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Mellon: An American Life

Author(s):Cannadine, David
Reviewer(s):Whaples, Robert

Published by EH.NET (December 2008)

David Cannadine, Mellon: An American Life. New York: Vintage, 2008. xvi + 778 pp. $20 (paperback), ISBN: 978-0-307-38679-3.

Reviewed for EH.NET by Robert Whaples, Department of Economics, Wake Forest University.

During the dark days of the Great Depression, Andrew Mellon?s son, Paul, found this quatrain scribbled on a gas station bathroom wall: Mellon pulled the whistle, Hoover rang the bell, Wall Street gave the signal, And the country went to hell.

If Hoover was the villain of the hour, Mellon was surely the nation?s number two scapegoat. Mellon struck the nation as Lionel Barrymore?s Henry F. Potter writ large. Here was a stern banker, with an unsentimental worldview. Suspicious of the unwashed mob, he was always on the lookout for a sharp deal and didn?t seem to worry if what was good for himself and his cronies was bad for the broader public. One of the wealthiest men in the world, he had even betrayed his home town by refusing to add $1 million to a plan to rescue the tottering Bank of Pittsburgh in 1931, simply because the deal wouldn?t meet the condition of giving his family a controlling majority of the bank?s stock ? cementing the Mellons? domination of Pittsburgh banking. The bank?s subsequent failure triggered the collapse of several other area financial institutions. ?Here, in cameo, was the sort reaction afflicting the whole national financial system at this time? (p. 440-41) and Mellon played the Scrooge.

Yet, the Andrew Mellon who emerges from David Cannadine?s even-handed biography is no Capraesque or Dickensian villain. Even though the author finds Mellon to be ?an unsympathetic person with unappealing politics? (p. xvi), his portrait of Mellon strikes the reader as fairly sympathetic, especially as Mellon mellows with age, becomes a generous public benefactor, and endures the unfairness of political reactions to the world-wide economic meltdown that was clearly beyond the grasp of period?s leaders.

Above all else, Cannadine is comprehensive. For nearly the first hundred pages the biography?s dominant figure is Thomas Mellon, Andrew?s Scots-Irish father, who rose to become a leading Pittsburgh businessman. Bewailing his inability to find competent and trustworthy business partners, Thomas Mellon?s ingenious business model was to make his talented sons his primary partners. This worked especially well in the case of Andrew, who eagerly learned about loans, mortgages, bookkeeping and foreclosures in his early teens, fulfilling his father?s hopes by learning ?an alertness to money making opportunities at the earliest possible age? (p. 36). In 1872 Thomas Mellon provided seventeen-year old Andrew and his younger brother, Dick, with $40,000 to develop real estate. Andrew moved quickly and competently, then sensing that Pittsburgh?s economic boom would soon collapse, he leased the lumber yard he?d developed to a fire-stricken competitor, just before the economy fell into recession. Three years later Andrew was given a one-fifth interest in his father?s bank, T. Mellon and Sons, and by age 21 he was given power of attorney to run the business on a day-to-day basis. By 1882 Judge Mellon had essentially turned the business almost completely over to Andrew and the family deferred to him and his virtually unfailing business judgments.

Andrew?s enterprises expanded as he acquired control of the Pittsburgh National Bank of Commerce (in partnership with his friend Henry Clay Frick), the Union Insurance Company, and other financial institutions in the 1880s, but his greatest successes came as a venture capitalist beginning in the late 1880s. In 1889 the founders of the fledging Pittsburgh Reduction Company approached Mellon for a $4000 loan to pay off a note owed to another Pittsburgh bank. Mellon was impressed by these men and captivated by the potential of their product ? aluminum. He offered them a loan of $25,000, bought a large block of shares in the company, became a director, and urged and financed the company?s expansion and the opening of a new plant powered by Niagara Fall?s hydroelectricity. The company, eventually renamed Alcoa, grew and prospered. Cannadine identifies Mellon?s ?extraordinary gift for spotting and nurturing outstanding individuals with promising ideas,? (p. 98), with Alcoa as exhibit A. Mellon?s name and fortune was made by repeated successes that paralleled Alcoa. Exhibits B, C, D, E and F are his vital roles in funding and nurturing the Carborundum Company (which produced silicon carbide, an abrasive that?s nearly as hard a diamond and which became widely used for the precision grinding of metal parts); the New York Shipbuilding Company (which built the U.S. Navy?s first dreadnought); McClintic and Marshall (which became the leading steel-fabricating business in the world, making the construction machinery for the Panama Canal locks); the Koppers Company (which brought German chemical science to the U.S., turning waste products from coke into industrial chemicals like benzene and toluene ? vital to the Allied effort in World War I); and most spectacular of all, Gulf Oil. As in the case of Pittsburgh Reduction, Mellon and his brother answered when opportunity knocked. This time the sound was two long-time associates, James Guffey and John Galey, seeking funding for their wildcatting ventures in Texas. Mellon loans enabled the breathtaking Spindletop strike in 1901. Mellon money and direction helped turn the wildcatters? floundering business into a thriving multinational corporation.

Mellon emerges as a ?creative enabler.? ??How can I help you?? … was invariably his professional greeting? (p. 113). Mellon was known as ?the best listener in Pittsburgh? ? shy, aloof, self-sufficient, with an ?incorrigible determination to live unostentatiously? (p. 231). In almost every case, his enterprises were closely held, secretive in their dealings, increasingly vertically integrated and stinting in their dividends, as profits were plowed into long-term investments.

Mellon reluctantly agreed to become Secretary of the Treasury under Warren Harding in 1921, recording in his diary that he accepted the position on account of his nineteen-year-old daughter?s social ambitions. He dutifully resigned his directorships of over sixty companies, and made over all his bank stock to his brother Dick, but Cannadine provides convincing evidence ? from Mellon?s diary ? that he continued to play an active role in directing his enterprises during his decade-long tenure as Secretary, in violation of the spirit (and probably the letter) of the law. Mellon immediately made his mark in the Treasury Department by refinancing the nation?s vast war debt at lower interest rates, saving taxpayers about $200 million per year. As a banker, he recognized that the Allies were in no position to repay their war debts to the U.S. unless the terms were restructured. Although the Mellon-led Debt Commission clearly overstepped its Congressional mandate, the generous terms it negotiated with Britain in 1923 were ratified, establishing the pattern of agreements reached with other nations and helping to return international financial arrangements to ?normalcy.? Mellon has always been given considerable credit for pushing through major tax reforms during the 1920s, which cut top marginal income tax rates from wartime highs of 77 percent down to 25 percent and which expanded the zero-tax bracket so that most Americans paid no income tax, although Cannadine makes it clear that Congress was not putty in his hands and his power and influence in these matters have been exaggerated.

In retrospect, the public scapegoating of Mellon (and Herbert Hoover) for the Great Depression was as predictable as it was unfair. Mellon tried to carefully talk the stock market down in early 1929 and was a strong advocate of boosting interest rates to curb speculation. My reading of economic historians? research on the Great Depression is that the key policy moves which might have curtailed the meltdown ? like the U.S. going off the gold standard at an early date ? were simply out of the realm of policy possibilities until it was too late. As Mellon became a political liability, ?reviled as a false prophet, a plutocrat who fiddled while the world burned around him,? (p. 451) and Congress began an investigation, Hoover offered him the position of ambassador to London, shunting him off stage. Ironically, Mellon?s greatest investment coup came during these catastrophic years, as his fortune dwindled from its peak of $300-$400 million. During this period he covertly purchased twenty-one of the finest paintings from the Soviet Union?s Hermitage collection. It was a buyers? market and he paid rock bottom prices.

The denouement of the story comes when Mellon was held up as one of the ?malefactors of great wealth? by the Roosevelt Administration. In 1935 Mellon was charged with having knowingly falsified his tax returns. Cannadine concludes that ?the record generally bears out the views of Mellon?s relatives and friends that the tax trial was politically motivated by an administration which … was ?entirely lacking in an elementary sense of decency?? (p. 534). He was ultimately and unequivocally exonerated of the charges (after his death) and Cannadine lays to rest the canard that ?Mellon gave his art and built his gallery [the National Gallery of Art] in tacit exchange for his acquittal at the tax trial? (p. 566).

Although not trained as an economic historian Cannadine, best known for The Decline and Fall of the British Aristocracy, has a strong grasp of the American economy that Mellon helped to build and direct. His understanding of the events of the Great Depression is sure-footed and I have only a handful of quibbles from the perspective of an economic historian ? e.g., his contention that Mellon earned ?excessive profits? from his sale of Union Steel and his repeated claims that from 1873 to 1898 economic times ?were generally hard? in the U.S. (Sam Williamson and Louis Johnston?s calculations at show real GDP per capita rising by 64 percent during this quarter century.) And I caught only a few factual errors ? e.g. the mistaken assertion that the Molly Maguires operated in the coal fields of western Pennsylvania.

Portions of Cannadine?s biography won?t appeal to economic historians, especially minute details of his personal life and art collecting. However, like Ron Chernow?s Titan: The Life of John D. Rockefeller, Sr. or Maury Klein?s The Life and Legend of Jay Gould, it authoritatively rewrites and rehumanizes the life of an economic heavyweight who has been misunderstood and maligned by earlier generations.

Robert Whaples is the former Director of EH.NET. His lecture series, Modern Economic Issues is available from The Teaching Company at It includes 36 30-minute lectures on CD and DVD. The topics range from productivity growth and inflation to global climate change, immigration, Wal-Mart, conspicuous consumption and economists? expectations about the future.

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

The Electric Vehicle: Technology and Expectations in the Automobile Age

Author(s):Mom, Gijs
Reviewer(s):Hultén, Staffan H

Published by EH.NET (March 2007)

Gijs Mom, The Electric Vehicle: Technology and Expectations in the Automobile Age. Baltimore: Johns Hopkins University Press, 2004. xiii + 423 pp. $55 (hardcover), ISBN: 0-8018-7138-2.

Reviewed for EH.NET by Staffan Hult?n, Department of Marketing and Strategy, Stockholm School of Economics.

The early history of the automobile and the battle between electric, steam-powered and gasoline cars has resulted in numerous interesting and thought-provoking articles and books. Among this research have been impressive case studies ? for example, Schallenberg’s book on the evolution of battery technology, Kirsch’s thesis on the electric car and Scharff’s book on gender and the early evolution of the car ? of how social and economic factors intervene in the technological selection process. Another type of research has been much more speculative. We have on the one hand the often repeated claim by Arthur that steam power, and maybe even electric power, could have become the dominating power source for the automobile and on the other hand Leibowitz and Margolis’s total rejection of such a possibility. Gijs Mom’s book, The Electric Vehicle: Technology and Expectations in the Automobile Age, is an impressive empirical study that helps resolve this debate.

The author has brought together a hitherto unknown collection of cases of electric vehicle usage from 1881 to 1925 and he also gives a sketchy overview of the subsequent evolution of electric cars to the 1970s. Reading the book, I was struck with how many chances and how much support the electric vehicles got over time. There occurred, in all probability, not a selection failure as suggested by Kirsch on EH.Net in 1996: “The failure of the EVC, I argue, was not pre-ordained by its choice of technology. Rather … it MIGHT HAVE SUCCEEDED under different circumstances, and if it had, it might have enrolled a host of other supporting institutions (electric utilities, the insurance underwriters, fleet vehicles owners, battery exchange providers [in place of gas stations], etc.).” Mom’s study shows that more than one actor tried to remedy a perceived malfunctioning market process and give electric power preferential treatment. In addition to the fairly well-known premature investments in electric taxi-cab fleets at the end of the nineteenth century in the U.S., Mom adds example after example where electric cars were given unfair advantages by local authorities. In German cities like Bremen and Hamburg gasoline taxicabs were banned by local authorities around 1910 to the benefit of electric taxicabs. In Berlin a prospective gasoline taxicab owner had in 1911 to hand in ten horse-cab licenses while a few years later a license for an electric taxicab only demanded two horse-cab licenses.

Mom’s book is not an easy read. It is packed with too much detail brought together in an implicit unfolding story, that when it ends leaves more questions than answers. One example is Mom’s treatment of the development of the taxicab market in Chapter 4. He presents different case studies with different levels of analysis and different types of data ? in Paris he presents the evolution of the whole market, in Bremen and Hamburg stories about taxicab firms and in Holland detailed statistical data about revenues and daily route length ? which makes it extremely difficult to compare the material. It comes as no surprise that his conclusions from the chapter are vague, general and not argued before. Take, for example, the conclusion on page 172: “Why then could the electric car not extend its position (Berlin) or maintain it (Bremen, Hamburg and Amsterdam)? Was it not the ideal ‘crisis car’ and was it not cheaper to maintain in a large fleet than a gasoline cab? The conclusion can only be that the gasoline cab had an important extra function, which widened its potential field of application considerably: that of the (paid) touring trip outside the city as well as the higher speed that accompanied it.” The touring idea is not detailed city by city in the chapter. We have no idea based on the material if this was the reason for the electric cab failure. The hint that electrics were cheaper is far from conclusive and my impression is that the author uses different yardsticks when comparing electric with gasoline taxicabs. He notes that you “only” got 260 effective days of operation with a gasoline car (p. 140), but when the electric cabs reached 213 operating days per car in 1907 “nothing seemed to stand in the way of a functional taxicab fleet” (p. 145). My guess would be that simple economics and good management preferred “only” 260 days before an increase to 213 days. Another quirky thing in this chapter is the launch of an extremely powerful conclusion without any empirical support before the chapter starts: “Largely neglected by automotive historiography, it was under the guise of the taxicab that gasoline engine propulsion entered into the urban application field and it was in this field that the gasoline vehicle learned to become ‘civilized’ and throw off its image of unreliability” (p. 131). This may be true but nothing in the chapter casts light on why this is the case. No comparative data of different modes of gasoline car use is analyzed, and no material on different gasoline cars is presented. It may be the case that “automotive historiography” has neglected this, but it shares this neglect with Mom himself. To pretend to know is not the same as to know.

Maybe it is Mom’s appetite for empirical knowledge that accounts for errors like the above, but this fault is at the same time one of the merits of the book. I mentioned earlier his documentation of seldom treated case material. In Chapter 5 and 6 he documents skillfully how electric motors were used in commercial vehicles and trucks. Electric buses were well diffused in Europe, often using a contact wire. To this case Mom adds numerous others and in particular the German experience with electric fire engines. The electric propulsion of these vehicles too a high extent depended on the entrepreneurial fire chief Maximilian Reichel. Here the story ends with the First World War, and the advantages of gasoline engines over electric motors on the battle field.

Mom concludes with two appendices (one is a note on method) that outline a theoretical framework. This is an unusual way of knowledge construction, as this section makes explicit what has been implicit in the analysis in the different cases. More interesting is his speculative epilogue that looks at different possible “failure factors”: socio-cultural or gender, the battery (and the tire), infrastructure, and competing technologies. For reasons not clarified in the text, the discussion of the failure factors builds on new material and speculations.

On the question of socio-cultural aspects he agrees with Schiffer and Scharff on gender and cars, claiming that “both approaches contain elements that match the conclusions of this study” (p. 278), Regardless of this he takes issue with them and belittles their research. “Added to the complete lack of data, these shortcomings have led to highly speculative analyses that easily assume the character of a religious dispute” (ibid). To prove his point, he presents some new anecdotal evidence, a necessity since this hasn’t been treated in the book. For example an advertisement entitled “The Gentleman’s Town Car” is pretended to support the claim that: “Too late did the electric industry realize its pitfalls of focusing on women as a marketing strategy” (p. 283).

The battery and the tire problems draw extensively on material presented earlier in the book. In the treatment of these factors Mom wants both to accept them as failure factors and reject them as failure factors. The limited range which blocked touring ? critical according to himself in the success of the gasoline taxicab ? is no longer critical because: “… the decisive battle was fought in the city, on territory where the advantages of electric propulsion were undeniable.” He also notes that when gasoline cars were forbidden to compete electric cars flourished (p. 285-86). Such thought processes certainly pave the way for another explanation. “So, if the second-generation battery has indeed contributed to the ‘failure’ of the electric car, … it was due to its antimachine character, which did not fit in the dominant technical culture and certainly not in the emerging culture of the gasoline car” (p. 288).

Infrastructure as a failure factor gives Mom plenty of problems. Infrastructural need seems to be an important criterion for judging the capacity of a car to develop (p. 291). We also get the information that many believe that the expansion of the road networks before and after the First World War were crucial for the success of the automobile (p. 292). But, this is too simple for Mom. The relationship is not at all clear-cut. It was trucks that needed better roads, not cars. The electric car didn’t lose the battle because of benefiting less from inter-city roads.

Finally on the issue on how the technology of electric vehicles interacted with the technology of gasoline cars Mom launches the idea that gasoline cars gained more from this interaction than electric cars. It is impossible to tell if this is a correct assessment. He points at different technology transfers but his list is far from conclusive and convincing. He presents a picture in which the gasoline car internalized all the advantages of the electric car without asking himself why the electric car entrepreneurs didn’t retaliate by internalizing all the advantages of the gasoline car.

Despite all its pitfalls, Mom’s book leaves very little to fantasize about for electric vehicle enthusiasts. There was no missed opportunity in the early days of the automobile, the electric vehicle disappeared from most usage areas because at the time and given existing preferences it represented an inferior technology to the gasoline car. It is possible that a new take on the electric vehicle question could include co-evolutionary aspects of automobile development. One critical issue would be whether most of a rapidly advancing capitalistic society’s mobility needs could have been met with another mix of modes of transport. One possible solution could have been more trains and buses for longer distances and electric vehicles for shorter distances. What consumers give up in such a transport system is privacy and flexibility ? things that are highly valued by many consumers.

Staffan Hult?n is Associate Professor in the Department of Marketing and Strategy at the Stockholm School of Economics. His recent publications include “Historical School and Institutionalism,” Journal of Economic Studies, 2005; “Predatory Bidding in Competitive Tenders: A Swedish Case Study,” European Journal of Law and Economics, 2006 (with Gunnar Alexandersson) and “High and Low Bids in Tenders: Strategic Pricing and Other Bidding Behaviour in Public Tenders of Passenger Railway Services,” Annals of Public and Cooperative Economics, in press (with Gunnar Alexandersson).

Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

The Resilient City: How Modern Cities Recover from Disaster

Author(s):Vale, Lawrence J.
Campanella, Thomas J.
Reviewer(s):Frey, Donald E.

Published by EH.NET (November 2006)


Lawrence J. Vale and Thomas J. Campanella, editors, The Resilient City: How Modern Cities Recover from Disaster. New York: Oxford University Press, 2005. xiv + 376 pp. $25 (paperback), ISBN: 0-19-517583-2.

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

This volume presents a set of fourteen case studies (plus introduction and conclusion) of urban recovery following major disasters, which range from earthquakes and fires to military and terrorist traumas. The editors, Vale and Campanella are affiliated with MIT and the University of North Carolina, Chapel Hill, respectively. This volume appeared too soon to have a chapter on the post-Katrina recovery of New Orleans. Despite the sub-title, parts of several chapters deal with pre-modern urban disasters. None of the authors is identified as an economist; but urban designers, planners, architects, journalists, and historians are represented.

Though most urban economics texts say surprisingly little about urban disaster and recovery, an economic approach to the topic would probably emphasize certain stylized facts: 1) that death and damage in modern cities are far less for comparable disasters than in third-world cities, due to standards of construction and technologies that poor countries cannot afford; 2) that recovery of key functions often starts quickly due to redundancy in urban infrastructure, substitution possibilities, and excess capacity; 3) that needed resources can potentially flow very quickly from the untouched larger society into the stricken area, provided, 4), that financial resources (insurance, grants, loans and savings) are readily available; 5), that a city becomes increasingly disaster-resistant as revised building codes, new technologies, etc., affect successive rebuilding efforts; finally, 6) that cities remain in disaster-prone locations because the modern city is typically so highly productive compared to the cost of rebuilding.

The Resilient City does not take such “stylized facts” at face value and work from them. Rather, without doing so explicitly, it reveals that such economic “givens” may actually be dependent on a host of deeper factors. For example, the availability of massive financing (and thus resources) must, in fact, occur in successful recoveries; however, political leadership, legal frameworks, cultural attitudes, traditions, and social goals may significantly affect whether, in what form, and at what rate, financing of redevelopment actually occurs.

The essays are partitioned into three sections. The first part (three chapters) deals with the dominant public “narratives” that emerge around disasters in order to interpret them and give them a public meaning. A narrative “grid over the bewildering mayhem” provides direction and hope. Such semi-official narratives may well have abetted the decision-making that allowed rapid reconstruction after the Chicago fire and the San Francisco earthquake; both were interpreted publicly as blessings in disguise, allowing for new futures that were grander projections of the cities’ pasts.

Part two deals with the symbolic dimensions of urban recovery, particularly of cities devastated by war. Again, while economists would note the aggregate importance of financing and resources needed to rebuild, the authors of these studies are more interested in particular purposes to which resources are devoted, and why. One essay is a case study of the post-war rebuilding of East and West Berlin by the competing Soviet and Western powers. The ideological competition no doubt sped the recovery, but it also shaped the recovery in the two sectors. Though occurring virtually side-by-side, the design, functional, and architectural choices were significantly different. A similar statement can be made for the post-war reconstruction of Warsaw. Though the Soviets and the local communist government had no Western competition, communist ideology competed with indigenous Polish nationalism as major planning decisions were made.

Finally, part three deals with the “conflict-riddled nature of resilience.” Perhaps the occupying powers of Berlin and Warsaw had a relatively free hand. However, the story was very different in Los Angles after the riots of 1992. The deep divisions among the population groups of L.A. that led to the riots in the first place hindered rebuilding. The area remained unattractive to large retailers, the NIMBY syndrome worked against proposals for redevelopment, and efforts to work with existing minority power-structures fell afoul of long-standing factional divisions among those very minorities. Instead, the riot area recovered despite itself as an influx of Latin immigrants, and the institutions they brought in their wake, created a sort of vitality amidst vacant lots and buildings.

The aftermath of Hurricane Katrina could have added another chapter to this volume. It is clear that the productivity of New Orleans as an entertainment venue and as an international port has been great enough to spur a rapid influx of capital, and some population, to restore those sectors. It is also clear that the political divisions among national, state and local leaders, which were vastly heightened during the first traumatic days, have impeded the restoration of public infrastructure of the city. For its part, residential housing has thus far depended on private financing such as insurance, personal resources, and loans; and the result seems to be that lower income areas of the city have yet to see much recovery. Several of the pieces in The Resilient City note that disasters only sometimes have been used as opportunities to take account of new realities. There appears so far to have been little high-level thought devoted to whether rebuilding a sinking city that is already below sea-level, located along an eroding coastline, is economically rational. At present, the decision may be made by default as many citizens simply fail to return and rebuild.

Donald E. Frey has recently completed a book manuscript titled America’s Economic Moralists. He has taught urban economics for many years and has written about the use and abuse of the economic multiplier when evaluating the benefits of local economic development projects.


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

The First Wall Street: Chestnut Street, Philadelphia, and the Birth of American Finance

Author(s):Wright, Robert E.
Reviewer(s):Rousseau, Peter L.

Published by EH.NET (September 2006)

Robert E. Wright, The First Wall Street: Chestnut Street, Philadelphia, and the Birth of American Finance. Chicago: University of Chicago Press, 2005. vii + 210 pp. $25 (cloth), ISBN: 0-226-91026-1.

Reviewed for EH.NET by Peter L. Rousseau, Department of Economics, Vanderbilt University.

Robert E. Wright, hailing from New York University’s Stern School of Business, continues to expand our understanding of early U.S. securities markets with his recent offering from the University of Chicago Press. If looking for an entertaining stroll through the rise and fall of Philadelphia as the hub of American finance from the late colonial period through the Bank War, one needs to go no further. At the same time, the book is a fine starting point for considering more extended research on the wide range of financial topics addressed therein.

The eleven chapters are, for the most part, organized around particular financial innovations or groups of innovations that emerged first in Philadelphia, many of which persist to the present in some form or another. But the deeper thread seems to be that, despite its eclipse by New York City around 1830, Philadelphia’s importance in setting the stage for the ascendancy of the United States as the world’s financial leader — a position achieved by the end of the nineteenth century and by some accounts well before — should not be discounted by historians and economic historians.

As Philadelphia rose to prominence as a political and economic center, it replaced London as the informational hub of the colonies, leading to a greater degree of financial integration and an end to the rather insulated existences that had prevailed for decades. Wright describes the rise of Chestnut Street with vivid narratives about the growth of the market for property rights (chapter 2), quasi-public and private banking (chapter 5), the fire and marine insurance industry (chapter 6), building societies (chapter 7), and financial securities markets. He also points out that it was Philadelphia that hosted the Federal mint and the nation’s first two central banks. Indeed, the anecdotes that Wright tells about the challenges that the mint faced in acquiring the bullion needed to perform its most basic function — challenges made more difficult by a seemingly constant need to justify its existence to legislators — are among the book’s most fascinating.

Given Chestnut Street’s precocious start as the nation’s first “Wall Street,” Wright devotes the final third of the book to explaining the fall of Philadelphia from its commanding perch atop the U.S. financial system (chapters 8-11). Here, the author recounts the familiar explanation that geographic inadequacies were at the heart of the city’s undoing — a fate sealed by New York’s unlocking the portal to the West with the Erie Canal. Wright’s explanation, however, is enhanced by a reconstruction of the life and business experiences of a less prominent yet well-established financier named Michael Hillegas. Hillegas began a modest career on Chestnut Street during its heyday and learned from some of the great financiers of that time. As some of his colleagues and mentors moved their operations to New York, however, Hillegas chose to stay behind, carving out a good living as one of the remaining “old timers.” In the end, though, the flow of human and financial capital away from Philadelphia led even Hillegas, and surely others like him, to experience increasing difficulties in keeping business from moving to New York and its more auspicious opportunities. Wright contends that it was the exodus of human capital that really spelled the end for Chestnut Street.

One point that Wright does not make explicitly, but which is nonetheless reinforced by his lively narratives, is the primal nature of real activity as the driving force behind the location and development of finance. At a time when colonial economic activity was more local in nature and commerce more international, Philadelphia’s position as an Atlantic port made it an adequate commercial center, especially since it was already a political center. It was therefore natural for the financial system to have its mainsprings there. A virtuous cycle of real needs leading to finance and promoting further real growth seems to have been the result. But as it became increasingly clear that the new nation and its large land mass was not a featureless plain, the move to New York might be seen as a classic example of Joan Robinson’s famous adage that “where enterprise leads, finance follows.” And follow it did in this case. As Chestnut Street’s best financiers headed off to New York, their expertise went with them. Only large sunk investments in plant and equipment for the Federal mint and the central bank could hold these institutions in the Quaker City, at least until political forces took care of the latter.

It is important to note that this book is not intended as a treatise on economic or financial theory as applied to the colonies or the young United States. Rather, it is solid effort to relate financial history to a wider popular audience. As such, the exposition might be a bit distracting at times to the academic reader. Yet the better understanding of Chestnut Street’s role in early U.S. growth and development that I gained from reading it was well worth an occasional diversion or two. Effectively bridging academic and non-academic audiences is a difficult feat indeed, but one that we have come to expect from a scholar as prolific as Wright. It leaves me in anticipation of what new ground his next work will cover.

Peter L. Rousseau is Associate Professor of Economics at Vanderbilt University in Nashville, TN and a Research Associate of the NBER. He is the author of “A Common Currency: Early U.S. Monetary Policy and the Transition to the Dollar,” Financial History Review (April 2006), and co-author (with Richard Sylla) of “Emerging Financial Markets and Early U.S. Growth,” Explorations in Economic History (January 2005).

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

For the Common Good? American Civic Life and the Golden Age of Fraternity

Author(s):Kaufman, Jason
Reviewer(s):Beito, David T.

Published by EH.NET (February 2004)

Jason Kaufman, For the Common Good? American Civic Life and the Golden Age of Fraternity. New York: Oxford University Press, 2002. x + 286 pp. $45 (hardcover), ISBN: 0-19-514858-4.

Reviewed for EH.NET by David T. Beito, Department of History, University of Alabama.

Jason Kaufman is a man on a mission. Dissenting from Alexis de Tocqueville and Robert Putnam, he examines the dark side of American voluntary associations. He indicts them for exacerbating racial and ethnic divisiveness, retarding the welfare state, nurturing a unique American “love affair with guns,” (p. 31), fueling “libertarian paranoia and mutual distrust,” (p. 9) and even for a causative role in Prohibition. Kaufman’s broadly social democratic outlook shapes his assumptions about the identity and definition of this dark side. To his credit, he does not shrink from acknowledging that his views about the good society help to frame his argument.

Kaufman carefully chronicles the development of a wide array of associations, including volunteer fire companies, business associations, shooting clubs and, most especially, fraternal societies. A key theme is that the disadvantages of the golden age of fraternity during the late nineteenth and early twentieth centuries far outweighed any advantages. A consequence of exclusionary membership policies, for example, was to encourage workers to define themselves in parochial terms, such as race and sex, and to foster anti-statism thus depriving America of the “opportunity to join Western Europe in the adoption of people-friendly social policies” (p. 198). Fraternalism, writes Kaufman, contributed to the comparative weakness of class-conscious organizations which, had they been stronger, might have united workers as they did in Europe.

There is much to like in this book. Kaufman’s research is diligent and he draws extensively and creatively from primary sources. But there is also considerable room for criticism. A persistent problem is that he too often holds American voluntarism to an impossibly high standard and exaggerates, or fails to put into comparative context, the sins in society that it allegedly fostered. A case in point is Kaufman’s almost matter-of-fact assumption that fraternal societies “historically engendered more ethnic, racial, and religious separatism” (p. 9) in the United States when compared to most other countries. This is by no means obvious. Ethnic and religious divisiveness have deeply plagued several highly developed welfare states, including France, the Netherlands, and Germany, in recent years. A strong case can be made, in fact, that the story of assimilation and the melting pot during the golden age of fraternity compares favorably with the Canada’s French and English strife, Britain’s Catholic and Protestant troubles, or renewed anti-Semitic and anti-Islam attacks in Western Europe. Blaming American voluntarism for the virulence of American racism makes about as much sense as blaming the pioneer welfare states of Germany and Austria for the holocaust or recent firebomb attacks on immigrants.

Along the same lines, Kaufman unduly slights the contributions of fraternal societies to assimilation by finding jobs and inculcating attitudes of upward mobility, thrift and self-reliance. Even a superficial survey in the primary sources of immigrant organizations in the late nineteenth and early twentieth societies reveals ample evidence of paeans to American patriotism and freedom of opportunity. Kaufman also neglects another crucial comparative context. While it is true that most fraternal organizations excluded blacks and women as full members, so too did the vast majority of political associations and labor unions during the same period. The exclusion of blacks from all-white unions often had the added effect of freezing them out of entire occupations. I do not raise this to downplay the importance of racial exclusion by fraternal societies but merely to point out that lodges were not the only, or for that matter, the most pernicious offenders as implied by Kaufman.

Similarly, Kaufman does not give adequate weight to the ways in which fraternalism contributed to the advancement of women. An example is his charge that societies “reached out to men but kept women at arm’s length, thus denying them the opportunity to purchase sickness and burial insurance on their own” (p. 50). Again, to the extent the critique is valid, it also applies to labor unions and political associations. In addition, it tends to slight the tremendous growth of auxiliaries and parallel organizations. While Kaufman mentions the Women’s Benefit Association, he does explore the implications of why this group, which also zealously supported feminism, existed in the first place. Finally, he skirts over the fact that women were primary financial beneficiaries of fraternal life insurance and that they constituted a majority of the residents of fraternal homes for the elderly.

As to blacks, some of his statements are overly dismissive such as one that they “had few if any successes with fraternalism” (p. 27). It is true that Kaufman’s study largely excludes the South. Even so, this sweeping claim, which includes no regional proviso, does not bear close scrutiny for either North or South (where most blacks lived, after all). Black women had significant leadership roles in thousands of lodges in cities ranging from New Orleans to New York that dispensed vast amounts of sick benefits, many continuously for decades. Black fraternal hospitals in the South gave low-cost health care to thousands for decades. The sponsoring organizations of these hospitals generally admitted women on equal terms with men and even, in several cases, had female majorities. It is likely, in fact, that the largest single black female voluntary association in the early twentieth century was the Household of Ruth (with nearly 200,000 members) of the Odd Fellows. The best-known black female fraternalist (not mentioned by Kaufman) was Maggie Lena Walker, the head of the Independent Order of St. Luke, probably the first woman bank president (at least who achieved the position in her own right).

These criticisms are not meant to belittle Kaufman’s overall accomplishment, however. His indictment may be relentless and uncompromising, but it also deserves to be taken seriously. He raises many challenging questions that other scholars have failed to ask. A copy of For the Common Good? should be on the shelf of any specialist in the history of American voluntary associations.

David Beito is author of From Mutual Aid to the Welfare State: Fraternal Societies and Social Services, 1890-1967 (Chapel Hill: University of North Carolina Press, 2000).

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

Public Pensions: Gender and Civic Service in the States, 1850-1937

Author(s):Sterett, Susan M.
Reviewer(s):Short, Joanna

Published by EH.NET (December 2003)

Susan M. Sterett, Public Pensions: Gender and Civic Service in the States, 1850-1937. Ithaca, NY: Cornell University Press, 2003. x + 222 pp. $39.95 (cloth), ISBN: 0-8014-3984-1.

Reviewed for EH.NET by Joanna Short, Department of Economics, Augustana College

In Public Pensions, Susan M. Sterett examines the development of state and local pensions in the United States. As early as the 1850s a few large cities made payments to disabled police and firefighters. By 1910, many cities provided pensions for teachers and other civil servants. By 1925, three states had developed state old-age pension plans for all elderly residents. Clearly, views on the appropriate use of public funds for pensions expanded. Initially, only those who performed a dangerous public service were eligible for a pension. Pensionable service gradually expanded to include any public employment, and finally included everyone regardless of service or employment.

Certainly, pension advocates influenced the transformation of public opinion on pensionable service, and thereby influenced the opinions of state court judges. More directly, though, courts responded to the inevitable challenges to new pension programs. In the process, judges carefully constructed their reasoning and placed pensions in the broader context of other payments to individuals, like poor relief and aid to farmers. In this book Sterett, Professor of Political Science at the University of Denver, provides a much-needed analysis of state court decisions on pension programs. She finds that the courts insisted on distinctions between “service,” which was pensionable, and “work,” which generally was not. Gradually, these distinctions were blurred, and the courts became tolerant of social insurance programs.

Courts regulated state taxing and spending using the public purpose doctrine. States could spend money on individuals or firms if the payments served a public purpose. Spending without a public purpose was considered class legislation, an unconstitutional preference of one group over another. Under this doctrine, Sterett claims that courts maintained a distinction between those who are inherently dependent and those who are independent. State payments to the dependent (poor relief, pensions for disabled veterans) served the public interest. Hence, “mother’s pensions,” for widows with children, were a legitimate use of state funds, but only when limited to the indigent. State payments to the independent, though, were considered class legislation. For example, in Griffith v. Osawkee Township (Supreme Court, 1875), the court found that a Kansas township could not sell bonds in order to buy grain for farmers who had suffered a total crop loss as a result of a grasshopper plague. At that time, aid to farmers did not satisfy a public purpose. Thus, the gradual expansion of public pensions hinged on a change in what constituted a public purpose.

The strength of Public Pensions is Sterett’s treatment of some of the early, and relatively obscure, court battles over payments to firemen and soldiers. In the 1850s, for example, insurance companies challenged laws in New York and Illinois requiring them to pay a tax to go to firemen’s charities. The courts upheld the tax, in part because those who paid the tax benefited directly from the services provided by firefighters. In addition, the firemen’s charities provided for the dependent, that is, for disabled firefighters.

Similarly, in response to the Conscription Act of 1863, several towns subject to a draft quota issued bonds or raised taxes in order to raise commutation fees collectively. Taxpayers, and occasionally bondholders who did not receive timely interest payments, sued the towns. For example, Charles Booth, apparently a cranky taxpayer, sued Woodbury, Connecticut. Woodbury planned to raise $200 per man for each man on the town’s 32-man draft quota. Booth argued that the town was transferring the personal liability of the draftees to everyone in town. Woodbury argued that military service was the collective obligation of the town. The court agreed that the draft quota was a collective obligation, therefore, raising money for commutation fees served a public purpose.

Although federal military pensions posed few legal problems since they clearly served a national purpose, states repeatedly disallowed state pensions for all but the disabled and poor. State courts argued that military pensions were a reward for past service, thus they could not serve a public purpose by, say, encouraging more recruits. How, then, did public purpose grow from applying only to those who served in a dangerous service to those who work as teachers and in other civil service jobs? Here, Sterett is not as clear. Courts apparently began to recognize the potential benefits that pensions could bring in recruiting, retaining, and providing an orderly retirement for civil servants. In particular, contemporary advocates of federal civil service pensions emphasized that pensions with a mandatory retirement age would make the civil service more efficient, by retiring elderly workers who had “retired on the job.” Thus, the expansion of pensions to civil servants may have originated with the aging of the civil service ranks once these jobs were transformed from temporary patronage to permanent civil service jobs. Sterett disagrees with this view, since pensions originated at the local level, and patronage (for example in the naming of police captains) continued with pensions as it did without them. Instead, Sterett argues that civil service pensions were part of a more general (and vague) transformation of the courts’ view from one of public, collective service to more direct ties between the individual and the state.

Much more could be said on why states paid pensions to expanding groups of civil servants, and why courts gradually accepted them. Sterett does a great service, though, by directly examining the reasoning that courts used in response to challenges, and how this reasoning changed over time.

Joanna Short is assistant professor of economics at Augustana College. She is the author of an article, currently under review, on Confederate veteran pensions and retirement in the South. At present, she is investigating the origins of saving for retirement in nineteenth-century America.

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

A History of Public Sector Pensions in the United States

Author(s):Clark, Robert L.
Craig, Lee A.
Wilson, Jack W.
Reviewer(s):Fishback, Price

Published by EH.NET (October 2003)

Robert L. Clark, Lee A. Craig, and Jack W. Wilson, A History of Public Sector Pensions in the United States. Philadelphia: University of Pennsylvania Press, 2003. ix + 259 pp. $49.95 (cloth), ISBN: 0-8122-3714-5.

Reviewed for EH.NET by Price Fishback, Department of Economics, University of Arizona.

Professors Clark, Craig, and Wilson (CCW) have written an extremely useful history of public sector pensions in the U.S. from Revolutionary times through the 1920s. After laying out the basic economics of pension plans, they set the stage for a discussion of the U.S. experience with military pensions by tracing the history of military pensions from Roman times through the various European plans in the late eighteenth century. Almost half of the book is devoted to an extensive case study of the development of the U.S. Navy pension fund. Once the naval experience has been established, they compare and contrast it with the development of pension plans for the Army, federal nonmilitary employees, and state and local workers.

One of my favorite chapters is the second chapter on “Pension Economics.” It is a marvelous introduction to the economic issues related to the provision of retirement pensions. It is clearly written with simple illustrations that make the fundamental points well. I plan to use it as a reading for MBA students to give them a better appreciation of pension schemes and how they influence labor market decisions. It would be useful as an extra reading for undergraduate labor economics or any other course where pensions are an issue.

The bulk of the book deals with the development of the U.S. Naval pension fund, which is fascinating in part because it seems so unusual to the modern student of pensions. The Continental Congress had offered disability payments to veterans of the Revolution but had never really established a fund. As the navy was established under the Early Republic, a specific disability fund was established and it relied primarily on the sales of prizes captured in naval conflicts. It seems unusual to fund long standing and relatively stable obligations with assets that are highly variable in nature. However, CCW show that the use of prizes to fund disability pensions and to provide direct compensation to naval forces was a long standing practice in many societies. They argue that it was difficult to monitor the actions of naval officers and that the provision of prizes helped provide the proper incentives in naval engagements. (For more extended discussions of this issue, see the recent debate between Douglas Allen and Daniel Benjamin and Christopher Thornberg in the April 2003 issue of Explorations in Economic History.)

Through the early 1830s, assets in the naval funds accumulated at a faster rate than payments for disability. Given this surplus of assets, it was easy politically for Congress to expand the definition of disability on several occasions. Eventually old age and service in the Navy qualified the ex-sailor for funds. The generosity to the family of veterans who died also expanded greatly. Problems arose with the pension fund eventually because the benefits kept expanding but the capture of prizes was highly variable, so that Congress had to bail out of the funds.

CCW’s description of the management of the naval pension fund will make pension experts cringe. Monies from the sale of the prizes were originally invested in relatively safe U.S. Treasury bonds, although the fund appeared to be paying a premium on the purchase of the assets. This avenue for investment eventually dried up as the U.S. retired its war debt and the fund was then invested in a range of state bonds and bank stocks. In analyzing the choices made by the pension fund manager, CCW provide a nice summary of the recent research on investment opportunities in the early 1800s. In their view the fund managers made a series of odd choices, particularly the choice to invest in some Washington, D.C. area banks. These investments were substantially riskier than the First Bank of the United States and many of the New York banks. Further, the failures of the Washington banks created some temporary problems for the disability fund. The odd choices came about partially because of political pressures that left the stock in the Bank of the United States and British government bonds out of bounds. In other cases, the choices appear to have been fraudulent. My sense is that CCW may have relied too much on hindsight in describing the problems with the investment choices. Here we have a brand new method for insuring the payment of disability and no one who had any prior experience in operating such a fund. The options for asset investments were very limited because there were few banks and British government bonds were not an option. The choice of Washington area investments may well have been driven by monitoring issues, as the fund manager trusted investing in assets that he could see close to home with people he knew as opposed to assets in New York (or in Britain for that matter) at a time when the post took a couple of weeks to arrive. Certainly, the discounts on distant bank currencies prior to the Civil War and the regional differences in interest rates through the nineteenth century are consistent with people treating distance as a significant source of monitoring costs.

CCW draw several lessons for modern public pension funds from the naval fund experience with which I agree. First, fund surpluses give politicians incentives to expand the generosity of benefits, particularly because beneficiaries can expect that if the fund goes bust, the taxing power of the state can be relied upon to maintain their benefits. Second, absence of adequate oversight can lead to significant problems with fraud in the administration of the funds, particularly when the funds are invested in private assets. Third, it is likely that political exigencies will get in the way of sound financial management of the fund. We can already point to experiences with Social Security funds that seem to fit these warnings, although I believe that CCW could have done more to describe actual problems experienced with modern pension funds that highlight how the lessons from the past are repeated.

CCW use the chapter on Army pensions to explain the fundamental differences in the financing of the pension disability funds for the Army and the Navy and to illustrate the common labor economics of retirement plans. The Army, unlike the navy, did not rely on prizes for compensation in part because the actions of land-based forces could be monitored more closely than could the navy. Eventually, the reliance of the naval fund on prizes was eliminated as changes in naval technology lowered the costs of monitoring effort at sea and Congress sought to eliminate the costs of operating two separate plans for the army and the navy. Both the Army and Navy pensions eventually shifted from pure disability plans into retirement plans. The retirement plans offered the advantage of providing deferred payment of compensation that would more tightly bind people to military careers. However, the typical patterns of promotion led to too many officers “retiring on the job.” Thus, the army and navy plans used a combination of limits on service and generosity to force and induce officers to retire when their productivity declined.

I have a couple of speculative insights to offer on the development of the army and the navy plans (and for that matter plans for police and firemen, as well). All of these plans started as disability plans to take care of those protecting the public when they were injured. All eventually turned into retirement plans by expanding the definition of disability to include old age. I believe that a combination of compassion for those who served and protected and the costs of monitoring disability claims can help explain this phenomenon of converting disability plans into de facto retirement plans. At young ages it is relatively easy to determine a disability related to service. However, battle wounds, injuries, and diseases often take their toll not just initially but later in life as well. Once veterans reached their sixties, trying to sort out the difference between battle-related and other disabilities became more difficult. As the number of potential pensioners dwindled, the total costs of taking care of those remaining fell, so it became easier to make the case that mere veteran status and current disability were enough to qualify for benefits.

The final two substantive chapters discuss the early origins of nonmilitary pensions for federal employees and for state and local employees. Municipalities led the way in providing pension plans for police officers, fire fighters, and teachers. The funding of these plans was restricted by the basic constitutional relationships between cities and the states; therefore, most city pension plans were invested heavily in their own debt. These plans were relatively generous, replacing nearly 50 percent of lost earnings, as they do today. At the federal level, there had been provisions for pensions for some federal employees but these were typically provided through special ad hoc legislation. The introduction of federal pensions was delayed until the development of a professional civil service that would have long term service. The federal plan provided much better benefits than the existing private pension funds at the time and over the long run put pressure on private employers improve their programs when competing with the government for workers. I found that the two chapters provide some new insights and in particular some valuable quantitative evidence on the character of state and local plans.

CCW could have done more to highlight just how important the military pension funds were in the development of social insurance for the entire population. Theda Skocpol’s Protecting Soldiers and Mothers: The Political Origins of Social Policy in the United States (Harvard University Press, 1992) and Dora Costa’s The Evolution of Retirement (University of Chicago Press, 1998) both show that Civil War pensions were widespread among retirees in the North in the early 1900s. Meanwhile, the pressure from World War I veterans for early payments of the veterans’ bonus was one of many pressures that contributed to the adoption of the Social Security Act.

The book left me sated with information on the navy pension fund, but it left me hungry for more evidence on the state and local and federal pension funds in the early 1900s. In terms of people served, it seems like the nonmilitary funds were more important. However, it is important to note that in terms of published knowledge, we knew much less about the early military pensions than we did about the state and local funds. In the final analysis, this book has admirably filled that gap. It provides a strong foundation for future studies of the development of both public and private pensions in the twentieth century.

Price Fishback is the Frank and Clara Kramer Professor of Economics at the University of Arizona and a Research Associate with the National Bureau of Economic Research. He and Shawn Kantor are the authors of A Prelude to the Welfare State: The Origins of Workers’ Compensation. Price is currently working on a series of studies of the Political Economy of the New Deal.

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

An Economic History of London, 1800-1914

Author(s):Ball, Michael
Sunderland, David
Reviewer(s):Green, David R.

Published by EH.NET (April 2003)


Michael Ball and David Sunderland, An Economic History of London, 1800-1914. London and New York: Routledge, 2001. x + 470 pp. ?75/$110 (hardback), ISBN: 0-415-24691-1.

Reviewed for EH.NET by David R Green, Department of Geography, King’s College, London.

Any analysis of the economy of the largest nineteenth-century city in the world that claims to be comprehensive is bound also to be ambitious. The two authors of this sizeable volume, Michael Ball and David Sunderland, have produced a wide-ranging study that trawls through most of the existing literature and attempts to systematize our knowledge of the structure, processes and changes in London’s economy between about 1800 and 1914. At the same time, it argues that others who have written about the metropolitan economy have largely misinterpreted the evidence and made claims about the city’s uniqueness that do not stand scrutiny when set again economic location theory. Suggestions that London was somehow “preindustrial,” or backward, are dismissed, as too are claims that the city’s service sector was somehow the motor that drove the economy forward. Theories of urban change that interpret London as a “jewel-encrusted terror” (p. 4) and that provide “heaven and hell-fire conclusions” (p. 417) regarding metropolitan development do not, according to the authors, make much economic sense. They dismiss the arguments of immiseration theorists who have interpreted the evidence to suggest that London’s economy suffered structural crises, which impacted adversely on significant sections of the population. In short, we have a polemical book that seeks to dispel the myth of metropolitan uniqueness and instead tries to use relatively well-known economic location theories to explain the city’s economic trajectory.

The book is divided into seven sections dealing with different topics that impinge more or less directly on the urban economy. After a brief overview and discussion of theoretical concepts, there are chapters on population, work, wealth and living standards. This is followed by discussions of the growth of retailing and the mass market, leisure, suburbanization and housing. The provision of the infrastructure necessary to transport goods, services and people, is dealt with next, followed by chapters on manufacturing, services and finance. Welfare, social policy and government are then examined, followed by a final assessment of the structure, processes and patterns of change that characterized London’s economy.

Although much of the book’s contents will be familiar, what is novel is the way in which the authors try to weave various aspects of economic location theory into the explanation. Agglomeration economies, institutional theory and economies of scale form the core set of concepts around which the explanation is structured. The interrelationships among these economic processes and the London economy lie at the heart of the book. By clustering together, London trades and services were able to save costs in two sets of ways: the first are savings to be made by the fact of clustering — sharing of tools, access to labor and ideas etc.; the second concerns those savings made as a result of being part of a larger urban economy such as encouraging innovation, widening scope and providing insurance. Of course, diseconomies also existed, particularly as the city’s economy boomed and both population and traffic increased. Rising land costs, pollution, congestion and higher local taxes, to name a few, hindered growth and in a few cases outweighed the benefits of remaining in the capital. Clustering also helped reduce transaction costs, as did the institutional frameworks — those conduits through which economic processes work themselves out — that developed over time to ease the flows of capital and information and without which business could not function efficiently. Finally, economies of scale resulting from the sheer volume of economic activity made possible by the size of the London market, as well as its role as an export center, also helped firms reduce costs by encouraging a greater division of labor. In this way, rather than responding to the availability of cheap labor that arose as a result of large-scale immigration, the desire to capture a greater market share drove forward changes in production methods. That machinery was not used to a greater extent reflected both the nature of demand for fashionable goods that could not be mass produced and the difficulties of providing power. Instead, the production process was subdivided and speeded up to allow more efficient use of labor, thereby reducing unit costs. Although the concepts are articulated more explicitly here and applied to a wider range of activities than in other accounts, little of this will come as much surprise to those with a broad grasp of the London economy.

As well as the articulation of economic theory, the other main strength of this book is its breadth of coverage. The highly diverse nature of London’s economy is mirrored by the range of topics. It is correct that a large number of works, though by no means all, have focused on manufacturing — partly because they were interested in other issues and not just the way in which goods were produced and services delivered. Other research has explored different aspects, such as banking and financial services. However, here we have a single work that seeks to encompass all and, moreover, to use similar kinds of economic theory to explain common processes affecting location and economic change. Breadth is the name of the game here. When it comes to examining manufacturing, we not only have the better known examples of metropolitan industries such as clothing, shoemaking and furniture, but also some of the lesser well known trades, such as piano making, cigarettes and candles. Domestic, clerical and professional services are included as well as the City’s financial services. When it comes to spending on leisure and pleasure we have, to name but a few of the attractions that loosened Londoners’ purses, hotels and gentlemen’s clubs as well as pubs, music halls and pleasure gardens. The chapter on utilities encompasses gas, electricity and water, as well as the operation of metropolitan markets. Woven into the narrative are also chapters on retailing, suburbanisation and housing, transportation, migration, living standards and poverty, welfare and social policy, and government at the local and municipal level. In each chapter, topics are broken down into discrete sections, a form of structure that provides case studies but which always stands in danger of breaking up the flow of the argument. Providing choice examples whilst maintaining continuity is for the most part handled well — something for which students will most certainly be thankful.

Inevitably, perhaps, in a book that relies entirely on secondary evidence, there are gaps in knowledge and coverage. There are chronological gaps that arise either because of the lack of work in specific fields, or the omission of existing references. For example, when dealing with the provision of poor relief, there is hardly any mention of the period after the Metropolitan Poor Act of 1867 and the subsequent crusade against out-relief, a result of the over-reliance on my own work that ends in that year. James Treble’s work on urban poverty (Urban Poverty in Britain, Batsford, London, 1979), one of the very few to adopt an explicitly comparative framework on the topic, is not cited. There is relatively little on London’s role as an imperial capital, with all that entailed in terms of conspicuous expenditure on the paraphernalia of empire such as government offices and architectural achievements. Whether or not the cultural dimensions of imperialism are considered important — and culture is deliberately downplayed throughout — anyone who has ever considered the economics of aesthetics will know that grandeur costs money and although London’s imperial architecture might not have matched that of Vienna or Paris, the range and scope of expenditure was impressive. More too might have been said of the very rich and the economics of emulation that being rich in the capital city entailed. Nor is there much on the range of institutions that fostered the spread of ideas so crucial to maintaining London’s industries and services at the forefront of technological and organizational innovation. Learned societies, universities, mechanics institutes and other such institutions that fostered flows of information and ideas are conspicuous by their absence. Institutional theory is, in part, about the rules of the game, but it is also about the means by which those rules are disseminated and in this respect such knowledge creating institutions play a central role in fostering innovation. Finally, with some judicious copy editing the book could have been made shorter and the bibliography more accurate. Volumes and page numbers are given inconsistently and some articles from the London Journal are attributed to a non-existent journal noted as London Studies. One hopes that in a second edition – perhaps one more suited to the pockets of undergraduates — these infelicities will be corrected.

However, to end on this note would not do justice to the book — even if the authors’ own tone sometimes verges on the quarrelsome. An enormous amount of information has been synthesized and presented in an articulate and clearly organized fashion — no mean feat given the range of examples and issues covered As a review of the existing evidence, this work has no parallel and is an extremely useful reference point for anyone interested not only in nineteenth-century London but also more generally in economic change over the period. Linking theory to evidence in a jargon-free way also allows the reader to move from one to the other in a seamless way that raises serious questions not just about London’s economic structure but also about the processes that linked the capital to the rest of the UK economy. Though it might not excite the imagination, it certainly provides food for thought.

David Green is editor of the London Journal. His publications include From Artisans to Paupers: Economic Change and Poverty in London, 1790-1870 (1995).

Subject(s):Urban and Regional History
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII

Investing for Middle America: John Elliot Tappan and the Origins of American Express Financial Advisors

Author(s):Lipartito, Kenneth
Peters, Carol Heher
Reviewer(s):Steeples, Douglas

Published by EH.Net (February 2003)

Kenneth Lipartito and Carol Heher Peters, Investing for Middle America: John

Elliot Tappan and the Origins of American Express Financial Advisors. (New

York: Palgrave for St. Martin’s Press, 2001) pp. X + 268.

Reviewed for EH.Net by Douglas Steeples, retired Dean of the College of Liberal

Arts and Professor of History, Mercer University.

The year 1894 was not an auspicious one for launching a new business in the

United States, let alone one that steered a course into uncharted financial

waters. The country was in the depths of its worst business depression of the

nineteenth century. Unemployment in many urban and industrial areas was 20,

even 25 percent. Farmers of wheat, corn, and cotton faced the lowest prices for

their crops in a generation. Workers with jobs averaged a bit more than a

dollar a day, working seven 10-hour days per week when they were fully

employed. Charities were strained to their limits and beyond. The jobless

picked over garbage hoping to find something edible. More than five hundred

banks had failed, and 20 percent of the nation’s railroad mileage was in

receivership. Revelations of mismanagement in finance, manufacturing, and

transportation; of outright fraud in securities trading of excessive reliance

of giant firms on credit in speculative overexpansion and attempts to achieve

monopolies; and of abuses of trust on the part of insurance companies struck

heavy blows at the confidence of many Americans in their business system. The

country’s deep-rooted ethic of self-reliance and manliness in personal affairs

and finance faced a withering challenge.

The United States was in fact passing through a great transition. Hitherto, the

country’s people pursued a dream of saving to achieve economic independence.

Hoping to rise from the ranks of employees to those of at least small business

owners or members of the professions, people viewed saving as the way to

accumulate the necessary capital. It was, too, a sign of virtue and thus a

measure of character. But with the increasing scale of enterprise, a shrinking

percentage of people could hope thus to climb the socioeconomic ladder. The

exhaustion of readily tillable western lands as an avenue of individual

opportunity played a role, too, as did increasing urbanization. To a constantly

growing degree, Americans faced the prospect of remaining employees lifelong.

Instead of adding to land holdings, if farmers, so that descendants could

support them in their old age, or if they dwelt in cities then accumulating

capital of other sorts for the same purposes, they faced a new prospect filled

with uncertainty. A young insurance industry, yet largely unregulated, was

often little more than a lottery. So, too, were investment schemes that

sustained themselves by drawing on money from new investors to pay returns to

their predecessors (pyramids) or that depended on high rates of lapsation and

forfeiture to generate income from which to pay returns (tontines).

John Elliott Tappan was born to parents of New England stock on a farm in

Vinland township, close to the junction of the Fox and Wolf Rivers at Lac Butte

des Morts near Oshkosh, Wisconsin, in 1870. His father died suddenly when

Tappan was but two years old, leaving his mother with three children and a

93-acre farm worth about $6,500. By 1877 his mother had sold the farm and

relocated to Minneapolis. Ten years later, in an extreme manifestation of the

prevalent belief that real men must confront the challenges of the world

outside of the home, seventeen-year old John Tappan began a three-year stint in

California and up the West Coast to Washington Territory. During the while he

tramped, hopped freight cars, worked in mining and lumber camps, and completed

college preparatory classes in Seattle. After a fire burned the city to the

ground in June, 1889, he returned to Minneapolis, hardened by life on the

fringes of civilization and imbued with a deep love for the out of doors and

nature but ambitious for a middle class career. After a month at home he

journeyed to Duluth and took an office job, a first step toward the middle

class career to which he aspired. Completion of a stenographic course added to

his business skills, and he later, while working, he finished legal studies at

the University of Minnesota and was admitted to the bar. In the interim, he

sold bonds and insurance, gaining knowledge of how independent sales agents

worked and of how to make actuarial calculations that would result in sound

business planning.

Tappan had as a boy experienced the depression of the 1870s. He grew up as the

nation passed through a generation of heated argument over monetary policy, as

proponents of gold, of silver, or a paper currency, and other schemes argued

over how best to assure prosperity. No radical, but surely an innovator, he

framed an idea that sought to marry western ideas of financial reform – those

that would make it easier for ordinary people to save and thereby advance in

the world – “with eastern financial orthodoxy” that sought to protect the

stability and soundness of money. His idea was for a new type of investment

instrument, to which he gave the name “face amount certificate.” This device

worked like zero coupon bonds. Purchased at a discount, they were to be held

until they matured to their face values of $1,000. The initial period to

maturity was twenty years. In order to make the investment more attractive,

Tappan in stages reduced it to twelve, then ten years. Tappan planned to sell

them for monthly installments. The actual return would vary depending on the

amount paid in and the certificates’ maturation period. As a rule, customers

received about a 6 percent return, double or triple what railroad bonds or

government bonds yielded. The monthly payment plan made these instruments

accessible to middle Americans, both wage earners and such professionals as

teachers, attorneys, and physicians who constituted the middle class in the

nation’s heartland. Unlike other instruments, these would rest on investments

in improved real estate. They thus were far less chancy than corporate bonds,

which in addition to higher risk typically sold in larger denominations and for

cash so that only well off individuals could buy them. Tappan’s Investors

Syndicate, incorporated in 1894, proposed to be something that would rest on

the ideals of thrift, honesty, and manly independence. It would be a mechanism

through which small investors’ monthly payments could be pooled. Customers

would benefit from expert management of their investments. They would be

protected against fluctuations in the country’s modernizing economy. They would

gain the advantages of working with a firm that was at once local (emphasizing

investments in real estate in and around Minneapolis and only gradually

expanding beyond) and then national, firmly controlled by management of

unquestioned integrity, and for many years small enough to be personal in

feeling even as it participated in the emergence of an economy in which giant

firms were predominant. In addition, the firm’s location in Minneapolis was

advantageous in that it could appeal to Midwesterners and Westerners suspicious

of eastern banking and financial centers.

The authors of Investing for Middle America are uniquely qualified to

write this book. Kenneth Lipartito is professor of history at Florida

International University and a specialist in the history of business. Earlier

works include The Bell System and Regional Business (1989) and

(coauthored with Joseph Pratt) Baker and Botts in the Development of Modern

Houston (1991). The excellence of his work has won recognition from the

Business History Conference, which awarded him the Williamson Prize in 2000,

and conferral of the Newcomen Award for Excellence in Business History Research

and Writing (1995). Carol Heher Peters is the great granddaughter of John

Elliott Tappan and is Communications Editor at the Princeton Environmental

Institute, Princeton University. This book grew out of genealogical research

begun by her grandmother, which led to her discovery of a collection of nearly

20,000 letters that Tappan wrote between 1894 and 1919. Six years of research

resulted in a draft manuscript that eventually reached Lipartito, who saw in it

a uniquely interesting point of entree into the daily conduct of finance during

a time of transition for which records are slender. Lipartito and descendants

of Tappan ultimately agreed that he would place Tappan’s life and business

career in a broader context that combined his personal life and story with

broader developments on the national business scene.

The Investors Syndicate, which Tappan founded and oversaw until he sold his

interest in it in 1925 after the other two principal stockholders conspired to

sell their majority holding, ultimately became Investors’ Diversified Services

(IDS), before its acquisition by American Express and renaming as American

Express Financial Advisers in 1984. The narrative becomes greatly compressed

for the years after Tappan sold his interest in his firm, leaving one with

relatively little information about the evolution of Investors Services into

Investors Diversified Services and then its present evolution under the

umbrella of American Express. Tappan lived until 1957 and continued to practice

law well into his later years. As an innovator, Lipartito and Peters do not

claim too much in comparing him to A.P. Giannini, father of “retail banking,”

Henry Ford, and Thomas Alva Edison. His contribution was to raise financial

intermediation to a new level. He took a simple idea – use expert and reliable

agents to solicit funds from investors, pool them, draw on expertise and

knowledge to place them where they would earn a higher rate of return than that

paid out to his investors, employ sound actuarial calculations to factor in

realistic lapsation rates, manage efficiently and prudently with clients’

interests in mind – and built a firm that in time became both a model and a

giant in the financial services industry. Integrity brought it through several

investigations prompted by the shady practices of others. It met the

competitive pressures of sales of government Liberty Bonds during World War I

(Tappan actually encouraged certificate holders to purchase war bonds with

their certificates). It grew enormously during the Great Depression of the

1930s when the stock market saw values fall by 90 percent. Tappan, meanwhile,

never wavered from his original aims. He could have become immensely wealthy,

but that was not his purpose. Instead, he reinvested the company’s profits for

many years while taking no salary and supporting himself with his law practice.

He remained true to the goal of making systematic and profitable savings

through conservatively managed, sound pooled investments possible to the mass

of middle Americans. He had, true, only one idea – but it evolved into the

mutual funds industry, and his firm remained a leader long after he had left

the scene.

Readers will find this book a lucid introduction to a fascinating subject.

Lipartito and Peters share a rare gift for lucid discussion of what in other

hands could be impenetrable subjects. Their narrative adeptly and seamlessly

interweaves the story of Tappan’s life with those of his company and of changes

in the nation’s economy. The research has been comprehensive (one might wish

only for references to Democracy in Desperation, by Steeples and

Whitten, 1998; Mary Ryan’s 1981 Cradle of the Middle Class; and Kim

Townsend’s 1997 Manhood at Harvard). Errors are few and trifling: Rotary

International originated in the twentieth, not the nineteenth century.

Investing for Middle America deserves to become a classic, and to win

for Lipartito yet another award. It should enjoy a wide readership among those

interested in American business and social history, 1870-1950.

Douglas Steeples is retired as dean of the College of Liberal Arts and

Professor of History from Mercer University. A specialist in nineteenth century

western and business history, he most recently published Advocate for

American Enterprise: William Buck Dana and the Commercial and Financial

Chronicle, 1865-1910 (2002).

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

The Voluntary City: Choice, Community and Civil Society

Author(s):Beito, David T.
Gordon, Peter
Tabarrok, Alexander
Reviewer(s):Lester, Richard

Published by EH.NET (November 2002)


David T. Beito, Peter Gordon, and Alexander Tabarrok, editors, The Voluntary City: Choice, Community and Civil Society. Ann Arbor: University of Michigan Press, 2002. xiii + 462 pp. $65 (cloth), ISBN: 0-472-11240-6; $24.95 (paperback), ISBN: 0-472-08837-8.

Reviewed for EH.NET by Richard Lester, Department of History, University of Missouri-Columbia.

The Voluntary City, edited by David T. Beito (University of Alabama), Peter Gordon (University of Southern California), and Alexander Tabarrok (The Independent Institute), is a collection of fifteen articles examining historical and contemporary examples of private delivery of public services. The articles generally challenge the view that government has to provide certain “public goods” because of the market’s failure to provide them efficiently.

Summing up the book’s major themes, the introductory and concluding essays contend that the market and the voluntary associations of “civil society” are better able to provide a much wider variety of “public goods” than has usually been acknowledged. The “free rider” and “externality” problems can be solved through creative market-oriented arrangements and private voluntarism. Consequently, the market often can provide “public goods” at least as efficiently as government. Moreover, the private sector may have significant advantages in providing “public goods,” particularly greater flexibility in responding to consumer demand.

The remaining essays explore a varied array of historical examples of the private provision of “public goods” on the local level. The first section focuses on the role played by private market-oriented arrangements in urban planning and the construction of urban infrastructure. Stephen Davies argues that real estate market practices and restrictive covenants were highly effective in regulating urban growth in Britain between 1740 and 1850, in the absence of public urban planning. David Beito examines late nineteenth century St. Louis’s private streets, which were owned and maintained by associations of adjoining homeowners. He argues that private streets were created in response to property owners’ dissatisfaction with municipal corruption and inadequate city services. Daniel Klein examines turnpike construction by private companies in the early nineteenth century, focusing on how these companies overcame “free rider” problems. Robert C. Arne explores the history of Chicago’s Central Manufacturing District as an example of “entrepreneurial city planning.”

The second part of the book examines private provision of quasi-governmental services. Bruce Benson examines the medieval law merchant, a private contractual system of law, which once governed international trade. Stephen Davies examines eighteenth and early nineteenth century British voluntary associations for the prosecution of felons, which often privately funded local watches and patrols. David Beito examines American fraternal societies while David Green examines similar British and Australian friendly societies. Both kinds of societies provided their members with insurance and important social services in the absence of a government social safety net. James Tooley examines private education in nineteenth century Great Britain and the United States, arguing rather unpersuasively that private schools provided a near-universal system of high quality education even before the creation of public school systems.

The third section, which focuses largely on contemporary examples, examines private communities such as condominiums, mobile home parks, and subdivisions governed by homeowners’ associations. Fred E. Foldvary, Donald J. Boudreaux and Randall G. Holcombe, Robert H. Nelson and Spencer Heath MacCallum all examine the private systems of government in these communities.

The Voluntary City works best as a series of case studies examining some fascinating historical examples of private provision of “public goods” such as urban infrastructure, city planning and law enforcement. Economic historians will find many essays to be of interest, particularly those by Beito, Davies and Klein. The book will be of particular interest to historians interested in private urban planning devices, which are covered more thoroughly and systematically than many of its other topics. At its best, the book also challenges historians to develop better explanations of why public city services triumphed over private market-based alternatives by calling into question the assumption that this triumph was logical and inevitable.

Overall, however, the quality of the articles is uneven. Some essays seem rather abbreviated and fail to examine the historical context of private provision of “public goods” adequately. With only a few exceptions, the essays generally fail to examine the role of the nonprofit sector, one of the most interesting issues raised in the editors’ introduction. Contributors’ frequent attempts to draw far-reaching policy implications from narrowly focused historical case studies are often strained and unconvincing. A few of the essays, such as the essay on the medieval law merchant, have only a peripheral relationship to the theme of the “voluntary city.” Many essays implicitly associate private provision of public services with free market policies. Historically, however, the link between the two is quite debatable. Early nineteenth century American cities relied heavily on private provision of public services at the same time that they heavily regulated prices and other economic activities. On the other hand, as city governments became more laissez-faire in their other economic policies, they also assumed increasing responsibility for providing “public goods.”

The articles often paint a highly selective picture of private sector efforts to provide “public goods,” highlighting their successes while omitting discussions of their limitations or failures. Examples of voluntarism that undercut the private sector’s reputation for efficiency, such as the early nineteenth century volunteer fire companies, which appear to have been highly ineffective at putting out fires, are simply not discussed at all. Even the very good essays on fraternal and friendly societies do little to address obvious questions about whether societies financed solely by assessments on their generally working class members really had the financial resources to provide adequate aid to these members in times of financial hardship.

The contributors also fail to explain adequately why so many privately provided “public goods” were ultimately replaced by government services, a historical development that the economic theory of “public goods” explains very well. The alternative explanations offered by the articles, that government generally seeks to expand its own power and that government intervention “crowds out” private sector initiatives, seem oversimplified and superficial. Most of the articles provide little supporting evidence for either explanation. Moreover, numerous counterexamples disprove the claim that government intervention automatically “crowds out” private sector initiatives. To cite only one, whatever its impact on fraternal societies, Social Security clearly did not “crowd out” the development of private employee pensions in the postwar United States.

Ultimately, I found the book’s critique of the “public goods” theory to be fundamentally unpersuasive. Few would deny that private market-based mechanisms can occasionally overcome “free rider” and “externality” problems. The real question is whether they can do so repeatedly and do so as efficiently as government intervention can, considering all the multiple “free rider” and “externality” problems typically associated with “public goods.” The scattered and impressionistic historical evidence in the volume failed to convince me that they could. It is doubtful whether private contractual arrangements can take into account every possible “negative externality,” no matter how remote. Moreover, the essays are silent on the transaction costs of such contractual arrangements. None of the essays really undertake the systematic historical comparisons between privately and publicly provided services that might prove or disprove the book’s major contentions. Finally, important questions about the fairness and equity of private provision of “public goods” are simply evaded. Many might question the desirability of making the quality of vitally important services like education and police protection contingent on the individual’s ability to pay for them, a logical consequence of privatization.

Nevertheless, The Voluntary City fulfills its primary purpose, which is more to raise questions than to provide answers. The editors themselves note that the essays in the volume cannot “definitively answer” the question of whether the “spontaneously created institutions of civil society [were] better than the government institutions that replaced them” (p. 3). They only contend that the historical evidence shows that the question is worth asking. Viewed in this light, The Voluntary City raises worthwhile questions, which will give historians much to think about. While they are unlikely to answer the questions in the same way as The Voluntary City, they will certainly benefit from consulting its frequently thought-provoking essays.

Richard Lester is a Visiting Assistant Professor at the University of Missouri-Columbia. He has written a number of conference papers on the administration of New Deal unemployment relief programs in Los Angeles County. He is currently working on turning his dissertation, “Building the New Deal State on the Local Level: Unemployment Relief in Los Angeles County during the 1930s,” into a book.

Subject(s):Urban and Regional History
Geographic Area(s):North America
Time Period(s):General or Comparative