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The Origins of Commercial Banking in America, 1750-1800

Author(s):Wright, Robert E.
Reviewer(s):Perkins, Edwin J.

Published by EH.NET (November 2001)

Robert E. Wright, The Origins of Commercial Banking in America,

1750-1800. London and New York: Rowman & Littlefield Publishers, 2001. xii

+ 219 pp. $65 (cloth), ISBN: 0-7425-2086-2; $24.95 (paperback), ISBN:


Reviewed for EH.NET by Edwin J. Perkins, Professor of History, emeritus,

University of Southern California.

Robert Wright has written a highly original book that merits our attention.

First, he overlaps the late colonial period and the first decade of the early

national era — an uncommon periodization for financial historians. Previous

authors typically have covered either the colonial period or the national

period, not both. Second, Wright approaches the subject mainly from an

economic perspective rather than from a political angle. Earlier writers have

been mostly concerned with the public policy ramifications of legislative

debates over financial matters, and they have been less concerned with the

impact of financial legislation on the economy. Trained as a historian but

employed for several years in the economics department of the University of

Virginia, Wright has a unique academic profile. That interdisciplinary

background has enabled him to generate an analysis of critical financial

issues during this era that is unmatched by any of his predecessors. For

economists, in particular, this volume stands as the new starting point for

gaining an understanding of the evolution of U.S. commercial banking.

Wright focuses throughout on the perpetual demand for improved liquidity. The

colonial economy had no active private banks. Likewise, there was no uniform

currency since the British had forbidden the establishment of a colonial mint.

As a result, most of the coinage in circulation originated in Spain’s colonial

empire in the Western Hemisphere. The paper currency issues of the various

colonial legislatures supplemented these hard monies. Capital markets in the

colonies were non-existent or thin. Only Massachusetts had a public debt that

was privately held and occasionally traded. The whole financial system was

institutionally immature. A huge percentage of the outstanding colonial

mercantile debt could be traced back to the London money market. Colonial

merchants did make use of domestic and foreign bills of exchange, but it was

nearly impossible to convert these financial instruments into cash during

periods of stringency. While the financial system was sufficiently functional

to support steady increases in the size of the colonial economy (primarily due

to population growth), its overall performance was less than optimal.

Liquidity was sorely lacking. Merchants, family farmers, great planters, and

artisans all sought some form of institutional relief.

Parliamentary regulations and the negative attitudes of distant British

administrators who were responsible for colonial affairs discouraged private

initiatives. Colonial leaders from South Carolina to New England periodically

sought legislative permission to create banks of one variety or another, but

none of these attempts produced anything sustainable. Wright covers these

early efforts in a fair amount of detail. He views these abortive efforts as

legitimate antecedents of the private commercial banks that emerged after


After the achievement of independence, the new nation began to experiment with

modern commercial banking. Luckily, these experiments, which aroused much

public debate and legislative controversy at the state and federal levels,

almost immediately led to the creation of viable institutions. I say “luckily”

because the effort to create similar institutions in many other emerging

nations over the last two centuries has produced numerous tragic missteps.

The Bank of North America, the brainchild of Robert Morris, the famous

treasurer of the confederation government, became the prime model for all

subsequent commercial banks. It issued currency supported by adequate specie

reserves, accepted deposits, discounted mercantile notes, and turned a

respectable profit for investors. Other commercial banks operating under state

charters began to multiply. The problem of illiquidity in the U.S. economy was

steadily alleviated thereafter. The national government created the Bank of

the United States, which was the largest economic unit in the economy

throughout its twenty-year life span. Commercial banks were the pillars and

catalysts for the expansion of the U.S. economy from 1790 forward. We are

finally coming to the realization, thanks largely to the contributions of

Richard Sylla and his collaborators, that improvements in financial services

preceded advancements in agriculture, transportation, and industry.

For his discussion of events after 1780, Wright draws most of his information

from a careful analysis of banking in Pennsylvania and New York. His

conclusions contrast at many points with Naomi Lamoreaux’s study of New

England banking during the same period. In her research, Lamoreaux found that

commercial banks were typically closely held; the major investors dominated

the board of directors and made numerous insider loans to themselves. Wright

has found a different pattern in the middle Atlantic region. These banks had a

larger capitalization and a broader ownership. They made loans mainly to

depositors, not owners, and the occupations of borrowers varied — from

merchants to farmers to artisans. As much as I admire Wright’s detailed

discussion of the development of the commercial banking system, I would have

gone about this project in a different manner — not necessarily better, but

different and complementary. Since I have been working in this subfield for

decades, I offer my own admittedly biased opinions without apology.

Whereas Wright concentrates on the demand for liquidity, I would have

celebrated the supply side of the equation. I am not convinced that the

colonial demand for liquidity was any different than the persistent demands of

thousands of urban merchants in past civilizations. I take the demand for

superior financial services as a given — a truism. What was astonishingly

different in the eighteenth century was the institutional response in the new

United States. Borrowing piecemeal from the example of a handful of British

private bankers and the singular Bank of England, the first generation of

independent Americans were imaginative and prudent institutional innovators.

Despite their strategic differences, Hamiltonians and Jeffersonians both

wanted a successful financial system — if only to prove to a skeptical world

that a republican form of government could survive and indeed thrive

financially as well as politically.

I also wish Wright had cited the public loan offices created by the colonial

legislatures as the prime forerunners of the modern commercial bank. Across

the Atlantic Ocean, advocates of land banks had tried for centuries to gain

the attention and approval of the ruling classes. Their proposed land banks

were designed to offer loans to citizens with real estate as collateral. None

of these European schemes proved viable. But in English North America, land

banks in the middle colonies (but not in New England) operated successfully

for decades. They made loans to a wide swath of landholders; they experienced

few losses; and they generated substantial interest revenue for their

provincial legislatures. Their issues of paper currency were retired at their

original purchasing-power values; depreciation was not a serious problem. The

Pennsylvania legislature imposed no new taxes for decades because interest

income from the loan office covered its modest annual expenses. True, the loan

offices did not accept deposits and did not discount mercantile paper, but

they succeeded over a long period of time, whereas similar efforts in all

other contemporary societies had failed. The colonial land offices were

remarkable enterprises for their era and deserve more recognition as emulative

institutional models.

My third friendly amendment relates to the coverage of the Bank of the United

States. Wright just does not devote sufficient space to this novel

institution. It too was highly innovative. Unlike the Bank of England, its

main customers after 1795 were private citizens, not governments. It possessed

branch offices in major port cities. As David Cowen has recently argued, the

BUS in tandem with the U.S. Treasury Department acted very much like a modern

central bank. Fourthly, Wright might have cited the recent work of Glenn

Crothers on commercial banking in northern Virginia in the 1790s. I had better

stop here with my recommended additions or I might be roundly accused of

criticizing the author for not writing the book I had envisioned rather than

the book he chose to write. By revising the analytical model for all subsequent

historians who embark on an examination of the origins of U.S. commercial

banking, Robert Wright has made a major scholarly contribution. The supply

side innovations did not occur in a vacuum, Wright reminds us; they came about

because thousands of participants in the eighteenth-century economy desired

increased levels of liquidity. If the author has gone slightly overboard to

prove a valid point, he has done so in a noble cause.

Edwin J. Perkins has written extensively about financial history. His books

include American Public Finance and Financial Services, 1700-1815 (Ohio

State University Press, 1994). His most recent publication is Wall Street

to Main Street: Charles Merrill and Middle Class Investors (Cambridge

University Press, 1999).

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):18th Century

New Spain’s Century of Depression

Author(s):Borah, Woodrow Wilson
Reviewer(s):Salvucci, Richard

Project 2001: Significant Works in Economic History
Woodrow Wilson Borah, New Spain’s Century of Depression. Berkeley: University of California Press, 1951. 58 pp.
Review Essay by Richard Salvucci, Department of Economics, Trinity University.

An Obscure Century in a Backward Country: Woodrow Borah and New Spain’s Century of Depression

In 1938, the English novelist Graham Greene traveled to Mexico to investigate the condition of the Catholic Church under the regime of President Plutarco El?as Calles. While there, Greene interviewed the strongman of San Luis Potos?, General Saturnino Cedillo. In the most memorable terms, Greene called Cedillo “an Indian general in an obscure state of a backward country.” So my title, I fear, is a plagiarism, but an appropriate one. For certainly some who read this essay will wonder why a brief (58 pages) book about seventeenth?century New Spain (as Mexico was then known) counts as influential at all, let alone very influential? After all, Lesley Simpson, an authority on Mexico, famously labeled the seventeenth as Mexico’s “forgotten” century, and everyone from Adam Smith to Thomas Jefferson thought the Spanish empire both backward and obscure.

Influence, of course, is a matter of audience. There must be few economic historians of Latin America and fewer still of Mexico who are unfamiliar with the work of Woodrow Borah and the so-called “Berkeley School” of historical demography. Even with prevailing intellectual fashions, it is hard to believe that most English?speaking historians of Latin America have not heard of Borah, although whether or not they read his work in graduate school or after is much less certain. So I might best define my task as to explain why New Spain’s Century of Depression, published in 1951 as number 35 of the University of California Press’s celebrated Ibero?Americana series, should be counted one of the truly important works of twentieth?century economic history, especially for those who have yet to make its acquaintance. I take it for granted that colleagues in my field would agree. But it is a small field, and I am under no illusion that even its best work is widely known, much less regarded as a crucial contribution to economic historiography.

Woodrow Borah, who died in 1999, was one of the outstanding members of the postwar generation of Latin Americanists that included Howard Cline, Charles Gibson, John Lynch and Stanley Stein. At Berkeley, Borah, who was Abraham D. Shepard Professor of History, was one of a stellar cast of scholars drawn from a wide range of disciplines — Sherburne Cook, George Foster, James Parsons, John Rowe, Carl Sauer, and Lesley Simpson come immediately to mind. They exercised a profound influence on each other, sometimes as collaborators, but more often as valuable colleagues. What emerged from their work was a distinctive scholarship that brought together striking research and insights drawn from the natural and social sciences, precocious social science history, you might say. And Borah, his prodigious reading, meticulous scholarship and personal austerity notwithstanding, was one of this group’s more daring and imaginative members. Indeed, in a rueful aside, Borah once told me that his critics (there were a few) had accused him of “inventing Indians,” and this he meant quite literally, not in the now prosaic historicist sense of the term.

The burden of New Spain’s Century of Depression was to suggest the impact of the massive decline of the aboriginal population of Central Mexico (whom we can simply, if incorrectly, call Indians) on the material prospects of the Iberian conquerors (whom we can simply, and equally incorrectly, call Spaniards) and their descendants. As Borah understood it, the intent of the Spaniards was to live off the labor of the dense Indian population they had encountered in Central Mexico, a population accustomed to the rule of a privileged upper stratum by generations of Mesoamerican conquerors of whom the Aztec were simply the most recent. The Spaniards’ intention was no mystery. They announced they had come to the “Indies” (wrong again, but who’s counting?) to get rich, and that they had no intention of tilling the soil “like peasants” in order to do so. To accomplish their goal, the Spaniards, victorious in the wake of Cort?s’ historic expedition, rewarded themselves with the famous encomienda, the right to extract labor from the Indians. For some, like Cort?s himself, the encomienda was the source of great personal wealth and social prestige, although others, including some of Cort?s’ outspoken critics, were less richly rewarded.

For the encomienda to function as an avenue of accumulation, evidently, there had to be Indians to be distributed. At the time of the arrival of the Spaniards, Central Mexico perhaps supported an Indian population as large as 25 million. Within a century, shockingly, the same Indian population had fallen to less than a million, the victims of European disease, massive economic disruption, and the destruction of a coherent civilization that the Spaniards willingly exploited but never really understood. It was one thing for the encomienda to yield a comfortable existence for the Spaniards when Indian labor was abundant. But, obviously, such a system could hardly be expected to function when the people who supported it had disappeared. And here, then, is the gist of the argument of New Spain’s Century of Depression. What happens to a system of colonial expropriation when the society on to which it is fixed essentially disappears?

A bald summary can hardly begin to capture the twists and turns of the research agenda that New Spain’s Century of Depression ultimately entailed. When Borah published it in 1951, Sherburne Cook and Lesley Simpson had produced the population figures for New Spain on which he relied. It would require fully another quarter century, down to 1976, for what are now the standard estimates of early colonial population to emerge. There was considerable controversy along the way, and to an extent, there still is. Yet it is important to keep several things in mind. Much of the controversy regarding the population of New Spain involves the pre?contact population. About the course of events after the Spanish invasion there is far less doubt. The Indian population fell, and it fell sharply within a century, on the order of 90 percent. From an economic standpoint, only one thing really matters: factor endowments. Before the Conquest, labor was the abundant factor in Mexico. By 1620, land had become the abundant factor. No amount of scholastic contention about how many Indians there “really” were can alter that.

The other point is that even if Borah used imperfect population figures or made arbitrary assumptions, his scholarship was sound. He knew the sources and was particularly well versed in the documents associated with the relaciones geogr?ficas, the reports prepared to give Philip II of Spain an idea of what his Mexican dominions contained. While these documents are widely available today due to the efforts of the Instituto de Investigaciones Antropol?gicas in Mexico, it must have required considerably greater difficulty to master them fifty years ago. The impression from reading Borah’s notes is of a reasonably extensive investigation of the archival and printed materials available in the 1940s. In other words, you need to know something about the history of colonial scholarship to appreciate what Borah and his colleagues at Berkeley accomplished and some of the critics simply did not.

The conclusion to which Borah came was straightforward. Beginning sometime in the 1570s, an “economic depression besetting the Spanish cities because of the shrinkage of the Indian base [would last] more than a century,” and a “large number of white families must have found themselves reduced from comparative wealth to straitened circumstances as the drag in the Indian population forced a downward spiral in the economy of the European stratum”(p. 27). Although Borah presented his findings as a “hypothesis of a century?long depression” or “a hypothesis which needs much additional investigation,” the hypothesis is generally accepted as settled fact. It was not until the early 1970s that the work of the English historian Peter Bakewell raised questions about the impact of population decline on the fortunes of silver mining, but Borah’s view of the economic circumstances of the settlers went largely unchallenged. Even John Lynch, whose brilliant synthesis, Spain under the Hapsburgs (1981), called into question the entire notion of a Mexican depression in the seventeenth century, did not address the crucial issue that Borah raised. How did the elite of Mexican society — in effect the advocates, bearers, beneficiaries and putative defenders of colonialism — adjust when deprived of the Indian population on which it depended? My suspicion is that New Spain’s Century of Depression seemed logically unassailable. Borah’s citation (p. 23) of Viceroy Velasco the Younger’s report to Philip II in 1595 was especially acute: “those who consume are many and the Indians who produce are few.” What more could be said?

If you have persisted this far, you may, perhaps, think otherwise or wonder at the peculiar way in which Borah shaped his investigation. Borah did not discuss the fate of the Indians, other than to note that they “seemed doomed to relentless extinction” (p. 28). And even so, life did not come to an end in Mexico in 1576, or 1626, or 1676. Emigration from Spain continued, a fact of which Borah was quite aware. Moreover, if Cook and Borah’s later research indicated that the Indian population reached its nadir around 1620 — Borah puts its size at 750,000 — it began to recover thereafter and probably continued to do so until the 1730s, when severe epidemic disease made is reappearance. A century of population growth in a preindustrial society, however slow, does not square easily with falling living standards. And other developments, particularly the growth of colonial textile production in the middle decades of the seventeenth century, give pause as well. If a “depression” had taken hold, and more people were producing more goods, what sort of a depression was it?

To the extent that there was much data available to answer the question — and by and large, there was not — Borah made some attempt to address the objections, postulating, for instance, the existence of not one, but two economies, one Spanish, the other Indian. But there was not much he could make of the distinction, although there was a hint as to where research might lead. A dramatic change in the land-labor ratio, with the Indian population falling by 90 percent, surely affected the marginal productivity of Indian labor.

However, as Borah pointed out (p. 21), it was inconceivable that rising productivity could have offset the sheer decline in the Indians’ numbers, but the upward drift in real wages of Indian workers in cloth manufactories toward the end of the sixteenth century suggests the horrible irony of a decimated Indian population now better able to sustain itself in the face of Spanish demands. Here was one reason for the subsequent recovery in the Indians’ numbers, along with greater resistance to European disease, more aggressive defense of the Indians’ interests by the Spanish Crown, and even changes in diet — the Spaniards brought chickens with them, which came to be a ubiquitous presence in rural villages. While Borah never said as much in New Spain’s Century of Depression, Borah and Sherburne Cook would go on to argue years later that the material conditions of a reconstituted Indian society may well have been higher than they were before the Conquest. So, in a sense, Borah’s argument about “depression” was potentially revolutionary even if, in some sense, it proved a trap to the unwary who did not think its implications through. The historical intuition was of a very high order, but it was exercised by a scholar who turned twenty in 1932; who hailed from Utica, Mississippi; and for whom the term “depression” was less a technical one than a shorthand for widespread impoverishment.

Another feature of New Spain’s Century of Depression should be attractive to economic historians. It concerns the nature of institutional change that occurred under the pressure of population decline in the sixteenth century. One is sometimes struck by the fact that much (but by no means, all) of the economic historiography that relies on institutions for explanation often does a poor job of explaining why a country has a given set of institutions to begin with. In Latin America, some mix of Divine Providence, Indians, bizarre political culture, difficult geography and dumb luck often seem to be the reasons for the existence of Mexican institutions. This, for all practical purposes, means that institutions are treated as exogenously given. Well, they aren’t, or at least, not always. While Borah, of course, never wrote in these terms, he carefully links the emergence of a Mexican regime of labor and land institutions to the shifting factor endowments with which the colonists had to work. For Borah, the ultimate significance of the dramatic decline of the Indian population was the emergence of the hacienda (which reflected increasingly abundant land) and debt peonage (which reflected increasingly scarce labor). Indeed, this was another central message of New Spain’s Century of Depression. The institutions that had given rise to the Mexican Revolution of 1910 — the hacienda and debt peonage — were a product of the seventeenth century and of the demographic disaster that had destroyed the Indians. This was a remarkably clear statement of what had long been the liberal view of the causes of the Mexican Revolution. Anyone who doubts its durability need do little more than read Alan Knight’s monumental history of the Revolution (The Mexican Revolution, 1986), which largely restates the old verities.

For an historian from Mississippi, an account of “debt peonage” as the defining characteristic of rural labor may not have been untoward. But what exactly one means by “debt peonage” is another matter. Borah’s position was a moderate one. This was not slavery, open or disguised (the enslavement of Indians was forbidden under most circumstances), but an Indian peon who owed a landlord, or, indeed, any employer money was legally required to work for that employer (and for him or her alone) until the debt was discharged. The notion that debt created a form of chattel slavery in rural Mexico does not seem to have entered the vocabulary until well into the regime of President Porfirio D?az (1876-1880, 1884-1910) and provided one explanation for the Revolution in a place like Yucat?n. For a time, colonial historians went to another extreme, intent on showing the agency of free peasants as makers of their own world. They forgot that seventeenth-century Mexico was an unlikely venue for the emergence of a smoothly functioning labor market in which buyers and sellers of labor had no recourse to force or fraud. Indeed, conquest is precisely about force and fraud, depriving the conquered of their possessions, and making them do things they otherwise would never do.

A more fruitful way of viewing the phenomenon of debt peonage — or simply workers’ indebtedness, for debt did not invariably impede their mobility — is to understand how it allowed employers to determine the rate of discount at which workers in a shifting, unstable, and terribly uncertain world valued future income. There is no point in beating around the bush. Life expectancy at birth for a Mexican in the colonial period was about twenty years, and in view of the catastrophic changes that had visited the Indian world since 1519, we can only conclude that Hobbes was right, and that Mexicans knew it. Their lives were short enough, and nasty and brutish as well. In a world in which only God (and whose God was up for grabs too) knew what the future would bring, it made sense for ordinary people to get as much as they could up front, which, after all, is all the “debt” part of debt peonage meant. This was just an extreme form of live for today, for tomorrow, literally, who knew? Workers bargained for better advances and often sought to enlarge them and employers understood this. The wide variance of debts reported by farms and factories for which we have records shows that their owners struck quite different bargains with different workers, a form of price discrimination that allowed them to “pay” no more than they had to, certainly less than raising wages to market-clearing levels. In fact, in the disorganized and fluid circumstances of the late sixteenth and early seventeenth centuries, when Indian villages were forming and reforming under the pressure of Castillian administration, it would have been impossible to gauge the overall willingness of Indians to leave their communities to work for wages, or even the willingness of their communities to allow individuals to leave, a point to which Borah was quite sensitive (pp. 41-42).

Besides, the point of indebtedness was not necessarily to reduce mobility. The Spaniards had other ways of doing so, which is another aspect of the system of land tenure they devised. As Evsey Domar once wrote, it is impossible to have free labor, free land and a nonworking landlord class simultaneously. One of the three must disappear. In Mexico, the Church prevailed in the 1540s in the struggle against the frank coercion of Indian labor. For most purposes, the labor of enslaved Africans was simply too expensive, even though there was a sizeable black population in seventeenth?century Mexico. No, the Spaniards made another choice, to deprive the Indians of access to free land, for free land they very well may have had. The dramatic decline in the Indian population left vast expanses of Central Mexico essentially empty, so what was to prevent the Indians from moving on to the land as a subsistence peasantry, to the lasting dismay of the Spaniards? The answer is that the Spaniards consciously set about driving the Indians into villages over which they could exercise some level of control, as Bernardo Garc?a Mart?nez demonstrated in Los pueblos de la Sierra (1987). At the same time, they sanctioned land?grabbing by the settlers, usually in amounts far in excess of anything the settlers could reasonably cultivate. At a stroke, the Spaniards accomplished two things. First, they shifted to a system of agriculture that reflected the abundance of land, a regime vastly different from the preconquest one based on the intensive use of labor, of which the famous raised?ridged fields (chinampas) of the Valley of Mexico were but one example. Second, they regularized the settlers’ land titles at the beginning of the seventeenth century, effectively transferring much land to Spanish control, whether or not it was cultivated. The hacienda thus circumscribed the ability of the Indian communities to survive independently of the Spanish economy, and in so doing, obviated the need for a draconian regime of forced labor, at least in Mexico.

This dramatic transition, from an economy based on intensive agriculture and the exploitation of a dense indigenous population, to one that relied on extensive agriculture and scarce Indian labor could not be accomplished rapidly. Moreover, the shift from an economy with relatively high levels of personal wealth in the form of Indians held in encomienda to a poorer one with fewer Indians and no encomiendas reduced New Spain’s capacity to import. It was now necessary to produce at home many goods that were, in the early years of the colony, imported through Spain. A reduction in consumption and a reorientation of expenditure toward investment was required to accommodate such a change. Borah, for instance, noted that the construction of churches tended to slow dramatically in the 1570s (p. 31), attributing this primarily to a redeployment of scarcer labor. (The demand for churches sadly fell as well, for there were far fewer souls to fill them.) For Borah, presumably, all this was a depression. To a later generation of historians, however, notably the British school headed by John Lynch, Borah’s “depression” was more a case of deferred consumption, the redirection of productive effort toward mining, manufacturing and farming that a colony living on its own required. None of this could have come easily or cheaply — the mining and irrigation works, the granaries, fences, sugar mills, ranches and textile manufactories absorbed resources. Hence, for Lynch and his followers, the apparent stagnation of the Mexican economy in the seventeenth century was just that, an apparent stagnation that marked the reorientation underway, one that would result in the visible renewal of economic growth under the Bourbon monarchs of the eighteenth century. It was not so much that Borah was wrong about what he had seen, but that he had, instead, seen wrongly.

Viewed fifty years after its publication, New Spain’s Century of Depression reads much like the pioneering work it was, full of insight, largely intuitive, sometimes wrong in detail and premature in judgment, but, all the same, arresting and audacious. It was, above all, a great work of history, for it sought to explain the present through the past, and to explain in simple but persuasive terms how what was distinctively Mexican, the play of institutions, political economy and an emerging social structure, came together out of the shock of the Conquest in the sixteenth and seventeenth centuries. If there is anything disappointing about New Spain’s Century of Depression, it is that the response to it has been admiration or assent from most students of Latin American history, but few studies in which appropriately trained scholars have undertaken the work necessary to establish Borah’s hypothesis fully, or to revise and extend it in ways consistent with contemporary population studies. That is the problem with writing a classic about an obscure century in a backward country: it is hard to get people to notice. Those of us who spend our time studying the history of Mexico know full well how important Borah’s elegant “hypothesis” was. It is time for mainstream economic historians, and, one hopes, their students, to develop an interest in replying to Woodrow Borah’s pioneering work as well.

Richard Salvucci teaches economics at Trinity University in San Antonio, Texas. He was a colleague of Woodrow Borah’s at the University of California, Berkeley, from 1980 through 1989. He works on the economic and financial history of Mexico between 1823 and 1884.


Subject(s):Historical Demography, including Migration
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):17th Century

Debt’s Dominion: A History of Bankruptcy Law in America

Author(s):Skeel, David A.
Reviewer(s):Hansen, Bradley A.

Published by EH.NET (April 2002)

David A. Skeel, Debt’s Dominion: A History of Bankruptcy Law in America.

Princeton, NJ: Princeton University Press, 2001. xi + 281 pp. $35 (hardback),

ISBN: 0-691-08810-1.

Reviewed for EH.NET by Bradley A. Hansen, Department of Economics, Mary

Washington College.

Since 1996, over one million people a year have voluntarily filed for

bankruptcy protection in the United States. Bankruptcies of giant corporations

and wealthy celebrities regularly appear in the news. Current bankruptcy law in

the U.S. is widely regarded as being more pro-debtor than the laws of other

developed countries. U.S. law provides individuals generous exemptions and

relatively easy discharge of debts. It also leaves the managers of bankrupt

businesses in control of their firms and gives them the first chance to form a

reorganization plan. In Debt’s Dominion, David Skeel sets out to explain

why the United States has a bankruptcy law and why that law has the particular

features that it does. He is aware that his book will inevitably be compared to

Charles Warren’s Bankruptcy in United States History (Harvard University

Press, 1935), which has been the standard reference on the history of

bankruptcy law for over sixty years. Warren’s book will remain useful for its

detailed descriptions of nineteenth century legislative debates, but those

interested in bankruptcy law will now turn first to Debt’s Dominion.

Skeel not only brings the history of bankruptcy law up to date, but also

provides an analysis of bankruptcy law in the nineteenth century that differs

substantially from Warren’s.

Because this review is directed primarily at economic historians, I should

begin by pointing out that this is probably not the history of bankruptcy that

an economic historian would write. It is, however, one that economic historians

concerned with institutional change should read. David Skeel is Professor of

Law at the University of Pennsylvania and his primary concern is explaining how

the law evolved. Skeel aims for a wide audience, and jargon and mathematics are

kept to a minimum. There are some tables showing trends in bankruptcy over

time, but there is not extensive quantitative analysis. There are no attempts

to measure the effects of changes in the bankruptcy law. Likewise, in the

political analysis there are none of the formal models or empirical analyses of

roll call votes that one typically sees in rational choice studies of politics.

Although he does not utilize formal models, Skeel’s analysis of the history of

bankruptcy law has been strongly influenced by the public choice literature

produced by economists and political scientists. Debt’s Dominion

provides an analysis of the development of bankruptcy law with important

lessons for anyone concerned with the study of institutional change.

Bankruptcy law in the United States has a peculiar history. For most of the

nineteenth century the United States did not have a bankruptcy law, but by the

end of the twentieth century bankruptcy had become a prominent feature of

American society. Four bankruptcy laws were passed in the nineteenth century —

in 1800, 1841, 1867 and 1898. The first three were each repealed within a few

years. The 1898 Bankruptcy Act was extensively amended in the 1930s and

replaced by the Bankruptcy Reform Act in 1978. Skeel argues that the general

pattern of bankruptcy law in the United States has been shaped by the conflict

between organized creditor interest groups and a countervailing pro-debtor

Populist ideology, but that within this conflict legal professionals have

played a leading role in shaping the features of U.S. bankruptcy law. The devil

is in the details. Even in the nineteenth century, debates were not just about

whether to have a bankruptcy law, but about what type of bankruptcy law to

have. Skeel clearly explains the features of bankruptcy law and how they have

changed over time. He explains such issues as means testing, venue choice,

exemptions, and absolute priority in a manner that non-lawyers can understand.

Although the conflict of debtor and creditor interests provides the basic

framework of analysis, the greatest strength of the book lies in its

descriptions of the ways in which legal professionals have acted within this

framework to shape the path of institutional change. Associations such as the

Commercial Law League and the National Bankruptcy Conference have played a

leading role in the development of bankruptcy law. The most distinctive feature

of Skeel’s analysis is that he integrates a traditional public choice attention

to interest groups with an emphasis on the role of individuals, such as, Jay

Torrey, Robert Swaine and William O. Douglas.

Skeel argues that the enactment and repeal of the first three bankruptcy acts

is an example of legislative cycling. There were three divisions regarding

bankruptcy law in the United States in the nineteenth century. The pro-debtor

group favored a purely voluntary law, and the pro-creditor group generally

supported a law with both voluntary and involuntary bankruptcy. The issue was

complicated by the existence of a group that opposed any federal bankruptcy law

on states’ rights grounds. The existence of three different groups made it

possible to form a successful coalition for bankruptcy law and then relatively

quickly thereafter to form a successful coalition against bankruptcy law.

Following a crisis, such as the Panic of 1839, pro-debtor and pro-creditor

forces would compromise to pass a bankruptcy law. When the crisis passed, those

who were dissatisfied with the law would join with states’ rights advocates to

repeal the law. This cycling ended in1898, Skeel argues, because of Republican

(pro-creditor) dominance of national politics and because the law itself

created a powerful vested interest — bankruptcy law professionals.

Beginning in the late nineteenth century, legal professionals (lawyers and

judges) came to play an increasingly important role in shaping bankruptcy law.

Although commercial creditors organized the national association that lobbied

for bankruptcy law in the late nineteenth century, its president was a

commercial lawyer, Jay Torrey. Torrey drafted what was to become the 1898

Bankruptcy Act and lobbied for its passage for nearly ten years. Unlike

previous bankruptcy laws, Torrey’s bill paid particular attention to

administration, with a mind toward reducing expenses. In the early twentieth

century, associations of lawyers such as the Commercial Law League and later

the National Bankruptcy Conference lobbied to retain bankruptcy law and to

amend it in ways that supported their interests. A government study of

bankruptcy in the late 1920s recommended a move toward a British-style

bankruptcy system that would have taken bankruptcy out of the hands of lawyers

and put it into the hands of government administrators. In 1932, a bill was

introduced to amend bankruptcy law that included a move to an administered

system. Bankruptcy lawyers successfully lobbied against the administrative

changes, and they were stricken from the bill before it was passed. William O.

Douglas, first as head of the Securities and Exchange Commission (SEC) and

later as a Supreme Court Justice almost single-handedly shaped corporate

reorganization from the late thirties until the Bankruptcy Reform Act of 1978.

Douglas saw to it that the Chandler Act of 1938 would include SEC oversight of

Chapter XI corporate reorganizations, and that managers of firms in Chapter XI

would lose control to a trustee. As a Supreme Court justice he wrote the

opinion which established that senior creditors had a right to be paid in full

before junior creditors could obtain anything. Douglas’s actions drove

corporations away from Chapter XI but ultimately led to the formation of

interest groups that would transform corporate reorganization with the

bankruptcy Reform Act of 1978. Legal professionals continue to play a leading

role in the evolution of bankruptcy law.

David Skeel has produced an excellent history of bankruptcy law. He emphasizes

the institutional entrepreneurship that often seems to get lost in formal

analysis of institutional change. While many questions about the history of

bankruptcy remain to be answered, the starting point for answering those

questions has changed.

Bradley A. Hansen is assistant professor of economics at Mary Washington

College. His publications on bankruptcy and insolvency include “The People’s

Welfare and the Origins of Corporate Reorganization: The Wabash Receivership

Reconsidered,” Business History Review (Autumn 2000); and “Commercial

Associations and the Creation of a National Economy: The Demand For A Federal

Bankruptcy Law,” Business History Review (Spring 1998).

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

The Cambridge Economic History of the United States, Volume III: The Twentieth Century

Author(s):Engerman, Stanley L.
Gallman, Robert E.
Reviewer(s):Libecap, Gary

Published by EH.NET (March 2001)


Stanley L. Engerman and Robert E. Gallman, editors, The Cambridge Economic History of the United States, Volume III: The Twentieth Century. New York: Cambridge University Press, 2000. vii + 1190 pp. $99.95 (cloth), ISBN: 0-521-55308-3.

Reviewed for EH.NET by Gary Libecap, Department of Economics, University of Arizona.

This is, of course, a volume about an extraordinarily successful economy in the twentieth century. Surely, in terms of individual welfare and economic advancement, there has been no parallel in human history. We not only are extremely lucky to be part of it, but are challenged to understand its origins and progress across the century. This volume is indispensable for such an undertaking. The chapters address key aspects of the American economy and are written by leading scholars in the field. In this review, I summarize some of the highlights from each of the seventeen chapters. There is a very useful bibliographic essay at the end of the volume for more details on the broad patterns described in each chapter. This is the third volume in the Cambridge series on the development of the American economy, and one that serious economic historians will want to have readily available for reference in research and for use in the classroom.

The volume appropriately begins with an overview of the macro economy, “American Macroeconomic Growth in an Era of Knowledge-based Progress: The Long Run Perspective,” by Moses Abramovitz and Paul David. The introduction provides an excellent summary of the recent history of the American economy. Abramovitz and David point out that in the twentieth century there was a shift from extensive productivity growth that characterized the nineteenth century to intensive growth that relied more on technological and organizational change. This is sensible since the American economy moved from a frontier, natural-resource-based economy to a more mature, technology, energy-based economy. While late nineteenth-century technological change tended to be capital using and labor saving, twentieth-century technological change was more intangible capital using and tangible capital and labor saving. Data are provided detailing changes in total factor productivity growth in the transitional decades of 1879 to 1909. Beginning at this time, there was a shift to a greater role for intangible assets — education and training and organized investment in R&D — that would define the twentieth century. Key areas in the new economy were electricity, telecommunications, petroleum, the internal combustion engine, and later, the digital computer. Abramovitz and David outline the rising global position of the American economy over the century. They begin with a statistical profile of American growth since 1800, noting measurement problems, in the early period due to a lack of basic data and in the later period due to problems of comparability and definition of inputs and outputs. Interpretation of production during wars also presents challenges. Many of these issues are familiar to economic historians and were raised in Volume II of the Cambridge series. The authors examine what measured growth fails to capture in reflecting well-being, chiefly improvements in product quality and introduction of new goods and services for consumers whose qualities are not well represented in standard consumption bundles.

Over the twentieth century, the American population became more urban, more western, and more geographically mobile. In Chapter 2, “Structural Changes: Regional and Urban,” Carol Heim outlines the broad regional and urban/rural shifts that have taken place. Cities have grown and regionally, the West and South have gained, especially in the post-WWII period in terms of population and income per capita. There has been general convergence in population and income per capita across the country over the century. Heim emphasizes market and non-market forces, and what she calls hypermarket factors, resource decisions within large firms, in explaining these trends. As part of urban/regional changes, there has been a shift from manufacturing to service, an issue addressed later by Claudia Goldin in her chapter on labor markets. The chapter includes useful data by region on the breakdown of gainful employment by major sector in geographic divisions that reflect the major trends of the century.

The U.S. experience in the twentieth century was really a North American experience, and the growth of the Canadian economy is described in Chapter 3, “Twentieth Century Canadian Economic History,” by Alan Green. He has a particularly heavy load to carry, describing one hundred years of Canadian development in a single chapter. The patterns are similar to those observed for the United States with increased urbanization and industrialization and a movement away from the older wheat and timber-based economy. He points out, however, that the Canadian economy in the 1970s shifted to new natural resources — oil and iron ore production. All in all, Green outlines a record of economic and population growth that for many periods exceeded that of the United States. He briefly examines the sources of economic growth — increases in factor inputs and the growth of total factor productivity. Most interesting is his overview of the wheat economy from 1896-1929, which includes a description of the wheat boom and the staple theory of growth. Green summarizes Canada’s experience with the Great Depression, and although the Canadian economy suffered a sharp drop between 1929 and 1933, as did the U.S., there was a noticeable rebound thereafter that exceeded that of the U.S. The Canadian economy continued to grow, until a slowdown after 1973, where it performed less well than its southern neighbor.

Chapter 4 returns to the American economy with “The Twentieth-Century Record of Inequality and Poverty in the United States” by Robert Plotnick, Eugene Smolensky, Eirik Evenhouse, and Siobhan Reilly. Many of the chapters in the volume address the growth of the economy. This one examines distribution. The authors define inequality and poverty, with the poverty rate equaling the proportion of the population with income below a particular income level fixed in real terms. Inequality was at its highest levels in the century during the period from 1900 to World War I. It then declined during the war, but rose once again through 1929. Inequality fell during the Great Depression and WWII and continued to fall until 1967. It was flat and then trended upward after 1979. The authors claim that there is no single factor that underlies the record of income inequality. In the latter part of the century, where the data are the best, labor supply and demand factors play key roles. After 1979, increases in the demand for skilled labor and technological change bias toward skilled labor led to a premium for those workers. Additionally, there have been changes in the composition of industry, with a shift away from manufacturing toward services, that have increased the earnings of skilled labor and reduced the relative position of the less skilled. The end of the chapter contains an assessment of the public policy effects of tax and expenditures on inequality. The authors find that despite substantial changes in the level and composition of government spending programs in the post-WWII period, there has not been a detectable impact on the trend of inequality. Turning from inequality to the issue of poverty, there has been a clear, generally persistent downward trend through the century. The elderly have experienced a marked decline in poverty, but single-parent households have done less well. In assessing the effects of government programs on poverty, the authors conclude that policies have tended to reinforce, not offset, market factors. The chapter ends with very useful data appendices.

Certainly, one of the major events of the American economy during the twentieth century was the Great Depression, and Chapter 5, “The Great Depression,” is by a leading scholar of the issue, Peter Temin. Temin argues that credit tightness explains most of the fall in production and prices during the first phase of the depression. He discusses the confounding effects of five events that have been cited in the literature as contributing to the start of the depression — the stock market crash, Smoot-Hawley tariff, the first banking crisis, the world-wide decline in commodity prices, and a decline in consumption. He examines the role of the Fed and its adherence to the Gold Standard. Temin argues that a serious macroeconomic downturn due to these factors was turned into the Great Depression by the Federal Reserve’s actions in late 1931 to preserve the Gold Standard. The devaluation that followed the movement off the Gold Standard by the Roosevelt Administration was not followed by aggressive fiscal policy so that the economy deteriorated sharply through 1933. There was recovery between 1933 and 1937, before another downturn. Temin discusses the first New Deal and the actions of the NIRA and AAA and then briefly turns to the second New Deal. Gold inflows from an increasingly unstable Europe increased the money supply, and this helped fuel the recovery through 1937. But government policy brought about an end to that recovery with the recession of 1937. Recovery followed in 1939, largely stimulated by new gold inflows and then the build up for World War II.

Besides the Depression, the other major events of the twentieth century were wars, and in Chapter 6, “War and the American Economy in the Twentieth Century” Michael Edelstein, attempts to gauge the costs of war. This is a very interesting and ambitious chapter. During the twentieth century, there were four major military conflicts — World War I, World War II, the Korean War, and the Vietnam War — along with the Cold War. These conflicts demanded considerable change in the amount of resources devoted by the United States to military activities, which were quite small in the late nineteenth century. Edelstein gauges the direct and indirect costs of these wars, with the direct costs being expenditures for labor, capital, and goods, and the indirect costs including the lost lives, injuries, and destruction of capital and land. Estimates are provided for each as a share of GNP in Table 6.1. The Cold War was the most costly conflict in terms of direct expenditures. Edelstein then turns to the financing of these military conflicts, examining total expenditures and their funding through taxes, borrowing and inflation. Financing approaches are outlined in Table 6.2-6.9. One long-term effect was the apparent permanent increase in the income tax, which was raised by the Revenue Acts of 1941 and 1942. WWII and Korea were financed more by taxation, while Vietnam more by inflation. Finally, Edelstein examines the opportunity costs of the wars by examining the lost capital and investment in public and private enterprises, as described in tables 6.10-6.12. WWI’s opportunity costs included a reduction in nondurable goods consumption and investment in residential and business structures. WWII, held back any growth in consumption, and reduced investment, and the Cold War, Korea, and Vietnam reduced non-durable consumption and relied on deficit financing.

Another broad trend of the twentieth century was the growth of international trade. Peter Lindert, in Chapter 7, “U.S. Foreign Trade and Trade Policy in the Twentieth Century,” examines changes in America’s competitive advantage, the goals of government policy, and their impact on trade. Over the century, he finds a steady increase in the advantage of American skill-intensive goods, with exports increasing. This was not the case for natural resource-based exports. Lindert notes that some industries lost competitive advantage over time, particularly, steel and autos. Although protectionism rose and fell, efforts to promote infant industries never dominated U.S. trade policy. Lindert concludes that U.S. government intervention played no major role in determining which sectors increased or lost competitiveness. Market forces were dominant.

Chapter 8, “U.S. Foreign Financial Relations in the Twentieth Century” by Barry Eichengreen, continues the examination of international trade and monetary patterns. This is one of the best summaries of the financial history of the twentieth century I have seen. It is so complete that students should find it especially useful. The theme of the chapter is that international financial transactions and the institutions that governed them significantly influenced the growth and formation of the American economy. More narrowly, foreign investment led to railroad construction, and more broadly, the business cycle and responses to it were shaped by international capital flows. A related theme is that U.S. financial flows have affected other economies. U.S. capital contributed to European reconstruction following WWI and less positively, transmitted the American depression in the 1930s to other economies. American capital flows had an even greater impact after WWII. Eichengreen examines the gold standard and international financial management during WWI and the associated transformation of U.S. foreign finance. He notes that the United States became more of a creditor at that time, raising policy tensions for balancing internal and external financial markets. This tension was very apparent during the start of the depression, when the U.S. retreated from its international financial position with devaluation and the move off the gold standard. World War II and post-war reconstruction once again increased the role of the United States in the international monetary system. Eichengreen cites Lend Lease, other foreign aid through the Marshall Plan, international borrowing for reconstruction, the Bretton Woods Conference, and the IMF as examples of the key contribution provided by the U.S. in the latter part of the century.

Chapter 9, “Twentieth Century American Population Growth,” by Richard Easterlin shifts attention from financial flows to demographic patterns. This chapter by another leading scholar in the field provides valuable demographic data and charts that outline key trends. Easterlin summarizes patterns that emerged during the century — fertility and mortality continued to decline — and discusses contributing factors. Internal migration to the West, noted earlier in the volume by Carol Heim, is examined in more detail. During the twentieth century, international migration ebbed and flowed, and by the end of the period became a major contributor to population growth. Easterlin concludes with discussion of the implications of the general aging of the population, a pattern offset somewhat by immigration.

Another very complete and useful chapter is by Claudia Goldin, “Labor Markets in the Twentieth Century,” Chapter 10. Goldin summarizes major trends in American labor markets and provides valuable data to demonstrate those trends. Labor gained enormously over the century in terms of increases in real hourly earnings, enhanced worker benefits, reduced hours per week, a reduction in years of work over lifetime, and greater security in the face of unemployment, old age, sickness, and job injury. Goldin argues that these improvements were not really due to union activity or to legislation. They mostly followed from market conditions. Over the century, the face of labor changed. There was a decline in child labor and work by the elderly. The labor force participation of women, however, rose sharply from around 18 percent at the turn of the century to close to 50 percent of the labor force by the end. There were other changes in the labor market, including a shift from manufacturing to service with greater emphasis on skill. The distributional implications of this change in labor markets were noted earlier in Chapter 4. Goldin also points out that workers gained more protection from unemployment, acquired more formal education, and developed increased long-term relationships with firms over the century. At the same time, less discretion was given to supervisors and foremen in hiring and firing and more labor decisions were determined by formal workplace rules. There were fewer strikes and greater reliance on rewards than on punishment by managers. The observed evolution of modern labor markets in the U.S. has affected both individual well being and the performance of the macro economy. Still, Goldin points out that there are differences across region, among immigrants, and across skill levels. She summarizes major twentieth century intervention in the job market, including the enactment of Social Security legislation, OSHA, and the passage of the Wagner Act. Even so, Goldin argues that these actions did not fundamentally change labor markets. Rather, they reinforced market trends. Among the useful data provided are labor force participation; the industrial distribution of the labor force; occupational distribution; self employment figures; productivity measures; data on earnings, benefits, and hours; union membership; unemployment; wage inequality; black/white differences; and the contribution of education.

The discussion of labor markets continues in Chapter 11, “Labor Law” by Christopher Tomlins. Tomlins provides institutional background for the experiences described by Goldin. He traces the beginning of labor law in England and its transfer to the United States in the eighteenth century. He examines the roles of the judicial and legislative bodies in the U.S. in framing labor markets. Unionization, the adoption of workers’ compensation, the granting of anti-trust exemption to unions, the labor provisions of the NIRA and the Wagner Act, as well as Taft Hartley legislation are described.

Chapter 12 turns to agriculture, “The Transformation of Northern Agriculture, 1910-1990,” by Alan Olmstead and Paul Rhode. The well-written introduction summarizes changes in American agriculture in the north during the century, including the decline in the number of farms and farmers and increases in productivity. Improvements in transportation and communication better linked agriculture with the rest of the economy. Olmstead and Rhode examine three themes: sources of technological change, the farm crisis, and government intervention. They begin with discussion of regional contrasts in farm size and number of farms between 1910 and 1990. They emphasize the importance of technological change in explaining these trends. Most productivity change occurred after 1940. There was a labor-saving bias, and a machinery and fertilizer-using bias in technological change. Mechanization was spurred by the internal combustion engine and improved tractor design. The chemical and biological revolutions brought hybrid seeds. Olmstead and Rhode describe the roles of the federal government in providing telephone and electricity to rural areas, in promoting research through the Hatch Act and the agricultural experiment stations, and in subsidizing agriculture. Declining commodity prices, worsening terms of trade, and falling farm populations led to greater federal support of agriculture, beginning in the 1920s, expanding during the New Deal, and continuing through the rest of the century.

While international financial flows were described in Chapter 8 by Barry Eichengreen, Eugene White completes the discussion with focus on internal developments in Chapter 13, “Banking and Finance in the Twentieth Century.” White argues that twentieth century American economic growth was financed by a expanded flow of funds, channeled by alternating waves of financial institutional innovation and government regulation. Government regulation was expanded through adoption of the Federal Reserve System and through various pieces of New Deal legislation, such as the Glass-Steagall Act. White describes the tension that subsequently emerged later in the century between market forces and the regulatory structure that ultimately resulted in political pressure for deregulation. He describes the actions of the Federal Reserve Bank between1913 and 1929 and its relative ineffectiveness in the late 1920s and early 1930s in response to bank failures. This discussion effectively supplements that provided by Eichengreen and Temin. He outlines the consequences of the New Deal and its legacy for financial markets in the last part of the century.

The role of technological change in twentieth century American economic development was emphasized by Abramovitz and David in Chapter 1 and by Goldin in Chapter 10. David Mowery and Nathan Rosenberg examine technology in more detail in Chapter 14, “Twentieth-Century Technological Change.” The distinctive feature of the twentieth century, according to Mowery and Rosenberg, was the institutionalization of the inventive process within firms, universities, and government laboratories. There was emphasis on the use of the scientific method to promote invention and practical use of technology. The authors describe the organization of research and development and the incremental adoption of new technology to improve products and processes. They link the contribution of technology to the pattern of American economic growth. Mowery and Rosenberg note, as well, that as the century progressed, international flows of technology increased through reductions in trade barriers. They show that early technological change tended to be linked with resource endowments and occurred within the chemical and petroleum industries. But there were other examples and the chapter includes short case studies of the internal combustion engine, the automobile and airplane industries, plastics, synthetic fibers, pharmaceuticals, electric power and electronics in production and in consumer products, semi conductors, and of course, computer hardware and software. They provide measures of the growth of industrial R&D and its ties to university research and government investment.

Much R&D occurred within modern corporations, and Louis Galambos describes the development of the corporation in Chapter 15, “The U.S. Corporate Economy in the Twentieth Century.” He outlines the U.S. business system, and argues that there were three major changes: a shift to the corporate form of organization and the development of a high degree of concentration at the beginning of the century; the movement toward the multi-division firm in the 1940s and 1950s, as illustrated by Ford and AT&T; and most significantly, the development of global organizations in the latter part of the century.

Big business and big government collided, as described in Chapter 16, “Government Regulation of Business,” by Richard Vietor. Vietor argues that the growth of regulation over the century in part was due to market failure and in part due to the strategic use of government by firms to enhance their competitive position. He usefully summaries theories of regulation, including the public interest and capture views. Vietor also describes the role of regulatory bodies, which were increasingly influential across the century. He highlights early anti-trust policy, New Deal regulation, and social and environmental regulation in the latter part of the century. He also discusses the deregulation that took place in some industries, notably, in airlines, telecommunications, petroleum and natural gas, and utilities.

The final chapter, “The Public Sector,” by Elliott Brownlee completes the discussion introduced by Vietor. Brownlee describes the growth of government in the twentieth century with data on the relative sizes of the federal, state, and local sectors. He emphasizes Robert Higgs’ crisis argument in explaining the expansion of the public sector. The importance of WWI, the Great Depression, and WWII are noted. Deregulation, however, remains more difficult to understand.

As I indicated in the beginning of this review, Volume III of the Cambridge Economic History of the United States is a superb companion to the earlier two volumes and is an essential addition to the libraries of all serious students of the American economy.

Gary D. Libecap is former editor of the Journal of Economic History. His books include Titles, Conflict and Land Use: The Development of Property Rights and Land Reform on the Brazilian Amazon Frontier (with Lee Alston and Bernardo Mueller) University of Michigan Press, 1999; The Federal Civil Service and the Problem of Bureaucracy: The Economics and Politics of Institutional Change, (with Ronald Johnson), University of Chicago Press and NBER, 1994, The Political Economy of Regulation: An Historical Analysis of Government and the Economy (co-editor with Claudia Goldin), University of Chicago Press and NBER, 1994, and Contracting for Property Rights, New York: Cambridge University Press, 1989.


Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Essays on the Great Depression

Author(s):Bernanke, Ben S.
Reviewer(s):Margo, Robert A.

Published by EH.NET (July 1, 2000)

Ben S. Bernanke, Essays on the Great Depression Princeton: Princeton

University Press, 2000. vii + 310 pp. $35.00 (cloth), ISBN 0-691-01698-4.

Reviewed for EH.NET by Robert A. Margo, Department of Economics, Vanderbilt


For many years, economic research on the origins and persistence of the Great

Depression bore a striking resemblance to historical research on the causes of

the American Civil War. Both sides to the respective debates talked past one

another, and little, if any, intellectual progress was made. Beginning in the

1980s, the situation began to change, at least in case of the 1930s, because of

a simple methodological innovation. That innovation was to look beyond time

series aggregates for a single country, either at dis-aggregated evidence

within countries or at aggregate outcomes across countries. Both types of

evidence are examined in Ben Bernanke’s new book, a collection of (mostly)

previously published articles. (Currently, Bernanke is the Howard Harrison and

Gabrielle Snyder Beck Professor of Economics, Professor of Economics and Public

Affairs, and Chair of the Economics Department, at Princeton University.)

Essays on the Great Depression is divided into three parts, made up of

nine substantive chapters in total, plus an index. Following a very brief

preface, Chapter 1 (“The Macroeconomics of the Great Depression”) presents the

basic themes of the book. Using a cross-country panel data set, Bernanke argues

that monetary factors, along with the Gold Standard, should be according

primary responsibility for the Depression. Adherence to the Gold Standard

resulted in monetary “meltdown” — the declines in the money stock,

accordingly, were non-neutral, because of negative effects of financial crisis

and sticky nominal wages on output growth. Countries that remained on the Gold

Standard did far worse than countries that abandoned it, and a case can be made

that staying on the Gold Standard was more or less an exogenous event – that

is, a “natural experiment.”

Part Two is made up of three chapters. Chapter 2 (“Nonmonetary Effects of the

Financial Crisis in the Propagation of the Great Depression”) is justly famous.

The paper argues that the US financial crises of the early 1930s had (negative)

effects on the real economy, essentially by driving up what Bernanke calls the

“cost of credit intermediation.” One of two chapters in the book to rely on

aggregate time series data for a single country, Bernanke shows (p. 58) that

including deposits of failed banks and liabilities of failed business in an

otherwise standard time-series regression helps to (negatively) predict output

growth. Chapter 3 (“The Gold Standard, Deflation, and Financial Crisis: An

International Comparison,” written with Harold James) reports a similar finding

using the international panel, while Chapter 4 (“Deflation and Monetary

Contraction in the Great Depression: An Analysis by Simple Ratios,” written

with Ilian Mihov) uses very simple methods (an identity linking the price level

to the nominal money supply, the monetary base, international reserves, and the

quantity and price of gold reserves) to decompose the sources of world-wide

deflation before and after 1931

Part Three, on labor markets, is made up of five chapters. Chapter 5 (“The

Cyclical Behavior of Industrial Labor Markets: A Comparison of the Prewar and

Postwar Eras,” written with James Powell) introduces the second major data set

examined in the book, pre-war monthly data on output, employment, hours, and

average hourly earnings for eight US manufacturing industries. Among its many

findings is the striking observation (p. 175) that prewar employers used

shorter hours to reduce labor during a business cycle downturn, while postwar

employers have relied on layoffs. Chapter 6 (“Employment, Hours, and Earnings

in the Depression: An Analyses of Eight Manufacturing Industries”), perhaps the

most influential of the lot, argues that nominal average hourly earnings did

not decline as much as one might expect during the downturn (that is, nominal

wages were sticky) because average weekly hours fell as well, and workers were

unwilling to accept drastic declines in the former given the declines in the

latter. Chapter 7 (“Unemployment, Inflation, and Wages in the American

Depression: Are There Lessons for Europe?” written with Martin Parkinson), the

shortest in the book at eight pages, examines whether the experience of the US

in the 1930s can shed light on certain features of recent European

macroeconomic behavior; namely, the persistence of high unemployment, and the

apparent lack of any influence of high unemployment on either the rate of

inflation or real wage growth. Bernanke concludes that, while there are some

useful lessons, “there are also large enough differences to make inferences

about policy treacherous” (p. 253). Chapter 8 (“Procyclical Labor Productivity

and Competing Theories of the Business Cycle: Some Evidence from Interwar

Manufacturing Industries,” also written with Martin Parkinson) uses the US

industry data to investigate “short run increasing returns to labor” (SRIRL)

during the interwar period. The key finding is that the degree of SRIRL appears

to have been similar in magnitude to the postwar period, which Bernanke claims

is “troubling for the technology shocks explanation of procyclical productivity

(and thus for the real business cycle hypothesis).” Chapter 9 (“Nominal Wage

Stickiness and Aggregate Supply in the Great Depression” written with Kevin

Carey) considers several econometric refinements to Eichengreen and Sach’s

well-known 1985 Journal of Economic History article on the gold standard

and the Great Depression. It concludes that the refinements do little to alter

Eichengreen and Sach’s findings, and concurs with Eichengreen and Sachs that

nominal wage stickiness was an important mechanism for propagating monetary

declines in the early 1930s.

Overall, Essays on the Great Depression is a mixed bag. Two of the

papers — “Non-Monetary Effects” and “Employment, Hours, and Earnings” — are

certifiable classics, and all the chapters are worth reading (or re-reading, as

the case may be). The quality of the prose is several notches better than the

usual fare in professional economics journals. The empirical analysis

demonstrates a practiced eye for what is important and what is not, attention

to historical and institutional detail, and a willingness to explore

alternative explanations. Conditional on when they were written, the

statistical analyses are state-of-the-art, an order of magnitude beyond what

passed for econometric sophistication in economic history journals at the time.

On the other hand, the value-per-dollar ratio is not particularly high. Eight

of the nine chapters are essentially copied (the type-setting is new and

consistent throughout) from their original sources, and six of these, being

from the American Economic Review, Journal of Political Economy,

and the like, are easily available (indeed, I bet most economists who

considering buying this book will have the originals, or most of them, on their

shelves already). The other two chapters were originally published in NBER

volumes, hardly less accessible except to the most library-challenged. That

leaves the three-page preface, the previously unpublished Chapter 4, and an

index as the new material — not much for the reader’s $35.00. I’m not

questioning Bernanke’s right to reprint his admittedly influential articles,

nor Princeton University Press’s decision to package them in a handsome volume

complete with a striking period photograph on the cover and laudatory blurbs

from Peter Temin, Barry Eichengreen, and Randall Kroszner on the back cover.

However, in the long run, scholarship on the Great Depression, along with

readers’ pocketbooks, would have been better served had these essays been

re-written into real chapters; with a real introduction and conclusion;

regressions re-estimated taking into account new data and new econometric

techniques; and new textual material interwoven throughout — in brief, if

Bernanke had written a real monograph. Even with a proper introduction and

conclusion, such a book, I suspect, would be a good deal shorter than this

volume’s 301 pages of rather small print — there is much unnecessary

repetition, indeed confusion, across the various chapters.

As a case in point, consider the treatment of wage stickiness throughout. In

Chapter 2, using his international panel, Bernanke (p. 31) concludes that

“countries in which nominal wages adjusted relatively slowly toward changing

price levels experienced the sharpest declines in manufacturing output.” Table

9 of Chapter 3 reports first-difference regressions of industrial production

(in logs) using evidently the same data set, noting that (p. 101) “only when

the PANIC variable [the dummy variable for financial distress] is included does

nominal wage growth have the correct (negative) sign … but it is not

statistically significant.” In Chapter 6, Bernanke (p. 236) simulates his US

industry model assuming “perfect wage adjustment to the cost of living.”

Remarkably, this assumption “had virtually no effect on the ability to track”

employment and hours, suggesting that “the importance of lagged adjustment for

explaining observed real wage behavior” during the Depression “may not have had

great allocative significance.” Then, drawing again on the international

evidence, Chapter 9 notes (p. 300) that “the correlation across countries of

high nominal wages and low output is interpretable as an allocational effect of

sticky wages.” Exactly what is going on here? Bernanke clearly views wage

stickiness in the 1930s as an economic puzzle, since few of the standard

post-WW2 institutional stories (e.g., unions, efficiency wages, and the like)

seem to have explanatory power. While I don’t disagree with Bernanke on this

point, greater familiarity with the economic history literature would have

alerted him to the stylized fact that wage stickiness long-predated the 1930s,

in the United States and other countries.

While I applaud Bernanke’s willingness to move beyond the standard US time

series, readers should keep in mind that all of the US data come from

conventional, if somewhat neglected sources, as do the international data.

Other than occasional asides, not much attention is paid to data quality, and

only rarely do readers get any sense of the sort of archival work that might

improve matters for future research. Some of the regressions (for example, in

Chapter 7) were estimated prior to Christina Romer’s revisions to the standard

(that is, Lebergott) labor force series, and thus invite re-estimation.

Finally, in a book of essays about the Great Depression, one might have

expected more attention paid to unemployment, particularly its uneven incidence

across the workforce, and the strikingly high levels of long-term unemployment

prevailing in the US and elsewhere.

Criticisms aside, Essays on the Great Depression displays one of the

great contemporary masters of applied macro-econometrics at work. In the grand

scheme of things, I am glad that Ben Bernanke is fascinated by the Great

Depression. Hopefully his personal obsession will translate in an expanded

audience for the work of economic historians. In any case, his book will more

than do as a fine and ready example of why the past continues to have useful


Robert A. Margo is Professor of Economics and of History at Vanderbilt

University, Nashville, TN, and a Research Associate of the National Bureau of

Economic Research. He will be on leave during the 2000-01 academic year as

Visiting Senior Scholar and Visiting Research Professor of Economics at Bard

College in Annandale-on-Hudson, NY. His most recent books are Wages and

Labor Markets in the United States, 1820-1860 (University of Chicago Press,

2000) and Women’s Work? American Schoolteachers, 1650-1920 (with Joel

Perlmann, forthcoming, University of Chicago Press, 2001).

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Designing a New America: The Origins of New Deal Planning, 1890 – 1943

Author(s):Reagan, Patrick D.
Reviewer(s):Cuff, Robert

Published by EH.NET (July 1, 2000)

Patrick D. Reagan, Designing a New America: The Origins of New Deal

Planning, 1890-1943. Amherst, MA: University of Massachusetts Press, 2000.

xii + 362 pp. $40 (cloth), ISBN: 1-55849-230-5.

Reviewed for EH.NET by Robert Cuff, Department of History, York University


Patrick Reagan, an historian at Tennessee Technological University, has

written a first-rate study of executive-level attempts at economic and social

planning during the 1930s and early 1940s. The National Resources Planning

Board (1939-1943) and its bureaucratic predecessors, the civilian agencies most

central to the story, have received varying degrees of attention in New Deal

historiography. In V Was For Victory: Politics and American Culture During

World War II (1976), for example, John Morton Blum made conservative

congressional attacks on NRPB after Pearl Harbor symbolic of a general wartime

backlash against New Deal liberalism, a theme now common in accounts of the

wartime domestic scene. Taking a broader perspective, Otis Graham in Toward

A Planned Society: From Roosevelt to Nixon (1976) interpreted New Deal

efforts at policy planning as part of a useable past for erstwhile planners in

the late 1970s. More recently, Alan Brinkley in The End of Reform: New Deal

Liberalism in Recession and War (1995) has traced NRPB’s role in policy

struggles over the meaning of liberalism for the postwar social order.

Reagan takes these and other studies into account but also makes his own

distinctive contribution. On the interpretative level, no one has so firmly

linked the national planning impulse of the 1930s to the intellectual and

organizational history of the pre-New Deal era. In this sense, Designing a

New America may be read as an archaeological excavation of New Deal

managerial ideals. In making the case for continuity, or for a broader

historical context, Reagan provides an impressive synthesis of recent

historiography (and an excellent primer for graduate students) on an array of

issues related to the planning impulse, including progressive-era urban reform;

mobilization during World War I; welfare capitalism; social science

policy-making; and inter-war attempts at voluntary economic stabilization.

Biographical studies of key Board members comprise five of the book’s eight

chapters, an approach, of course, that reinforces the sense of linkage between

the 1930s and networks of policy advocates in prior decades. Included are

detailed portraits of Franklin Roosevelt’s uncle Frederic A. Delano, a former

railroad executive whom Reagan regards as the father of New Deal planning;

University of Chicago political scientist Charles Merriam; institutional

economist Wesley Clair Mitchell; Massachusetts business executive Henry S.

Dennison; and Rockefeller foundation manager Beardsley Ruml. While all five

chapters draw on primary as well as secondary sources, and all are worth

reading, those on the lesser-known Delano and Ruml contain the freshest

material. Ruml’s career trajectory from philanthropy manager to a member in

1935 of Roosevelt’s planning board is particularly intriguing.

In a certain respect, the biographical material is so strong that the reader

comes away a bit uncertain about the story’s administrative dimension–of how

and why the National Planning Board of 1933 evolved into the NRPB of 1939, and

what exactly those agencies did during their ten-year existence. I also think

the author repeats the description of a seamless historical web a bit too often

when he might better have added a page or two on what exactly had changed in

approaches to nation-wide planning in the period he covers. But these are

simply quibbles about a piece of work that’s impressive as both interpretative

scholarship and original research.

Robert Cuff teaches at York University. He has written on economic planning

during World Wars I and II.

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

A Monetary History of the United States, 1867-1960

Author(s):Friedman, Milton
Schwartz, Anna Jacobson
Reviewer(s):Rockoff, Hugh

Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press (for the National Bureau of Economic Research), 1963. xxiv + 860 pp.

Review Essay by Hugh Rockoff, Department of Economics, Rutgers University.

On Monetarist Economics and the Economics of a Monetary History

A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna J. Schwartz is surely one of the most important books in economic history, and indeed, in all of economics, written in the twentieth century. It has had a profound impact on the way economists think about monetary theory and policy. And it is still one of the most frequently cited books in economics. To some extent, it has suffered the fate of most classics: it is often cited, but seldom read. In the course of preparing this review essay, I have been repeatedly struck by the difference between what people think Friedman and Schwartz say, and what they actually say. Below I try to set out some of the reasons for the enormous impact of A Monetary History, and some of the reasons why there is such a large gap between (to subvert the title of Axel Leijonhufvud’s fine book on Keynes) “Monetarist Economics and the Economics of A Monetary History.”

The main point of A Monetary History is that “money matters: ” The quantity of money is an independent and controllable force that strongly influences the economy. This view, which is now accepted, at least in some measure, by most economists is very different from the view that prevailed when A Monetary History was published. At that time the professional consensus considered monetary policy ineffective. The job of central bankers was to keep interest rates as low as possible as long as unemployment was a problem. Following this policy would mean, however, only that investment might be bit higher than it would otherwise be and unemployment a bit lower. And although inflation might be countered with higher interest rates, the presumption was that monetary policy would have little impact. The rate of unemployment and the behavior of costs, particularly wage rates, largely determined the rate of inflation. Controlling labor unions was important for controlling inflation; monetary policy was at best a secondary consideration. The main tool for keeping the economy on an even keel was fiscal policy. It was a development in the real world, of course, the growing problem of inflation in the 1960s and 1970s, that was the main factor overturning the Keynesian orthodoxy. But A Monetary History was a powerful voice for restoring to monetary policy some of its former prestige. How did Friedman and Schwartz persuade the majority of the profession that money matters? The basic methodology of A Monetary History is to highlight “natural experiments,” occasions when the stock of money changed for reasons unrelated to the current state of the economy, so that we can then attribute the corresponding changes in the economy to changes in money.

Friedman and Schwartz offer an impressive array of case studies. To convey a sense of their approach, let me cite three of their most famous examples: (1) the contrast between 1879-1896 and 1896-1914 in terms of the behavior of the price level; (2) the contrast between World War I and World War II in terms of the behavior of the price level; and (3) the impact of restrictive actions taken by the Federal Reserve system in 1937.

(1) Prices (the NNP deflator) fell -0.93 percent per year between 1879, when the United States returned to the gold standard, and 1896, when the deflation came to an end, and then rose 2.08 percent per year between 1897 and 1914. The stock of money behaved in a similar way. Money per unit of output (money divided by real NNP) rose 2.99 percent per year from 1879 to 1896, and then rose 4.23 percent per year between 1897 and 1914. The acceleration in money growth was the result of the flow of new gold, much of it from the mines of South Africa. (High-powered money rose 3.49 percent per year between 1879 and 1896 and 4.83 percent per year between 1897 and 1914.) To be sure, the intense searches for new gold mines and new ways of refining gold ore that were rewarded when the mines of the Rand became productive and the cyanide process for refining it had been perfected, had been encouraged by rising real price of gold before 1896. But these events long preceded the post-1896 inflation. The correlation between rising money supplies and rising prices after 1896, Friedman and Schwartz argue, must be chance or must reflect a causal connection running from money to prices.

(2) Surprisingly, prices rose more in World War I than in World War II, and by about the same magnitude in World War I as in, to go outside the strict boundaries of A Monetary History, the Civil War. Yet measured in almost any conventional way (length of war, casualties, government deficits, etc.) World War I was a much smaller war for the United States than the Civil War or World War II. The monetary facts, however, are roughly in line with the inflation facts. From 1914 to 1920 money per unit of output rose 8.45 percent per year while the price level rose 10.84 percent per year. From 1939 to 1948 money per unit of output rose 7.90 percent per year while the price level rose 6.65 percent per year.

As these figures indicate, money cannot explain everything. The difference in inflation in the two wars exceeds the difference in the rate of growth of money per unit of output. Nevertheless, the striking fact is that the rate of inflation and the rate of growth of money per unit of output were broadly similar in the two wars. One would have expected, based on the degree of mobilization, far more money growth and inflation in World War II.

Part of the reason that the United States could “get away with” slower monetary growth in World War II was that the deposit-reserve ratio of the banking system was lower during World War II. The government, therefore, received a larger share of the revenues produced by increases in the stock of money. High-powered money, the main channel through which the government acquires seigniorage, rose 10.78 percent per year in World War II compared with 12.25 percent per year in World War I. Friedman and Schwartz conclude that the correlation between prices and money per unit of output suggests causation running from money to prices, rather than the common effect of some third factor, such as the intensity of the mobilization.

(3) One of the most famous and most hotly debated examples offered by Friedman and Schwartz is the 1937-1938 recession. In early 1937 the Federal Reserve doubled the required reserve ratios of the banking system with the purpose of immobilizing reserves and preventing future inflation. After some months, this action was followed by declines in the stock of money and real output. Money fell -0.37 percent between 1937 and 1938 while prices fell -0.50 percent, and real output fell -8.23 percent. High-powered money, responding to other forces, rose by 7.95 percent during the same year. Friedman and Schwartz conclude that the correlation between the decline in the stock of money and the decline in economic activity must have resulted from chance or from causation running from money to economic activity.

These case studies, I should note, arose in three different institutional regimes. In case (1) the United States was on the gold standard, and there was no central bank. In case (2) the Federal Reserve was constrained by the need to finance large wartime government deficits, and had to follow the Treasury’s lead. In case (3) the Federal Reserve was relatively independent, and could follow its own judgments about appropriate monetary policy. Drawing examples from different institutional environments strengthens the argument. In each case there is a rough correlation between monetary changes and changes in the economy, yet the factors determining the supply of money are very different. This suggests that the proposition “money matters,” represents a fundamental economic relationship, and is not the adventitious result of some particular set of institutional arrangements.

None of these “natural experiments” or the many others cited in A Monetary History, was conducted in a laboratory. Many variables were changing, and it is always possible, although not always easy, to construct an alternative explanation based on some other key factor. An extensive literature, for example, has grown up elaborating and contesting the Friedman-Schwartz interpretation of case (3), and attributing the 1937 downturn to other factors, such as fiscal policy. But for someone seeking to overturn A Monetary History, contesting one of these explanations is only the beginning. What gives weight to Friedman and Schwartz’s argument is the multiplicity of examples. So far, I would argue, none of Friedman and Schwartz’s critics has been able to forge an alternative explanation – whether based on fiscal policy, or labor union militancy, or technological change, or whatever – that fits all of the examples explored in A Monetary History. Indeed, to my way of thinking, the major advances since A Monetary History, have been the attempts by Brunner and Meltzer, Bernanke, and others to enrich the picture of how disturbances in the financial sector, and in particular the banking sector, affect the rest of the economy, rather than attempts to explain macroeconomic events from totally different perspectives.

Perhaps the greatest mystery is not that the Friedman-Schwartz methodology was persuasive, but rather that despite the enormous impact of A Monetary History, few economists use its methodology. Typically, when an economist attempts to persuade other economists, the first step is to feed the numbers through the computer and in the process strip away the historical circumstances that adhere to them.

Friedman and Schwartz’s interpretation of the Great Depression is both figuratively and literally at the heart of their book. The detailed discussion occupies about 30 percent of the total, and the episode is referred to by way of contrast in discussions of other episodes. Princeton University Press later issued this section as a separate volume, The Great Contraction.

Their point, as most college students of economics now know (or should know), is that the Great Depression could have been greatly ameliorated by better monetary policy. Today, only a few dyed-in-the-wool Keynesians reject any causal role for monetary policy, although many economic historians would place the major blame for the Depression on other factors, and relegate bad monetary policy to a secondary role. The Friedman-Schwartz interpretation of the Depression was crucial, moreover, to the revival of confidence in market-based economics. The Great Depression, and the way it was interpreted by Keynesian economists, convinced a generation of American intellectuals that only socialism (or near-socialism) could save the American economy from periodic economic meltdowns. If Great Depressions could be prevented through timely actions by the monetary authority (or by a monetary rule), as Friedman and Schwartz contended, then the case for market economies was measurably stronger.

It has been objected that Friedman and Schwartz don’t prove that monetary forces caused the Great Depression. They merely describe the Great Depression in great detail as if monetary forces were the causal factor. This objection is true, but not as decisive as it might seem at first glance. From the point of view of proving the importance of money, the Depression is merely another period, although a particularly revealing one, in which to search for natural experiments. It provides additional evidence, such as the case of the doubling of required reserve ratios in 1937 discussed above, and other episodes, but this one short period by itself cannot prove anything.

Friedman and Schwartz are doctors writing up the results of a detailed clinical examination of a patient who entered the hospital on the verge of death. Their observation that the patient was suffering from a bacterial infection is not by itself proof that the infection caused the patient’s illness. The fact that other patients with the same symptoms and the same infection have been seen at other hospitals in other places and at other times is what makes their argument persuasive. And it is the evidence taken as a whole that makes the prescription offered by Drs. Friedman and Schwartz, that the patient should have been given a strong dose of antibiotics (high-powered money), appear so sensible.

Perhaps the most misunderstood aspect of A Monetary History is the way that Friedman and Schwartz treat Nonmonetary factors. Their approach is to assume a “real” business cycle, which is then pushed a pulled by monetary factors. I use the term “real” with some trepidation. What Friedman and Schwartz have in mind is the sort of cycle described by Wesley C. Mitchell, Arthur Burns, and other scholars at the National Bureau of Economic Research in work that preceded A Monetary History, rather than what now goes by the name “real business cycle.” Yet there is a family resemblance worth stressing. Friedman and Schwartz, unfortunately for us, say little about the sources of this cycle, although at times they make some interesting observations about the tendency of good harvests in the United States to occur at the same time as bad harvests in Europe, and a few other factors. Nevertheless, it is clear that various supply-side shocks including technological shocks that now appear important to macroeconomists would fit easily into the Nonmonetary cycle that forms the backdrop for Friedman and Schwartz’s analysis.

The real cycles in which Friedman and Schwartz impound other factors are often forgotten when economic historians recount “monetarist” interpretations of historical episodes. I have heard economic historians claim that Friedman and Schwartz “say” that the recession of 1937 was caused by the doubling of reserve requirements in 1937. In fact, they write the following.

“Consideration of the effects of monetary policy [the increase in required reserve ratios] on the stock of money certainly strengthens the case for attributing an important role to monetary changes as a factor that significantly intensified the severity of the decline and also probably caused it to occur earlier than otherwise” (p. 544).

Similarly, I have heard economic historians claim that Friedman and Schwartz say that money caused the Great Depression, or that the stock market crash did not cause the Great Depression. In fact their statements on both points are more circumspect, and assume a Nonmonetary contraction of some magnitude. Of the stock-market crash Friedman and Schwartz write that “… its [the stock market crash’s] occurrence must have helped to deepen the contraction in economic activity. It changed the atmosphere within which businessmen and others were making their plans, and spread uncertainty where dazzling hopes of a new era had prevailed” (p. 306).

The crucial turning point in the Depression, according to Friedman and Schwartz, was late 1930 or early 1931, when they thought the contraction might have come to an end in the absence of the banking crises. But they acknowledge that even so, the contraction of the early 1930s “would have ranked as one of the more severe contractions on record” (p. 306).

In their counterfactual discussion of the effects of an open market purchase of $1 billion, they conclude that if undertaken between January 1930 and October 1930 the open market purchase would have “reduced the magnitude of any crisis that did occur and hence the magnitude of its aftereffects” (p.393). If undertaken between September 1931 and January 1932, the open market purchase would have produced a change in the monetary tide and as a result “the economic situation could hardly have deteriorated so rapidly and sharply as it did” (p. 399).

In discussing the banking panic of 1907, to give an earlier example, Friedman and Schwartz conclude that “There can be little doubt that the banking panic served to intensify and deepen the contraction: its occurrence coincides with a notable change in both the statistical indicators and the qualitative comment. If it had been completely avoided, the contraction would almost surely have been milder” (p. 163).

In short, Friedman and Schwartz tried to show that good monetary policy – best of all, as Friedman argued elsewhere, a monetary rule – would make the world a better place; they never promised a rose garden.

Although the central thesis is “money matters,” Friedman and Schwartz follow a large number of closely related threads. These range from the determinants of the greenback price of gold after the Civil War, to the relative effects of mild inflation and mild deflation on long-term economic growth, to the effects of deposit insurance on the stability of the banking system, and so on. Their discussions of these episodes are invariably intelligent, and often at variance with what was the conventional wisdom at the time they wrote. Not only do these discussions help us to understand these particular episodes; they also increase our confidence in their central thesis. They convince us that we are reading economic historians of outstanding ability who have explored every nook and cranny of American monetary history.

As most readers of A Monetary History recognize the book also succeeds in part because of how well it is written. Friedman and Schwartz employ a style that might be called high-NBER. It is written for the intelligent lay person. No special knowledge of statistics is required to read it, and no equations appear in the text, although there is an appendix on the determinants of the stock of money that uses equations. The quantity theory of money never appears in algebraic form. The sentences flow in magisterial fashion, and yet one is aware that the authors have thought about what they are discussing and are eager to make sure that the reader understands. In many ways their book, with its myriad of examples and its telling analogies, is the most similar, among all the classics of economics, to The Wealth of Nations. One can’t help but feel that the former lecturer on rhetoric would have approved of Friedman and Schwartz’s polished yet straightforward style.

For all these reasons, my choice for the most significant book in the field of economic history in the twentieth century is A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna J. Schwartz.

Annotated References:

There is a large and growing literature on A Monetary History. Here I will mention just a few sources that I have found particularly useful.

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

Bordo, Michael D., editor, Money, History, and International Finance: Essays in Honor of Anna J. Schwartz. National Bureau of Economic Research Conference Report series. Chicago: University of Chicago Press, 1989. (This volume, a Festschrift for Anna J. Schwartz, contains a number of relevant essays, including one by Bordo that focuses explicitly on the contributions of A Monetary History.)

Brunner, Karl and Allan H. Meltzer, “Money and Credit in the Monetary Transmission Process.” American Economic Review. Vol. 78 (2): 446-51, May 1988.

Hammond, J. Daniel, Theory and Measurement: Causality Issues in Milton Friedman’s Monetary Economics. Cambridge: Cambridge University Press. 1996. (Hammond discusses all of the Friedman-Schwartz work on money focussing on methodological issues and the large volume of criticism their work generated).

Leijonhufvud, Axel, On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory. New York: Oxford University Press, 1968.

Lucas, Robert E, Jr., “Review of Milton Friedman and Anna J. Schwartz’s A Monetary History of the United States, 1867-1960.” Journal of Monetary Economics. Vol. 34 (1): 5-16, August 1994. (Lucas lays out what he considers the most important contributions of A Monetary History.)

Miron, Jeffrey A., “Empirical Methodology in Macroeconomics: Explaining the Success of Friedman and Schwartz’s A Monetary History of the United States, 1867-1960. Journal of Monetary Economics. Vol. 34 (1): 17-25, August 1994. (Miron explains why members of the younger generation of macroeconomists, even those not trained at Chicago, found A Monetary History so persuasive.)

Steindl, Frank G., Monetary Interpretations of the Great Depression. Ann Arbor: University of Michigan Press, 1995. (Steindl provides a useful overview, which compares and contrasts the Friedman-Schwartz interpretation of the Great Depression with the interpretations offered by other monetary historians.)

Temin, Peter, Did Monetary Forces Cause the Great Depression? New York: Norton, 1976 and Temin, Peter, Lessons from the Great Depression. Cambridge, MA: MIT Press, 1989. (Temin presents a detailed and extremely skeptical reading of the Friedman-Schwartz interpretation of the Great Depression.)

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Knowledge Works: Managing Intellectual Capital at Toshiba

Author(s):Fruin, W. Mark
Reviewer(s):Robertson, Andrew

Published by EH.NET (July 1999)

W. Mark Fruin, Knowledge Works: Managing Intellectual Capital at


Japan Business and Economics Series. New York: Oxford University Press,

1997. 256 pp. $39.95 (cloth). ISBN: 0195081951

Reviewed for H-Business and EH.NET by Andrew Robertson, Harvard University.


in a sea of high quality, meticulously engineered electronic and mechanical

products bearing the label “Made in Japan”, Americans — both inside and

outside academia — continue to wonder, despite Japan’s recent economic

troubles, “How does Japanese industry do it?” In Knowledge Works:

Managing Intellectual Capital at Toshiba, Mark Fruin addresses this

perennial question through a factory organization at Toshiba’s Yanagicho

factory. At irregular intervals from 1986 through 1992, Fruin entered Toshiba’s

workforce to observe the complicated social patterns that generate change at

Toshiba. Because Toshiba devolves most of its resources related to product and

process development to the factory level, working in the various sections

responsible for bringing

new products on line permitted Fruin to study at firsthand the technical,

social, and cultural relations that structure Toshiba’s larger technology

strategy. In

Knowledge Works, Fruin argues persuasively that Toshiba’s success during

the 1980s in responding to rapid shifts in market preference, to the quickly

strengthening yen, and to the establishment — sometimes voluntary,

sometimes not — of international trade quotas, stemmed directly from the

development of a new form of factory organization, a form beyond simple mass

production, a form Fruin terms the “Knowledge Works”.

Briefly, this

book is a useful and thought provoking study of how a single

factory is organized to support rapid innovation in both process and production

technology. Fruin presents a useful model — that is, the knowledge works —

for analysis of this industrial form and supports his claims with detailed

descriptions of the technical systems, social organization, institutional

values, and individual attitudes that underpin this

form. The book is not, however, without its flaws, most prominent being

Fruin’s desire to generalize this form as a source and explanation of Japan’s

national rather than Toshiba’s corporate comparative advantage.

In the term “knowledge works”, Fruin playfully emphasizes the central point of

the book: “Knowledge works” are places where “knowledge works”. Put a little

more elegantly and emphatically,

“Knowledge works are a force for a new age, a postproduction age, of

intellectual capitalism. Instead of

making things, a production problem pure and simple, making the right things,

in the right amounts, at the right times and prices, is the postproduction

problem. And because nothing stands still, making righter thing, in

righter amounts, at righter prices and times, must be the goal.

Post production , or intellectual capitalism, presumes information processing

abilities of a high order,

on-site differentiation and integration of functions, a

customer-is-always-right point of view, and quite emphatically, an

environmentally conscious mode of operations” (p. 24).

Knowledge works permit a higher degree of responsiveness to changes in markets

by permitting higher levels of differentiation in a factory’s product lines and

simultaneously higher levels of

integration technically,

socially, and culturally across the different groups managing, designing,

and producing these products. While management remains well attuned to the

short-term exigencies of the market, still more important to the continued

vitality of both the factories as knowledge works and Toshiba as a corporation

is management’s strategic commitment to factories as sites for not only the

production of better products but also the production of better skilled, more

knowledgeable, better motivated workers on better organized, better managed

lines. Knowledge works prosper not by the traditional mass production

strategies of de-skilling and the division of labor; instead, at Yanagicho, the

factory provides the site where technicians, engineers, and managers from not

only Yanagicho but also other Toshiba plants, group companies, suppliers, and

even outsiders cooperate to attain the “physical, spatial, and functional

integration of labor and information (p. 17).”

Understanding the characteristics

of the manufacturing processes undertaken in knowledge works as being

profoundly determined by the particulars of a given site’s history provides

Fruin a useful explanation to understand how Toshiba innovates so quickly. It

does so because on the factory

floor, the whole organizational panoply of managers, engineers, technicians,

suppliers, assembly personnel, inspection personnel and such are synchronized

by a common set of values, practices, and goals. Technical knowledge, social

contracts, and cultural

intuitions combine seamlessly to create the basis for rapid process and

product innovation. Continuous and ongoing renegotiations of these compacts is

the norm which permits flexible response by management and engineering in the

deployment of Yanagicho’s intellectual, financial, and labor resources.

While it is the social and cultural dynamism and cohesiveness of “knowledge

works” that power technical development at Toshiba, it is the technologies

themselves that create value for the company. Which technologies — and

consequently which complementary skills and what forms of organizational

knowledge — to develop is central in determining which markets any given

knowledge works can and will be able to service. Fruin notes the presence in

each of Toshiba’s

knowledge works of what he terms “Champion Lines”,

families of products that provide not only considerable revenue flows but also

considerable and ongoing innovation in both product and process development.

“They lay a threshold of organizational knowledge on which related products

can thrive, one that ultimately justifies the high risk and cost of creating

multifunctional capabilities in particular product departments [of, that is, a

knowledge works.] (p. 47)” Yanagicho’s

“Champion Line” — plain paper

copiers — has defined the trajectory of technical, product, and market

development for the whole factory complex since the mid-1980s. While the

knowledge works form enables Toshiba to participate in the crowded and highly

competitive domestic copier mark et,

at the same time, in developing the technical know-how necessary to compete in

this market, Toshiba augments, complements, and improves the basic technical

and organizational knowledge present at Yanagicho and thus drives change in the

other product families produced there. Indeed, of the thirteen product lines

produced in the Yanagicho plant, fully two-third are

“historically and technically linked” to its plain paper copier line (p.


Having introduced the concept and architecture of the Knowledge Works in the

first two chapters, Fruin spends the majority of the book studying how Toshiba

management maintains, extends, and reproduces the structures that define a

knowledge works. The third chapter describes how management promotes the

education, socialization and acculturation of its workforce to the needs and

values of a knowledge works through a continual process termed organizational

campaigning. The fourth describes how Toshiba — or more accurately the

Yanagicho factory — manages its relations with suppliers, encouraging

excellence and cooperativeness through the strategic exchange of knowledge,

expertise, and personnel. In the fifth chapter,

Fruin uses a case study of the development of the SuperSmart card — a credit

card sized computer —

to demonstrate the potency of knowledge works to develop rapidly (in only 22

months) a product embodying multiple technological innovations. In the sixth

chapter, Fruin examines how Toshiba responded to the problems encountered in

exporting both the know ledge works concept and plain paper copier manufacture

to a plant in Irvine,

California. Not surprisingly, the seventh and concluding chapter reprises the

basic argument of the book, pointing to Toshiba’s potential for flexible and

speedy innovation that

results from the presence of a corporate factory system organized around

knowledge works.

As noted above, this is a useful and interesting book. Having worked in the

Yanagicho factory as an employee, Fruin writes with an authority born of

experience. At

the same time, the book is more than simply a diary of production line

experience. His experience is structured by new readings of old arguments in a

variety of literatures in management and economics.

Moreover, his method is not limited by overly fastidious attention to

disciplinary boundaries. In trying to understand what motivates workers to

participate, Fruin bravely enters the problematic realm of individual values,

culture, and inevitably history. Knowledge Works persuasively

demonstrates the importance of these less quantifiable and more local aspects

of human experience in Toshiba’s development of a factory-based capability to

respond to and generate rapid change.

Using this multidisciplinary approach combined with a fine detail derived from

careful field research, Fruin has formulated an argument that emphasizes the

importance of a particular cluster of factors — some cultural, some social,

some institutional, some political, some market, and some technical — in

enabling the creation of know ledge works at Toshiba.

By so tightly and persuasively linking the factors of the knowledge works’

creation to the particulars of Toshiba’s products, market, organization,

and culture, Fruin renders any generalization of the knowledge works concept

problematic. After making a good case for knowledge works being the source of

Toshiba’s comparative advantage, Fruin — too boldly in my view

– continues, making much the same claim regarding the sources of Japan’s

national comparative advantage. For example,

in his conclusion Fruin writes,

The widespread existence of Knowledge Works in Japan but the relative scarcity

(or nonexistence) elsewhere suggests the powerful impact of national

competition on manufacturing organization at home, the competitive edge enjoyed

by Japan’s industrial firms in established product markets,

and their ability to respond quickly, even preemptively, to new domestic and

overseas markets (p. 210).

Since no company has experienced exactly what Toshiba has experienced and since


a few even come close in terms of market, product lines, and such, it is

difficult to believe that the knowledge work per se is widespread even in


This is not idle philosophizing. Over the course of the book, we do in fact

learn that many of the

most prominent Japanese companies are not configured in a knowledge works-like

style of production. For example, serving as they do radically different

markets, Toshiba and Toyoda do not, indeed could not, operate using the same

production models (p. 206)

; for Hitachi,

Mitsubishi, and NEC, R&D deployment is mostly focused — contrary to knowledge

works best practice — at laboratories that are neither physically nor

institutionally linked to specific factory sites (p. 57-59);

and the competitive cooperation found in Yanagicho’s dynamic and responsive

supplier network derives from the shared intangible assets fostered under the

knowledge works approach rather than the formal, more static, and more widely

spread fiscal and organizational relations defining

traditional keiretsu and kiygo shodan business groupings (p. 99). These are not

inconsequential differences. In the knowledge works model, the structure of the

supplier network, the factory level allocation of R&D, and the organization of

production are key structuring elements. By and large, its seems that

knowledge works — in the mode in which they are implemented at Yanagicho and

described by Fruin — could be as rare in Japan as they are abroad. By making

an argument that ties knowledge works so tightly to the specific technical,

institutional, and corporate history of Toshiba and its Yanagicho plant, Fruin

renders the imitation of knowledge works by Toshiba’s domestic competitors only

slightly less problematic than their transplantation from Toshiba

‘s plants in Japan to new factories in the United States.

Another way to estimate the influence of knowledge works on Japanese industrial

development would be to ask when they first came into being. In terms of

knowledge works influencing larger issues of national comparative advantage,

earlier would be better to allow time for dispersal. Indeed,

Fruin argues,

“Knowledge Works are not a recent, postwar invention. They appeared during the

interwar period as focal factories: multifunction and occasionally

multiproduct factories that bore administrative responsibility for serving

regional markets at a time when national markets were not well integrated.”

(p. 31).

Here and elsewhere in the book, Fruin times the advent of knowledge works as

during the inter war period. I do not wish to suggest that Fruin is wrong in

drawing links to this period; however, these must be termed only the barest

beginnings of certain aspects of the knowledge works structure. They should not

be mistaken for the structure itself. Given that certain knowledge works

structures at Yanagicho such as total productivity organizational campaigning

(p. 69), the establishment of factory oriented R&D structures (p. 191), and the

creation of an active and responsive Supplier Association (p. 9 7) all stem

from institutional changes undertaken in the period between the late 1970s and

mid-1980s, the development of the knowledge works form should be seen as a

product of the slow down in Toshiba’s corporate growth engendered by “Oil

Shocks” and the

ending of Japan’s period of high economic growth.

Thus, to my way of thinking, the organization defined as knowledge works is

both more recent and less widely spread in Japan than is suggested by Fruin’s

otherwise well constructed and excellently researched book.

Subject(s):Business History
Geographic Area(s):Asia
Time Period(s):20th Century: WWII and post-WWII

The History of Black Business in America: Capitalism, Race, Entrepreneurship

Author(s):Walker, Juliet E. K.
Reviewer(s):Dailey, Maceo

Published by EH.NET (June 1999)

Juliet E.K. Walker. The History

of Black Business in America: Capitalism, Race, Entrepreneurship. New

York: Macmillan Library Reference USA. 1998.

Pp. xxv, 482. $45.00.

Reviewed for H-Business and EH.NET by Maceo Dailey, Jr.,

University of Texas (El Paso).

In The History of Black Business In America, Juliet E. K. Walker makes a

magnificent contribution to the literature on African American entrepreneurship

and capitalism. Shattering myths, pointing

to possibilities, and refining our thinking about procrustean racism,

Professor Walker explores perceptively a world where blacks have been much

maligned and vilified as incapable of mastering simple and/or worldshaking

business attitudes and skills.

Writing boldly in her introduction, the author quickly alerts us to the value

of the book: “Beginning in l600s, Africans in America, slave and free, seized

every opportunity to develop enterprises and participate as businesspeople in

the commercial life of a

developing new nation . . . Why,

after almost 400 years do we find black business activities in the late

twentieth century existing at virtually the same level of industry

participation as it did under slavery?”

From the first page of the book, we are

carried through the maze of history to the answer: one that lies not in

when-the-sinner-comes-to-the-mourner’s-bench bromides, but the very serious and

destructive practice of American racism preventing blacks from access to

resources and fair opportunities to develop. Professor Walker invites us to

review and put asunder the old foolishness, the blaming the victim ad hominem

argument, that black business failure and/ or limited growth were rooted in

African inexperience turned into African American ineptitude and lassitude.

Professor Walker was inspired to take up the question of the African American

business ethos owing to the family lesson and lore of her

great-great-grandfather, Free Frank (l777-1854), who entered the realm of

commerce and business with good intentions that got good results. Previous

scholars would have us belief that Free Frank was an anomaly in his

determination and his more than modicum of success. Though he “could not read

or write…he could count,” notes Walker. Free Frank established his own

saltpeter (gunpowder) manufacturing business. He used profits to purchase his

wife’s freedom. In the intricacies of the slave world, Free Frank occupied a

“triple status” as entrepreneur, intrapreneur, and field laborer, respectively

opera ting his own business, managing his absentee owner’s farm, and producing

as a worker. If Free Frank was in an awkward situation, he nonetheless made the

best of circumstances in a world driven by capitalism. In this, he found

himself within, as well as inspiration for, a great tradition of black men and

women in business–dealing with the hard and unfair, but constantly showing

resolve. If the stories of Free Frank and other African American business

individuals were unappreciated by contemporaries, historians have compounded

the ignorance by omitting black entrepreneurs and intrapreneurs from any

serious discussion of the nexus between American racism and capitalism.

The evidence is overwhelming in Professor Walker’s book that African slaves

were not dumbfounded upon entry into America. Despite the disorientation,

they found means of marketing goods for profits to improve their lot. Free

blacks came forth too with similar stellar business strategies and successes.

In the l7th century, Africans, as victims and profiteers,

existed within a market for selling human capital on both sides of the

Atlantic. Africans had great experience in market economies in their homeland

as evinced by their trading organizations, secret societies, craft and merchant


and cooperatives. African women also functioned significantly in trade and

commerce on their continent. Certainly those skills were exported with them to

the so-called new world, and their abilities were manifold in the names of

Anthony Johnson, and later as attitudes and determination were carried over

into the l8th and l9th centuries in the personages of Amos Fortune, Cyrus

Bustill, and Samuel Frances, William Leidesdorff, Stephen Smith, Norbert

Rillieux, James Forten, John B. Vashon, Henriett S. Duterte, Elleanor

Eldridge, and Lucy McWorter. But Walker reminds us that “Race-based exclusion

from credit networks limited the commercial advancement of blacks throughout

colonial America,” as it did also in later centuries. Furthermore there were

enacted laws to strip slaves of their property as they themselves used profits

to purchase freedom for family members and friends, especially in the cases of

slave women concerned about the welfare of their children. We are,

perforce, made to face the fact that Africans and African Americans were

thinking, business-minded individuals with agendas for progress. Any doubt

about a significant history of black capitalism prior to the late l9th century

and early 20th century should be dispelled by Martin Delaney’s report in l852,

one giving an idea of the range of business activities of African Americans.

Also the annual meetings of reform-minded blacks known as the National Negro

Convention urged in l834, in Hamiltonian fashion,

that a black bank be created and underscored that idea again in l847. One

enterprising African American sought a seat on the New York Stock Exchange

prior to the Civil War, but ultimately was denied in his request.

Black women during this period demonstrated their capability, though their

numbers were small: in l850, 438 of a total of 48,888 free African American


were property owners. Statistic revealed that by l860 another 2,000 free black

women in the South possessed property. The lesson was clear:

“Those (women) who worked for themselves achieved more wealth than those who

worked for others.”

Within the pre-Civil War days was the embryonic black capitalism that gave rise

to rapid movement in the period l876-l901, dubbed the “Nadir” by scholar

Rayford Logan (a conceptual framework we must now rethink owing to Professor

Walker’s book). Looked at another way, the era revealed the promises of freedom

as mutual benefit societies and other youthful business enterprises were

turned into manufacturing, real estate, banking, and insurance establishments.


l876, some five million black southerners had purchasing power of $300 million,

remarkable when one considers the depths from which they came. By l900, the

total wealth of slightly more than ten million blacks was $700 million.


Americans had been enterprising enough to prepare their communities for the

“Golden Age Of Black Business From l900 to l930,” as Professor Walker sees it.

She is right to redirect our attention to this era and the African American

business dynamics now legendary black scholars of the period–Benjamin Brawley

and Carter G. Woodson–understood and addressed so ably. Booker T. Washington’s

National Negro Business League was founded in Boston in l900; W. E. B. Du Bois

and John Hope even got a touch of capitalist fever as they adumbrated the

“Talented Tenth” to action. Heman Perry of Atlanta, Madam C. J. Walker of New

York, Jessie Binga of Chicago,

Robert Church of Memphis, and Harry H. Pace of Chicago all proved to be some of

the most imaginative and success-

tasting black capitalists. Mound Bayou and Boley, respectively in Mississippi

and Oklahoma, were townships demonstrating what black capitalism could do in

microcosm. In other places in America, a black started a car manufacturing

company; a company for making black dolls came into existence. Embalming

fluid, hair care, and toothpaste producers emerged also during this period.

Capitalist ideas abounded in the Universal Negro Improvement Association and

Marcus Garvey-led black nationalist movement.

The Depression hit, however, and “‘New Thought'” economic principles were born

of necessity and introduced to black Americans most dramatically by the

evangelist Father Divine (George Baker). Black churches and consumers came to

believe in the “Double Duty Dollar (don’t spend a dollar where you can’t get a

job),” as they established interracial Consumers Cooperative Associations and

other economic projects for serving their communities.

Blacks did much of this without the protection or encouragement of government,

and, as Walker writes, we see in the later years the set asides of a paltry

$8.5 billion for minority corporations compared to $246 billion for white

firms. So whites have had “affirmative action,” so long built into the system

that they sanctimoniously talk of free enterprise ability,

individual initiative, and skillful business techniques as though they were

endowed with them at birth and ordained with clever means of making money.

Coming to the modern period, the story revolves around many confide nt and

enterprising African Americans such as H. J. Russell, John H. Johnson,

Reginald Lewis, Ron Brown, Oprah Winfrey, Bill Cosby, Earl Graves, and Robert

L. Johnson, a few of the nationally known individuals who strode on the scene

knowing full well their abilities and what they wanted to achieve. In some

instances, the black capitalists antedated the Civil Rights Movement. In other

cases, they profited from the doors that were opened by the suffering and

sacrifices of Rev. Dr. Martin Luther King, Jr., Malcolm X, Rosa Parks, Angela

Davis, and H. “Rap” Brown. The emergent black capitalists of the post World War

II era all demonstrated an ingenuous aptitude for business, despite being

encumbered by racism as when the Federal Trade Commission peculiarly singled

out John H. Johnson for scrutiny on one occasion and Reginald Lewis was

indicted by foes for being

“too greedy.” One, therefore, cannot take lightly the observation of Beatrice

founder and guiding force, Reginald Lewis, that “Here in this country the re is

a certain conspiratorial desire–regardless of what you do, how much you earn,

you’re still black. And that’s meant to demean. But it only demeans if you

allow it.” The codeword in corporate America cannot be “beware of blackness,”

as it too frequently seems now! All benefit from inclusion; competition

fosters better products, markets, and entrepreneurs.

It remains for America to make this a reality as Professor Walker demonstrates

so aptly in this book, a scholarly work that will remain the benediction for a

long time to come on the meaning of the black American business tradition.

The prizes already bestowed on Professor Walker for this monumentally important

book are well deserved. Picayune criticism, nonetheless, will surface, and here

I can add my own by pointing to minor errors in spelling or printing: Herman

Perry for Heman ( p. l83) and Marvin Gay (p. 327) for Gaye. The last surname is

also omitted from the index.

In addition in the category of perhaps asking too much of a scholar who already

has done a prodigious amount of research: a fuller exploration is needed

into institutional–church sponsored, black college curricula, and

newspaper–endeavors to foster a black capitalist ethos and support for those

business activities in the African American community. Howard University, for

example, tried desperately in the 20th century to direct attention to commerce,

even exploring establishing a chair for the purpose.

T. Thomas Fortune, the dean of African American journalism in the late l9th and

early 20th centuries (also both a Bookerite and Garveyite) sought to promote

the concept of black capitalism on significant trips through the South and


Finally, while the book is compelling in its thesis, some may find it

circumstantial in the

absence of mastodon direct and systematic data (many times the hidden,

misplaced, or destroyed evidence) showing that African American businesspeople

hit that wall of racism when applying for loans or competing in markets.

Whatever the pundits might argue

, however, the reading audience should know that no effective discussion of the

black community can go on without Professor Walker’s book as a basis for

understanding the peculiarities and promises of Black life in America.

Maceo Crenshaw Dailey, Jr.,

Director, African American Studies Associate Professor, Dept. of History

University of Texas at El Paso El Paso, Texas 79968

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):General or Comparative

The International Origins of the Federal Reserve System

Author(s):Broz, J. Lawrence
Reviewer(s):Wheelock, David C.

Published by EH.NET (June 1999)

J. Lawrence Broz. The International Origins of

the Federal Reserve System. Ithaca: Cornell University Press, 1997. xiii

+ 269 pp.

$35,ISBN: 0-8014-3332-0.

Review for EH.NET by David C. Wheelock, Federal Reserve Bank of St. Louis.

Why was the Federal Reserve System established? The common view is that the

Fed was established as a public good to correct deficiencies in the U.S.

banking and payments system that made the system inefficient and prone to

crises. Reform proponents blamed crises on the nation’s “inelastic currency”–

stocks of currency and bank reserves that did not adjust with seasonal or

cyclical fluctuations in demand, let alone in response to bank runs. Other

proponents of reform pointed to the difficulty of making inter-regional

payments, citing long delays and high costs associated with the clearing of

checks and drafts. Still other reformers decried the concentration of bank

reserves in the central money markets and the investment of correspondent

balances in stock market call loans. A less import ant goal of reformers, the

traditional view argues, was to promote use of the dollar in international

trade and finance.

J. Lawrence Broz argues that the goal of promoting the dollar as an

international currency was in fact the primary consideration of reform

proponents, and that reform was achieved only by alignment of strong private

interests for promoting international usage of the dollar with the general

public interest of improving the stability of the U.S. payments system. The

establishment of the

Federal Reserve System thus fits a “joint products” model, in which

institutional change produces a public good, but occurs only because of the

efforts of a narrow interest group seeking private gain.

The United States’ share of world exports, particular ly of manufactured goods,

rose during the last decades of the nineteenth century, and by the early

twentieth century the Untied States enjoyed an increasingly persistent current

account surplus. Despite these gains, the dollar was not used widely in inter

national commerce because, Broz contends, U.S. banks were prohibited from

issuing bankers acceptances to finance international trade and the U.S. lacked

a central bank with the power to create liquidity as needed by re-discounting

commercial paper. Because the dollar was not an international currency,

American exporters faced exchange risk and high transactions costs, while

American banks were largely shut out of the market for financing international

transactions. A coalition of leading bankers and manufacturers thus developed

with the goal of enhancing the dollar’s role as an international currency by

reforming American banking laws and institutions.

For the dollar to be acceptable to international markets, the stability and

efficiency of the U.S. banking and payments system had to be enhanced.

Thus, the interests of large U.S. banks and exporters aligned with the public

interest generally. The creation of the Federal Reserve System, Broz argues,

was an institutional reform that was consistent with both sets of interests.

Various alternatives for improving the domestic payments system, such as

adoption of nationwide branch banking, were insufficient to meet the interests

of internationally-oriented bankers and businessmen, and hence failed

to inspire a

strong coalition to push for their adoption.

Broz points to two features of the Federal Reserve Act that were crucial for

gaining acceptance of the dollar for international payments. First, the act

permitted U.S. banks to issue bankers acceptances to finance foreign trade.

Second, the act established facilities to re-discount acceptances and other

commercial paper, thereby adding depth and liquidity to the U.S.

money market. Other features of the legislation directly benefiting large banks

included a reduction of reserve requirements and authority for banks with

capital of at least $1 million to establish foreign branches. The legislation

thereby solved, apparently, the problems of an inelastic currency and an

inefficient payments system, while promoting the dollar’s use as an

international currency.

While the fundamental reforms embedded in the Federal Reserve Act provided the

key ingredients for promoting the dollar as an international currency,

specific features of the Act reflected give and take among various private and

public interests. Banks outside the central money market, for example,

were strong proponents of a currency backed by commercial paper, while New York

City bankers by and large preferred a currency backed by government bonds.


outside New York City also favored a decentralized system that limited the

ability of New York City banks to dominate. Bankers in general and many in

Congress favored a system controlled by banks themselves, but the Wilson

Administration, and especially

William Jennings Bryan, pushed for strong public oversight in the form of a

Federal Reserve Board. The Federal Reserve System was the product of compromise

at every stage and detail.

Broz supports his study of the origins of the Federal Reserve by examining how

well the founding of other central banks fit his joint products model.

The central banks he considers are the Bank of England, and the First and

Second Banks of the United States. In contrast to the Federal Reserve, each of

these banks was created

in part for government revenue. In exchange for providing loans on favorable

terms to the government, the owners of the banks were granted certain monopoly

privileges. The Bank of England was given a monopoly over note issuance, while

the First and Second Banks of the United States profited as the government’s

fiscal agents, as well as from their unique ability to branch nationwide. Broz

argues persuasively that the Bank of England survived, while the two U.S. banks

did not because in the United States federalism created a potent political

opposition that could be exploited by private enemies of the central bank.

While Andrew Jackson’s militant “hard money” philosophy explains his opposition

to the Second Bank, Wall Street bankers also sought to kill the

Bank on the grounds that its monopoly position as the government’s fiscal

agent gave the Bank advantages that state-chartered banks did not have.

I find little to quibble with Broz’s explanation of the origins of the Federal

Reserve System. Clearly the

most ardent proponents of establishing a central bank, especially the New York

bankers, sought to establish a major international money market in the United

States and to promote the dollar in international commerce and finance. There

was, however, strong

opposition to the establishment of a “central bank,” particularly one dominated

by New York bankers, and key players in shaping the Federal Reserve Act, such

as Carter Glass, William Jennings Bryan and Woodrow Wilson, sought to limit the

influence on the

System of New York banks.

Nonetheless, Broz has persuaded me that establishment of the Federal Reserve

required the ongoing support of leading banks and others who sought to firmly

establish the U.S. dollar as an international currency. I highly recommend

this book for anyone interested in either the history of the Federal Reserve or

other central banks, or for those interested in the origins of institutions and

institutional change more broadly.

David C. Wheelock is Assistant Vice President and Economist at the Federal

Reserve Bank of St. Louis. His research interests are the history of the

Federal Reserve System and other monetary policy institutions, and the

regulation and performance of commercial banks.

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