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Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan

Author(s):Metzler, Mark
Reviewer(s):White, Eugene N.

Published by EH.NET (January 2007)

Mark Metzler, Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan. Berkeley: University of California Press, 2006. xxii + 370 pp. $50 (cloth), ISBN: 0-520-24420-6.

Reviewed for EH.NET by Eugene N. White, Department of Economics, Rutgers University.

Drawing extensively on archival sources, University of Texas professor Mark Metzler provides a detailed history of Japan’s experience with the gold standard. Japan’s interwar quest to return to gold is instructive not only as a policy problem but also because it was a key issue in Japan’s struggle over whether to join a liberal global economy or build a state-controlled empire.

Following Germany’s example after the Franco-Prussian War of extracting reparations to facilitate a move to the gold standard, Japan gained the needed reserves after the Sino-Japanese War of 1894-1895 yielded an indemnity from China. Whether the gold standard offered a nation a seal of good housekeeping when it sought to borrow abroad is currently hotly debated. For Japan, Metzler shows that moving to gold was considered as vital to gaining access to Western capital markets. But empire and gold went hand in hand. To prevent Russian dominance of Korea, Britain signed an alliance with Japan in 1902 that recognized Japanese interest in Korea, after which the British Foreign Office supported the sale of Japanese bonds in London. Japan had equal success on Wall Street, where a critical role was played by Jacob Schiff of Kuhn, Loeb who was eager to see anti-Semitic Russia (and the Morgan bank) defeated. As a result 40 percent of the 1904-1905 Russo-Japanese war was funded with overseas borrowing.

While conquest and the gold standard marched together up to this point, they now pulled Japan in opposite directions. Military-industrial interests wanted to increase government spending, while those committed to the gold standard pressed for balancing the budget and husbanding resources to pay the foreign debt. Metzler translates the two competing policies (sekkyoku seisaku and sh?kyoku seisaku) as “positive” and “negative” policies, suggesting that they represented Keynesian and monetarist approaches. Better translations would be “active” and “passive” policy, which reflected the expansionary imperialist program and the “rules of the game” followed by a liberal state. Two dramatis personae occupied center stage in this battle: Inoue Junnosuke (finance minister and governor of the Bank of Japan) and Takahashi Korekiyo (vice governor of the Bank of Japan, finance minister and prime minister) who respectively campaigned for classic liberal and expansionary economic polices.

By declaring war against Germany in 1914, Japan easily seized German concessions in China. Emboldened, Japan attempted to gain hegemony, issuing the infamous but unsuccessful “Twenty-One Demands” to the Chinese government. The war cost relatively little and created extraordinary export opportunities. The trade surplus led to an inrush of gold, producing a monetary expansion and inflation, and Japan only exited the gold standard after the U.S. embargoed gold exports in 1917.

The worldwide postwar boom was amplified by “positive” policies pursued by finance minister Takahashi who saw an opportunity for Japan to catch up. The government floated new bonds to finance military spending, notably the anti-Bolshevik Siberian expedition. Warning about the dangers of a speculation boom, governor of the Bank of Japan Inoue, lobbied the cabinet to lift the gold embargo. When the Bank of Japan was permitted to raise interest rates in 1919, the boom came to a resounding end with a stock market crash and bank runs.

The battered economy never truly recovered in the 1920s. A gold standard at the prewar parity was a distant goal because postwar deflation was insufficient. Although volatile, the yen was often 20% below its prewar value. A key problem that worsened with time was the Japanese military’s political independence, which made budget cuts difficult. Fiscal policy was loose, but the Bank of Japan kept its key rate over 8% from 1919 to 1925. Chances of an early return to gold ended with the great 1923 Kant? earthquake that devastated Tokyo and Yokohama. The Bank of Japan provided massive credits to banks. Rolled over year after year, they added to the bad loans from the collapse of the postwar boom, undermining the solvency of the banking system.

After Britain’s return to gold in 1925, the government hoped to follow and began a retrenchment in 1926. The costs of an appreciating yen proved to be very high, wounding export industries. When the finance minister moved to clean up the banking system, a storm erupted in Parliament over the disclosure of weak banks. Rumors swirled, setting off a severe panic in 1927, in which 36 banks with 9% of deposits closed. The government fell, and Takahasi returned to the finance ministry, where he halted retrenchment and allowed the yen to depreciate.

Yet by 1929, a new government concluded that a restoration of the gold standard was necessary as Japan’s foreign loans were coming due and needed to be refinanced. Assistance came from the House of Morgan led by Thomas Lamont. An enthusiastic supporter of (some would say, apologist for) Japan, Lamont demanded a “thorough-going” deflation and an end to the government’s “extravagance.” He supported Inoue for whom a return to gold was a matter of honor. The government began an extraordinary campaign, exhorting people to give up unneeded luxuries; and a propaganda pamphlet was distributed to almost every household. Movies and popular songs promoted the government’s plan. The “Retrenchment Ditty,” a movie theme song, entreated the public: Let’s retrench, let’s retrench?..

You give up salt, I’ll give up tea isn’t it so? Lifting the gold embargo (that’s right absolutely) until the joyful lifting of the embargo.

In spite of the 1929 stock market crash a Morgan-led group of banks provided a $25 million loan (to which London added ?5 million) for a cushion of reserves that enabled Japan to lift the gold embargo on January 11, 1930. An overvalued yen caused gold to flow out, yielding a 25% decline in prices. The effects were wrenching. Wage cuts spread across industry, followed by strikes and rising unemployment. Indebted farmers began to fail when world rice and silk prices collapsed. Panics hit the Tokyo stock exchange in April and September 1930.

Whatever control the government had over the military was lost in 1931 when faked Chinese sabotage on the South Manchurian Railway allowed the army to attack China. After Britain abandoned gold in September 1931, a run on the yen began. Inoue tried to stop it by raising interest rates. For his efforts to restrain military spending, he was assassinated in 1932 by a member of the right-wing Blood Pledge Corps. Back at the finance ministry, Takahashi took the yen off gold in December 1931. Budget deficits were financed with money creation; but when inflation picked up, he tried to cut the military budget in 1936. Wrathful ultranationalist officers shot and hacked the 82-year-old finance minister to death in his bed. Gearing up for war, the army’s general staff drafted a five-year plan in 1937 that buried what remained of the liberal economy.

Metzler’s book provides a solid, nuanced and depressing account of the failure of the interwar gold standard in Japan. One can only speculate that had Japan returned to gold at less than its prewar value, the country could have avoided the wrenching deflation that radicalized the public and produced allies for the fanatics promoting imperial expansion.

Eugene N. White is professor of economics at Rutgers University and a NBER research associate. His most recent publication is “Bubbles and Busts: The 1990s in the Mirror of the 1920s,” in G. Toniolo and P. Rhode, editors, The Global Economy in the 1990s: A Long-run Perspective (Cambridge University Press, 2006). He is currently writing on war finance and the microstructure of the NYSE and the Paris Bourse.

Subject(s):Military and War
Geographic Area(s):Asia
Time Period(s):20th Century: Pre WWII

Corruption and Reform: Lessons from America’s Economic History

Author(s):Glaeser, Edward L.
Goldin, Claudia
Reviewer(s):Cain, Louis P.

Published by EH.NET (August 2006)


Edward L. Glaeser and Claudia Goldin, editors, Corruption and Reform: Lessons from America’s Economic History. Chicago: University of Chicago Press, 2006. ix + 386 pp. $75 (cloth), ISBN: 0-226-29957-0.

Reviewed for EH.NET by Louis P. Cain, Loyola University Chicago, Northwestern University, and the University of Chicago.

Corruption and Reform is a stimulating set of eleven essays that follow an instructive introduction by the editors, both of whom are Professors of Economics at Harvard. The authors, stalwarts of the National Bureau of Economic Research’s Development of the American Economy program directed by Claudia Goldin, first presented their papers at a July 2004 conference. Edward Glaeser, in collaboration with Andrei Shleifer, wrote what is perhaps the work most frequently cited in this collection, “The Rise of the Regulatory State,” which appeared in the June 2003 Journal of Economic Literature. Glaeser and Shleifer use economic history to argue that the strategy a society chooses to enforce its laws depends on each alternative’s vulnerability to subversion by affected interests. Given their research interests, it is logical that these authors address the issues raised by Glaeser and Shleifer’s hypotheses. It is logical that this book focuses on the Progressive Era which, after all, “was dedicated to the elimination of corruption” (p. 4). And, while it is unfortunate the total social costs of corruption are probably unknowable in any time or place, it is clear the reforms discussed in this collection were cost reducing.

The volume is organized into four parts; the first consists of the editors’ introduction and three essays under the heading of “Corruption and Reform: Definitions and Historical Trends.” The introduction and the first essay by John Joseph Wallis attempt to define what is meant by corruption. As the editors note, it is essential to have a consistent definition in order to do time series work, but there are many possible definitions, and Wallis’ article is particularly good in articulating the sometimes subtle differences. The definitions adopted in the other essays, while they differ slightly one from another, generally are consistent with what Wallis terms “venal corruption,” a situation where economics corrupts politics, as opposed to “systematic corruption” where the reverse is true. The editors present three series to establish a “time path of corruption in the United States” (pp. 12-18). That path appears to have rather large cycles around a relatively horizontal trend between 1815 and 1890, a downward trend between 1890 and 1930 (the Progressive Era), and much smaller cycles around a relatively horizontal trend between 1930 and 1975. This is consistent with Glaeser and Shleifer who find that regulation became the increasingly efficient enforcement strategy in the Progressive Era. One reason for the smaller cycles is that, over the twentieth century, the price paid by corrupt politicians has significantly increased. The final two essays establish time paths consistent with those of the editors. Rebecca Menes’ essay makes use of information on corrupt mayors and urban administrations, while that of Stanley Engerman and Kenneth Sokoloff examines cost overruns on major public works, beginning with the Erie Canal System and continuing into the twenty-first century.

The second section, “Consequences of Corruption,” consists of two essays. The first, by Naomi Lamoreaux and Jean-Laurent Rosenthal, discusses how the rise of corporations diminished the protection afforded minority stockholders, a particular problem given the mergers and combinations of the Progressive Era. They note the major movement toward reform here did not develop until the stock market crashed in 1929. The second, by David Cutler and Grant Miller, looks at the development of urban water systems in the Progressive Era, a time when municipalities’ access to capital was substantially increasing. This essay does not confront corruption as directly as others in the volume, in part because they find “corruption-based explanations” for these municipal improvements are not supported. This, in turn, makes the useful point that corruption generally did not interfere with the creation of public goods.

The third section consists of three essays concerning “The Road to Reform.” The two editors and Matthew Gentzkow examine the role of the media is providing a check against corruption. Their essay contrasts two eras, the first characterized by the Credit Mobilier scandal of 1870 and the second by the Teapot Dome scandal of 1922. In the first, the media was largely “partisan,” but in the second it was primarily “informative.” They attribute this change to increasing financial returns to the sale of newspapers (as production costs fell, circulation, advertising revenues, and the number of newspapers increased). They simply comment, without attribution of causality, that this contributed to reform by providing supportive news coverage. Howard Bodenhorn, looks at the development of free banking in New York, one of the first reform movements in the United States. He argues it resulted from the self-interest of one political party attempting to limit the rents of corruption accruing to the other, what Wallis terms a “classic case” of systematic corruption. He sees reform as a result of parallel forces dating from early in the century that were moving toward greater economic and political self-determination. In the third essay, Werner Troesken conjoins his knowledge of the ownership structure of utilities with a definition of corruption stressing the illicit sale of political influence to explain why there was a movement toward public ownership in the early years of the twentieth century and a movement away from it seventy-five years later. His investigation reaches the conclusion that “corruption, and the necessity to eliminate corruption when it gets too costly, accounts for the efficacy of regime change” (p. 278); the direction of change is less important than the removal of corrupt elements.

The three essays in the final section, “Reform and Regulation,” look at safety reform in the workplace (Price Fishback), the Pure Food and Drugs Act of 1906 (Marc Law and Gary Libecap), and relief legislation during the New Deal (Wallis, Fishback, and Shawn Kantor). Fishback notes that labor generally supported safety regulations in mining and manufacturing, while management generally opposed them. Mining laws were targeted to a single industry (devoid of women) often located in isolated areas where managers and owners were likely to have a disproportionate amount of political power. Manufacturing regulations were applied to a broad range of industries and raised the costs of small firms much more than those of large firms, thus the latter’s managers often favored the regulations. Law and Libecap note that the Food and Drug Administration resulted from a combination of consumers concerned about quality (concerns often attributable to muckraking journalists) and producers interested in calming those concerns. After presenting three views of Progressive Era reform (regulatory capture, public interest, and rent seeking), they argue the evidence supports a “nuanced combination” of all three. Wallis, Fishback, and Kantor argue that the move to federal provision of relief, particularly welfare and unemployment compensation, significantly reduced the corruption that had been endemic in local provision, and Roosevelt recognized the incentive he had to maintain the good will generated by the new system. Although a portion of relief provision remained under local administration, the federal government controlled the distribution of funds and required that local administration be fair and impartial.

All in all, this is a first rate collection on a topic that will always be relevant, at least from the perspective of one who lives in Cook County, Illinois. A short review such as this can not do justice to the contributions each of these essays makes on a number of different margins. Even though many are still available as NBER working papers, the intersections between them make the whole more valuable than the parts.

Louis P. Cain is Professor of Economics at Loyola University Chicago, Adjunct Professor of Economics at Northwestern University, and Visiting Professor at the University of Chicago’s Graduate School of Business where he is serving as Visiting Co-Director of the Center for Population Economics. With the late Jonathan Hughes, he is author of American Economic History, soon to appear in its seventh edition.

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

Recessions and Depressions: Understanding Business Cycles

Author(s):Knoop, Todd A.
Reviewer(s):Glasner, David

Published by EH.NET (October 2005)

Todd A. Knoop, Recessions and Depressions: Understanding Business Cycles. Westport, CT: Praeger, 2004. xiv + 289 pp. $55 (hardback), ISBN: 0-8018-8203-6.

Reviewed for EH.NET by David Glasner, Federal Trade Commission.

Like its subject matter, the study of business cycles is itself something of a cyclical phenomenon. Not surprisingly, attention to this branch of economics varies countercyclically with the overall rate of economic activity and procyclically with measures of economic distress such as unemployment, bankruptcies, and the like. Thus the volatile 1920s and the disastrous 1930s were a boon to business cycle theory and stimulated the first serious empirical studies of business cycles. Attention wandered in the prosperous decades after World War II, but the troubled period from the mid-1970s to the early 1980s stimulated another burst of intellectual activity focused on business cycles. But that stimulus, too, wore off and interest flagged in the late 1980s and most of the 1990s, with only an evanescent stock market crash and a short and shallow recession in 1991-92 to keep interest from evaporating totally. More recently, the rapid succession of crises in Mexico, East Asia and Argentina, followed by the bursting of the U.S. stock market bubble and the subsequent mild but lingering recession in the United States, with the intractable Japanese recession casting a lengthening shadow on the overall landscape have combined to cause another upturn in interest in business cycles. This useful book by Todd Knoop of Cornell College (in Mt. Vernon, Iowa, not Ithaca, NY), provides a historical survey of business cycles and of important business-cycle theories, as well as an up-to date (2003) survey of recent cyclical events.

The author explains in the preface that the book grew out of an upper-level undergraduate class in business cycles that he has been teaching for some time. Because there was no text available for such a course, Knoop began to type out and disseminate his class notes to students and eventually those notes were developed into the book under review, which is therefore aimed primarily at an audience of upper-level undergraduates. Specialists or advanced graduate students will find little in the volume that they don’t know already, but researchers in other areas who want a quick introduction to basic approaches to cycle theories or the main empirical issues related to business cycles may find the text to be of some value.

Knoop begins in Part I (Chapters 1-2) with a general descriptive overview of business cycle facts and terminology. In Part II (Chapters 3-9), Knoop turns to a survey of the leading business-cycle theories. In chapter 3, lightly touching on a number of the pre-Keynesian monetary and real cyclical theories, he presents at greater length a stylized version of a Classical macroeconomic model which, owing to its adherence to Say’s Law, can account for periods of generally falling employment and output, only by attributing them to misguided government policies or adverse economic shocks. In successive chapters, Knoop surveys the contributions of Keynesian, Monetarist, Rational Expectations, Real Business Cycle, and New Keynesian theories. Part III concludes with an excellent survey of macroeconomic forecasting. Part III is devoted to an historical and empirical survey of the Great Depression (chapter 10) and post-war business cycles (chapter 11), and then considers (chapter 12) whether our “new economy” is substantially less vulnerable to the business cycle than the “old economy.” Part IV surveys recent international business cycle experience: the East Asia crisis (chapter 13), the Argentine Crisis (chapter 14), and the Great Recession in Japan (chapter 15). Some concluding observations are offered in chapter 16.

Although the book is generally well written, it does suffer from sloppiness in thinking or editing, so that the exposition at times is obscure or confusing. On a more substantive level, I was troubled by tendency to present the basic business-cycle models in terms of overly simplified assumptions and categories. The resulting theoretical paradigms, particularly the Classical, Keynesian, and Monetarist models turn out to be strawmen rather than realistic presentations of historical models that real people actually believed in.

For example, the “Classical model” is characterized by perfect competition, a vertical short-run aggregate supply curve that determines real output with the price level determined by the quantity theory of money. Under the usual interpretation of Say’s Law, such a model pretty much rules out business cycles. This interpretation, by the way, is one of the most persistent misconceptions in the history of economic thought. No Classical theorist ever denied, as belief in Say’s Law presumably would have required, that there could be and were periods of acute and general economic distress, but there is no hint in Knoop’s presentation that there is a disconnect between his version of the “Classical model” and what Classical theorists actually thought about business cycles. And they really did think hard about business cycles or financial crises or periods of acute economic distress. Moving on to Keynesian theory, Knoop would have us believe that Keynes’s fundamental contribution was to recognize that the “classical” assumptions of perfect price and wage flexibility and continuous market clearing (neither of which were entertained by any classical theorist of whom I am aware) were not really valid, inasmuch as labor markets are only imperfectly competitive and workers are reluctant to accept piecemeal wage reductions. Keynes, of course, went to great lengths in the General Theory to prove (whether successfully or not is another issue) that even perfectly flexible wages could not achieve macroeconomic equilibrium under conditions of deficient aggregate demand. In the process, Knoop elides two decades of debate about the nature of the Keynesian model and the conditions under which a Keynesian underemployment equilibrium may or may not hold. It is not Knoop’s failure to summarize these debates that is troubling, but that he provides not even a hint of their existence. Instead we are told (p. 49) “Keynes believed that wages were not fixed, only sticky. If given enough time, workers will gradually reduce their nominal wage demands as they observe other similar workers taking nominal wage cuts. This will reduce real wages and move the economy back toward full employment. The problem with this approach, however, is that there are no assurances about how long the process will take. … In Keynes’s opinion, policymakers cannot afford to wait patiently for this process to work itself out in the long run because, in his words, ‘in the long run we are all dead.'” One is at a loss to know whether Knoop really believes that this is the key theoretical contribution of the General Theory, in which Keynes believed that he had advanced far beyond the insight of his famous observation (published twelve years before the General Theory in the Tract on Monetary Reform) about mortality in the long run, or whether such details of intellectual history simply don’t matter to the author.

According to Knoop, the Monetarist model assumes that wages and prices are perfectly flexible, but, since expectations are adaptive not forward-looking, wage and price adjustments are slower than required to maintain output and employment at their “natural” levels. It is possible to interpret Monetarism in this way, but it surely does not accurately reflect how most Monetarists believed that markets actually work. It appears that Knoop has projected backwards onto earlier paradigms a style of theorizing associated with more recent Rational Expectations, Real Business Cycle, and New Keynesian theories. In a way, this projection allows Knoop to highlight certain differences among his simplified paradigms. But in doing so, he mischaracterizes what the earlier models and disputes were actually about. Now it may be that Knoop’s evident sympathy for the New Keynesian explanations for sluggish wage and price adjustment have led him to overstate the importance of wage and price rigidity in the original Keynesian paradigm. Nevertheless, the belief that wages and prices are not flexible was not, as Knoop implies, the key difference that distinguished Keynesian from Classical or Monetarist economists.

Knoop’s discussion of the development of Rational Expectations, Real Business Cycle, and New Keynesian models seems to me generally more accurate, and more helpful than his treatment of the earlier paradigms. While his presentation of the newer models is even-handed, he does not conceal his preference for the New Keynesian models over the other two paradigms. While acknowledging that there are many New Keynesian models that focus on the macroeconomic implications of various sorts of market failure, Knoop attributes a greater degree of consensus about theory and policy than I think is warranted. In particular, I doubt his assertion (p. 109) that New Keynesians accept that there is single natural rate of unemployment and that there is no long-run tradeoff between inflation and unemployment. I would also observe in passing that, by demonstrating the link between market failure at the micro-level and aggregate demand failures that require remedial macroeconomic policy, the New Keynesians have unwittingly vindicated the insight embedded in the much reviled Say’s Law. It is, precisely as Say’s Law teaches, a failure of supply at the micro-level that triggers a cumulative failure of demand at the macro-level.

Although Knoop’s discussion of the Great Depression correctly highlights the recent research that shows that the Great Depression was largely the result of a breakdown of the international gold standard, he fails to note that this view of the Great Depression was espoused by a number of important economists at the time, most notably Ralph Hawtrey and Gustav Cassel. In fairness, however, it should be acknowledged that the early interpretations of the Great Depression as a breakdown of the gold standard have by now been largely forgotten. However, the exposition would have benefited greatly if it had included an explanation of the fragility of the post-World War I reconstruction of the gold standard and had discussed the destabilizing role of the huge post-war international transfers (repayment of U.S. loans to its wartime allies and reparations imposed on Germany).

To close on a positive note, Knoop’s discussion of the problems of macroeconomic forecasting, whether through the use of leading economic indicators, market indicators, or econometric models, is highly informative and insightful. The final chapters on recent international business-cycle experience are also generally well done. Despite occasional lapses in exposition, this book should be accessible to students, and they will gain a good deal of information about, and a fair understanding of, business cycles from reading it. However, this could easily have been a much better book than it is.

The views expressed by the reviewer do not necessarily reflect the views of the Federal Trade Commission or the individual commissioners.

David Glasner is editor of Business Cycles and Depressions: An Encyclopedia (1997). Later this year Cambridge University Press will publish the paperback edition of his book Free Banking and Monetary Reform.

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

A Dictionary of Economics

Author(s):Black, John
Reviewer(s):Whaples, Robert

Published by EH.NET (March 2004)

John Black, A Dictionary of Economics. Oxford: Oxford University Press, 2002, second edition. vi + 501 pp. $16.95 (paperback), ISBN: 0-19-0860767-9.

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

Economic History in a ‘Mainstream’ Reference Work

Oxford’s Dictionary of Economics would make an excellent gift — perhaps as a prize to the top student in an introductory economics class. It’s a fairly good buy, especially after noting that lists it at over $5 off the publisher’s price. The Dictionary “aims to provide for the needs of students of economics at A-level and in the ‘mainstream’ part of first degree courses, and of lay readers of journals such as The Economist,” and will generally serve these audiences well. It includes about 2500 definitions of concepts that are used in standard economics texts and terms connected with personal finances. The definitions are unusually clear and often include editorial comments about the broader importance of a concept or the controversies surrounding a theory or issue. I learned a lot just thumbing through its pages and will keep the volume close at hand.

I wouldn’t be reviewing the dictionary for EH.NET, however, unless more needed to be said about its treatment of economic history. I first flipped to the appendix, where there is a list of Nobel Prize winners in economics. Tellingly, Douglass North’s first name is misspelled. By chance, within minutes of beginning to browse the dictionary itself I came across the term “cliometrics.” The text offers this definition: “the application of quantitative methods in economic history. The main problem with applying econometrics to any but very recent economic history is the poor quality of the available data.” The first sentence has room for improvement. I would prefer something closer to “the application of economic theory and quantitative techniques to the study history,” and it would be informative to add something about the etymology of the term, but the tragedy of this definition and, perhaps, of the recent fate of the field of economic history, is that the author felt compelled to add his blunt, ill-informed aside. The thickness and richness of historical data sets has always amazed me and I assume this is true of almost anyone with even a passing familiarity with what is available to researchers. Thus, I can only attribute Black’s comment to gross ignorance. Is he representative of the vast body of ahistorical economists who flip right past the economic history articles that still appear in the leading mainstream journals and wouldn’t even consider picking up a journal or book with the word “history” in the title?

What can be done to solve the problem of the deafness of mainstream economists toward economic history? My preferred solution has always been to make the cost of obtaining economic history lower and lower — hence the existence of EH.NET, our database collection, our book reviews, our abstracts service, and especially How Much Is That? and the online Encyclopedia of Economic and Business History. These resources get a lot of traffic, but it is interesting and informative to see what types of economic history sell. The ten most frequently accessed articles in EH.NET’s encyclopedia last year are listed below (note that most of these articles have significant cliometric content):

1. “The Economics of the Civil War” by Roger Ransom
2. “Alcohol Prohibition” by Jeffrey Miron
3. “The Smoot-Hawley Tariff” by Anthony O’Brien
4. “Slavery in the United States” by Jenny Wahl
5. “The Economic History of Tractors in the U.S.” by William White
6. “Child Labor during the British Industrial Revolution” by Carolyn Tuttle
7. “The Depression of 1893″ by David Whitten
8. “The Works Progress Administration” by Jim Couch
9. “Women Workers in the British Industrial Revolution” by Joyce Burnette
10. “The Gold Standard” by Lawrence Officer

My conclusion is that the buying public (in this case probably mostly students) looks to economic history mainly for a recurrent trio of intriguing topics — human conflict (slavery and the Civil War), economic depression (Smoot-Hawley, 1893, the WPA), and the industrial revolution. Also, near the top of the list is another “sexy” topic — booze.

However, giving the product away for free has only limited success, because the demand curve for most economic history doesn’t seem to be very elastic. Is there some way to force feed this stuff to our colleagues and the public? Can we sugar coat it, so that they don’t know they’re getting it? The Economic History Association has recently shifted to subsidizing new producers — granting funds to budding economic historians in graduate school.

Interestingly, the Dictionary generally exudes a confidence about economic growth. For example, several figures discussing hypothetical economic trends (natural vs. logarithmic scales, trade cycles, and time trends) all depict strong upward trends in GDP — growth triumphant, as Richard Easterlin might say. Perhaps this is one of the discontents of growth — as the future looks brighter and brighter there is less of a compelling reason to look to the past?

Finally, there are a few errors and omissions in the Dictionary worth mentioning. For example, AFDC is identified as the U.S. federal welfare program — despite its replacement by TANF in 1997, and the ICC’s entry states that “its jurisdiction has since been extended to include transport by inland waterways, roads, and pipelines” belying the fact that it was terminated in 1996. “Black Monday” (October 19, 1987) is identified, but not “Black Tuesday,” (October 29, 1929). (Likewise, the entry titled “stock market crash” surprisingly refers only to October 19, 1987!) Perhaps due to its British origin several entities one would regularly see discussed in the business press, such as Fannie Mae and Freddie Mac, have no entries. A “chartist” is defined as “a person who believes there are recurring patterns in the behaviour of market variables over time, so that study of past variations assists in predicting the future.” There is no mention of William Lovett, the People’s Charter and the political economy of Britain in the 1830s and 1840s. The definition of exploitation doesn’t explain the neoclassical version of the term. The discussion of “globalization” gives the impression that “the process by which the whole world becomes a single market” has had a pretty uniform trend — leaving out the retrogression in the era from World War I to World War II. The space given to the Great Depression is woefully small — shorter even than the discussion given to nearby terms such as “gravity model,” “greenfield development,” and “greenhouse gases.” Likewise the slender discussion of “mercantilism” is shorter than discussions of “median,” “merit good,” and “migrants’ remittances.” The definition of public choice — “the choice of the kind, quantity, and quality of public goods to provide, and how to pay for them” — seems unduly restrictive. I would have preferred Dennis Mueller’s definition: “the economic study of nonmarket decision making, or simply the application of economics to political science.” Based on the evidence I’ve seen, the caveats about the quantity theory of money seem overly cautious: “maybe the quantity theory would work in the very long run, but it would be ages before this could be checked.” The paragraph about the “ratchet effect” neglects to mention arguments about the growth of government. The discussion of the “rustbelt” is inappropriately written in the present tense — “the rustbelt suffers from high obsolescence.” The entry on slavery appears to be uninformed by the intense debates triggered by Robert Fogel and Stanley Engerman’s findings. It unblinkingly states that while slavery has a long history, it is no longer generally practiced on humanitarian grounds and “because it is believed to be inefficient at providing incentives for work.” Other terms missing include “comparable worth,” “prime rate,” “social savings rate” and perhaps worst of all — “institution.”

Robert Whaples is the editor of EH.NET’s Encyclopedia of Economic and Business History at

Subject(s):Development of the Economic History Discipline: Historiography; Sources and Methods
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Rethinking the Great Depression

Author(s):Smiley, Gene
Reviewer(s):Wheelock, David C.

Published by EH.NET (February 2003)

Gene Smiley, Rethinking the Great Depression. Chicago, IL: Ivan R. Dee,

2002. xii + 179 pp $24.95 (hardcover), ISBN: 1-56663-472-5.

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

Despite being less than 200 pages, Gene Smiley’s Rethinking the Great

Depression is a fairly comprehensive, as well as highly readable, account

of the origins, depth and legacy of the Great Depression. The book is intended

for a non-specialist audience, and would be appropriate reading for

undergraduate courses in American economic history or macroeconomics.

The book’s first two chapters focus on the causes of the Great Depression and

why the Depression was especially severe in the United States. Smiley

attributes the world wide Depression to a breakdown of the international gold

standard. He describes how countries that had undervalued currencies, e.g., the

United States and France, prevented gold inflows from equilibrating national

money supplies and price levels during the 1920s. Tight monetary policy, Smiley

argues, largely explains the unusual severity of the Depression in the United

States. The Federal Reserve adopted a tight monetary policy in 1928 to stem

gold outflows and contain stock market speculation. The Fed remained tight

after the stock market crash in 1929 because of continued gold losses and

because Fed officials mistakenly interpreted low market interest rates and

little discount window borrowing as signaling that monetary policy was in fact


In addition to monetary forces, Smiley argues that rising real wage rates also

contributed to the severity of the Great Depression in the United States.

Previous economic downturns had been relatively short, he contends, because

nominal wage rates had declined when the price level fell to keep real wages

relatively constant. Consequently, output and employment fell less than during

the Great Depression, and recovery came sooner. Smiley attributes the changed

behavior of real wages during the Depression to President Hoover’s lobbying of

large corporations to not cut money wage rates in the hope of preventing large

declines in consumer spending.

The book’s next two chapters focus on the recovery phase of the Depression,

with emphasis on the New Deal. Smiley describes the slow, halting pace of

recovery, which he attributes to misguided government policies. He argues that

the principal policies of the “first” New Deal, including the Agricultural

Adjustment Act (AAA) and the National Industrial Recovery Act (NIRA), were

aimed as much or more at reform than at economic recovery. Roosevelt’s main

economic advisors had little confidence in capitalism or free markets, Smiley

contends, and favored industrial planning and cooperation between business,

labor and government. The spirit of both the AAA and NIRA reflected the view

that deflation was caused by excessive competition and too much production. The

AAA sought to raise farm prices by cutting output, permitting cooperative

marketing, and through government purchases of commodities at target prices.

The NIRA had a similar objective for the price of manufactured output, and led

to the creation of industrial codes that limited competition and production, as

well as instituting labor market reforms. Smiley explains that “the NRA was

attuned to discourage recovery, that is exactly what it did” (p. 100).

Next Smiley discusses the depression of 1937-38. National output grew strongly

in 1935-36, after the “shackles of the NRA” had been removed (p. 106). The

money stock grew rapidly during these years, primarily because of gold inflows

from abroad. The “golden avalanche” allowed banks to build up substantial

excess reserves, which caught the attention of the Federal Reserve Board. Fed

officials worried about the inflationary potential of excess reserves and

increased reserve requirements three times during 1936-37 to reduce them.

Although policymakers viewed excess reserves as being redundant, Smiley argues

that banks held excess reserves as precautionary balances and thus responded to

the Fed’s actions by reducing loans and selling securities, which increased

interest rates. The policy was thus contractionary. Higher taxes on business

associated with a new tax on undistributed corporate profits and the

introduction of Social Security, further contributed to the contraction,

according to Smiley.

The final chapter of the book focuses on the apparent return to full employment

and high output growth during World War II, and the legacy of the Great

Depression for postwar economic policy. Smiley first addresses the

macroeconomic effects of the war. He describes the return to full employment

and rapid output growth, but argues economic conditions (and data) were highly

distorted by the military build up, price controls and rationing. Nevertheless,

the war years were widely seen as providing evidence that fiscal policy could

maintain high employment, and helped bring Keynesian macroeconomics to the fore

among economists and policymakers.

Smiley traces the origins of major postwar government social programs,

regulations, and economic stabilization policies to the Great Depression and

World War II. He also describes how the Bretton Woods System, which

reconstituted the international gold standard after the war, was incompatible

with the Keynesian-influenced monetary and fiscal policies U.S. officials

pursued during the 1960s. In the quest for high employment, these policies

resulted in rising inflation that ultimately forced the breakdown of fixed

exchange rates and dollar convertibility.

Smiley’s interpretations of the origins and effects of the Great Depression are

orthodox. He largely ignores other explanations, such as the possibility that

rising income or wealth inequality, or financial speculation, helped bring

about the Depression. Although many economists would accept Smiley’s

explanations about the causes of the Great Depression, the alternative

explanations are widely believed, especially among non-economists. Hence, the

book might have been enhanced by a discussion of some alternative explanations

and their weaknesses. Similarly, Smiley’s interpretation of New Deal policies

on economic recovery are almost uniformly negative. Although he is careful to

identify how some policies benefited labor and other groups, the book could do

more to distinguish between the effects of New Deal policies on economic growth

and their other effects — for example, on infrastructure, rural

electrification, etc. Moreover, in arguing that New Deal policies retarded

economic recovery, Smiley focuses on disruptions to institutions that defined

property rights. It has been argued, however, that Roosevelt’s policies

stimulated recovery by giving consumers and firms confidence that recovery was

possible. Such effects are hard to quantify, but worth considering. Despite

these quibbles, I recommend this book as a widely accessible and clearly

written summary of the main causes of the Great Depression and its legacy for

economic policy.

David C. Wheelock is Assistant Vice President and Economist, Federal Reserve

Bank of St. Louis. He is author of The Strategy and Consistency of Federal

Reserve Monetary Policy, 1924-1933 (Cambridge, 1991) and numerous articles

on financial and monetary history.

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

The End of Globalization: Lessons from the Great Depression

Author(s):James, Harold
Reviewer(s):Hatton, Tim

Published by EH.NET (January 2002)

Harold James, The End of Globalization: Lessons from the Great

Depression. Cambridge, MA: Harvard University Press, 2001. viii + 260 pp.

$39.95 (cloth), ISBN: 0-674-00474-4.

Reviewed for EH.NET by Tim Hatton, Department of Economics, University of


Harold James, who is highly renowned for his wide-ranging research on

monetary history, has written a new book analyzing the process of

de-globalization during the interwar period. He relates this to the economic

structures and institutions that developed during the era of globalization

before 1914 and he asks whether a globalization backlash could occur all over

again in the present. The book has already received considerable acclaim. No

less an organ than the Economist gave the book a full-page review (29

September, p. 107). In the wake of global uncertainty caused by the September

11th attacks on the United States, the Economist‘s reviewer commented

that “It would be hard to think of a better instance of the right book on the

right subject published at the right time.” Praise indeed. The review went on

to urge vigilance against de-globalizing tendencies in the light of the

catastrophic interwar experience.

So much for reviews of reviews. What does the book actually say? It starts

with a breezy summary of globalization before 1914 and, with this as

background plots out the dismal record of the interwar years. The three

chapters that follow deal, respectively with banking and monetary policy,

trade and tariff policy and labor and migration policy. Each in its own way

offers telling insights into the mechanics of de-globalization that are

persuasive and compelling. There follows a chapter on the politics of

nationalism and then a concluding chapter on the lessons for today. This last

chapter, perhaps the most important for the general reader, is the least

satisfactory for reasons I shall come to below.

The chapter on money and banking is Harold James at his best. With enormous

poise and consummate command of the literature, he develops the story of

structural weaknesses leading to financial instability and banking failures.

He describes how hot money flows transmitted contagion from one country to

another and how, as a result, the gold exchange standard fell like a row of

dominoes. James puts banking collapses, or the threat of collapse, at the very

center of the interwar story, beginning in central Europe in the late 1920s,

then spreading to Britain, the US and finally France and the gold bloc. In

the case of Britain, for example, he argues that the incipient threat of

banking collapse (as a result of losses in central Europe and elsewhere)

explains the puzzle of why Britain went off the gold standard without a fight

– that is without trying to stave off devaluation with tough monetary

measures. This stands in sharp contrast to accounts that emphasize the

dramatic disappearance of French and American credits, the concern about

domestic employment and even the indisposition of Governor Norman. Similarly

for the United States, the banking crisis of 1932-33 is seen as originating

in the international sphere rather than in the domestic economy.

The next chapter looks at the causes of declining international trade and

rising tariff barriers. James sees delicate domestic political balances across

the industrialized world, which promoted logrolling politics, as lending an

upward ratchet effect to trade barriers. But his most compelling point is that

during the 1930s trade and payments policies became ever more closely and

inextricably entwined. Thus what began with tariffs ended with trading blocs,

bilateralism and exchange controls. International co-operation proved totally

unable to untie this Gordian knot. Perhaps the most telling quote comes from

Sir Frederick Leith Ross (the British Government’s Chief Economic Advisor)

who, in discussions leading up to the abortive 1933 World Economic Conference

in London, commented thus: “The Financial Sub-Committee thought action in the

monetary sphere was dependent on greater freedom in the movement of goods,

while the Economic Sub-Committee considered that no progress could be made

until financial and monetary questions were settled” (p. 130).

Two shorter chapters then deal with migration and nationalism. On

international migration, James argues that the US immigration acts of 1921 and

1924, followed by growing restrictions elsewhere, led to increasing labor

market pressures which lent impetus to calls for national economic polices,

and in one notorious case added to pressure for “lebensraum.” But the argument

that immigration policies were a globalization backlash is not treated in any

depth. The following chapter deals with the interrelations between economic

events and nationalism, stressing the disenchantment with internationalism

(even among central bankers, of which Schacht is an extreme example) and the

rise of national policies of self-sufficiency that took place against the

backdrop of the apparently successful Soviet industrialization drive.

In the final chapter James asks: “Can it happen again?” Could the progressive

globalization that proceeded cautiously and incrementally from the 1950s, and

that seems to have accelerated since the fall of the Berlin wall, lead to a

backlash that could precipitate the descent once more into the economic

turmoil and de-globalization characteristic of the interwar years? His

conclusion is cautious and (contrary to the impression given by the

Economist‘s reviewer) somewhat agnostic: “The absence of … two

features — the intellectual cement and the specific model of national success

– explains why the pendulum is so slow in swinging back from globality. But

it does not explain why it will not swing” (p. 224).

To my mind this rather negative conclusion follows from James’s failure to

fully confront the following questions. How different is the globalized world

now as compared with that of 1914? And given this structure, are the shocks

that occurred in the following two decades likely to be repeated? And if so,

with what effect? To be fair, this closing chapter does argue that trade and

capital markets have become progressively more liberalized, that (under the

so-called Washington consensus) international institutions remain fragile, but

that for lack of a coherent alternative vision anti-globalization forces

remain weak and unorganized. But there is little direct analysis of the likely

threats that shocks might pose to globalization in the world economy today.

Here’s how such an assessment might go. Trade is probably as globalized as it

was in 1913, international capital may be even more so, but international

migration is not — nor is it likely to become so in the foreseeable future.

Banking systems and financial markets may be as vulnerable to panics and

crises as they were in the interwar period. So the risks may be there. But a

shock like the First World War with its legacy of political and economic

turmoil and the concomitant disruption to trade and payments seems unlikely,

at least in the developed world which, after all, accounts for ninety percent

of trade and income. Such an event seems all the more remote since the demise

of the Soviet Union and the admittedly faltering steps of the successor states

towards rapprochement with the capitalist world.

Furthermore, James seems not to have noticed the radical developments in

monetary policy during the past decade — developments which have surely

lowered the downside risk. Alan Greenspan’s Fed is not the Fed of George

Harrison, neither is the Bank of England the Bank of Montague Norman, nor is

the ECB the Bank of Haljmar Schacht. Not only is the gold exchange standard,

which (according to the new orthodoxy) magnified the economic shocks of the

1920s and precipitated depression on a world scale, long since dead and

buried, new lessons have been learned from the experience of the 1980s and

1990s. One key lesson is that in a world of globalized capital there is no

hiding place between freely floating exchange rates and full currency union.

A second lesson is that the money supply or the exchange rate make poor

targets for monetary policy. As a consequence a new monetary regime has

emerged over the last decade. Among 90 central banks surveyed by researchers

at the Bank of England, more than 60 percent now have inflation targets

(although some, like the ECB, have intermediate targets as well).

In a world where inflation targeting characterizes many of the leading

economies, where more and more central banks are becoming independent, and

where we no longer worship at the alter of gold, shocks like those of the

interwar period would not be transferred across the exchanges in the domino

pattern that Harold James so eloquently describes. The stock market crash of

1987 and the Asian meltdown of 1997 did not turn into worldwide crises, and

similar shocks in the future are equally unlikely to bring the whole edifice

of trade and payments tumbling down. But even if there were more serious

shocks, the interlinking of trade policy and monetary policy in a downward

descent into bilateralism as in the interwar period is simply not seen as

feasible by the major players today. Thus, the lessons for today from the

interwar experience should be drawn from the fundamental differences between

now and then, and not from the superficial similarities. It is odd that Harold

James does not draw this conclusion since it would seem to follow directly

from his own analysis of the interwar period.

I cannot resist this final comment. James argues that the most worrying

development is wrongheaded approaches to economic policy that have

characterized the countries of Africa, with devastating effect. And he goes on

to remark that “frighteningly, the same diagnosis applies to continental

Europe.” I have to say that policies in Europe are not even remotely like some

of those we have seen in Africa — and they are not going in that direction

either. Indeed the EU has seen progressive liberalization in trade and in a

wide variety of other areas, especially in the last decade. Fortress Europe is

nowhere on the agenda (except perhaps in asylum policy). While progress may

sometimes have been slow it has nevertheless been inexorable. If Harold James

were to visit Europe more often I am sure he would revise his opinion of it.

Some of us who live here would be glad to show him around!

But I have carped on for far too long about the concluding chapter of what,

after all, is a fine book about the economic de-globalization of the interwar

period. James’s sheer depth of knowledge about the period and his clear

writing style make this stimulating book a pleasure to read — and to

recommend to others.

Tim Hatton is Professor of Economics at the University of Essex in the UK. He

has worked on international migration, unemployment and other labor market

issues in the century after 1850.

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: Pre WWII

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

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

Published by EH.NET (March 2001)


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

Wall Street to Main Street: Charles Merrill and Middle Class Investors

Author(s):Perkins, Edwin J.
Reviewer(s):Mason, David L.

Published by EH.Net (February 2000)

Edwin J. Perkins, Wall Street to Main Street: Charles Merrill and Middle

Class Investors. New York: Cambridge University Press, 1999. xiv + 283 pp.

8p. of plates. $29.95 (cloth), ISBN: 0-5216-3029-0.

Reviewed for H-Business and EH.NET

by David L. Mason, Department of History, The Ohio State University.

In this book, Professor Perkins provides an illuminating business biography of

one of the most influential figures in modern investment finance. A founder of

the nation’s largest investment banking firm, Charlie Merrill transformed the

major financial markets with his belief that people of limited resources should

have access to the same professional investment advice as the wealthy. By

pioneering the idea that middle-class Americans should become active investors

in stocks and bonds, Merrill

helped to demystify Wall Street, but more importantly offered a way for

millions to achieve a secure financial future. Significantly, his vision of a

nationwide chain of brokerage firms serving Main Street America–his most

memorable accomplishment–evolved from a lifetime of achievements.

As Perkins capably details, the business life of Charlie Merrill consisted of

three separate, but interrelated careers. Merrill was born outside

Jacksonville Florida in 1885 and educated in the North, where he graduated from

Amherst. Merrill entered the world of Wall Street by way of an old school

friend who told him about an opening in a small brokerage firm. This contact

was but the first of

a string of career-advancing personal relationships Merrill cultivated in his

professional life. After learning the brokerage business, Merrill went out on

his own and by the early 1920s had teamed up with Eduard Lynch to form Merrill,

Lynch & Co.

The new firm was stunningly profitable in the legendary Bull Market of the

1920s, providing business and institutional clients with a variety of merchant

banking services including those relating to bond issues and mergers and

acquisitions. In the process, Mer rill, Lynch achieved a positive reputation

working with new industries like motion pictures and chain stores. Merrill’s

interest in “the chains” stemmed in part from his childhood job working in his

father’s pharmacy, and he acquired interests in several

of the major firms including Safeway grocery stores. By 1928,

Merrill warned his partners and his clients that the stock market was

overvalued, and pushed for a more conservative investment strategy that by

October 1929 helped the company and its customers preserve much of their

wealth. With the stock market mired in a prolonged slump, Merrill and Lynch

sold their brokerage business to E.A. Pierce & Co., and the smaller firm became

essentially dormant as the two partners opted for semi-retirement.

By 1932, the first career of Charlie Merrill as an investment banker came to an


While Eddie Lynch enjoyed a retirement of pleasure and travel, Charlie Merrill

spent the depression years managing Safeway Stores, in which he was the

majority stockholder. Although he was not a director and did not hold an

official position in the company, Merrill was a key force in helping to make

Safeway the leading chain of grocery stores in the West. The experience gave

the former investment banker crucial insights into the operation of a consumer

business, especially one that relied on economies of scale for success. In

1940, these lessons proved valuable when Merrill’s long time business associate

and fellow Amherst alumnus Win Smith encouraged him to return to his old firm

in an effort to revive its waning fortunes. Smith had joined E.A. Pierce when

it acquired Merrill Lynch’s brokerage business, and although his new employer

was the largest chain of brokers in the country, by the end of the 1930s it was

on the verge of

bankruptcy. Even as the national economy emerged from the decade long

depression, the brokerage business remained in the doldrums, and Smith hoped

Merrill would rejoin as managing director and contribute some much needed

capital. Merrill, who was tiring

of retirement, accepted the challenge, thus ending his second career and

beginning his most important part of his long business life.

The older Merrill Lynch & Co. merged with E.A. Pierce, and Merrill began

charting a future for the new firm. Although he

returned to Wall Street,

Merrill did not intend to be a merchant banker, but rather wanted to develop

investment-banking services such as retail brokerage. His work with Safeway had

shown Merrill how a broad distribution base could increase sales and revenues,

and he wanted to replicate this in the brokerage business in order to tap the

growing wealth of the nation’s middle class.

To do this, however, Merrill had to change the negative public image of

stockbrokers. Because brokers worked on a commission,

a prevailing attitude was that the main goal of brokers was to “churn and

earn” by encouraging customers to make needless trades so the brokers could

earn fees on the transactions. Merrill instituted straight salaries for all

employees as a way to dispel

these perceptions, and while this move did have the potential of reducing

broker earnings, a new company-sponsored retirement profit-sharing plan helped

minimize the loss. The firm also began to refer to brokers as account

executives, a practice still used throughout the industry, and it also

assigned customers to brokers based on clients’

investment objectives.

Merrill, whose lifelong credo was “first investigate then invest,” also sought

to improve the education of both the firm’s employees and the public. To build

the image of brokers as professionals, Merrill pioneered an in-house training

program that included courses on all aspects of merchant and investment

banking. He also increased the size and scope of the research department so

brokers could

provide their clients with current and accurate investment advise. To bring

down the veil of mystery surrounding the stock and bond markets, Merrill was

among the first to use mass-market advertisements explaining how and why people

should save for special goals like education or retirement. Although these

efforts took time to bear fruit, they ultimately helped millions gain a better

understanding of financial markets and the need for systematic savings. By the

time of Charlie Merrill’s death in 1956 his

firm was the dominant force in retail brokerage with the formal name Merrill,

Lynch, Pierce, Fenner &

Beane, known informally as “We the People”–today known as Merrill, Lynch,

Pierce, Fenner, & Smith.

Perkins’ book is an important scholarly portrait of

a leading Wall Street personality, and presents his story in a clear and

concise fashion. Perkins had a wealth of primary source material at his

disposal, and this constitutes one of the main strengths of the work. Perkins

conducted numerous interviews with Merrill’s children and business associates,

and obtained access to documents in the Merrill, Lynch archives previously

unavailable to those outside the company. Most of the source citations refer to

direct quotations; and, while this is certainly adequate for the lay reader,

historians might wish for a fuller annotation. Perkins’ deftly employs

Chandlerian business theory to place the story of Charles Merrill in a broader

perspective. Realizing that some of these concepts may be confusing to

nonacademic readers, the author provides clearly understandable explanations

for both theoretical and financial terms.

Perkins avoids the tendency of a biographer to glorify his subject. He

describes Merrill’s inability to see the potential for many financial

innovations, such as mutual funds, which he believed would never be popular

with the

investing public. Still, Perkins may be giving too much weight to Merrill’s

prescience in making early, confident predictions about the stock market crash.

The weaknesses of

this book they are minor, and do not detract from its value to scholars and the

general public. Wall Street to Main Street:

Charles Merrill and Middle Class Investors is highly recommended to those

interested in the history of finance, investment banking, or the service

industry. Perkins presents a complex story in an accessible manner,

combining rigorous historical analysis that is refreshingly free of the

intricacies of financial jargon.

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

A Monetary History of the United States, 1867-1960

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

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

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

On Monetarist Economics and the Economics of a Monetary History

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Annotated References:

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

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

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

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

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

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

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

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

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

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

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

Titan: The Life of John D. Rockefeller, Sr.

Author(s):Chernow, Ron
Reviewer(s):Goldin, Milton

Published by and EH.Net (June, 1998)

Ron Chernow. Titan: The Life of John D. Rockefeller, Sr. New York: Random House, 1998. xxii + 749 pp. Photographs, notes, bibliography, and index. $30.00 (cloth), ISBN 0-679-43808-4. Reviewed for H-Business and EH.Net by Milton Goldin , National Coalition of Independent Scholars (NCIS)

Ron Chernow did much of his research for Titan at the Rockefeller Archive Center in Pocantico Hills, Sleepy Hollow, New York, earlier the home of John D. Rockefeller, Jr. and his second wife, Martha Baird. Just beyond the elegant staircase in the entrance hall is a portrait of John D. seated before his rolltop desk. The richest man in the world (he pulled ahead of Andrew Carnegie sometime during the early 1900s) gazes not so much at you as through you. And the symbolism of the rolltop desk, with its dozens of drawers into which papers can be filed, hidden, quickly retrieved, quickly refilled, and quickly rehidden, should not go unnoticed. The overall impression is of a man without illusions, organized and purposeful, a man fully in control of himself and events.

The problem is that, like almost everything else about John D.’s extraordinary life, this impression is simultaneously accurate and inaccurate. As Chernow makes clear, John D. was a titan with remarkable needs and equally remarkable abilities to mask his real self. For nearly every characteristic of his that we know to be true, there is another, countervailing characteristic that we also know to be true.

Chernow tells us that John D.’s philanthropic gifts financed theoretical (and many practical) bases of modern health care in America. Yet, when he became ill, Rockefeller frequently relied on folk remedies, such as smoking mullein leaves in a pipe. He insisted that “the best men must be had” as faculty members for the University of Chicago, which came into existence thanks largely to his munificence. But Chernow notes that “To some extent, Rockefeller sent out conflicting messages and was partly to blame for [President William Rainey] Harper’s profligacy. It was Rockefeller, after all, who urged Harper to pay top dollar for America’s best academic minds.” And it was also Rockefeller, a true believer in capitalist enterprise, who fumed because Harper sought to earn as much as he could from other assignments while he headed the university. “It was an odd situation,” comments Chernow, with “the world’s richest man chastising a biblical scholar for unseemly materialism”(p. 318).

John D., Jr. had to dissuade his father from ringing the family compound in (then) Tarrytown, New York, with barbed wire. Yet, throughout his life, John D. happily joined fellow Baptists–black or white, it made little difference to him–to prepare for Judgement Day. And, like the ordinary true believer he claimed to be, he swept Cleveland’s Erie Street Baptist Mission (which became the Euclid Avenue Baptist Church) without complaint. “Even in later years, when huge swarms of people congregated at the church door to glimpse the world’s richest man, he would still clasp people’s hands and bask in the glow of familial warmth,” writes Chernow (p. 53).

But John D.’s humility never prevented him from driving competitors into poverty or caused him to worry about the fates of their wives and children. Chernow describes 1872, two years after Standard Oil was incorporated, as the “annus mirabilis” of the titan’s life: “The year revealed both his finest and most problematic qualities as a businessman: his visionary leadership, his courageous persistence, his capacity to think in strategic terms, but also his lust for domination, his messianic self-righteousness, and his contempt for those shortsighted mortals who made the mistake of standing in his way” (p. 133).

In his search for the essential John D.–that is, to identify the characteristics that took precedence over other characteristics–Chernow acknowledges his intellectual debt to Allan Nevins, the first writer to attempt a biography of the titan reasonably free of the categorical judgements of muckrakers, who were determined that the evil John D. must predominate in the public mind. Nevins’s two-volume Study in Power: John D. Rockefeller: Industrialist and Philanthropist was published in 1953. Dozens of books about the Rockefeller family, with sections on John D., appeared after Nevin’s; but Chernow notes that no full biographies followed, except for David Freeman Hawke’s monograph-length John D.: The Founding Father of the Rockefellers (1980).

A major reason for this situation was that the Rockefeller family would not permit files to be opened. Given John D.’s appalling reputation during his lifetime (made worse by writers during the Great Depression) and Chernow’s access to the closed files, Titan was awaited with great anticipation. What would the author tell us that was new, how would he reinterpret what was already known, and, most important, to what extent could he reveal the essential John D. Rockefeller?

Briefly put, Titan is more a filling out of a portrait than it is revelations on the nature of John D. We have long known, for example, about the convoluted relationship between John D.’s father, William, “Big Bill,” and his mother, Eliza Davison. But the full extent of Big Bill’s unsavory behavior–he was a mountebank hustler of “cancer cures” and a womanizer and bigamist who literally brought a mistress into his home and sequentially impregnated both his wife and his mistress–has never been drawn more clearly. Eliza, a devoutly religious woman, accepted the burdens of their life together without complaint. Chernow concludes, “Bill had been her sole chance, her crazily squandered bid to escape from rural tedium, and the misbegotten marriage left both her and her eldest son [John D.] with a lifelong suspicion of volatile people and rash actions” (p. 59).

Chernow leaves no doubt, however, it was from his father that John D. inherited his sheer love of money. (“After he had made his gargantuan fortune, he said admiringly of his father, `He made a practice of never carrying less than $1000, and he kept it in his pocket'”[p. 24].) From his mother came not only his deep religious beliefs but his sincere reverence for women. (To his great credit, John D. endowed a college for black women in Georgia, when neither blacks nor women were generally considered worthy of receiving any education, let alone a higher education. Chernow describes the creation of Spelman College with praiseworthy conciseness and comprehension on pages 240-42.)

“Of all the lessons John absorbed from his father, perhaps none surpassed in importance that of keeping meticulous accounts,” Chernow adds (p. 25). But from neither parent did he evidently inherit his incredible determination not only to always know exactly what was happening in his business but to plan strategically on the basis of state-of-the-art information. The titan had to know to the last pipe, to the last oil storage tank at each of his refineries, to the last Standard Oil tanker at sea, to the last penny in Standard Oil’s Accounts Receivable, and to the last of whatever else he could think of in his business, where everything was, how the item or person served his purposes, and their exact value. Chernow tells us that John D. even calculated the exact number of chews it took–ten–to properly masticate food; family and dinner guests who allocated fewer chews when taking nourishment simply had to await his completion of the task.

From the beginning of his career, when he worked as a bookkeeper, John D. liked everything about business (he originally took on the job because Big Bill would not provide money for him to attend college: “About to enter into his second [and bigamous] marriage, Bill must have been drastically scaling back on first-family expenditures, albeit without disclosing the reason for the sudden urgency,”[43]). He liked making entries in ledgers, he liked “all the method and system of the office,” he delighted in negotiating secret rebate agreements, and he positively reveled in consolidating control over the oil business. His mother had taught him that “willful waste makes woeful want,” and he could not bear to waste a minute on any task, no matter how much he might have enjoyed it. Blotting his signature took valuable time and energy, so he hired a man to blot for him.

Such super-activity led to nervous disorders. Chernow writes, “Starting in early 1889, Rockefeller had complained continually of fatigue and depression. For several decades, he had expended superhuman energy in the creation of Standard Oil, mastering myriad details; all the while, pressure had built steadily beneath the surface repose…” (p. 319). And yet he died just two years short of a hundred.

Chernow deals at length with the “myriad details” of how and why Standard Oil came into existence and how John D. managed the corporation. In broad outline, his observations do not tell us a great deal more than does Daniel Yergin’s The Prize, published in 1991. But how Chernow’s particulars not only fill out the picture but disprove Nevins’s claim that Rockefeller’s fortune was an “historical accident!”

To illustrate how Rockefeller would make informed gambles–but gambles, nonetheless–Chernow describes the way John D. used the disastrous June 1893 stock market crash to finally consolidate his empire: “As the [Pittsburgh] Mellons emerged as a worrisome threat in the export market, Rockefeller feared they might strike an alliance with the French Rothschilds. In August 1895, having borrowed heavily against Pittsburgh real estate to build their budding oil empire, the Mellons were forced to sell their Crescent Pipe Line Company and other properties to Standard–a huge windfall that yielded 14,000 acres and 135 producing wells. It now seemed that Standard Oil owned the entire industry, lock, stock, and barrel” (p. 335). But had the market recovered earlier or had the Mellons held out longer, John D., along with his competitors, might have found themselves overextended.

Chernow makes clear that John D.’s philanthropic giving was as strategic as his business activities. As a lowly-paid bookkeeper, he had purchased an inexpensive ledger to record how every cent of his salary was spent, including a regular dime to charity. For the most part, before he moved his family to the Tarrytown compound, he gave as he earned, secretly. He liked to sit in church, scan the congregation for needy but deserving brethren, and place cash in deserving hands.

But whether the gift was a dime or in the millions, he had to be persuaded that his charity would do some good. He wanted results, not just to give handouts, and he sought the best counsel he could obtain on giving money from Frederick Taylor Gates, a former Baptist minister who became a member of his staff. Gates had to convince him in detail of the advisability of what would come to be called “scientific philanthropy.” And what sold John D. was that this systematic approach to giving would accomplish a nationwide and even worldwide reordering of mankind’s current status.

At Gates’s urging, Rockefeller’s first major gift went to establish a Baptist institution of higher learning, the University of Chicago. Grateful students celebrated his generosity by singing, “John D. Rockefeller, wonderful man is he/Gives all his spare change to the U. of C.” But the University did not receive the bulk of his gifts; the bulk went to a startling variety of causes ranging from Spelman College to public-private partnerships in the South, to massive health care initiatives.

Meanwhile, Congress, like the majority of newspaper editors and reporters, distrusted him. In 1890, the Sherman Antitrust Act became law, and for five years, until the Standard Oil trust was dissolved, Washington hounded him. What Washington and the editors clearly missed, however, was that “Rockefeller was a unique hybrid in American business: both the instinctive, first-generation entrepreneur who founds a company and the analytic second-generation manager who extends and develops it. He wasn’t the sort of rugged, self-made mogul who quickly becomes irrelevant to his own organization. For that reason, his career anticipates the managerial capitalism of the twentieth century” (pp. 227-8).

John D. spent his last days worshiping among blacks (he was the only white congregant) of the Union Baptist Church in Ormond Beach, Florida. The day before he died, he paid off the mortgage of the Euclid Avenue Baptist Church. His body was interred in Cleveland, where he began his career and where even a glimpse of the building in which he began as a bookkeeper moved him deeply.

At the family compound, John D. had had a flag unfurled to mark various anniversaries in his life. Today, no one remembers the anniversaries, and nearly all his great-grandchildren and great-great-grandchildren have moved away. Chernow notes that “Although Junior moved into Kykuit [John D.’s home at the compound] after Rockefeller’s death, he knew that his father was inimitable, and so he decided to retain the Jr. after his name. As he was often heard to say in later years, ‘There was only one John D. Rockefeller'” (p. 676).

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