortality rates could be traced to improvements in nutrition (food intake) was one of the early rationales for the modern study of historical stature. Subsequent work has presented evidence for the parallel cycling of height and life expectancy in the United States during the nineteenth century. The relationship between the body-mass index, morbidity, and mortality risk within historical populations has also been documented. Along a similar line, Sandberg and Steckel’s data on Sweden have pointed out the parallel nature of stature trends and childhood mortality rates in the mid-nineteenth century.

Economic and social history are not the only two fields which have felt historical anthropometrics’ impact. North American slave height-by-age profiles developed by Steckel have been used by auxologists to exemplify the range of possible growth patterns among humans. Based on findings within the biological sciences, historical studies of stature have come full circle and are providing those same sciences with new data on human physical potential.

Methodological Issues

Accuracy problems in military-based data sets arise predominantly from carelessness of the measurer or from intentional misreporting of data rather than from lack of orthodox practice. Inadequate concern for accuracy can most often be noticed in heaping (height observations rounded to whole feet, six inch increments, or even numbered inches) and lack of fractional measurements. These “rounding” errors tend to be self-canceling. Of greater concern is intentional misreporting of either height or age, because minimum stature and age restrictions were often applied to military recruits. Young men, eager to discover the “romance” of military life or receive the bounty which sometimes accompanied enlistment, were not impervious to slight fabrication of their age. Recruiting officers, hoping to meet their assigned quotas quickly, might have been tempted to round measurements up to the minimum height requirement. Hence, it is not uncommon to find height and age heaping at either the age or stature minima.

For anthropometric historians, the issue of the representativeness of the population under study is similar to that for any social historian, but several specific caveats are appropriate when considering military samples. In time of peace military recruits tend to be less representative of the general population than are wartime armies. The military, with fewer demands for personnel, can be more selective, often instituting more stringent height minima, and occasionally maxima, for recruits. Such policies, as well as the self-interested behaviors noted above, require those who would use military data sets to evaluate and potentially adjust the data to account for the observations missing due to either left or right tail truncation. A series of techniques to account for such difficulties in the data have been developed, although there is still debate over the most appropriate technique. Other data sets also exhibit selectivity biases, although of different natures. Prison registers clearly do not provide a random sample of the population. The filter, however, is not based on size or desire for “exciting” work – rather on the propensity for criminal activity and on the enforcement mechanism of the judicial system. The representativeness of anthropometric samples can also be affected by previous selection by the Grim Reaper. Within Afro-Caribbean slave populations in Trinidad, death rates were significantly higher for shorter individuals (at all ages) than for the taller ones. The result is that a select group of more robust and taller individuals remained alive for eventual measurement.

One difficulty faced by anthropometric historians is the association of this research, more imagined than real, with previous misuses of body measurement. Nineteenth century American phrenologists used skull shape and size as a means of determining intelligence and as a way of justifying the enslavement of African-Americans. The Bertillon approach to evaluating prison inmates included the measurement and classification of lips, ears, feet, nose, and limbs in an effort to discern a genetic or racial basis for criminality. The Nazis attempted to breed the perfect race by eliminating what they perceived to be physically “inferior” peoples. Each, appropriately, has made many squeamish in regard to the use of body measurements as an index of social development. Further, while the biological research which supports historical anthropometrics is scientifically well founded and fully justifies the approach, care must be exercised to ensure that the impression is not given that researchers either are searching for, or promoting, an “aristocracy of the tall.” Being tall is not necessarily better in all circumstances, although recent work does indicate a series of social and economic advantages do accrue to the tall. However, for populations enduring an on-going sub-optimal net nutritional regime, an increase in mean height does signify improvement in the net nutritional level, and thus the general level of physical well-being. Untangling the factors responsible for change in this social indicator is complicated and height is not a complete proxy for the quality of life. However, it does provide a valuable means of assessing biological well-being in the past and the influence of social and economic developments on health.

Future Directions

Historical anthropometrics is maturing. Over the past several years a series of state-of-the-field articles and anthologies of critical works have been written or compiled. Each summarizes past accomplishments, consolidates isolated findings into more generalized conclusions, and/or points out the next steps for researchers. In 2004, the editors of Social Science History devoted an entire volume to anthropometric history, drawing upon both current work and remembrances of many of the field’s early and prominent researchers, including an integrative essay by Komlos and Baten. Anthropometric history now has its own journal, as John Komlos, who has literally established a center for historical anthropometrics in Munich, created Economics and Biology, “devoted to the exploration of the effect of socio-economic processes on human beings as biological organisms.” Early issues highlight the wide geographic, temporal, and conceptual range of historical anthropometric studies. Another project which shows the great range of current effort is Richard Steckel’s work with anthropologists to characterize very long term patterns in the movement of mean human height. Already this collaboration has produced, The Backbone of History: Health and Nutrition in the Western Hemisphere, a compilation of essays documenting the biological well-being of New World populations beginning in 5000 B.C. using anthropological evidence. Its findings, consistent with those of some other recent anthropological studies, indicate a decline in health status for members of Western Hemisphere cultures in the pre-Columbian period as these societies began the transition from economies based on hunting and gathering to ones relying more heavily on settled agriculture. Steckel has been working to expand this approach to Europe via a collaborative and interdisciplinary project funded in part by the U.S. National Science Foundation, titled, “A History of Health in Europe from the Late Paleolithic Era to the Present.”

Yet even with these impressive steps, continued work, similar to early efforts in the field, is still needed. Expansion of the number and type of samples are important steps in the confirmation and consolidation of early results. One of the field’s on-going frustrations is that, except for slave records, few data sets contain physical measurements for large numbers of females. To date, female slaves and ex-slaves, some late nineteenth century U.S. college women, along with transported female convicts are the primary sources of female historical stature. Generalizations of research findings to entire populations are hindered by the small amount of data on females and the knowledge, from that data which are extant, that stature trends for the two sexes do not mimic each other. Similarly, upper class samples of either sex are not common. Future efforts should be directed at locating samples which contain data on these two understudied groups.

As Riley noted, the problem which anthropometric historians seek to resolve is not the identification of likely influences on stature. The biological sciences have provided that theoretical framework. The task at hand is to determine the relative weight of the various influences or, in Fogel’s terms, to perform “an accounting exercise of particularly complicated nature, which involves measuring not only the direct effect of particular factors but also their indirect effects and their interactions with other factors.”

More localized studies, with sample sizes adequate statistical analysis, are needed. These will allow the determination of the social, economic, and demographic factors most closely associated with human height variation. Other key areas of future investigation include the functional consequences of differences in biological well-being proxied by height, including differences in labor productivity and life expectancy. Even with the strides that have been made, in some corners, skepticism remains about the approach. To combat this, researchers must be careful to stress repeatedly what anthropometric indicators proxy, what their limits are, and how knowledge of anthropometric trends can appropriately influence our understanding of economic and social history as well as inform social policy. The field promises many future insights into the nature of and influences on historical human well-being and thus clues about how human well-being, the focus of economics generally, can be more fully and more widely advanced.

Selected Bibliography

Survey/Overview Publications

Engerman, Stanley. “The Standard of Living Debate in International Perspective: Measures and Indicators.” In Health and Welfare during Industrialization, edited by Richard H. Steckel and Roderick Floud, 17-46. Chicago: University of Chicago Press, 1997.

Floud, Roderick, and Bernard Harris. “Health, Height, and Welfare: Britain 1700-1980.” In Health and Welfare during Industrialization, edited by Richard H. Steckel and Roderick Floud, 91-126. Chicago: University of Chicago Press, 1997.

Floud, Roderick, Kenneth Wachter, and Annabelle Gregory. “The Heights of Europeans since 1750: A New Source for European Economic History.” In Stature, Living Standards, and Economic Development: Essays in Anthropometric History, edited by John Komlos, 10-24. Chicago: University of Chicago Press, 1994.

Floud, Roderick, Kenneth Wachter, and Annabelle Gregory. Height, Health, and History: Nutritional Status in the United Kingdom, 1750-1980. Cambridge: Cambridge University Press, 1990.

Fogel, Robert W. “Nutrition and the Decline in Mortality since 1700: Some Preliminary Findings.” In Long-Term Factors in American Economic Growth, edited by Stanley Engerman and Robert Gallman, 439-527. Chicago: University of Chicago Press, 1987.

Haines, Michael R. “Growing Incomes, Shrinking People – Can Economic Development Be Hazardous to Your Health? Historical Evidence for the United States, England, and the Netherlands in the Nineteenth Century.” Social Science History 28 (2004): 249-70.

Haines, Michael R., Lee A. Craig, and Thomas Weiss. “The Short and the Dead: Nutrition, Mortality, and the ‘Antebellum Puzzle’ in the United States.” Journal of Economic History 63 (June 2003): 382-413.

Harris, Bernard. “Health, Height, History: An Overview of Recent Developments in Anthropometric History.” Social History of Medicine 7 (1994): 297-320.

Harris, Bernard. “The Height of Schoolchildren in Britain, 1900-1950.” In Stature, Living Standards and Economic Development: Essays in Anthropometric History, edited by John Komlos, 25-38. Chicago: University of Chicago Press, 1998.

Komlos, John, and Jörg Baten. The Biological Standard of Living in Comparative Perspectives: Proceedings of a Conference Held in Munich, January 18-23, 1997. Stuttgart: Franz Steiner Verlag, 1999.

Komlos, John, and Jörg Baten. “Looking Backward and Looking Forward: Anthropometric Research and the Development of Social Science History.” Social Science History 28 (2004): 191-210.

Komlos, John, and Timothy Cuff. Classics of Anthropometric History: A Selected Anthology, St. Katharinen, Germany: Scripta Mercaturae, 1998.

Komlos, John. “Anthropometric History: What Is It?” Magazine of History (Spring 1992): 3-5.

Komlos, John. Stature, Living Standards, and Economic Development: Essays in Anthropometric History. Chicago: University of Chicago Press, 1994.

Komlos, John. The Biological Standard of Living in Europe and America 1700-1900: Studies in Anthropometric History. Aldershot: Variorum Press, 1995.

Komlos, John. The Biological Standard of Living on Three Continents: Further Essays in Anthropometric History. Boulder: Westview Press, 1995.

Steckel, Richard H., and J.C. Rose. The Backbone of History: Health and Nutrition in the Western Hemisphere. New York: Cambridge University Press, 2002.

Steckel, Richard H., and Roderick Floud. Health and Welfare during Industrialization. Chicago: University of Chicago Press, 1997.

Steckel, Richard. “Height, Living Standards, and History.” Historical Methods 24 (1991): 183-87.

Steckel, Richard. “Stature and Living Standards in the United States.” In American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John J. Wallis, 265-310. Chicago: University of Chicago Press, 1992.

Steckel, Richard. “Stature and the Standard of Living.” Journal of Economic Literature 33 (1995): 1903-40.

Steckel, Richard. “A History of the Standard of Living in the United States.” In EH.Net Encyclopedia, edited by Robert Whaples, http://www.eh.net/encyclopedia/contents/steckel.standard.living.us.php

Seminal Articles in Historical Anthropometrics

Aron, Jean-Paul, Paul Dumont, and Emmanuel Le Roy Ladurie. Anthropologie du Conscrit Francais. Paris: Mouton, 1972.

Eltis, David. “Nutritional Trends in Africa and the Americas: Heights of Africans, 1819-1839.” Journal of Interdisciplinary History 12 (1982): 453-75.

Engerman, Stanley. “The Height of U.S. Slaves.” Local Population Studies 16 (1976): 45-50.

Floud, Roderick and Kenneth Wachter. “Poverty and Physical Stature, Evidence on the Standard of Living of London Boys 1770-1870.” Social Science History 6 (1982): 422-52.

Fogel, Robert W. “Physical Growth as a Measure of the Economic Well-being of Populations: The Eighteenth and Nineteenth Centuries.” In Human Growth: A Comprehensive Treatise, second edition, volume 3, edited by F. Falkner and J.M. Tanner, 263-281. New York: Plenum, 1986.

Fogel, Robert W., Stanley Engerman, Roderick Floud, Gerald Friedman, Robert Margo, Kenneth Sokoloff, Richard Steckel, James Trussell, Georgia Villaflor and Kenneth Wachter. “Secular Changes in American and British Stature and Nutrition.” Journal of Interdisciplinary History 14 (1983): 445-81.

Fogel, Robert W., Stanley L. Engerman, and James Trussell. “Exploring the Uses of Data on Height: The Analysis of Long-Term Trends in Nutrition, Labor Welfare, and Labor Productivity.” Social Science History 6 (1982): 401-21.

Friedman, Gerald C. “The Heights of Slaves in Trinidad.” Social Science History 6 (1982): 482-515.

Higman, Barry W. “Growth in Afro-Caribbean Slave Populations.” American Journal of Physical Anthropology 50 (1979): 373-85.

Komlos, John. “The Height and Weight of West Point Cadets: Dietary Change in Antebellum America.” Journal of Economic History 47 (1987): 897-927.

Le Roy Ladurie, Emmanuel, N. Bernageau, and Y. Pasquet. “Le Conscrit et l’ordinateur: Perspectives de recherches sur les Archives Militaries du XIXieme siecle Francais.” Studi Storici 10 (1969): 260-308.

Le Roy Ladurie, Emmanuel. “The Conscripts of 1868: A Study of the Correlation between Geographical Mobility, Delinquency and Physical Stature and Other Aspects of the Situation of the Young Frenchmen Called to Do Military Service That Year.” In The Territory of the Historian. Translated by Ben and Sian Reynolds. Chicago: University of Chicago Press, 1979.

Margo, Robert and Richard Steckel. “Heights of Native Born Whites during the Antebellum Period.” Journal of Economic History 43 (1983): 167-74.

Margo, Robert and Richard Steckel. “The Height of American Slaves: New Evidence on Slave Nutrition and Health.” Social Science History 6 (1982): 516-38.

Steckel, Richard. “Height and per Capita Income.” Historical Methods 16 (1983): 1-7.

Steckel, Richard. “Slave Height Profiles from Coastwise Manifests.” Explorations in Economic History 16 (1979): 363-80.

Articles Addressing Methodological Issues

Heintel, Markus, Lars Sandberg and Richard Steckel. “Swedish Historical Heights Revisited: New Estimation Techniques and Results.” In The Biological Standard of Living in Comparative Perspective, edited by John Komlos and Jörg Baten, 449-58. Stuttgart: Franz Steiner, 1998.

Komlos, John, and Joo Han Kim. “Estimating Trends in Historical Heights.” Historical Methods 23 (1900): 116-20.

Riley, James C. “Height, Nutrition, and Mortality Risk Reconsidered.” Journal of Interdisciplinary History 24 (1994): 465-92.

Steckel, Richard. “Percentiles of Modern Height: Standards for Use in Historical Research.’ Historical Methods 29 (1996): 157-66.

Wachter, Kenneth, and James Trussell. “Estimating Historical Heights.” Journal of the American Statistical Association 77 (1982): 279-303.

Wachter, Kenneth. “Graphical Estimation of Military Heights.” Historical Methods 14 (1981): 31-42.

Publications Providing Bio-Medical Background for Historical Anthropometrics

Bielecki, T. “Physical Growth as a Measure of the Economic Well-being of Populations: The Twentieth Century.” In Human Growth, second edition, volume 3, edited by F. Falkner and J.M. Tanner, 283-305. New York: Plenum, 1986.

Bogin, Barry. Patterns of Human Growth. Cambridge: Cambridge University Press, 1988.

Eveleth, Phyllis B. “Population Differences in Growth: Environmental and Genetic Factors.” In Human Growth: A Comprehensive Treatise, second edition, volume 3, edited by F. Falkner and J.M. Tanner, 221-39. New York: Plenum, 1986.

Eveleth, Phyllis B. and James M. Tanner. Worldwide Variation in Human Growth. Cambridge: Cambridge University Press, 1976.

Tanner, James M. “Growth as a Target-Seeking Function: Catch-up and Catch-down Growth in Man.” In Human Growth: A Comprehensive Treatise, second edition, volume 1, edited by F. Falkner and J.M. Tanner, 167-80. New York: Plenum, 1986.

Tanner, James M. “The Potential of Auxological Data for Monitoring Economic and Social Well-Being.” Social Science History 6 (1982): 571-81.

Tanner, James M. A History of the Study of Human Growth. Cambridge: Cambridge University Press, 1981.

World Health Organization. “Use and Interpretation of Anthropometric Indicators of Nutritional Status.” Bulletin of the World Health Organization 64 (1986): 929-41.

Predecessors to Historical Anthropometrics

Bowles, G. T. New Types of Old Americans at Harvard and at Eastern Women’s Colleges. Cambridge, MA: Harvard University Press, 1952.

Damon, Albert. “Secular Trend in Height and Weight within Old American Families at Harvard, 1870-1965.” American Journal of Physical Anthropology 29 (1968): 45-50.

Damon, Albert. “Stature Increase among Italian-Americans: Environmental, Genetic, or Both?” American Journal of Physical Anthropology 23 (1965) 401-08.

Gould, Benjamin A. Investigations in the Military and Anthropological Statistics of American Soldiers. New York: Hurd and Houghton [for the U.S. Sanitary Commission], 1869.

Karpinos, Bernard D. “Height and Weight of Selective Service Registrants Processed for Military Service during World War II.” Human Biology 40 (1958): 292-321.

Publications Focused on Nonstature-Based Anthropometric Measures

Brudevoll, J.E., K. Liestol, and L. Walloe. “Menarcheal Age in Oslo during the Last 140 Years.” Annals of Human Biology 6 (1979): 407-16.

Cuff, Timothy. “The Body Mass Index Values of Nineteenth Century West Point Cadets: A Theoretical Application of Waaler’s Curves to a Historical Population.” Historical Methods 26 (1993): 171-83.

Komlos, John. “The Age at Menarche in Vienna.” Historical Methods 22 (1989): 158-63.

James M. Tanner. “Trend towards Earlier Menarche in London, Oslo, Copenhagen, the Netherlands, and Hungary.” Nature 243 (1973): 95-96.

Trussell, James, and Richard Steckel. “The Age of Slaves at Menarche and Their First Birth.” Journal of Interdisciplinary History 8 (1978): 477-505.

Waaler, Hans Th. “Height, Weight, and Mortality: The Norwegian Experience.” Acta Medica Scandinavica, supplement 679, 1984.

Ward, W. Peter, and Patricia C. Ward. “Infant Birth Weight and Nutrition in Industrializing Montreal.” American Historical Review 89 (1984): 324-45.

Ward, W. Peter. Birth Weight and Economic Growth: Women’s Living Standards in the Industrializing West. Chicago: University of Chicago Press, 1993.

Articles with a Non-western Geographic Focus

Cameron, Noel. “Physical Growth in a Transitional Economy: The Aftermath of South African Apartheid.” Economic and Human Biology 1 (2003): 29-42.

Eltis, David. ‘Welfare Trends among the Yoruba in the Early Nineteenth Century: The Anthropometric Evidence.” Journal of Economic History 50 (1990): 521-40.

Greulich, W.W. “Some Secular Changes in the Growth of American-born and Native Japanese Children.” American Journal of Physical Anthropology 45 (1976): 553-68.

Morgan, Stephen. “Biological Indicators of Change in the Standard of Living in China during the Twentieth Century.” In The Biological Standard of Living in Comparative Perspective, edited by John Komlos and Jörg Baten, 7-34. Struttart: Franz Steiner, 1998.

Nicholas, Stephen, Robert Gregory, and Sue Kimberley. “The Welfare of Indigenous and White Australians, 1890-1955.” In The Biological Standard of Living in Comparative Perspective, edited by John Komlos and Jörg Baten, 35-54. Stuttgart: Franz Steiner: 1998.

Salvatore, Ricardo D. “Stature, Nutrition, and Regional Convergence: The Argentine Northwest in the First Half of the Twentieth Century.” Social Science History 28 (2004): 297-324.

Shay, Ted. “The Level of Living in Japan, 1885-1938: New Evidence.’ In The Biological Standard of Living on Three Continents: Further Explorations in Anthropometric History, edited by John Komlos, 173-201. Boulder: Westview Press, 1995.

Articles with a North American Focus

Craig, Lee, and Thomas Weiss. “Nutritional Status and Agriculture Surpluses in antebellum United States.” In The Biological Standard of Living in Comparative Perspective, edited by John Komlos and Jörg Baten, 190-207. Stuttgart: Franz Steiner, 1998.

Komlos, John, and Peter Coclanis, “On the ‘Puzzling’ Antebellum Cycle of the Biological Standard of Living: The Case of Georgia,” Explorations in Economic History 34 (1997): 433-59.

Komlos, John. “Shrinking in a Growing Economy? The Mystery of Physical Stature during the Industrial Revolution,” Journal of Economic History 58 (1998): 779-802.

Komlos, John. “Toward an Anthropometric History of African-Americans: The Case of the Free Blacks in Antebellum Maryland.” In Strategic Factors in Nineteenth Century American Economic History: A Volume to Honor Robert W. Fogel, edited by Claudia Goldin and Hugh Rockoff, 267-329. Chicago: University of Chicago Press, 1992.

Murray, John. “Standards of the Present for People of the Past: Height, Weight, and Mortality among Men of Amherst College, 1834-1949.” Journal of Economic History 57 (1997): 585-606.

Murray, John. “Stature among Members of a Nineteenth Century American Shaker Commune.” Annals of Human Biology 20 (1993): 121-29.

Steckel, Richard. “A Peculiar Population: The Nutrition, Health, and Mortality of American Slaves from Childhood to Maturity.” Journal of Economic History 46 (1986): 721-41.

Steckel, Richard. “Health and Nutrition in the American Midwest: Evidence from the Height of Ohio National Guardsmen, 1850-1910.” In Stature, Living Standards, and Economic Development: Essays in Anthropometric History, edited by John Komlos, 153-70. Chicago: University of Chicago Press, 1994.

Steckel, Richard. “The Health and Mortality of Women and Children.” Journal of Economic History 48 (1988): 333-45.

Steegmann, A. Theodore Jr. “18th Century British Military Stature: Growth Cessation, Selective Recruiting, Secular Trends, Nutrition at Birth, Cold and Occupation.” Human Biology 57 (1985): 77-95.

Articles with a European Focus

Baten, Jörg. “Economic Development and the Distribution of Nutritional Resources in Bavaria, 1797-1839.” Journal of Income Distribution 9 (2000): 89-106.

Baten, Jörg. “Climate, Grain production, and Nutritional Status in Southern Germany during the XVIIIth Century.” Journal of European Economic History 30 (2001): 9-47.

Baten, Jörg and John Murray “Heights of Men and Women in the Nineteenth-century Bavaria: Economic, Nutritional, and Disease Influences.” Explorations in Economic History 37 (2000): 351-69.

Komlos, John. “Stature and Nutrition in the Habsburg Monarchy: The Standard of Living and Economic Development in the Eighteenth Century.” American Historical Review 90 (1985): 1149-61.

Komlos, John. “The Nutritional Status of French Students.” Journal of Interdisciplinary History 24 (1994): 493-508.

Komlos, John. “The Secular Trend in the Biological Standard of Living in the United Kingdom, 1730-1860.” Economic History Review 46 (1993): 115-44.

Nicholas, Stephen and Deborah Oxley. “The Living Standards of Women during the Industrial Revolution, 1795-1820.” Economic History Review 46 (1993): 723-49.

Nicholas, Stephen and Richard Steckel. “Heights and Living Standards of English Workers during the Early Years of Industrialization, 1770-1815.” Journal of Economic History 51 (1991): 937-57.

Oxley, Deborah. “Living Standards of Women in Prefamine Ireland.” Social Science History 28 (2004): 271-95.

Riggs, Paul. “The Standard of Living in Scotland, 1800-1850.” In Stature, Living Standards, and Economic Development: Essays in Anthropometric History, edited by John Komlos, 60-75. Chicago: University of Chicago Press: 1994.

Sandberg, Lars G. “Soldier, Soldier, What Made You Grow So Tall? A Study of Height, Health and Nutrition in Sweden, 1720-1881.” Economy and History 23 (1980): 91-105.

Steckel, Richard H. “New Light on the ‘Dark Ages’: The Remarkably Tall Stature of Northern European Men during the Medieval Era.” Social Science History 28 (2004): 211-30.

Citation: Cuff, Timothy. “Historical Anthropometrics”. EH.Net Encyclopedia, edited by Robert Whaples. August 29, 2004. URL http://eh.net/encyclopedia/historical-anthropometrics/

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The Economy of Ancient Greece

Darel Tai Engen, California State University – San Marcos

Introduction 1

The ancient Greek economy is somewhat of an enigma. Given the remoteness of ancient Greek civilization, the evidence is minimal and difficulties of interpretation abound. Ancient Greek civilization flourished from around 776 to 30 B.C. in what are called the Archaic (776-480), Classical (480-323), and Hellenistic (323-30) periods.2 During this time, Greek civilization was very different from our own in a variety of ways. In the Archaic and Classical periods, Greece was not unified but was comprised of hundreds of small, independent poleis or “city-states.” During the Hellenistic period, Greek civilization spread into the Near East and large kingdoms became the norm. Throughout these periods of ancient Greek civilization, the level of technology was nothing like it is today and values developed that shaped the economy in unique ways. Thus, despite over a century of investigation, scholars are still debating the nature of the ancient Greek economy.

Moreover, the evidence is insufficient to employ all but the most basic quantitative methods of modern economic analysis and has forced scholars to employ other more qualitative methods of investigation. This brief article, therefore, will not include any of the statistics, tables, charts, or graphs that normally accompany economic studies. Rather, it will attempt to set out the types of evidence available for studying the ancient Greek economy, to describe briefly the long-running debate about the ancient Greek economy and the most widely accepted model of it, and then to present a basic view of the various sectors of the ancient Greek economy during the three major phases of its history. In addition, reference will be made to some recent scholarly trends in the field.

Sources of Evidence

Although the ancient Greeks achieved a high degree of sophistication in their political, philosophical, and literary analyses and have, therefore, left us with a significant amount of evidence concerning these matters, few Greeks attempted what we would call sophisticated economic analysis. Nonetheless, the ancient Greeks did engage in economic activity. They produced and exchanged goods both in local and long distance trade and had monetary systems to facilitate their exchanges. These activities have left behind material remains and are described in various contexts scattered throughout the extant writings of the ancient Greeks.

Most of our evidence for the ancient Greek economy concerns Athens in the Classical period and includes literary works, such as legal speeches, philosophical dialogues and treatises, historical narratives, and dramas and other poetic writings. Demosthenes, Lysias, Isokrates, and other Attic Orators have left us with numerous speeches, several of which concern economic matters, usually within the context of a lawsuit. But although these speeches illuminate some aspects of ancient Greek contracts, loans, trade, and other economic activity, one must analyze them with care on account of the biases and distortions inherent in legal speeches.

Philosophical works, especially those of Xenophon, Plato, and Aristotle, provide us with an insight into how the ancient Greeks perceived and analyzed economic matters. We learn about the place of economic activities within the Greek city-state, value system, and social and political institutions. One drawback of such evidence, however, is that the authors of these works were without exception members of the elite, and their political perspective and disdain for day-to-day economic activity should not necessarily be taken to represent the views of all or even the majority of ancient Greeks.

The ancient Greek historians concerned themselves primarily with politics and warfare. But within these contexts, one can find bits of information here and there about public finance and other economic matters. Thucydides, for example, does takes care to describe the financial resources of Athens during the Peloponnesian War.

Poems and dramas also contain evidence concerning the ancient Greek economy. One can find random references to trade, manufacturing, the status of businessmen, and other economic matters. Of course, one must be careful to account for genre and audience in addition to the personal perspective of the author when using such sources for information about the economy. The plays of Aristophanes, for example, make many references to economic activities, but such references are often characterized by stereotyping and exaggeration for comedic purposes.

One of the most extensive collections of economic documents is the papyri from Greek-controlled Egypt during the Hellenistic period. The Ptolemaic dynasty that ruled Egypt developed an extensive bureaucracy to oversee numerous economic activities and like all bureaucracies, they kept detailed records of their administration. Thus, the papyri include information about such things as taxes, government-controlled lands and labor, and the unique numismatic policies of the Ptolemies.

Epigraphic evidence comes in the form of stone inscriptions from public and private institutions. Boundary markers placed on land used as security for loans, called horoi, were often inscribed with the terms of the loans. States such as Athens inscribed honorary decrees for those who had done outstanding services for the state, including economic ones. States also inscribed accounts for public building projects and leases of public lands or mines. In addition, religious sanctuaries frequently inscribed accounts of monies and other assets, such as produce, land, and buildings, under their control. Although accounts tend to be free of human biases, honorary decrees are much more complex and the historian must be careful to consider the perspective of their issuing institutions when interpreting them.

Archaeological evidence is free of some of the representational complexities of the literary and epigraphic evidence. Pottery finds can tell us about pottery manufacture and trade. The vase types indicate the goods they contained, such as olive oil, wine, or grain. The distribution of finds of ancient pottery can, therefore, tell us the extent of trade in various goods. Finds of hoarded coins are also invaluable for the information they reveal about the volume of coins minted by a given state at a given time and the extent to which a state’s coinage was distributed geographically. But such archaeological evidence is not without its drawbacks as well. The same “muteness” that frees such evidence from human biases also makes it incapable of telling us who traded the goods, why they were traded, how they were traded, how much they cost, and how many middlemen they went through before reaching their find spots. Furthermore, it is always dangerous to attempt to extrapolate broad conclusions about the economy from a small number of finds, since we can never be sure if those finds are representative of larger phenomena or merely exceptional cases that archaeologists happened to stumble upon.

Some of the most spectacular and informative finds in recent years have been made under the waters of the Mediterranean, Aegean, and Black Seas by what is known as marine (or nautical) archaeology. Ancient shipwrecks containing goods for trade have opened new doors to the study of ancient Greek merchant vessels, manufacturing, and trade. Although the field is relatively new, it has already yielded much new data and promises great things for the future.

The Debate about the Ancient Greek Economy

As stated above, the ancient Greek economy has been the subject of a long-running debate that continues to this day. Briefly stated, the debate began in the late nineteenth century and revolved around the issue of whether the economy was “primitive” or “modern.” These were a poor choice of terms with which to conceptualize the ancient Greek economy and are to a great extent responsible for the intractability of the debate. These terms are clearly normative in character so that essentially the argument was about whether the ancient Greek economy was like our “modern” economy, which was never carefully defined, but apparently assumed to be a free enterprise, capitalistic one with interconnected price-making markets. In addition, confusion arose over whether the ancient Greek economy was like a modern economy in quantity (scale) or quality (its organizing principles). Lastly, such terms clearly attempt to characterize the ancient Greek economy as a whole and do not distinguish differences among regions or city-states of Greece, time periods, or sectors of the economy (agriculture, banking, long distance trade, etc.).

Seeing extensive trade and use of money in Greece from the fifth century B.C. onward, the modernists extrapolated the existence of a market economy in Classical Greece. On the other hand, seeing traditional Greek social and political values that disdained the productive, impersonal, and industrial nature of modern market economies, the primitivists downplayed the existence of extensive trade and the use of money in the economy. Neither primitivists nor modernists could conceive of the existence of extensive trade and the use of money unless the ancient Greek economy was organized according to market principles. Moreover, neither side in the debate could call activities “economic” unless such activities were productive and aimed at growth.

Historical methods were also a factor in the debate. Traditional ancient historians who relied on philology and archaeology tended to side with the modernist interpretation, whereas historians who employed new methods drawn from sociology and anthropology tended to hold to the primitivist view. For example, Michael Rostovtzeff assembled a wealth of archaeological data to argue that the scale of the ancient Greek economy in the Hellenistic period was so great that it could not be considered primitive. On the other hand, Johannes Hasebroek used sociological methods developed by Max Weber to argue that the ancient Greek citizen was a homo politicus (“political man”) and not a homo economicus (“economic man”) – he disdained economic activities and subordinated them to traditional political interests.

A turning point in the debate came with the work of Karl Polanyi who drew on anthropological methods to argue that economies need not be organized according to the independent and self-regulating institutions of a market system. He distinguished between “substantivist” and “formalist” economic analysis. The latter, which is typical of economic analysis today, is appropriate only for market economies. Market economies operate independently of non-economic institutions and their most characteristic feature is that prices are set according to an aggregate derived from the impersonal forces of supply and demand among a group of interconnected markets. But material goods may be produced, exchanged, and valued by means other than market institutions. Such means may be tied to non-economic social and political institutions, including gift exchange or state-controlled redistribution and price-setting. Hence, other tools of analysis, namely “substantivist” economics, must be employed to understand them. Polanyi concluded that ancient Greece did not have a developed market system until the Hellenistic period. Before that time, the economy of ancient Greece did not comprise an independent sphere of institutions, but rather was “embedded” in other social and political institutions. Thus, Polanyi opened the door through which scholars could begin to examine the ancient Greek economy free from the normative parameters originally imposed on the debate. Unfortunately, the grip of the old parameters has been very strong and the debate has never completely freed itself from their influence.

The Finley Model and Its Aftermath

At present the most widely accepted model of the ancient Greek economy is that which was first set forth by Moses Finley in 1973. This view owes much to the Weber-Hasebroek-Polanyi line of analysis and holds that the ancient Greek economy was fundamentally different from the market economy that predominates in most of the world today. Not only was the ancient Greek economy much smaller in scale than economies today, it also differed greatly in quality.

Although the ancient Greek word oikonomia is the root of our modern English word “economy,” the two words are not synonymous. Whereas today “economy” refers to a distinct sphere of human interactions involving the production, distribution, and consumption of goods and services, oikonomia meant “household management,” a familial activity that was subsumed or “embedded” in traditional social and political institutions. True, the Greeks produced and consumed goods, engaged in various forms of exchanges including long-distance trade, and developed monetary systems employing coinage, but they did not see such activities as being part of a distinct institution which we call the “economy.”

According to Finley’s model, the subordination of economic activities to social and political ones was a byproduct of a Greek value system that emphasized the wellbeing of the community over that of the individual. Economic activity was necessary in this system only in so far as the individual male citizen had to provide sustenance for himself and his family. This could be accomplished simply by farming a small plot of land. Beyond that, the male citizen was expected to devote himself to the wellbeing of the community by participating in the public religious, political, and military life of the polis.

On the other hand, ancient Greek values held in low esteem economic activities that were not subordinated to the traditional activities of managing the family farm and obtaining goods for necessary consumption. So-called banausic work, which included manufacturing, business, and trade (which were not tied to the land and the family farm), and what we would call “capitalism” (investing money to make more money) were considered to be incompatible with active participation in the affairs of the polis and even as unnatural and morally corrupting. A life on the land, farming to produce only so much as was needed for consumption and leaving enough leisure time for active participation in the public life of the polis, was the social ideal. Production and exchange were to be undertaken only for personal need, to help out friends, or to benefit the community as a whole. Such activities were not to be undertaken simply to make a profit and certainly not to obtain capital for future investment and economic growth.

Given the limits put on economic activity by traditional values and the absence of a modern conception of the economy, agriculture comprised the bulk of production and exchange. Most production, therefore, was carried out in the countryside and cities were net consumers rather than producers, living off the surplus of the countryside. With limited technology and no understanding of economies of scale, cities were not hubs of industry, and manufacturing existed only on a small scale. Cities were mainly places for people to live as well as religious and governmental centers. Their contribution to the economy was only to demand the surplus produce of the countryside, manufacture limited amounts of goods, and provide market places and ports of trade for the exchange of goods.

Since the bulk of economic wealth was produced from the land and banausic occupations were not esteemed, the elite of ancient Greek society were landowners who consequently dominated politics, even in democratic poleis like Athens. Such men had little interest in manufacturing, business, and trade and, like their society as a whole, did not consider the economy as a distinct sphere separate from social and political concerns. Thus, their official policies with regard to the economy were much different from that of modern states.

Modern states undertake policies with specifically economic goals, desiring in particular to make their national economy more productive, to expand or grow, thereby increasing the per capita wealth of the state. Ancient Greek city-states, on the other hand, had an interest and involvement in what we would call economic activities (trade, minting coins, production, etc.) that, like oikonomia on the household level, were consumptive in nature and fulfilled traditional social and political needs, not strictly economic ones.

Finley’s model also holds that there was neither a “market mentality” nor interconnected markets that could operate according to impersonal price-setting market mechanisms. Individual city-states certainly had “market places” (agorai), but such markets existed largely in isolation with minimal connections among them. Thus, prices were set according to local conditions and personal relationships rather than in accordance with the impersonal forces of supply and demand. This was so in part because of the Greek socio-political emphasis on self-sufficiency (autarkeia), but also because the physical environment and industry of the eastern Mediterranean tended to produce similar goods, so that there were few items that a city-state needed which could not be obtained from within its own boundaries.

Moreover, according to Finley’s model, the interests of Greek city-states in trade were likewise limited by traditional political concerns to the consumptive goals of ensuring the import of adequate supplies of “material wants,” such as food at reasonable prices for their citizens, and revenue which could be obtained from taxes on trade. The former goal could be fulfilled by making laws that required or provided incentives for traders to bring grain into the city. Laws such as these were merely extensions of traditional political policies, like conquest and plunder, but in which a less violent form of acquisition would now be undertaken. But though the means had changed, the ends were still political; there was no interest in the economy per se. The same holds true for the traditional need of city-states for revenue to pay for public projects, such as temple building and road maintenance. Here again, old and often violent methods of obtaining revenue were augmented through such things as taxes on trade.

Finley’s model has had a great impact on those who study the ancient Greek economy and is still widely accepted today. But although the general picture it presents of the ancient Greek economy has not been superceded, the model is not without flaws. It was inevitable that Finley would overstate his model, since it attempted to encompass the general character of the ancient Greek economy as a whole. Thus, the model makes little distinction between different regions or city-states of Greece, even though it is clear that the economies of Athens and Sparta, for example, were quite different in many respects. Finley also treats the various sectors of the economy (agriculture, labor, manufacturing, long-distance trade, banking, etc.) as if they were all governed equally in accordance with the general tenets of the model, despite the fact that, for example, there were significant differences between the values that applied in the landed economy and those that prevailed in overseas trade. Lastly, Finley’s model is synchronic and hardly acknowledges changes in both the quantity and the quality of the economy over time.

Some close examinations of the various sectors of the ancient Greek economy in different places and at different times have supported Finley’s model in its general outlines. But they have been matched by just as many studies that have revealed exceptions to the model. Thus, one recent trend in the scholarship has been to try to revise the Finley model in light of focused studies of particular sectors of the economy at specific times and places. Another trend has been simply to ignore the Finley model and bypass the old debate altogether by examining the ancient Greek economy in ways that make them irrelevant. Basically, given the quantity and the quality of the available evidence, our attempts to understand the ancient Greek economy are greatly affected by the perspective from which we approach it. We can choose to try to characterize the entire ancient Greek economy in general, to see the forest as it were, and debate whether it was more or less similar to our own. Or we can focus in on the trees and undertake narrow studies of particular sectors of the ancient Greek economy at specific times and places. Both approaches are useful and not necessarily mutually exclusive.

The Archaic Period

Finley’s model holds most true for the Archaic period (c. 776-480 B.C.) of ancient Greek history. Archaeological evidence and literary references from such works as the epic poems of Homer (the Iliad and the Odyssey), the Works and Days of Hesiod, and the works of the lyric poets attest to an economy that was generally small in scale and centered on household production and consumption. This is not surprising, since it was during the Archaic period that Greek civilization was re-emerging from a “Dark Age” of upheaval and forming its basic social, legal, political, and economic institutions. The fundamental political unit, the polis or independent city-state, appears at this time as do non-monarchal governments allowing for at least some degree of political participation among a broad swath of citizens.

For the most part, governments did not actively involve themselves in economic matters, except during the occasional political upheavals between “haves” and “have-nots” in which land might be confiscated from the few and redistributed to the many. Despite the fact that much of the Greek mainland is mountainous and the rivers generally small, there was enough fertile land and winter rainfall so that agriculture could account for the bulk of economic production, as it would in all civilizations before the modern industrial era. But unlike the large kingdoms of the Near East, Greece had a free-enterprise economy and most land was privately owned. Agriculture was carried out primarily on small family farms, though the Homeric epics indicate that there were also some larger estates controlled by the elite and worked with the help of free landless thetes whose labor would be needed especially at harvest time. Slaves existed, but not in such large numbers as to make the economy and society dependent on them.

As the populations of cities were fairly small, crafts and manufacturing were largely carried out within households for internal consumption. Both literary accounts and material remains, however, indicate that there was a certain amount of specialization. Artisans are referred to in the Homeric epics and the level of craftsmanship seen on items, such as metal work and painted pottery, was not likely to have been accomplished by non-specialists. Nevertheless, without large-scale manufacturing, safety from brigands on land and pirates at sea, and a monetary system employing coinage (until late in the sixth century), markets were necessarily small, devoted to local products, and certainly not interconnected into a price-setting market economy. Trade was limited mostly to local exchanges between the countryside and the urban center of city-states. Farmers might load up their surplus goods on a small ship to sell them in a neighboring city, as Hesiod attests, but long-distance sea-borne trade was devoted almost exclusively to luxury items, such as precious metals, jewelry, and finely-painted pottery. Moreover, gift exchanges in accordance with social traditions were as prominent if not more so than impersonal exchanges for profit. In general, those who engaged in banausic occupations on more than a part-time basis and sought profit from such activities were looked down on and did not hold positions of prestige in society or government.

Nevertheless, it cannot be denied that the scale of the Greek economy grew during the Archaic period and if not per capita, at least in proportion to the clear growth in population. Population increases and the desire for more land were the primary impetuses for a colonizing movement that established Greek poleis throughout the Mediterranean and Black Sea regions during this period. These new city-states put more land under cultivation, thereby providing the agriculture necessary to sustain the growing population. Moreover, archaeological evidence for the dispersal of Greek products (particularly pottery) over a wide area indicate that trade and manufacturing had also expanded greatly since the Dark Age. It is probably no coincidence that the end of the Archaic period witnessed for the first time a divergence between the designs of merchant vessels and warships, a distinction that would become permanent. Also, after the invention of coinage in Asia Minor in the early sixth century B.C., even though various other forms of money and barter continued to be employed throughout the course of ancient Greek history, the Greeks were quick to adopt coinage and it became the predominant means of exchange from the end of the sixth century onward. The aforementioned economic trends are traced in an important recent book by David Tandy, who argues that they had a fundamental impact on the development of the social and political organization and values of the Archaic polis.

Key Economic Sectors of the Classical Period

During the Classical period of ancient Greek history (480-323 B.C.), continued increases in population as well as political developments influenced various sectors of the economy to the extent that one can see a growing number of deviations from the Finley model. Evidence concerning the economy also becomes more abundant and informative. Thus, a more detailed description of the economy during the Classical period is possible and more attention to the distinctions between its various sectors is also desirable.

In light of the cautionary statements made earlier in this article about overgeneralization, it is important to note that great variation existed among the regions and city-states of the ancient Greek world, especially during the Classical period. Athens and Sparta are famous examples of two almost polar opposites in their social and political organizations and this is no less true with regard to their economic institutions. Given, however, the fact that Athens is the best documented and most studied place in ancient Greek history, the various sectors of the ancient Greek economy during the Classical period will be discussed primarily as they existed in Athens, despite the fact that it was in many ways exceptional. Significant variations from the Athenian example will be noted, however, as will some recent trends in scholarship.

Public and Private Economic Sectors

It is first necessary to distinguish between the public and private sectors of the economy. Throughout most of ancient Greek history before the Hellenistic period, a free enterprise economy with private property and limited government intervention predominated. This places Greece in sharp contrast to most other ancient civilizations, in which governmental or religious institutions tended to dominate the economy. The main economic concerns of the governments of the Greek city-states were to maintain harmony within the private economy (make laws, adjudicate disputes, and protect private property rights), make sure that food was available to their citizenries at reasonable prices, and obtain revenue from economic activities (through taxes) to pay for government expenses.

Athens had numerous laws to protect private property rights and had officials and law courts to enforce them. In addition, there were officials who oversaw such things as weights, measures, and coinage to make sure that people were not cheated in the market place. Athens also had laws to ensure an adequate supply of grain for its citizens, such as a law against the export of grain and laws to encourage traders to import grain. Athens even had agreements with other states in which the latter gave favorable treatment to traders bound for Athens with grain.

On the other hand, Athens did not tax its citizens directly except in cases of state emergencies (eisphorai) and in requiring the wealthiest citizens to perform public services (liturgies). Most taxes were indirect: market taxes, port taxes, import-export taxes, and taxes on foreigners who took up long-term residence in Athens. Taxes were collected by companies of private tax farmers who bid on contracts issued by the state. In addition to taxes, Athens obtained revenue from leases of publicly owned lands and mines. Revenue was necessary for various government expenditures, including administrative costs, public festivals, and maintenance of widows and orphans of soldiers who died in battle as well as building ships’ hulls for the navy, walls for the city, and temples for the gods. Such state expenditures could have a significant impact on the economy, as is clear from the large quantities of money and labor that appear in the inscribed accounts of the building projects on the Athenian acropolis.

Although the Finley model is right in many respects with regard to the limited interest and involvement of the state in the economy, one recent trend has been to show through carefully focused examinations of specific phenomena that Finley pressed his case too far. For example, Finley drew too sharp a distinction between the interests of non-citizen (and, therefore, non-landowning) traders and the landed citizens who dominated Athenian government. It is true that the latter might not have exactly the same economic interests as the former, but the interests of the two were nevertheless complementary, for how could Athens get the grain imports it required without making it in the interest of traders to bring it to Athens?. Moreover, it has been argued that the policies of Athens with regard to its coinage betray a state interest in the export of at least one locally produced commodity (namely silver), something completely discounted by the Finley model.

But again, Finley was probably right to argue that during the Archaic and Classical periods the vast majority of economic activity was left untouched by government and carried out by private individuals. On the other hand, by the Classical period a self-sufficient household economy was an ideal that was becoming increasingly difficult to maintain as the various sectors of economic activity became more specialized, more impersonal, and more profit oriented as well.

Land

As in the Archaic period, the most important economic sector was still tied to the land and the majority of agriculture continued to be carried out on the subsistence level by numerous small family farms, even though the distribution of land among the population was far from equal. Primary crops were grains, mostly barley but also some wheat, which were usually sown on a two-year fallowing cycle. Olives and grapes were also widely produced throughout Greece on land unsuitable for grains. Animal husbandry focused on sheep and goats, which could be moved from their winter lowland pasturage to the moister and cooler mountainous regions during the hot summer months. Cattle, horses, and donkeys, though less numerous, were also significant. While usually sufficient to support the population of ancient Greece, unpredictable rainfall made agriculture precarious and there is much evidence for periodic crop failures, shortages, and famines. Consequently, competition for fertile land was a hallmark of Greek history and the cause of much social and political strife within and between city-states.

One recent trend in the study of ancient Greek agriculture is the use of ethnoarchaeology, which attempts to understand the ancient economy through comparative data from better-documented modern peasant economies. In general, studies employing this method have supported the prevailing view of subsistence agriculture in ancient Greece. But caution is necessary, since there have been changes in the physical environment of and settlement patterns in Greece over time that can skew comparative analyses. Ethnoarchaeology has also been used to show that Greek farmers in both ancient and modern times have had to be flexible in their responses to wide variations in local topographical and climatic conditions and, thus, varied their crops and fallowing regimes to a significant degree. Rational exploitation of fluctuations in production brought on by such variations might have been the means by which some farmers were able to obtain enough wealth to rise above their peers and become members of a landed elite and this might point to a productive mentality at odds with the Finley model.

Metals were another important landed resource of Greece and so mining occupied an important place in the economy. Ancient Greeks typically used bronze and iron tools and weapons. There is little evidence that copper, the principal metal in bronze, was ever mined in abundance on mainland Greece. It had to be imported from the island of Cyprus, where it existed in large quantities, and other more distant regions. Tin, the other metal in bronze, was also rare in Greece and had to be imported from as far away as Britain. Iron is relatively plentiful throughout Greece and there is archaeological evidence of iron mining; however, literary references to it are few and so we know little about the process.

Precious metals were used in jewelry, art, and coinage. Athens had an abundance of silver and we know much about its mining industry from surviving inscriptions of government mine leases to private entrepreneurs. The mines were extremely productive, providing Athens with an income of 200 talents per year for twelve years from 338 B.C. onward. One talent was the equivalent of around nine year’s worth of wages for single skilled laborer working five days a week, 52 weeks a year, according to the wage rates we know from 377 B.C. Though productive in silver, ancient Greece was not as rich in gold, which was found primarily in Thrace and on the islands of Thasos and Siphnos.

Recent scholarship continues to focus on the silver mines of Athens, drawing not only on the inscribed mine leases, but also on extensive archaeological investigation of the mines themselves. They tend to indicate that, contrary to the Finley model, mining in Athens was specialized enough and extensive enough to constitute an “industry” in the modern sense of the word and one geared toward growth. In a study of mine-leasing records Kirsty Shipton has shown that the elite of Athens preferred mines leases, with their potential for greater profits, to land leases. Thus, the traditional preference of the elite for the consumptive acquisition of land and disdain for productive investments for profit postulated by the Finley model might be a characteristic feature of the ancient Greek world as a whole, but it does not entirely hold for Athens in the Classical period.

Stone for building and sculpture was another valuable natural resource of Greece. Limestone was available in abundance and fine marble could be found in Athens on the slopes of Mount Pentelikos and on the island of Paros. The former was used in building the Parthenon and the other structures of the Athenian acropolis while the latter was often used for the most famous ancient Greek free-standing and relief sculptures.

Labor

It is notoriously difficult to estimate the population of Athens or any other Greek city-state in ancient times. Generally accepted figures for Athens at the height of its power and prosperity in 431 B.C., though, are in the range of approximately 305,000 people, of which perhaps 160,000 were citizens (40,000 male, 40,000 female, 80,000 children), 25,000 were free resident foreigners (metics), and 120,000 were slaves. Athens was the largest polis and the populations of most city-states were probably much smaller. Citizens, metics, and slaves all performed labor in the economy. In addition, many city-states included forms of dependent labor somewhere in between slave and free.

As stated above, much of the agriculture of ancient Greece was carried out by small farmers who were exclusively free citizens, since non-citizens were barred from owning land. But although being a farmer was the social ideal, good land was scarce in Greece and it is estimated that in Athens about a quarter of the male citizens did not own land and had to take up other occupations for their livelihoods. Such occupations existed in the manufacturing, service, retail, and trade sectors. These “business” occupations were not only socially disesteemed, but they also tended to be small scale. Wage earning was very much looked down upon, since working for another person was thought of as an impingement on freedom and akin to slavery. Thus, free men doing the same work side by side with metics and slaves on the Acropolis building projects earned the same wages. Yet wages appear to have been adequate to make a living. In Athens the typical wage for a skilled laborer was one drachma per day at the end of the fifth century and two and a half drachmai in 377. In the fifth century a Greek soldier on campaign received a ration of 1 choinix of wheat per day. The price of wheat in Athens at the end of the fifth century was 3 drachmai per medimnos. There are 48 choinices in a medimnos. Thus, one drachma could buy enough food for 16 days for one person, four days for a family of four.

One thing that made up for the limited number of free citizens who were willing or had to become businessmen or wage earners was the existence of metics, foreign-born, free non-citizens who took up residence in a city-state. It is estimated that Athens had about 25,000 metics at its height and since they were barred from owning land, they engaged in banausic occupations that tended to be looked down upon by the free citizenry. The economic opportunities afforded by such occupations in Athens and other port cities where they were particularly abundant must have been significant. They attracted metics despite the fact that metics had to pay a special poll tax and serve in the military even though they could not own land or participate in politics and had to have a citizen represent them in legal matters. This is confirmed by the numerous metics in Athens who became wealthy and whose names we know, such as the bankers Pasion and Phormion and the shield-maker Cephalus, the father of the orator, Lysias.

Foreign-born, free non-citizen transients known as xenoi also played an important role in the ancient Greek economy, since it is apparent that many, though certainly not all, those who carried out long-distance trade were such men. Like metics, they too were subject to special taxes, but few rights.

Slaves comprised an undeniably large part of the labor force of ancient Greece. In fact, it is fair to say, as Finley did, that ancient Greece was a “slave dependent society.” There were so many slaves; they were so essential to the economy; and they became so thoroughly embedded into the every day life and values of the society that without slavery, ancient Greek civilization could not have existed in the manner it did. In Classical Athens it has been estimated that there were around 120,000 slaves. Thus, slaves comprised over a third of the total population and outnumbered adult male citizens by three to one.

The slaves of Athens were chattel, that is the private property of their owners, and had few, if any, rights. The demand for them was high as they performed almost every kind of work imaginable from agricultural labor to mining labor to shop assistants to domestic labor even to serving as the police force and secretaries for the government in Athens. About the only thing slaves did not normally do was military service, except in emergencies, when they did that too.

Slaves were supplied by a variety of sources. Many were war captives. Some were enslaved for failure to pay debts, though this was outlawed in Athens in the early sixth century B.C. Some were foundlings, abandoned children rescued and reared in return for their labor as slaves. Of course, the children of slaves would also be slaves. In addition, there was an extensive and regular slave trade that trafficked in people who had become slaves by all the means mentioned previously.

In part because of the diverse means by which slaves were supplied, there was no particular race that was singled out for enslavement. Anyone could become a slave if unfortunate enough, including Greeks. It does appear, however, that a large percentage of slaves in Greece originated in the Black Sea and Danubian regions. In most cases they were probably captives from internecine tribal wars and sold to slave traders who shipped them to various parts of the Greek world.

The treatment of chattel slaves varied, depending on the whims of individual slave owners and the types of jobs done by the slaves. Slaves who worked in the silver mines of Athens, for example, worked in dangerous conditions in large numbers (as many as 10,000 at a time) and had virtually no contact with their owners that could result in human bonds of affection (they were usually leased out). On the other hand, slaves who worked in households assisting the matron of the family in her household tasks were probably treated much better as a rule. Their labor was less strenuous and since they worked in close proximity with their owners’ families, at least some human bonds of affection were likely to form between them and their owners. Some slaves even lived on their own and ran their owners’ businesses largely unsupervised.

One aspect of ancient Greek slavery that is often cited as evidence for it being more “humane” than other slavery regimes is manumission. There is enough evidence for slaves being freed to make us believe that manumission was not uncommon and many slaves could probably hope for freedom, even if most of them never actually obtained it. But manumission was quite self-serving for slave owners, since it made slaves much less likely to risk rebellion in the hope that they might some day be given their freedom. As it turns out, there were only two noteworthy large-scale rebellions of chattel slaves in the history of ancient Greece. Moreover, inscriptions from the religious sanctuary of Delphi from the Hellenistic period show that slaves almost always had to compensate their owners for their freedom, either in the form of cash or some other valuable commodity, like their own children, who would also be slaves of the master and eventually replace their aging parents with young labor. So it is a dubious matter to say that the manumission of slaves is a testament to the humanity of ancient Greek slavery. Individual slaves might benefit, but the practice allowed the institution of slavery to flourish throughout Greek history.

When slaves were freed, they did not become citizens, but rather metics. Yet even though they still could not possess the full rights and privileges of citizens, they could prosper economically, just as other metics could. In Athens the prominent and wealthy metic banker, Pasion, for example, was originally a slave who assisted his masters Antisthenes and Archestratus. By the terms of his will, Pasion in turn manumitted his own slave assistant, Phormion, and not only left him his bank, but also stipulated that Phormion marry his widow and manage the inheritance of his son, Apollodorus.

In addition to chattel slavery, there were other forms of dependent labor in the ancient Greek world. One famous example is helotry, known principally from the city-state of Sparta. The helots of Sparta were agricultural serfs, indigenous peoples conquered by the Spartans and forced to work their former lands for their Spartan overlords. They were not the private property of the individual Spartans, who were allotted the former lands of the helots, and could not be bought or sold. But their mobility was completely restricted; they had very few rights; they had to turn over a large percentage of their produce to their Spartan overlords; and they were routinely terrorized as a matter Spartan state policy. The one drawback for the Spartans of using helot labor, though, was that the helots, living still on their former homeland and having a sense of ethnic unity, were prone to revolt and did so on several occasions at great cost both to themselves and to the Spartans.

With the exception of Sparta and a few other city-states, women in ancient Greece, free citizens or otherwise, could not control land. They could own it in name only and were not allowed to dispose of it as they saw fit, but were legally obliged to yield control of it to a male representative. Since land was the chief source of wealth in the ancient Greek economy, the inability to control it severely constrained the economic role of women. The ideal was for women to get married, have children, raise them, and carry out the indoor tasks of the household, such as cooking and textile production.

Of course, not all women could live up to such an ideal at all times. Women undoubtedly helped outdoors on the farm during harvest time. Those of poorer families might by necessity have to sell in the market place what little surplus produce their households could generate or perform service-oriented jobs for others for wages. Female metics and slaves did similar work and also comprised the majority of the prostitutes of Athens, which was a legal profession. Prostitutes, though, ranged from lowly brothel workers to high-class call girls, the latter of which, such as Aspasia, sometimes obtained prominence in Athenian society.

Despite their disdain for certain types of work and their dependence on slave labor, most Greeks had to work hard to make a living. Yet they did not develop a “work ethic” and did not consider work to be ennobling, but simply necessary. Hence, if one could afford a slave to do one’s work, then one bought a slave. The availability of cheap slaves was a major factor in Greek attitudes toward labor and may also explain why there were no labor unions in Greece. For how could wage-earners pressure their employers for better conditions or wages when the latter could always replace them with slaves if necessary?

Manufacturing

Slavery also affected manufacturing in ancient Greece. It is often said that technology and industrial organization stagnated in ancient Greece because the availability of cheap slave labor obviated any imminent need to improve them. If one wanted to produce more, one merely bought a few more slaves. Thus, most manufactured products were literally hand-made with simple tools. There were no assembly lines and no big factories. The largest manufacturing establishment we know of was a shield factory owned by the metic, Cephalus, the father of the orator, Lysias, which employed 120 slaves. Most manufacturing was carried out in small shops or within households. Hence, in comparison with agriculture, manufacturing comprised a small part of the ancient Greek economy.

Nevertheless, documentary and archaeological evidence attests to a wide variety of manufactured items and some in large quantities. Among the most extensively manufactured products was clay pottery, the remains of which archaeologists have found scattered throughout the Mediterranean world. The wheel-made pots took many shapes appropriate for their contents and use, which ranged from hydria for water to amphorae for olive oil and wine to pithoi for grain to aryballoi for perfume to kylikes for drinking cups. Finely painted vases were also manufactured for decorative and ritual purposes. The finest, most numerous, and widely dispersed of these were made in Corinth, Aegina, Athens, and Rhodes.

Literary accounts as well as scenes from painted vases make it clear that the ancient Greeks left textile production largely to women. The principal material they worked with was wool, but linen from flax was also common. Textiles were used in turn in the manufacture of clothing. Again, women were largely responsible for this and it was done primarily within the household. Textiles were often dyed, the most desirable dye being a reddish purple color derived from aquatic murex snails. These had to be harvested, mashed into a jelly, and then boiled to extract the dye.

Although the trees of Greece were for the most part not particularly good for woodworking materials and especially not for large-scale building, the Greeks did use wood extensively and, therefore, had to import good timber from places like Macedonia, the Black Sea region, and Asia Minor. Given the countless islands of Greece, it is not surprising that shipbuilding was an important sector of manufacturing. Vessels were needed for commercial as well as military uses. In Athens the state obtained the necessary timber for the ships (and oars) of its navy, but it contracted with carpenters who worked under the supervision of state officials to craft the timber into the warships that were so vital for Athenian power in the Classical period.

Buildings ranged from private houses to monumental stone temples. The former tended to be rather humble, made of unbaked mud brick laid on a stone foundation and covered by a thatched or tiled roof. On the other hand, the great temples of ancient Greece required much organization, many resources, and incredible technical skill. As is evidenced by the extant accounts for the construction of the buildings of the Athenian acropolis, the work was normally contracted out in small units to private individuals who either worked alone or in charge of others to do anything from quarrying marble to transporting wooden beams to sculpting facades. The degree of specialization varied. In some cases we see contractors carrying out a variety of tasks, whereas in others we see them specializing in only one.

Metal crafts were highly specialized. The Greeks smelted iron, but only in wrought form. They were unable to achieve furnace temperatures high enough to make pig iron and did not have the technical know-how to add carbon to the smelting process with enough precision to make steel with any consistency. Blacksmiths crafted body armor, shields, spears, swords, farm implements, and household utensils. Bronze casting reached the level of fine art in Classical Greece. Sculptors used the lost-wax method, in which they first made a clay model of a statue, then covered the model with a layer of wax, which they then covered again with another layer of clay. Small openings were left in the outer clay covering, into which molten bronze was poured. The hot molten bronze melted the wax, which then flowed out another opening in the outer clay covering. After the bronze cooled the outer clay covering was broken off, leaving the cast bronze.

It is clear that in the Classical period in Athens there was much specialization in manufacturing and that the quantity of goods was far greater than that which could have been produced in a purely “household economy.” At the same time, however, the scale and organization of manufacturing was a far cry from those of industrialized civilizations of recent centuries.

Markets and Prices

According to the Finley model, there was no network of interconnected markets to form a price-setting market economy in the ancient Greek world. Although this is true for the most part, like other aspects of the Finley model, the case is overstated. There do, for example, appear to be connections between markets for some commodities, such as grain and probably precious metals as well. In the case of grain, it can be shown that supply and demand over long-distances did have an impact on prices and traders sought to take advantage of the lag-time between price adjustments in order to make a profit. Obviously, though, this is nothing like the modern world in which the price of crude oil changes instantly worldwide in reaction to a change in supply from one of the major producers. For the most part in ancient Greece, prices were set in accordance with local conditions, personal relationships, and haggling.

Government price-fixing was limited. Although there is evidence that Athens, for example, fixed the retail price of bread in proportion to the wholesale price of grain, there is no evidence that it fixed the price of the latter. Even in times of severe grain shortages, Athens was content to allow traders bringing grain to Athens to charge the going rate. In such cases, the state alleviated the crises for its citizens by paying the going rate for the grain and then reselling it to its citizenry at a lower price.

Despite the general absence of interconnected markets, however, there were market places. Each city-state had at least one market place (agora) in the heart of city and a port market (emporion) as well, if it had a good harbor. The agora was a place of much activity, serving not only as a center of economic exchange, but also as a political, religious, and social center. In the agora one could find law courts, offices for public officials, and coin mints as well as shrines and temples. In fact, agorai were considered sacred places to the degree that they were marked off with boundary stones across which no one who had the stain of religious pollution could cross. Within the agora economic activities were segregated by types of goods, services, and labor so that there were specific places where one could regularly find the fishmongers, blacksmiths, money changers, and so on.

Ancient Greek city-states regulated the economic activities that took place in their markets to a certain degree. Public officials oversaw weights, measures, scales, and coinage to limit and resolve disputes in exchanges as well as to ensure state interests. For example, Athens employed a publicly owned slave to check coins and guard against counterfeiters. In this way, Athens protected the integrity of its own coinage as well as the interests of buyers and sellers. The state ensured the affordability of key goods, such as bread, by fixing its retail prices relative to the wholesale price of grain. Various activities in the market place were also taxed by the state. Port and transit taxes affected exchanges in emporia like the Piraeus of Athens and xenoi had to pay a special tax for engaging in transactions in the agora.

Trade

Local trade between countryside and urban center and on the retail level within cities continued largely as it had in the Archaic period. But rather than producers transporting and selling their surplus goods directly in city markets, specialized retailers (kapeloi) who profited as middlemen between producers and consumers became more the norm. Local trade goods could be probably transported over short distances on land. But long-distance trade over land was difficult and time consuming, given the mountainous topography of Greece and the fact that the fragmented city-states of Greece never built an extensive system of paved roads that tied them together in the manner of the Roman Empire. Most “roads” between cities were single track and suitable only for pack animals, though there were some on which wheeled carts could be pulled by oxen, donkeys, or mules.

Long-distance trade was primarily done by merchant ships over the waters of the Aegean, Mediterranean, and Black Seas. Evidence from the Attic Orators indicates that during the Classical period overseas trade developed into a specialized and important sector of the economy. Trade was carried out by private individuals and not organized by the state. A typical trading venture involved a non-citizen trader (emporos) who either owned his own ship or rented space on a ship owned by another (naukleros). In most cases described by the orators, the traders typically borrowed money from a citizen lender to finance the venture. There is some dispute among scholars whether such loans constituted productive borrowing on the part of the traders or were just a type of insurance, because the loans would only have to be repaid if the ship and cargo reached their contracted destinations. From the perspective of the lenders, the loans were certainly productive, since they charged interest at a rate much higher than that which applied to loans on the security of land, anywhere from 12 to 30%.

Marine archaeology has recently increased our knowledge of merchant vessels and their cargoes tenfold by the discovery of several ancient shipwrecks. The ships appear to have been generally small by modern standards. In 1968 the well-preserved wreck of a merchant ship from c. 300 B.C. was found off the coast of Kyrenia in Cyprus. Being only 35 feet long and 15 feet wide with a capacity of 30 tons, it is probably the kind of merchant vessel that made short hauls and kept within sight of the coastline. But other shipwrecks as well as evidence from the Attic Orators seem to indicate that the typical capacity of merchant vessels that traveled over long distances on the open sea was some 80 tons.

Many of the goods traded throughout ancient Greek history were luxury goods, manufactured items, such as jewelry and finely painted vases, as well as specialty agricultural products like fine wine and honey. Necessities were also traded, however, for without long-distance trade, many Greek cities would not have been able to obtain metals, timber, wine, and slaves. One of the most extensively traded necessity items was grain, which came to Athens typically from the Black Sea region, Thrace, and Egypt. According to the orator, Demosthenes, Athens imported some 400,000 medimnoi (approximately 4,800,000 liters) of grain per year in the late fourth century from the Crimean kingdom of the Bosporus alone.

Chiefly because of the need for certain imports, such as grain and timber, and for revenue drawn from taxes on trade, many cities did have an interest and involvement in overseas trade. Athens in particular made laws that prohibited the export of grain produced in Athens and required that loans on trading ventures be for cargoes of grain and that ships bringing grain into the Piraeus sell one-third of it on the spot and the remaining two-thirds in Athens. Athens also instituted special courts to expedite the adjudication of disputes involving traders, granted honors and privileges to anyone who performed extraordinary services relating to trade for the city, and made agreements with other states to obtain favorable conditions for those bringing grain to Athens.

In all the aforementioned examples Athens’ chief interest was to supply itself with imported grain so that its citizenry could obtain food at reasonable prices. Athens was not particularly concerned with helping traders and enhancing their profits per se or in obtaining a trade surplus or to protect home produced goods against imported foreign ones. To this extent, then, the Finley model holds true, even if it is clear that the Athenian state recognized that its interests were complementary with those of foreign traders and, thus, had to help them in order to help itself.

Moreover, it does appear that Athens had some concern about its home produced products as well, at least in the case of silver. Xenophon, an Athenian writer from the fourth century, noted that Athens could always be assured of traders bringing their goods into Athens, because traders knew they could always get a valuable trade commodity, namely silver in the form of Athenian coinage, in exchange. To ensure the demand for its silver, Athens took great care to maintain the reputation of its coinage for high quality and to associate that reputation with a familiar design that went unchanged for several centuries. Such a policy attests to a state interest in production and exports, at least in this sector of the economy.

Athens was also motivated to encourage trade to obtain revenue from taxes. Both transient and resident foreigner traders had to pay poll taxes in Athens that citizens did not. Athens also had various port, transit, and market taxes that would benefit by increased trade, including a two percent tax on all imports and exports.

Money and Banking

With few exceptions (Sparta being the most famous), the Greeks of the Classical period had a thoroughly monetized economy employing coinage whose value was based on precious metals, principally silver. The value of the coinage was commensurate to the value of the precious metal it contained with a small mark-up, since the value of the metal was guaranteed by its issuing state. The tie of the Greek monetary system to the supply of precious metals limited the ability of governments to influence their economies through the manipulation of their money supplies. However, we do know of cases when states debased their coinages for such purposes.

Ancient Greek coins are similar in appearance to modern ones. But like other manufactured products in ancient Greece, they were made by hand. A blank metal circular “flan” was placed on an obverse die that rested on an anvil and then was struck with a hammer bearing a reverse die. The nature of the process naturally produced coins in which the image was often poorly centered on the flan. Nevertheless, the issuing authority, usually a government, was clear as the designs or “types” of the coins expressed an image symbolic of the issuing authority and were often augmented by a “legend” of letters that spelled out an abbreviation of the issuing authority’s name.

Coinage was issued in a variety of denominations and weight standards by various city-states. The chief weight standards of the Classical period were the Attic, Aeginetan, Euboiic, and Corinthian. The basis of the Attic standard was the silver tetradrachm of 17.2 grams, which retained the design of the head of Athena on the obverse and her symbolic owl on the reverse throughout the Classical period. It was the most widely circulated coinage during this time and appears in large numbers of hoards found throughout the Greek world and beyond. This was due not only to the far reach of Athenian trade, but also to Athenian imperialism. Athens used its coinage to pay for its military operations abroad and even issued the “Standards Decree,” which for a few decades of the fifth century required the many cities of the Aegean Sea under its control to discontinue their local types and use only Athenian coinage. The local coinage had to be turned in, melted down, and re-struck as Athenian coinage for a fee. Unlike that of Athens, most city-states’ coinages circulated only locally. When such local issues were taken abroad, they were probably treated as bullion, as can be inferred from test-cuts often found on them.

A recent debate among scholars concerns the degree to which coinage was an economic or a political phenomenon in the ancient Greek world. Finley’s model, of course, holds that coinage had strictly political functions. Finley believed that coinage was merely a tool designed to reinforce and project a city-state’s civic identity. States minted coins not to facilitate economic transactions among their citizens, but merely for state purposes so that, for example, it had a convenient medium through which to collect taxes or make state expenditures. Athens’ “Standards Decree” was not undertaken for economic gain, but for political purposes to facilitate tribute payments and to show Athens’ subjects who was boss.

But here again Finley goes too far. Although the type of a Greek coin certainly expressed political symbols and could, therefore, serve as a political tool, such symbolism was largely lost on people who used the coins in places like Egypt, the Levant, Asia Minor, and Mesopotamia, where hoards of Greek coins have been found in abundance. The fact that they could use the coins independently of their original political context (and for what else besides economic purposes then?) is a good reason to believe that the Greeks could do so as well. Moreover, as Henry Kim has recently argued, the minting of large quantities of small-denomination coinage from the outset in Greece shows that the state did have a concern for the wide use of coinage at the micro-level by common people in day-to-day economic exchanges, not just for large-scale public and political purposes.

Nevertheless, one of the most active areas of research on ancient Greek money and coinage today concerns its representational nature and place within sectors other than the economy, including religion, society, and politics. Both Leslie Kurke and Sitta von Reden have argued that the advent of a monetized economy employing coinage need not have undermined traditional values or led to a disembedding of the economy. Rather, the symbolic aspect of coinage could be manipulated to reinforce traditional social and religious practices that were non-economic in the modern sense. In her analysis of the poetry of Pindar, for example, Kurke argues that the poet re-embedded money within traditional social values, thereby allowing the landed aristocratic elite to embrace money and its potential for de-personalizing social interactions without discarding the old social ties and values that bolstered their privileged place in society. Although von Reden believes that the use of coinage arose within an embedded economic context and, therefore, did not have to be re-embedded, she has argued that coinage and other forms of money did not have an intrinsically economic use or meaning in ancient Greece, but rather multiple meanings that were determined by the context within which they were used, which could be social, religious, or political as well as economic.

Given that the ancient Greeks did have a monetized economy, it is not surprising that they also developed banking and credit institutions. It is generally agreed that at the very least, bankers, who were metics as a rule (note Pasion and Phormion above), performed various functions from money-changing to securing deposits in cash and other assets. The question whether bankers lent out money deposited by others at interest, however, is the subject of some debate. Paul Millett, a student of Finley, not surprisingly argues in his book, Lending and Borrowing in Ancient Athens, that bankers did not loan out other peoples money for interest and he formulates a model in which lending and borrowing were predominantly done for consumptive purposes and, therefore, thoroughly embedded in traditional social relations. In contrast, Edward Cohen’s book, Athenian Economy and Society: A Banking Perspective, employs a close philological analysis of the evidence in his assertion that productive lending and borrowing, divorced from concerns for personal relationships, were common in Classical Athens and that bankers did indeed lend out deposited money at interest. Although Millett may be right that much of the lending and borrowing in Athens was for consumptive purposes, particularly those secured by landed property, it is hard to deny that the evidence of productive lending and borrowing from banking practices, numerous maritime loans, and even temple loans in the Classical period constitute something more than just exceptions to the rule.

Economic Changes during the Hellenistic Period

In large part owing to the Near Eastern conquests of Alexander the Great, but also because of social and economic changes that had already been occurring during the Classical period, the economy of the Hellenistic period (323-30 B.C.) grew immensely in scale. The Finley model is probably right in general to hold that the essentially consumptive nature of the economy in the traditional Greek homelands changed little during this time. But it is clear that there were significant innovations in some places and sectors on account of the collision and fusion of Greek notions of the economy with those of the newly won lands of the Near East. Thus, we see greatly increased government control over the economy, as evidenced most strikingly in the surviving papyrus records of the Greek Ptolemaic dynasty that ruled Egypt.

A large percentage of the land and, therefore, agriculture, was controlled by the Greek royal dynasties that ran the Hellenistic kingdoms. Peasants whose status lay somewhere between slave and free not only worked the king’s lands, but were also often required to labor on other royal projects. The Ptolemies of Egypt dominated agriculture to such an extent that they instituted an official planting schedule for various crops and even loaned out the tools used by farmers on state-owned lands. Almost all produce from these estates was turned over to the government and redistributed for sale to the population. Some crown lands, however, were assigned to government officials or soldiers and though technically still the property of the state, they often came to be treated as de facto private property.

The Ptolemaic state also involved itself in various manufacturing processes, such as olive oil production. Not only were the olives cultivated on state-controlled lands by peasant labor, but the oil was extracted by contracted labor and sold at the retail level by licensed dealers at fixed prices. However, the state probably had no intention to improve efficiency or to provide better quality olive oil at lower prices to its citizens. The Ptolemies instituted a tax on imported olive oil of 50 percent that was essentially a protective tariff. The goal of the government seems to have been to protect the profits of its state-run business.

Yet for all its interference in the economy, the Ptolemaic government did not assemble a state merchant fleet and instead contracted with private traders to transport grain to and from public granaries. It also left it up to private traders to import the few goods that Egypt needed from abroad, including various metals, timber, horses, and elephants, all of which were essential for the Ptolemies’ standing mercenary army and fleet. But although the Ptolemies also exported wheat and papyrus, for the most part, the economy of Egypt was a closed one. Unlike the other Hellenistic kingdoms, Egypt minted coins on a lighter standard than the Attic one universalized by Alexander the Great. Moreover, in 285, the Ptolemies barred the use of foreign coins in Egypt and required them to be turned in to government officials, melted down, and re-minted as Egyptian coinage for a fee. Although Egypt controlled gold mines in Nubia, it did not produce silver and had chronic shortages of silver coins for daily transactions. Thus, many exchanges were performed in kind rather than in cash, even though value was always expressed in cash equivalents.

Despite its chronic shortages of silver coins and its closed coinage system, Egypt still had a coin-based economy largely because of Alexander the Great, who flooded the economies of the eastern Mediterranean with coins and monetized some places in the Near East for the first time. Along with coinage, Greek banking practices also made their way into these areas. Thus, the general scale of economic activities increased as large kingdoms of the Near East and the Greek mainland and islands became more interconnected. Although this was offset to some degree by political instability and warfare during the Hellenistic period, in general we do see economic activity on a larger scale and increased specialization as some places, such as Tyre and Sidon in Phoenicia, became renowned for particular products, in this case purple dye and glassware respectively. Moreover, thousands of amphorae whose handles were stamped with names of issuing magistrates have been found that, if nothing else, reveal a very high volume of pottery production and may also allow scholars some day to reconstruct in more detail other aspects of the economy, such as agricultural production, land tenure, and trade patterns.

The Hellenistic period is known for its technological innovation and some new technologies did have an impact on the economy. Archimedes’ screw-like pump was used to remove water from mines and to improve irrigation for agriculture. In addition, new varieties of wheat and the increased use of iron ploughs improved yield while better grape and olive presses facilitated wine and oil production. Unfortunately, some of the most impressive technological innovations of the Hellenistic period, such as Heron’s steam engine, were never applied in any significant way. Thus, most production continued to be low tech and labor intensive.

All in all, then, although the scale of the economy increased during the Hellenistic period, consumption still seems to have been the primary goal. Technology was not applied as much as it might have been to increase production. States were much more involved in economic affairs, both in controlling production and in collecting taxes on countless items and activities, but mostly just to extract as much revenue from them as possible. The revenue was spent in turn in royal benefactions (euergetism), but mostly only for ostentatious display that threw money into non-productive sink holes.

Conclusion

The foregoing survey shows that the Finley model provides a reasonable, if simplified, general picture of the ancient Greek economy. Overall, the ancient Greek economy was very different from our own. It was much smaller in scale and differed in quality as well, since it generally lacked the productive growth mentality and the interconnected markets that are so characteristic of most of the world economy today. With regard to the details, however, recent studies are showing that the Finley model does at least need to be revised. As more research is done, it may even be necessary to replace the Finley model altogether in favor of one that fits the evidence better. In the meantime, though, we can still use Finley’s model as a basic description while being careful to acknowledge the contradictory evidence provided by recent studies and continuing to investigate the various sectors of the ancient Greek economy at various times and places.

Select Annotated Bibliography

The bibliography on the ancient Greek economy is enormous and it would be counterproductive to list all works here. Therefore, I list only a selection of the essential primary and secondary works, preferring more recent works in English for the sake of students. Further and more specialized works may be found within the bibliographies of the works listed below.

Primary Sources

Literary Works

Many of the literary works listed below are available in the Loeb Classical Library and Penguin Classics series in English translations.

Aristotle, Politics (particularly 1.1258b37-1.1259a5)

In his study of the polis, Aristotle devotes this section to modes of acquisition and criticizes what we would call “capitalism.”

[Aristotle], Oikonomikos (Economics – “household management”)

Book 2 shows how states obtain revenues. The methods are largely coercive, not productive, such as cornering the market in grain during a famine, debasing coinage, etc.

Demosthenes and [Demosthenes], speeches

Especially useful are several speeches for lawsuits involving economic matters.

Hesiod, Works and Days

A poem containing advice and attitudes about farming in the early Archaic period, c 700 B.C.

Homer, Iliad and Odyssey

Two great epic poems with much information about economic practices at the outset of the Archaic period, c. 800-750 B.C.

Isokrates, speeches (especially Trapezitikos and On the Peace)

On the Peace argues for economic activity rather than warfare as a means of obtaining revenues for the state. Trapezitikos concerns a lawsuit involving trade and banking.

Lysias, speeches (especially On the Grain Retailers)

Plato, Republic and Laws

These two dialogues concern the organization of the polis. Although the Republic represents the ideal city-state and the Laws presents a more realistic picture, both betray an elitist disdain for non-landed economic activities.

Xenophon, Oikonomikos (Economics – “household management”) and Poroi (Revenues)

Two extended essays on household management and the means by which the state may obtain more revenues, respectively. The latter is one of the most important documents concerning state interests in trade and mining.

[Xenophon] “The Old Oligarch” (or “Constitution of the Athenians”)

This is an anonymous mid-fifth-century B.C. political pamphlet that argues that the life-blood of Athenian democracy is the economic exploitation of the so-called “allies” of Athens.

Collections of Primary Sources: Documentary, Epigraphic, and Material

Burstein, S.M. The Hellenistic Age from the Battle of Ipsos to the Death of Kleopatra VII. Cambridge: Cambridge University Press, 1985.

A collection of documents, including inscriptions, translated into English.

Fornara, C.W. From Archaic Times to the End of the Peloponnesian War, second edition. Cambridge: Cambridge University Press, 1983.

A collection of documents, including inscriptions, translated into English.

Harding, P. From the End of the Peloponnesian War to the Battle of Ipsus. Cambridge: Cambridge University Press, 1985.

A collection of documents, including inscriptions, translated into English.

Meijer, F. and O. van Nijf. Trade, Transport, and Society in the Ancient World. New York and London: Routledge, 1992.

A sourcebook of documents translated into English.

Thompson, M., O. Mørkholm, and C.M. Kraay, editors. An Inventory of Greek Coin Hoards. New York: American Numismatic Society, 1973.

Essential listing of all discovered hoards of ancient Greek coins up to 1973.

Wiedemann, T. Greek and Roman Slavery. Baltimore: Johns Hopkins University Press, 1981.

Excellent collection of documents on Greek and Roman slavery translated into English.

Secondary Sources

General Works and Surveys

Austin, M.M. and P. Vidal-Naquet. Economic and Social History of Ancient Greece. Berkeley: University of California Press, 1977.

Provides both a survey of the subject and excerpts from the primary sources of evidence. It adheres to the Finley model in general.

Austin, M.M. 1988. “Greek Trade, Industry, and Labor.” In Civilization of the Ancient Mediterranean: Greece and Rome, volume 2, edited by M. Grant and R. Kitzinger, 723-51. New York: Scribner’s.

Often insightful overview of the ancient Greek economy primarily from the Finley perspective.

Cambridge Ancient History (CAH), second edition. Several volumes. Cambridge: Cambridge University Press.

The standard encyclopedia of ancient history with entries on various subjects, including the ancient Greek economy at different periods, by leading scholars.

Finley, M. I. The Ancient Economy, second edition. Berkeley: University of California Press. 1985. (Now available in an “Updated Edition” with a foreword by Ian Morris. Berkeley: University of California Press, 1999.)

The most influential book on the subject since its initial publication in 1973. It takes a synchronic approach to the Greek and Roman economies and argues that they cannot be analyzed or understood in terms appropriate for modern economic analysis. In general, the ancient Greek economy was “embedded” in “non-economic” social and political values and institutions. Heavily influenced by Weber, Hasebroek, and Polanyi.

Hasebroek, J. Trade and Politics in Ancient Greece. Translated by L.M. Fraser and D.C. MacGregor. Reprint. London, 1933. (Originally published as Staat und Handel im alten Griechenland [Tübingen, 1928].)

A classic that greatly influenced Finley.

Hopper, R.J. Trade and Industry in Classical Greece. London: Thames and Hudson, 1979.

Survey of various aspects of the ancient Greek economy in the Classical period.

Humphreys, S.C. “Economy and Society in Classical Athens.” Annali della Scuola Normale Superiore di Pisa 39 (1970):1-26.

An important survey that also argues for focused studies on individual sectors of the ancient Greek economy at particular times and places.

Lowry, S.T. “Recent Literature on Ancient Greek Economic Thought.” Journal of Economic Literature 17 (1979): 65-86.

Michell, H. The Economics of Ancient Greece, second edition. Cambridge: W. Heffer, 1963.

Slightly dated, but useful survey.

Morris, Ian. “The Ancient Economy Twenty Years after The Ancient Economy.” Classical Philology 89 (1994): 351-366.

Excellent survey of new approaches to the study of the ancient Greek and Roman economies since Finley, to whose model the author is generally sympathetic.

Oxford Classical Dictionary (OCD), third revised edition, edited by S. Hornblower and A. Spawforth. Oxford: Oxford University Press, 2003.

Includes brief entries by leading scholars on various aspects of the ancient Greek economy.

Pearson, H.W. “The Secular Debate on Economic Primitivism.” In Trade and Market in the Early Empires, edited by K. Polanyi, C.M. Arensberg, and H.W. Pearson, 3-11. Glencoe, IL: Free Press, 1957.

A concise statement of the influential ideas of Karl Polyani about the ancient Greek economy.

Rostovtzeff, M. The Social and Economic History of the Hellenistic World. Oxford: Oxford University Press, 1941.

Monumental “modernist” approach to a wealth of archaeological evidence about the economy during the Hellenistic period.

Samuel, A.E. From Athens to Alexandria: Hellenism and Social Goals in Ptolemaic Egypt. Lovanii, 1983.

A good survey with an important discussion of ancient Greek attitudes toward economic growth.

Starr, C.G. The Economic and Social Growth of Early Greece, 800-500 B.C. Oxford: Oxford University Press, 1977.

Modernist survey.

Weber, M. Economy and Society. Translated by E. Fischoff et al. Edited by G. Roth and C.

Wittich. Berkeley: University of California Press, 1968. (Originally published as Wirtschaft und Gesellschaft [Tübingen, 1956].)

A classic that greatly influenced Hasebroek and Finley.

Collections

Archibald, Z.H., J. Davies, and G. Oliver. Hellenistic Economies. London: Routledge, 2001.

Collection of articles that take the study of the economy in the Hellenistic period beyond Rostovtzeff.

Cartledge, P., E.E. Cohen, and L. Foxhall. Money, Labour, and Land: Approaches to the Economies of Ancient Greece. London: Routledge, 2002.

Finley, M.I. Economy and Society in Ancient Greece. Edited by B.D. Shaw and R.P. Saller. New York: Viking, 1982.

Garnsey, P. Non-Slave Labour in the Graeco-Roman World. Cambridge: Cambridge Philological Society, 1980.

Garnsey, P., K. Hopkins, and C.R. Whittaker. Trade in the Ancient Economy. Berkeley: University of California Press, 1983.

A collection of articles along Finley lines.

Mattingly, D.J. and J. Salmon. Economies beyond Agriculture in the Classical World. London: Routledge, 2001.

A collection of articles that focuses on the non-agrarian sectors of the ancient Greek and Roman economies with a mind to revising the Finley model.

Meadows, A. and K. Shipton. Money and Its Uses in the Ancient Greek World. Oxford: Oxford University Press, 2001.

A collection of articles on the use of money and coinage in ancient Greece.

Parkins, H. and C. Smith. Trade, Traders, and the Ancient City. London: Routledge, 1998.

Scheidel, W. and S. von Reden. The Ancient Economy. London: Routledge, 2002.

An excellent collection of some of the most important articles on the ancient Greek and Roman economy from the last 30 years with a helpful introduction, notes, and glossary. Especially useful is their “Guide to Further Reading,” pp. 272-278.

Specialized Works

Brock, R. “The Labour of Women in Classical Athens.” Classical Quarterly 44 (1994): 336-346.

Burke, E.M. “The Economy of Athens in the Classical Era: Some Adjustments to the Primitivist Model.” Transactions of the American Philological Association 122 (1992): 199-226.

A good argument that attempts to adjust the Finley model.

Carradice, I. and M. Price. Coinage in the Greek World. London: Seaby, 1988.

A brief, accessible survey.

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

A close philological study of the evidence for banking practices in Classical Athens that argues for a disembedded economy with productive credit transactions.

Engen, D.T. Athenian Trade Policy, 415-307 B.C.: Honors and Privileges for Trade-Related Services. Ph.D. dissertation, UCLA, 1996. (This dissertation is currently being revised for publication as a book tentatively entitled, Honor and Profit: Athenian Trade Policy, 415-307 B.C.E.)

Examines Athenian state honors for those performing services relating to trade and argues for a revision of some aspects of the Finley model.

Engen, D.T. “Trade, Traders, and the Economy of Athens in the Fourth Century B.C.E.” In Prehistory and History: Ethnicity, Class, and Political Economy, edited by David W. Tandy, 179-202. Montreal: Black Rose, 2001.

Argues for the diversity of those responsible for trade involving Classical Athens.

Engen, D.T. “Ancient Greenbacks: Athenian Owls, the Law of Nikophon, and the Ancient Greek Economy.” Historia, forthcoming(a).

Argues that the numismatic policies of Athens may indicate a state interest in exports.

­­­­­Engen, D.T. “Seeing the Forest for the Trees of the Ancient Economy.” Ancient History Bulletin, forthcoming(b).

A review article of Meadows and Shipton, 2001, and Scheidel and von Reden, 2002, that argues for the mutual compatibility of broad and detailed studies of the ancient Greek and Roman economies.

Finley, M.I. The World of Odysseus, revised edition. Harmondsworth: Penguin, 1965.

A brief and highly readable survey of the early Archaic period.

Fisher, N.R.E. Slavery in Classical Greece. London: Bristol Classical Press, 1993.

A brief survey.

Garlan, Y. Slavery in Ancient Greece, revised edition. Ithaca: Cornell University Press, 1988.

The standard survey of slavery in ancient Greece.

Garnsey, P. Famine and Food Supply in the Greco-Roman World. Cambridge: Cambridge University Press, 1988.

Examines private and public strategies to ensure food supplies.

Isager, S. and J.E. Skydsgaard. Ancient Greek Agriculture: An Introduction. London: Routledge, 1992.

Kim, H.S. “Archaic Coinage as Evidence for the Use of Money.” In Money and Its Uses in the Ancient Greek World, edited by A. Meadows and K. Shipton, 7-21. Oxford: Oxford University Press, 2001.

Argues that the existence of large quantities of small-denomination coins from the earliest of coinage in ancient Greece is evidence of the economic use of coinage.

Kraay, C.M. Archaic and Classical Greek Coins. Berkeley: University of California Press, 1976.

Long the standard survey of ancient Greek coinage.

Kurke, L. The Traffic in Praise: Pindar and the Poetics of Social Economy. Ithaca: Cornell University Press, 1991.

Takes the new cultural history approach to analyzing the poetry of Pindar and how it represents money within the social and political value system of ancient Greece.

Kurke, L. Coins, Bodies, Games, and Gold: The Politics of Meaning in Archaic Greece, 1999. Princeton: Princeton University Press.

Millett, P. Lending and Borrowing in Ancient Athens. Cambridge: Cambridge University Press, 1991.

Reinforces the Finley model by arguing that lending and borrowing was primarily for consumptive purposes and embedded among traditional communal values in Athens.

Osborne, R. Classical Landscape with Figures: The Ancient Greek City and Its Countryside. London: George Philip, 1987.

Explores rural production and exchange within political and religious contexts.

Sallares, R. The Ecology of the Ancient Greek World. London: Duckworth, 1991.

Interdisciplinary analysis of a massive amount of information on a wide variety of aspects of the ecology of ancient Greece.

Schaps, David M. The Invention of Coinage and the Monetization of Ancient Greece. Ann Arbor: University of Michigan Press, 2004.

Shipton, K. “Money and the Elite in Classical Athens.” In Money and Its Uses in the Ancient Greek World, edited by A. Meadows and K. Shipton, 129-44. Oxford: Oxford University Press, 2001.

Argues that the elite of Athens preferred leasing high-profit silver mines to public land.

Tandy, D. Warriors into Traders: The Power of the Market in Early Greece. Berkeley: University of California Press, 1997.

Traces developments in the economy of the Archaic period and argues that they had an important impact in the formation of the basic social and political institutions of the polis.

Von Reden, S. Exchange in Ancient Greece. London: Duckworth. 1995.

Employs the methods of new cultural history to argue that exchange in ancient Greece was thoroughly embedded in non-economic social, religious, and political institutions and practices.

Von Reden, S. “Money, Law, and Exchange: Coinage in the Greek Polis.” Journal of Hellenic Studies 107 (1997): 154-176.

A cultural historical study of the representational uses of coinage in the social, political, and economic life of ancient Greece at the advent of the use of coinage.

White, K.D. Greek and Roman Technology. London: Thames and Hudson, 1984.

1 Portions of this article have or will appear in other forms in Engen, 1996, Engen, 2001, Engen, Forthcoming(a), and Engen, Forthcoming(b).

2 This article will not discuss the preceding Mycenaean period (c. 1700-1100 B.C.) and “Dark Age” (c. 1100-776 B.C.E.). During the Mycenaean period, the ancient Greeks had primarily a Near Eastern style palace-controlled, redistributive economy, but this crumbled on account of violent disruptions and population movements, leaving Greece largely in the “dark” and the economy depressed for most of the next 300 years.

Citation: Engen, Darel. “The Economy of Ancient Greece”. EH.Net Encyclopedia, edited by Robert Whaples. July 31, 2004. URL http://eh.net/encyclopedia/the-economy-of-ancient-greece/