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Smart Globalization: The Canadian Business and Economic History Experience

Editor(s):Smith, Andrew
Anastakis, Dimitry
Reviewer(s):McInnis, Marvin

Published by EH.Net (September 2014)

Andrew Smith and Dimitry Anastakis, editors, Smart Globalization: The Canadian Business and Economic History Experience. Toronto: University of Toronto Press, 2014. xi + 239 pp.  $28 (paperback), ISBN: 978-1-4426-1612-7.

Reviewed for EH.Net by Marvin McInnis, Professor of Economics, Queen’s University.

This is a collection of studies presented at a conference held at the University of Waterloo in January 2010. The editors offer them as exemplifications of the positive results of selective or “smart” globalization. They build especially on the writing of Dani Rodrik (e.g., Rodrik 2011). The proposition is that nations facing the integration of their economies with the rest of the world may be best advised to pursue a selective policy of some openness and some protective measures. Smith and Anastakis claim that Canadian economic history offers good examples of just such a policy stance. Economists and historians who have mostly looked upon the Canadian response to late nineteenth century globalization as essentially protectionist will be surprised by this point of view.

The inherent nature of the Canadian economy meant that from the initial time of European settlement of the country it was closely integrated into a wider world economy. Much of Canadian economic policy was based upon the desire to benefit from its international trading relationships. The dominant fact, however, facing Canadians was that their closest and most promising trading partner, the United States, had taken a steep step in a protectionist direction. The Canadian response was essentially defensive. Canada, too, became protectionist. Was this “smart” or merely a matter of just jumping onto the protectionist wagon? Wherein lay the selectivity? The usual view of the Canadian tariff is that, in a blanket fashion, protection was offered to anyone who wanted it, and even some (like the agricultural implement manufacturers) who said that they did not need it. There is little in the studies presented here that would point to clever design in the implementation of the tariff.

If one really wanted to assess whether the Canadian case exemplifies a strategic or selective use of protectionist measures within a broader accommodation to exposure to the rest of the world, one would need to carry out a carefully structured investigation. Picking and choosing studies by scholars who had other objectives in mind does not make a convincing case. Too often we are left wondering what might have been the alternative outcome. That said, the individual studies in the collection are interesting and useful contributions to our understanding of Canadian economic history. They are worth reading in their own right.

Andrew Dilley shows how the province of Ontario was able to develop hydroelectric power production and distribution as a state enterprise despite severe opposition from financiers in London. It is not shown that this was accomplished with impunity. For the editors’ purposes it would be useful to learn how the experience of the neighboring province of Quebec, acquiescing on private enterprise, contrasted with the experience of Ontario. In his chapter, Mark Kuhlberg shows how the much vaunted “manufacturing condition” imposed on pulpwood was in fact subverted by other policy aims of the province of Ontario. The requirement that pulpwood cut on crown land in Ontario be manufactured in the province, a patently protectionist measure, is shown to have had little actual effect given the exemptions offered to encourage settlement in the northern forest area. Daryl White explains how, under the stress of national emergency during World War I, Canada effectively forced the International Nickel company to refine nickel in Canada, rather than in the then non-combatant United States, to assure that Canadian nickel would not be supplied to the enemy. It is an interesting incident in Canadian development but hardly contributes to the editors’ line of argument.

Livio Di Matteo, Herbert Emery and Martin Shanahan contrast the broader developmental effects of natural resource based development in South Australia with the experience of the much more limited and differently situated area of northwestern Ontario. That certainly relates to globalization but it is not at all clear that it has much to do with protectionism, selective or not. Michael Hinton examines the widely claimed assertion that the Canadian cotton textile manufacturing industry is an outstanding example of the failure of infant industry protection. Not so, declares Hinton. Rather it was the reverse. Behind substantial tariff protection cotton textile manufacturing grew rapidly in Canada and it became a relatively efficient industry, as gauged by total factor productivity. It was not, however, the much-touted National Policy tariff of 1879 that brought this about but the enactment of a protective tariff twenty years earlier. It is less clear that this earlier protective measure was selective nor that it was the leading cause of the development of the industry. Nevertheless, Hinton’s chapter is closest to providing support for the general claim of the editors. It calls for close attention and evaluation.

Greig Mordue looks at the development of Canada’s automobile manufacturing industry. It is a subject worthy of study but can hardly be dealt with adequately in a short article or book chapter. Mordue is particularly skimpy on the early years of the development of the industry. In the 1920s Canada was a prominent exporter of automobiles. How much that had to do with a protective environment, how much to do with shrewd entrepreneurship, and how much to do with the exploitation of privileged status within the British Empire is not sorted out. As much as anything, the chapter is intended to provide some background to the more recent and innovative development of integration of the North American automotive industry. It provides a starting point, but only that.

Graham Taylor provides an account of the success of Samuel Bronfman’s Seagram Corporation in becoming whiskey distributor to the world. As much as anything this is a story of careful tip-toeing around other countries’ protectionism. This is entrepreneurial history, including the ultimate “decline of empire.” It makes a good read. Almost as if for balance Matthew Bellamy tells about beer. The issue is why Canada’s oldest and in many ways most successful of North America’s brewing industries did not establish a world presence. It might have been expected to do that. Molson, Labatt, and Carling were, at least for a time, big names in beer. The U.S. market was difficult to penetrate and Carling did it only under unusual circumstances and by Americanizing, but ultimately was unable to sustain its presence. What Bellamy does not point out is that at the beginning of the twentieth century Anheuser-Busch’s Budweiser was more of a national brand in Canada than Molson (a much older company). How is it that Foster’s of Australia may have been more successful in gaining an international presence than Labatt of Canada? The particularized European market was a tough challenge to penetrate, but what about the third world? If Canadians were able to do so well in electrical utilities and banking in third world countries, why not in beer? A lot of questions remain to be answered. The great consolidation of brewing internationally is a very recent phenomenon.

In short, the individual chapters of this book make interesting and useful contributions to our understanding of Canadian economic history. From that point of view they are well worth examining. The editors of the volume are, however, unsuccessful in using these individual studies to make a case for the cogency of selective protectionism. There is too little attention to what might have been the course of development in the absence of protectionist measures. A structured analysis of the selective protection issue is lacking.

Reference:
Dani Rodrik, 2011, The Globalization Paradox: Democracy and the Future of the World Economy, New York: Norton.

Marvin McInnis is professor of economics emeritus at Queen’s University, Canada. He is currently assembling a few of his previously unpublished papers into a book on Canadian economic development in the nineteenth and early twentieth centuries.

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

Subject(s):Business History
Economic Planning and Policy
International and Domestic Trade and Relations
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

American Big Business in Britain and Germany: A Comparative History of Two “Special Relationships” in the Twentieth Century.

Author(s):Berghahn, Volker R.
Reviewer(s):Hannah, Leslie

Published by EH.Net (June 2014)

Volker R. Berghahn, American Big Business in Britain and Germany: A Comparative History of Two “Special Relationships” in the Twentieth Century. Princeton NJ: Princeton University Press, 2014. ix +375 pp. $49.50 (cloth), ISBN: 978-0-691-16109-9.

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

Volker Berghahn, now Emeritus Professor of History at Columbia University, also has extensive earlier personal and academic experience in the other two countries in the title and is exceptionally well-qualified to analyze this subject. His thesis is that, notwithstanding the century-long self-deluding puffery of Stead, Churchill and Blair of a supposed “special relationship” with the U.S., America’s business elite actually felt a greater, truly modernizing, affinity with their German counterparts for most of the century. This led to their successful collaboration as “grave-diggers” of British industry and finance (p. 361), so Germany has naturally supplanted Britain as the U.S.’s “special” partner in Europe.

For my taste such rhetoric smacks too much of a zero-sum, politicized dramatization of complex (and often mutually beneficial) business and diplomatic interactions among the three nations, a distressingly populist category error that too often soured their past relations. However, the eventual outcome – whether the whole truth or partially true – is hardly surprising. In 1900, America was already the world’s leading economy, with a GDP equal to Britain’s and Germany’s combined. There still remained a clear German lag, on Maddison’s data, in that Britain’s GDP still exceeded Germany’s even though the latter had 32 percent more people. Britons (like Americans) then enjoyed a level of economic development significantly higher than Germans, as proxied by real GDP per capita. Yet there is no doubt that they were all in the same convergence club. By 2000, again on Maddison’s data, re-united Germany had (almost) caught up with Britain’s real GDP per head and its population was by then 38 percent higher, though both countries lagged the U.S. outlier, whether in terms of real GDP per capita or (a fortiori) of absolute GDP (many Europeans having sensibly gone forth to the U.S. and multiplied). If the business of America really remained business, then – other things equal – market and technological considerations would progressively incline the U.S. more toward Germany’s more populous and larger economy than toward the UK’s, as this process advanced. Any Yankee soft spot for its British ally would be confined to fading sentimental memories of shared wartime victories, cultural/linguistic affinities and U.S. affection for its “poodle” (a term approvingly cited on p. 8). For some, Britain was “special” only as a faithful dog, more willing than (now impressively more pacific) Germany to use its more experienced military and intelligence assets in support of U.S. global ambitions. The latter include, apparently, eavesdropping on Angela Merkel’s cellphone, more easily – though less secretly and probably less usefully – than past espionage on German ENIGMA machines. Of course, national technological superiority, though occasionally useful, is not everything.

There are some large elephants – as well as such implausibly dysfunctional dogs – in this small room. Berghahn thus has to devote much of the book to explaining why Germany struggled for so long to arrive at an outcome that should, arguably, have resulted earlier from the natural long-term convergence of its – numerous, civilized, educated and hard-working – people on the standards of the initial Anglo-Saxon leaders. This process was already proceeding encouragingly (and peacefully) before 1914, but was then sabotaged by Germany’s dysfunctional politics and militarism, resulting in its impoverishment (and that of its enemies and allies in Europe generally) relative to the U.S. The author pillories two prime saboteurs of his dream scenario: Kaiser Wilhelm II (who misused his decisively authoritarian foreign policy powers in 1914) and Herr Hitler, who (more ambitiously and with the deposed Wilhelm’s qualified admiration) rubbed out Weimar democracy, militarily occupied and economically exploited much of Europe, and systematically murdered millions. Neither were exactly minor aberrations, yet multiple American businessmen are shown to have admired both these (distinctly un-admirable) German rulers, while others provided support for reasons of business expediency. Their pacific optimism, isolationism, legal punctiliousness as alien corporate guests, Germanic origins, or anti-Semitism twice eventually yielded to patriotic support for the U.S. joining France and Britain in shared elemental struggles against Germans thus misled. There is debate about how willingly misled, but the impressive bottom line is that there are few Germans in today’s admirable federal republic who would rather Hitler had won. They certainly owe Americans considerable thanks for that happy outcome, duly acknowledged here.

Alfred D. Chandler’s Scale and Scope (1990) famously pre-figured Berghahn in bracketing Germans and Americans together as business soul-mates, while seeing the British as obtusely lagging on business “modernity.” Surprisingly, Berghahn essentially ignores his work, perhaps because many of Chandler’s comparative findings have, in a quarter-century of subsequent research, been seriously questioned by experts on both Britain and Germany. Berghahn also rarely cites the “varieties of capitalism” school, which presents a more direct challenge to his thesis. In this alternative view it is the U.S. and UK that are bracketed together as typifying an “Anglo-Saxon” culture of market-orientated business organization, while German business epitomizes the “Rhenish,” corporatist, bank-orientated alternative. This challenge is evasively dismissed rather than seriously addressed on pages 7-8, though Berghahn does later acknowledge much un-American corporatist and cartelist historical baggage in German business before 1945. He then emphasizes (with less chronological differentiation for the – only sketchily covered – second half of the century) that bourgeois Germany was eventually competitively “recast” (the language – though not the interpretation – echoes Charles Maier) more effectively than were Britain’s dysfunctional mutations. For the latter, he rounds up the usual culprits: restrictive trade practices, class exclusion and nationalization.

There are surprisingly few references to Mira Wilkins, whose multiple studies of international investment provide comprehensive statistics that have (largely) stood the test of time. Despite his stated aim of building bridges between political/diplomatic history and quantitative economic history (p. 10), it is not clear how the author would reconcile his impressionistic assertions based on contemporary opinion with her quantitative data. These show that U.S. multinationals favored Britain over Germany as a destination for their overseas investments (e.g. Maturing of Multinational Enterprise, 1974, pp. 56, 185) and that stocks of British investments in the U.S. consistently exceeded Germany’s (e.g. History of Foreign Investment in the United States, 2004, pp. 9, 72, 391, 441-5); and both are in absolute dollar terms rather than scaled to Britain’s smaller population.  Nor can war-time forced sales explain the discrepancy, because American friendship in wartime was as expensive (though fortunately certified by a victory quality brand) as its enmity. Britain had to sell significantly more of its U.S. investments to finance American logistic support in World War One than the U.S. compulsorily or otherwise exacted from Germany (Wilkins, History of Foreign Investment, p. 63), though, in World War Two, the British and German contributions to the U.S.’s costs of European liberation were more equal (albeit then a tiny fraction of the overall cost). Then what does explain the UK’s consistently higher involvement than the German businessmen (whom, Berghahn alleges, were more favored) in two-way multinational capital flows across the Atlantic? Perhaps the subset of Americans buying or selling businesses internationally were for some reason unable to understand the insights about the relative promise of the two countries that he reports? Perhaps Hitler’s determined drive for re-armament was more effective than Britain’s effete 1930s leaders in blackmailing Americans into forms of business complicity not reflected in investment data? Perhaps British managers were as backward and incompetent as he suggests and so needed to invite more American management fizz into their domestic economy than their German counterparts (though that does not explain why British managers were also larger investors in the U.S.)? Or perhaps Berghahn’s business opinion samples are systematically biased?

More recent publications on Europe’s “Americanization” (many focusing on the micro-level and accessible only in German) are more extensively and usefully mined and summarized, while America’s convergence on some European standards is generally downplayed. For those of us who admire (most) modern American values, it is useful to remember that they came from a more eclectic and ambiguous range of sources than the all-seeing Founding Fathers of “Tea Party” mythology. The American military-industrial complex that underpins its present (for all its mistakes, more benign than satanic) global hegemony places the U.S. nearer to Britain (the pre-1914 naval hegemon) and Germany (with the strongest pre-1914 land army) than to the nineteenth century U.S. (then a second-rank, sporadically anti-Hispanic, military power).

Both the role of immigrant German engineers and managers in U.S. business (currently a major focus of an impressive project at the German Historical Institute, Washington) and Germany’s interwar anti-American Ueberfremdung scare might have been given more prominent billing, perhaps without detracting from his argument on net. Some historians might also reasonably question the author’s swallowing of the American (extreme protectionist) “pot” calling the British (still more open, free-trading) “kettle” black, even before Ottawa in 1932 entrenched imperial preferences almost as thoroughly as America’s own longstanding equivalents. We sometimes forget that what earlier united the young American Economic Association with German economic policymakers (incidentally supporting Berghahn’s hypothesis) was their shared opposition to the UK’s reviled “Manchesterismus” (an economic ideology not easily distinguished from what we now call the “Washington consensus”). America’s more successful modern leadership of liberalizing international trade and investment flows might possibly be characterized by less Whiggish historians as “Britishization.”

The most original and interesting parts of the book are its accounts of business opinion, based, inter alia, on the published writings and private papers of Frank A Vanderlip (the globetrotting chairman of National City Bank) and Parker Gilbert (Wall Street banker and official Reparations Agent in Germany under the Dawes Plan), as well as of the regretful ex-Nazi Otto Friedrich’s heartening post-war experiences with American industrialists. The (sometimes spectacularly erroneous) views of the Wall Street Journal, now conveniently searchable online, are also extensively cited.

Even for readers who struggle to find support for some of its claims (among whom you may have gathered this reviewer is one), this formidably eclectic report on some neglected themes offers an interesting survey of the changing perspectives of American and European business elites on multiple important issues. Alas, this potential utility is compromised by the printed book’s exceptionally poor index, so serious researchers should consider the alternative E-book (ISBN13: 978-0-691-85029-7) which, presumably, can be more readily searched.

Leslie Hannah (lesliehannah@hotmail.com) is Visiting Professor, Economic History Department, London School of Economics and author (with James Foreman-Peck)  of “Extreme Divorce: The Managerial Revolution in UK Companies before 1914,” Economic History Review, 2011.

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

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

Building Co-operation: A Business History of The Co-operative Group, 1863-2013

Author(s):Wilson, John F.
Webster, Anthony
Vorberg-Rugh, Rachael
Reviewer(s):Purvis, Martin

Published by EH.Net (May 2014)

John F. Wilson, Anthony Webster and Rachael Vorberg-Rugh, Building Co-operation: A Business History of The Co-operative Group, 1863-2013. Oxford: Oxford University Press, 2013. xv + 440 pp. £30/$45 (hardcover), ISBN: 978-0-19-965511-3.

Reviewed for EH.Net by Martin Purvis, School of Geography, University of Leeds.

The recent troubles of the Co-operative Group increase the interest of a welcome history of the Group and its predecessor, the Co-operative Wholesale Society (CWS). As the first comprehensive study of the CWS published since 1938, this handsomely-produced volume is an important contribution to the recent revival of academic interest in co-operation. But as an account of one of Britain’s largest and most distinctive economic institutions, the book is of wider relevance to business historians, and others interested in the economic, social and political development of modern Britain.

The book begins with a review of existing literature on the British co-operative movement and a reminder of the varied paths of co-operative development from the eighteenth century onwards. The latter is useful in putting the familiar story of the Rochdale Pioneers into context, and in highlighting early attempts to reinforce co-operative retailing with wholesale distribution. The remainder of the book is strictly chronological in structure, detailing the 150-year history of the family of co-operative organizations which began with the foundation of the North of England Co-operative Wholesale Society in 1863. The first four chapters focus on the foundation and expansion of the CWS from the 1860s to 1930s. In common with the rest of the book, this narrative benefits from unrivalled access to archival material in its account of the development of a business which grew from a regional wholesaling operation for north-west England to a major national and international enterprise. On the way it developed not only depots and warehouses across England and Wales, but also factories and farms producing a growing range of consumer requirements, including foodstuffs, clothing and furniture. Aspirations to protect British consumers from exploitation and to encourage co-operative development overseas led to direct CWS involvement in international trade and production, including ownership of tea plantations in India and Sri Lanka.

The authors argue that successful expansion of the wholesale society’s operations, which also included banking and insurance interests, gives the lie to previous criticism of co-operative managerial methods as inferior to those of private business. Their account is, however, honest in acknowledging the sometimes tense relations between the CWS and the retail societies that were its customers and its collective owners. The potential frustrations created by co-operative structures of governance is a theme which has contemporary resonances and comes to dominate the second part of the book which explores the challenges that the CWS, and co-operation in general, have faced in responding to societal and commercial change since the Second World War. As the account here explores, this period has seen co-operation face a sustained increase in commercial competition and periods of particular difficulty, including the attempted hostile take-over of the CWS. In response the CWS has been at the heart of efforts to consolidate co-operative wholesaling and retailing to create individually more viable units, and to reinterpret the movement’s ethics in ways that will resonate with twenty-first-century consumers.

The book was written before the Co-operative Group hit the headlines for all the wrong reasons, indeed its discussion of a recent co-operative renaissance may sound more optimistic than many now feel. But the chapters dealing with the evolution of the CWS since the 1960s and the series of mergers with retail co-operatives which created the Co-operative Group contain some valuable evidence of the flaws and fissures which have long weakened the co-operative movement. Drawing on both archival material and interviews with senior co-operative figures the book shows the difficulties faced when attempting to reconcile democratic decision-making by the membership with the radical changes in operational practice and managerial structures necessary to adapt to a changing business climate.

There is a danger, however, that in attending to co-operative managerial structures, reform plans and the personalities involved the latter chapters of this book do not pay as much attention to the actual trade of the CWS as some readers will expect. Indeed, throughout the book I would have liked to have known more about the wholesale society’s operations as a business. What exactly did it sell and to which retail societies? What were the most and least profitable elements of its business? How did it develop new products? How justified were criticisms of the quality and design of some of its products? What did post-war efforts to modernize co-operative production entail in practice? What happened to its overseas depots and tea plantations? Further questions are prompted by the book’s use of illustrations. All are well-chosen and nicely reproduced, but they stand somewhat in isolation from the text. Greater use might have been made of these illustrations to enrich discussion of, for example, the wholesale society’s activities as an advertiser, including pioneering use of promotional films; and its role during the mid-twentieth century in the design and construction of distinctively modern stores.

Arguably, too, the book’s detail can sometimes become too dense. Plentiful evidence is provided to support the book’s claim to explore the distinctive qualities of co-operative trading. The account is suitably balanced in acknowledging that the ‘co-operative difference’ is positive in its benefits for members, democracy and espousal of ethical good practice; but also problematic in the barriers sometimes placed in the path of reform by dysfunctional governance systems. A narrative account does, of course, reveal just how often co-operators have wrestled with substantially the same difficulties over recent decades. But the detail can sometimes get in the way of the reader’s understanding of the underlying issues. A more reflective, analytical tone is struck by the concluding chapter on the evolution of the co-operative business model; I would have welcomed more in this vein throughout the book as a whole. But it would be unfair to conclude on a negative comment; a book that leaves you wanting more has done a good job. It also highlights the availability of a substantial body of records held by the National Co-operative Archive in Manchester which will repay the continuing attention of researchers interested not just in business history, but in social, cultural and political life in Britain and elsewhere over the past two centuries.

Martin Purvis is currently engaged in a research project exploring the fortunes of British retailing, both private and co-operative, amid the economic changes and uncertainties of the interwar decades. m.c.purvis@leeds.ac.uk

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

Subject(s):Business History
Geographic Area(s):Europe
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Harriman vs. Hill: Wall Street’s Great Railroad War

Author(s):Haeg, Larry
Reviewer(s):Kerr, K. Austin

Published by EH.Net (January 2014)

Larry Haeg, Harriman vs. Hill: Wall Street’s Great Railroad War.  Minneapolis: University of Minnesota Press, 2013.  xv + 375 pp. $30 (hardcover), ISBN: 978-0-8166-8364-2.

Reviewed for EH.Net by K. Austin Kerr, Department of History, Ohio State University.

This book is narrative history at its best.  Larry Haeg, once an executive with Wells Fargo, has vividly told the story of the conflict in 1901 between E.H. Harriman and Jacob Schiff of the Union Pacific Railroad and James J. Hill and J.P. Morgan of the Great Northern and Northern Pacific railroads to gain majority control of the stock of the Northern Pacific.  The Harriman-Schiff stock purchases, at first covert, led to a huge bubble in May of 1901 of the value of Northern Pacific stock.  The end result was the ruination of some investors and the near collapse of some of the brokerage houses and banks that were involved.

Hill was a businessman who, with the backing of J.P. Morgan (the world’s most important financier), had turned a regional Minnesota railroad into a successful transcontinental line linking the upper Midwest to Seattle and Puget Sound.  The Great Northern also gained control of the twice-bankrupt Northern Pacific, which took a more southerly route from Minnesota to Puget Sound.  Hill had ambitions of integrating these railroads with steamship lines carrying freight on the Great Lakes and the Pacific Ocean.  To fulfill these ambitions he needed better rail connections to Chicago and other Midwestern points.  The best solution was to acquire the Burlington Railroad, a profitable line that connected Chicago with the Twin Cities, and the Midwest with the Northern Pacific in Billings, Montana.  The result could be agreements for through rates on traffic moving both east and west (and cotton from the south headed for Asian markets).

E.H. Harriman had gained control of the bankrupt Union Pacific Railroad in 1897 and was fulfilling ambitions to rebuild the original transcontinental and improve its connections to Pacific ports.  Harriman, supported by the Jacob Schiff, perhaps second only to Morgan in the American financial world, sought to prevent Hill from acquiring the Burlington, but their offer was rejected.  In 1901 Harriman and Schiff quietly started accumulating Northern Pacific stock with the goal of wresting control from Hill and Morgan and turning the Burlington into the arms of the Union Pacific.

When Hill and Morgan realized that their control of the Northern Pacific, and with it control of the Burlington, was threatened, they countered by entering the market.  The result was an incredible bubble, with the two interests cornering the market – owning all of the shares between them – with other investors and speculators caught short, having sold shares they did not possess in order to purchase them for later delivery.  After a few hectic days of trading in May 1901, shares in the recently bankrupt Northern Pacific reached $1000.

Harriman lost the battle for control but he still owned a large block of shares in the Northern Pacific.  After the chaos of that spring, Morgan formed a holding company, the Northern Securities Company, to hold the shares of the Great Northern and Northern Pacific (and with them of the Burlington.)  Soon, however, Theodore Roosevelt became President and the Department of Justice challenged the legality of Northern Securities under the Sherman Anti-Trust Act of 1890.  The Supreme Court in 1903 by the narrowest of margins declared the holding company illegal.  Soon it was dissolved, but the Hill-Morgan railroads still had overlapping boards of directors and operated profitably as a “community of interest.”

Haeg tells this story with marvelously rich detail based on a combination of skillful combing of contemporary accounts, private correspondence, and scholarly literature.  The book is a pleasure to read, with personalities vividly revealed and the drama of events, from cross-country trips in private rail cars to the hazards of stock trading in full display.  Illustrations and maps add to the clarity and understanding of the people involved.

Haeg’s purpose is well-fulfilled in having us understand this war.  He misses the full after-effects, long known in the literature, of the Northern Securities case, the understanding that developed between the “House of Morgan” and the Roosevelt administration, and later American policy and politics.  As an admirer of well-managed railroads (an admiration I share), his denouement of condemning American transportation policy is brief and not well-executed.   Readers wanting an understanding of later American transportation policy are better served by The Best Transportation System in the World: Railroads, Trucks, Airlines, and American Public Policy in the Twentieth Century by Mark H. Rose, Bruce E. Seely, and Paul F. Barrett, now issued in paperback by the University of Pennsylvania Press.

K. Austin Kerr, Professor Emeritus of History at Ohio State University, is a founding editor of H-Business and has published widely in business history.

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

Subject(s):Business History
Transport and Distribution, Energy, and Other Services
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII

The Sterling Area

Jerry Mushin, Victoria University of Wellington

1931-39

One of the consequences of the economic crisis of 1929–33 was that a large number of countries abandoned the gold standard. This meant that their governments no longer guaranteed, in gold terms, their currencies’ values. The United Kingdom (and the Irish Free State, whose currency had a rigidly fixed exchange rate with the British pound) left the gold standard in 1931. To reduce the fluctuation of exchange rates, many of the countries that left the gold standard decided to stabilize their currencies with respect to the value of the British pound (which is also known as sterling). These countries became known, initially unofficially, as the Sterling Area (and also as the Sterling Bloc). Sterling Area countries tended (as they had before the end of the gold standard) to hold their reserves in the form of sterling balances in London.

The countries that formed the Sterling Area generally had at least one of two characteristics. The UK had strong historical links with these countries and/or was a major market for their exports. Membership of the Sterling Area was not constant. By 1933, it comprised most of the British Empire, and Denmark, Egypt, Estonia, Finland, Iran, Iraq, Latvia, Lithuania, Norway, Portugal, Siam (Thailand), Sweden, and other countries. Despite being parts of the British Empire, Canada, Hong Kong, and Newfoundland did not join the Sterling Area. However, Hong Kong joined the Sterling Area after the Second World War. Other countries, including Argentina, Brazil, Bolivia, Greece, Japan, and Yugoslavia, stabilized their exchange rates with respect to the British pound for several years and (especially Argentina and Japan) often held significant reserves in sterling but, partly because they enforced exchange control, were not regarded as part of the Sterling Area.

Following the 1931 crisis, the UK introduced restrictions on overseas lending. This provided an additional incentive for Sterling Area membership. Countries that pegged their currencies to the British pound, and held their official external reserves largely in sterling assets, had preferential access to the British capital market. The British pound was perceived to have a relatively stable value and to be widely acceptable.

Membership of the Sterling Area also involved an effective pooling of non-sterling (especially U.S.dollar) reserves, which were frequently a scarce resource. This was of mutual benefit; the surpluses of some countries financed the deficits of others. The UK could perhaps be regarded as the banker for the other members of the Sterling Area.

Following the gold standard crisis in the early 1930s, the Sterling Area was one of three major currency groups. The gold bloc, comprising Belgium, France, Italy, Luxembourg, Netherlands, Switzerland, and Poland (and the colonial territories of four of these), consisted of those countries that, in 1933, expressed a formal determination to continue to operate the gold standard. However, this bloc began to collapse from 1935. The third group of countries was known as the exchange-control countries. The members of this bloc, comprising Austria, Bulgaria, Czechoslovakia, Germany, Greece, Hungary, Turkey, and Yugoslavia, regulated the currency market and imposed tariffs and import restrictions. Germany was the dominant member of this bloc.

1939-45

In September 1939, at the start of the Second World War, the British government introduced exchange controls. However, there were no restrictions on payments between Sterling Area countries. The value of the pound was fixed at US$4.03, which was a devaluation of about 14%. Partly as a result of these measures, most of the Sterling Area countries without a British connection withdrew. Egypt, Faroe Islands, Iceland, and Iraq remained members, and the Free French (non-Vichy) territories became members, of the Sterling Area.

1945-72

There were three main changes in the Sterling Area after the Second World War. First, its membership was precisely defined, as the Scheduled Territories, in the Exchange Control Act, 1947. It was previously unclear whether certain countries were members. Second, the Sterling Area became more discriminatory. Members tended not to restrict trade with other Sterling Area countries while applying restrictions to trade with other countries. The intention was to economize on the use of United States dollars, and other non-sterling currencies, which were in short supply. Third, war finances had increased many countries’ sterling balances in London without increasing the reserves held by the British government. This exposed the reserves to heavier pressures than they had had to withstand before the war.

In 1947, the Sterling Area was defined as all members of the Commonwealth except Canada and Newfoundland, all British territories, Burma, Iceland, Iraq, Irish Republic, Jordan, Kuwait and the other Persian Gulf sheikhdoms, and Libya. In the rest of the world, which was categorized as the Prescribed Territories, controls prevented the conversion of British pounds to U.S. dollars (and to currencies that were pegged to the U.S. dollar). Formal convertibility of British pounds into U.S. dollars, which was introduced in 1958, applied only to non-residents of the Sterling Area (Schenk, 2010).

Following the 1949 devaluation of the British pound, by 30.5% from US$4.03 to US$2.80, much of the rest of the world, and almost all of the Sterling Area, devalued too. This indicates the major international trading role of the British economy. A notable exception, which did not devalue immediately, was Pakistan. Most currencies’ sterling parities did not change, so this destroyed the intended effect of the British devaluation.

The world economy had changed by the time of the next sterling crisis. The immediate international impact of the 1967 devaluation of the British pound, by 14.3% from US$2.80 to US$2.40, reflects the diminished significance of the Sterling Area. In marked contrast to the response to the 1949 devaluation, only fourteen members of the International Monetary Fund devalued their currencies following the British devaluation of 1967. A significant proportion of Sterling Area countries, including Australia, India, Pakistan, and South Africa, did not devalue. Many of the other Sterling Area countries, including Ceylon (Sri Lanka), Hong Kong, Iceland, Fiji, and New Zealand, devalued by different percentages, which changed their currencies’ sterling parities. Outside the Sterling Area, a small number of countries devalued; most of these devalued by percentages that were different to the British devaluation. The effect was that a large number of sterling parities were changed by the 1967 devaluation.

The Sterling Area showed obvious signs of decline even before the 1967 devaluation. For example, Nigeria ended its sterling parity in 1962 and Ghana ended its sterling parity in 1965. In 1964, sterling was 83% of the official reserves of overseas Sterling Area countries, but this share had decreased to 75% in 1966 and to 65% in 1967 (Schenk, 2010). The role of the UK in the Sterling Area was frequently seen, especially by France, as an obstacle in the British application to join the European Economic Community.

The reserves of the overseas members of the Sterling Area suffered a capital loss following the 1967 devaluation. This encouraged diversification of reserves into other types of assets. The British government responded by negotiating the Basel Agreements with other governments in the Sterling Area (Yeager, 1976). Each country in the Sterling Area undertook to limit its holdings of non-sterling assets and, in return, the U.S.dollar value of its sterling assets was guaranteed. These agreements restrained, but did not halt, the downward trend of holdings of sterling reserves. The Basel Agreements were partly underwritten by other central banks, which were concerned for international monetary stability, and were arranged with the assistance of the Bank for International Settlements.

1972-79

In 1972, the UK ended the fixed exchange rate, in U.S. dollars, of the pound. In 1971 or in 1972, most other Sterling Area countries ended their fixed exchange rates with respect to the British pound. Some of these countries, including Australia, Hong Kong, Jamaica, Jordan, Kenya, Malaysia, New Zealand, Pakistan, Singapore, South Africa, Sri Lanka, Tanzania, Uganda, and Zambia, pegged their currencies to the U.S. dollar. The minority of Sterling Area members that retained their sterling parities included Bangladesh, Gambia, Irish Republic, Seychelles, and the Eastern Caribbean Currency Union. Other countries in the Sterling Area introduced floating exchange rates.

Also in 1972, the UK extended to Sterling Area countries the exchange controls on capital transactions that had previously applied only to other countries. This decision, combined with the changes in sterling parities, meant that the Sterling Area effectively ceased to exist in 1972.

In 1979, when it joined the European Monetary System, the Irish Republic ended its fixed exchange rate with respect to the British pound. Membership of the EMS, which the UK did not join until 1990, required the ending of the link between the British pound and the Irish Republic pound. Also in 1979, the UK abolished all of its remaining exchange controls.

Overview

The Sterling Area was a zone of relative stability of exchange rates but not a monetary union. It did not have a single central bank. Distinct national currencies circulated within its boundaries, and their exchange rates, although fixed with respect to the British pound, were occasionally changed. For example, although the New Zealand pound was devalued in 1949 by the same percentage as the British pound, it was revalued in 1948 and devalued in 1967, both relative to the British pound. The other important feature of the Sterling Area is that capital movements between its members were generally unregulated.

The decline of the Sterling Area was related to the decline of the British pound as a reserve currency. In 1950, more than 55% of the world’s reserves were in sterling (Schenk, 2010). In 2011, the proportion was about 2% (International Monetary Fund).

In addition to the UK, the vestige of the Sterling Area now consists only of Falkland Islands, Gibraltar, Guernsey, Isle of Man, Jersey, and St. Helena, and is of purely local significance. No other countries now fix their exchange rates in terms of the British pound. Since 1985, no members of the International Monetary Fund have specified fixed exchange rates in British pounds. In one generation, the British pound has evolved from a pivotal role in the world economy to its present minor role.

References and other important sources:

Aldcroft, Derek and Michael Oliver. ExchangeRate Régimes in the Twentieth Century. Edward Elgar Publishing, Cheltenham, 1998.

Conan, Arthur. The Problem of Sterling. Macmillan Press, London, 1966.

Day, Alan. Outline of Monetary Economics. Oxford University Press, 1966.

McMahon, Christopher. Sterling in the Sixties. Oxford University Press, 1964.

Sayers, Richard. Modern Banking [7th ed]. Oxford University Press, 1967.

Scammell, W.M. The International Economy since 1945 [2nd ed]. Macmillan Press, London, 1983.

Schenk, Catherine. The Decline of Sterling: Managing the Retreat of an International Currency, 1945–92. Cambridge University Press, 2010.

Tew, Brian. The Evolution of the International Monetary System, 1945–88. Hutchinson and Co, London, 1988.

Wells, Sidney. International Economics. George Allen and Unwin Ltd, London, 1971.

Yeager, Leland. International Monetary Relations: Theory, History, and Policy [2nd ed]. Harper and Row Publishers, New York, 1976.

Jerry Mushin can be reached at jerry.mushin1@outlook.com.

Antebellum Banking in the United States

Howard Bodenhorn, Lafayette College

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

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

Financial Sector Growth

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

Table 1

Number of Banks and Total Loans, 1820-1860

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

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

Adaptability

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

State Banking in New England

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

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

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

Table 2

Average Bank Size by Capital and Lending in 1820 and 1850 Selected States and Cities

(in $ thousands)

1820

Capital

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

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

Source: Bodenhorn (2002).

Explanations for New England Banks’ Relatively Small Size

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

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

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

The Suffolk System

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

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

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

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

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

Summary: New England Banks

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

Banking in the Middle Atlantic Region

Pennsylvania

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

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

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

New York

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

Deposit Insurance

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

“Free Banking”

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

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

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

Banking in the South and West

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

Branch Banking

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

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

State Involvement and Intervention in Banking

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

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

“Commonwealth Ideal” and Inflationary Banking

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

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

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

Conclusion: Banks and Economic Growth

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

Bibliographic Essay

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

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

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

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

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

References and Further Reading

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bertola.Uruguay.final

An Overview of the Economic History of Uruguay
since the 1870s

Luis Bértola, Universidad de la República — Uruguay

Uruguay’s Early History

Without silver or gold, without valuable species, scarcely peopled by gatherers and fishers, the Eastern Strand of the Uruguay River (Banda Oriental was the colonial name; República Oriental del Uruguay is the official name today) was, in the sixteenth and seventeenth centuries, distant and unattractive to the European nations that conquered the region. The major export product was the leather of wild descendants of cattle introduced in the early 1600s by the Spaniards. As cattle preceded humans, the state preceded society: Uruguay’s first settlement was Colonia del Sacramento, a Portuguese military fortress founded in 1680, placed precisely across from Buenos Aires, Argentina. Montevideo, also a fortress, was founded by the Spaniards in 1724. Uruguay was on the border between the Spanish and Portuguese empires, a feature which would be decisive for the creation, with strong British involvement, in 1828-1830, of an independent state.

Montevideo had the best natural harbor in the region, and rapidly became the end-point of the trans-Atlantic routes into the region, the base for a strong commercial elite, and for the Spanish navy in the region. During the first decades after independence, however, Uruguay was plagued by political instability, precarious institution building and economic retardation. Recurrent civil wars with intensive involvement by Britain, France, Portugal-Brazil and Argentina, made Uruguay a center for international conflicts, the most important being the Great War (Guerra Grande), which lasted from 1839 to 1851. At its end Uruguay had only about 130,000 inhabitants.

“Around the middle of the nineteenth century, Uruguay was dominated by the latifundium, with its ill-defined boundaries and enormous herds of native cattle, from which only the hides were exported to Great Britain and part of the meat, as jerky, to Brazil and Cuba. There was a shifting rural population that worked on the large estates and lived largely on the parts of beef carcasses that could not be marketed abroad. Often the landowners were also the caudillos of the Blanco or Colorado political parties, the protagonists of civil wars that a weak government was unable to prevent” (Barrán and Nahum, 1984, 655). This picture still holds, even if it has been excessively stylized, neglecting the importance of subsistence or domestic-market oriented peasant production.

Economic Performance in the Long Run

Despite its precarious beginnings, Uruguay’s per capita gross domestic product (GDP) growth from 1870 to 2002 shows an amazing persistence, with the long-run rate averaging around one percent per year. However, this apparent stability hides some important shifts. As shown in Figure 1, both GDP and population grew much faster before the 1930s; from 1930 to 1960 immigration vanished and population grew much more slowly, while decades of GDP stagnation and fast growth alternated; after the 1960s Uruguay became a net-emigration country, with low natural growth rates and a still spasmodic GDP growth.

GDP growth shows a pattern featured by Kuznets-like swings (Bértola and Lorenzo 2004), with extremely destructive downward phases, as shown in Table 1. This cyclical pattern is correlated with movements of the terms of trade (the relative price of exports versus imports), world demand and international capital flows. In the expansive phases exports performed well, due to increased demand and/or positive terms of trade shocks (1880s, 1900s, 1920s, 1940s and even during the Mercosur years from 1991 to 1998). Capital flows would sometimes follow these booms and prolong the cycle, or even be a decisive force to set the cycle up, as were financial flows in the 1970s and 1990s. The usual outcome, however, has been an overvalued currency, which blurred the debt problem and threatened the balance of trade by overpricing exports. Crises have been the result of a combination of changing trade conditions, devaluation and over-indebtedness, as in the 1880s, early 1910s, late 1920s, 1950s, early 1980s and late 1990s.

Population and per capita GDP of Uruguay, 1870-2002 (1913=100)

Table 1: Swings in the Uruguayan Economy, 1870-2003

Per capita GDP fall (%) Length of recession (years) Time to pre-crisis levels (years) Time to next crisis (years)
1872-1875 26 3 15 16
1888-1890 21 2 19 25
1912-1915 30 3 15 19
1930-1933 36 3 17 24-27
1954/57-59 9 2-5 18-21 27-24
1981-1984 17 3 11 17
1998-2003 21 5

Sources: See Figure 1.

Besides its cyclical movement, the terms of trade showed a sharp positive trend in 1870-1913, a strongly fluctuating pattern around similar levels in 1913-1960 and a deteriorating trend since then. While the volume of exports grew quickly up to the 1920s, it stagnated in 1930-1960 and started to grow again after 1970. As a result, the purchasing power of exports grew fourfold in 1870-1913, fluctuated along with the terms of trade in 1930-1960, and exhibited a moderate growth in 1970-2002.

The Uruguayan economy was very open to trade in the period up to 1913, featuring high export shares, which naturally declined as the rapidly growing population filled in rather empty areas. In 1930-1960 the economy was increasingly and markedly closed to international trade, but since the 1970s the economy opened up to trade again. Nevertheless, exports, which earlier were mainly directed to Europe (beef, wool, leather, linseed, etc.), were increasingly oriented to Argentina and Brazil, in the context of bilateral trade agreements in the 1970s and 1980s and of Mercosur (the trading zone encompassing Argentina, Brazil, Paraguay and Uruguay) in the 1990s.

While industrial output kept pace with agrarian export-led growth during the first globalization boom before World War I, the industrial share in GDP increased in 1930-54, and was mainly domestic-market orientated. Deindustrialization has been profound since the mid-1980s. The service sector was always large: focusing on commerce, transport and traditional state bureaucracy during the first globalization boom; focusing on health care, education and social services, during the import-substituting industrialization (ISI) period in the middle of the twentieth century; and focusing on military expenditure, tourism and finance since the 1970s.

The income distribution changed markedly over time. During the first globalization boom before World War I, an already uneven distribution of income and wealth seems to have worsened, due to massive immigration and increasing demand for land, both rural and urban. However, by the 1920s the relative prices of land and labor changed their previous trend, reducing income inequality. The trend later favored industrialization policies, democratization, introduction of wage councils, and the expansion of the welfare state based on an egalitarian ideology. Inequality diminished in many respects: between sectors, within sectors, between genders and between workers and pensioners. While the military dictatorship and the liberal economic policy implemented since the 1970s initiated a drastic reversal of the trend toward economic equality, the globalizing movements of the 1980s and 1990s under democratic rule didn’t increase equality. Thus, inequality remains at the higher levels reached during the period of dictatorship (1973-85).

Comparative Long-run Performance

If the stable long-run rate of Uruguayan per capita GDP growth hides important internal transformations, Uruguay’s changing position in the international scene is even more remarkable. During the first globalization boom the world became more unequal: the United States forged ahead as the world leader (nearly followed by other settler economies); Asia and Africa lagged far behind. Latin America showed a confusing map, in which countries as Argentina and Uruguay performed rather well, and others, such as the Andean region, lagged far behind (Bértola and Williamson 2003). Uruguay’s strong initial position tended to deteriorate in relation to the successful core countries during the late 1800s, as shown in Figure 2. This trend of negative relative growth was somewhat weak during the first half of the twentieth century, improved significantly during the 1960s, as the import-substituting industrialization model got exhausted, and has continued since the 1970s, despite policies favoring increased integration into the global economy.

 Per capita GDP of Uruguay relative to four core countries, 1870-2002

If school enrollment and literacy rates are reasonable proxies for human capital, in late 1800s both Argentina and Uruguay had a great handicap in relation to the United States, as shown in Table 2. The gap in literacy rates tended to disappear — as well as this proxy’s ability to measure comparative levels of human capital. Nevertheless, school enrollment, which includes college-level and technical education, showed a catching-up trend until the 1960’s, but reverted afterwards.

The gap in life-expectancy at birth has always been much smaller than the other development indicators. Nevertheless, some trends are noticeable: the gap increased in 1900-1930; decreased in 1930-1950; and increased again after the 1970s.

Table 2: Uruguayan Performance in Comparative Perspective, 1870-2000 (US = 100)

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
GDP per capita

Uruguay

101 65 63 27 32 27 33 27 26 24 19 18 15 16

Argentina

63 34 38 31 32 29 25 25 24 21 15 16

Brazil

23 8 8 8 8 8 7 9 9 13 11 10
Latin America 13 12 13 10 9 9 9 6 6

USA

100 100 100 100 100 100 100 100 100 100 100 100 100 100
Literacy rates

Uruguay

57 65 72 79 85 91 92 94 95 97 99

Argentina

57 65 72 79 85 91 93 94 94 96 98

Brazil

39 38 37 42 46 51 61 69 76 81 86

Latin America

28 30 34 37 42 47 56 65 71 77 83

USA

100 100 100 100 100 100 100 100 100 100 100
School enrollment

Uruguay

23 31 31 30 34 42 52 46 43

Argentina

28 41 42 36 39 43 55 44 45

Brazil

12 11 12 14 18 22 30 42

Latin America

USA

100 100 100 100 100 100 100 100 100
Life expectancy at birth

Uruguay

102 100 91 85 91 97 97 97 95 96 96

Argentina

81 85 86 90 88 90 93 94 95 96 95
Brazil 60 60 56 58 58 63 79 83 85 88 88
Latin America 65 63 58 58 59 63 71 77 81 88 87
USA 100 100 100 100 100 100 100 100 100 100 100

Sources: Per capita GDP: Maddison (2001) and Astorga, Bergés and FitzGerald (2003). Literacy rates and life expectancy; Astorga, Bergés and FitzGerald (2003). School enrollment; Bértola and Bertoni (1998).

Uruguay during the First Globalization Boom: Challenge and Response

During the post-Great-War reconstruction after 1851, Uruguayan population grew rapidly (fueled by high natural rates and immigration) and so did per capita output. Productivity grew due to several causes including: the steam ship revolution, which critically reduced the price spread between Europe and America and eased access to the European market; railways, which contributed to the unification of domestic markets and reduced domestic transport costs; the diffusion and adaptation to domestic conditions of innovations in cattle-breeding and services; a significant reduction in transaction costs, related to a fluctuating but noticeable process of institutional building and strengthening of the coercive power of the state.

Wool and woolen products, hides and leather were exported mainly to Europe; salted beef (tasajo) to Brazil and Cuba. Livestock-breeding (both cattle and sheep) was intensive in natural resources and dominated by large estates. By the 1880s, the agrarian frontier was exhausted, land properties were fenced and property rights strengthened. Labor became abundant and concentrated in urban areas, especially around Montevideo’s harbor, which played an important role as a regional (supranational) commercial center. By 1908, it contained 40 percent of the nation’s population, which had risen to more than a million inhabitants, and provided the main part of Uruguay’s services, civil servants and the weak and handicraft-dominated manufacturing sector.

By the 1910s, Uruguayan competitiveness started to weaken. As the benefits of the old technological paradigm were eroding, the new one was not particularly beneficial for resource-intensive countries such as Uruguay. International demand shifted away from primary consumption, the population of Europe grew slowly and European countries struggled for self-sufficiency in primary production in a context of soaring world supply. Beginning in the 1920s, the cattle-breeding sector showed a very poor performance, due to lack of innovation away from natural pastures. In the 1930’s, its performance deteriorated mainly due to unfavorable international conditions. Export volumes stagnated until the 1970s, while purchasing power fluctuated strongly following the terms of trade.

Inward-looking Growth and Structural Change

The Uruguayan economy grew inwards until the 1950s. The multiple exchange rate system was the main economic policy tool. Agrarian production was re-oriented towards wool, crops, dairy products and other industrial inputs, away from beef. The manufacturing industry grew rapidly and diversified significantly, with the help of protectionist tariffs. It was light, and lacked capital goods or technology-intensive sectors. Productivity growth hinged upon technology transfers embodied in imported capital goods and an intensive domestic adaptation process of mature technologies. Domestic demand grew also through an expanding public sector and the expansion of a corporate welfare state. The terms of trade substantially impacted protectionism, productivity growth and domestic demand — the government raised money by manipulating exchange rates, so that when export prices rose the state had a greater capacity to protect the manufacturing sector through low exchange rates for capital goods, raw material and fuel imports and to spur productivity increases by imports of capital, while protection allowed industry to pay higher wages and thus expand domestic demand.

However, rent-seeking industries searching for protectionism and a weak clienteslist state, crowded by civil servants recruited in exchange for political favors to the political parties, directed structural change towards a closed economy and inefficient management. The obvious limits to inward looking growth of a country peopled by only about two million inhabitants were exacerbated in the late 1950s as terms of trade deteriorated. The clientelist political system, which was created by both traditional parties while the state was expanding at the national and local level, was now not able to absorb the increasing social conflicts, dyed by stringent ideological confrontation, in a context of stagnation and huge fiscal deficits.

Re-globalization and Regional Integration

The dictatorship (1973-1985) started a period of increasing openness to trade and deregulation which has persisted until the present. Dynamic integration into the world market is still incomplete, however. An attempt to return to cattle-breeding exports, as the engine of growth, was hindered by the oil crises and the ensuing European response, which restricted meat exports to that destination. The export sector was re-orientated towards “non-traditional exports” — i.e., exports of industrial goods made of traditional raw materials, to which low-quality and low-wage labor was added. Exports were also stimulated by means of strong fiscal exemptions and negative real interest rates and were re-orientated to the regional market (Argentina and Brazil) and to other developing regions. At the end of the 1970s, this policy was replaced by the monetarist approach to the balance of payments. The main goal was to defeat inflation (which had continued above 50% since the 1960s) through deregulation of foreign trade and a pre-announced exchange rate, the “tablita.” A strong wave of capital inflows led to a transitory success, but the Uruguayan peso became more and more overvalued, thus limiting exports, encouraging imports and deepening the chronic balance of trade deficit. The “tablita” remained dependent on increasing capital inflows and obviously collapsed when the risk of a huge devaluation became real. Recession and the debt crisis dominated the scene of the early 1980s.

Democratic regimes since 1985 have combined natural resource intensive exports to the region and other emergent markets, with a modest intra-industrial trade mainly with Argentina. In the 1990s, once again, Uruguay was overexposed to financial capital inflows which fueled a rather volatile growth period. However, by the year 2000, Uruguay had a much worse position in relation to the leaders of the world economy as measured by per capita GDP, real wages, equity and education coverage, than it had fifty years earlier.

Medium-run Prospects

In the 1990s Mercosur as a whole and each of its member countries exhibited a strong trade deficit with non-Mercosur countries. This was the result of a growth pattern fueled by and highly dependent on foreign capital inflows, combined with the traditional specialization in commodities. The whole Mercosur project is still mainly oriented toward price competitiveness. Nevertheless, the strongly divergent macroeconomic policies within Mercosur during the deep Argentine and Uruguayan crisis of the beginning of the twenty-first century, seem to have given place to increased coordination between Argentina and Brazil, thus making of the region a more stable environment.

The big question is whether the ongoing political revival of Mercosur will be able to achieve convergent macroeconomic policies, success in international trade negotiations, and, above all, achievements in developing productive networks which may allow Mercosur to compete outside its home market with knowledge-intensive goods and services. Over that hangs Uruguay’s chance to break away from its long-run divergent siesta.

References

Astorga, Pablo, Ame R. Bergés and Valpy FitzGerald. “The Standard of Living in Latin America during the Twentieth Century.” University of Oxford Discussion Papers in Economic and Social History 54 (2004).

Barrán, José P. and Benjamín Nahum. “Uruguayan Rural History.” Latin American Historical Review, 1985.

Bértola, Luis. The Manufacturing Industry of Uruguay, 1913-1961: A Sectoral Approach to Growth, Fluctuations and Crisis. Publications of the Department of Economic History, University of Göteborg, 61; Institute of Latin American Studies of Stockholm University, Monograph No. 20, 1990.

Bértola, Luis and Reto Bertoni. “Educación y aprendizaje en escenarios de convergencia y divergencia.” Documento de Trabajo, no. 46, Unidad Multidisciplinaria, Facultad de Ciencias Sociales, Universidad de la República, 1998.

Bértola, Luis and Fernando Lorenzo. “Witches in the South: Kuznets-like Swings in Argentina, Brazil and Uruguay since the 1870s.” In The Experience of Economic Growth, edited by J.L. van Zanden and S. Heikenen. Amsterdam: Aksant, 2004.

Bértola, Luis and Gabriel Porcile. “Argentina, Brasil, Uruguay y la Economía Mundial: una aproximación a diferentes regímenes de convergencia y divergencia.” In Ensayos de Historia Económica by Luis Bertola. Montevideo: Uruguay en la región y el mundo, 2000.

Bértola, Luis and Jeffrey Williamson. “Globalization in Latin America before 1940.” National Bureau of Economic Research Working Paper, no. 9687 (2003).

Bértola, Luis and others. El PBI uruguayo 1870-1936 y otras estimaciones. Montevideo, 1998.

Maddison, A. Monitoring the World Economy, 1820-1992. Paris: OECD, 1995.

Maddison, A. The World Economy: A Millennial Perspective. Paris: OECD, 2001.

The Economics of the American Revolutionary War

Ben Baack, Ohio State University

By the time of the onset of the American Revolution, Britain had attained the status of a military and economic superpower. The thirteen American colonies were one part of a global empire generated by the British in a series of colonial wars beginning in the late seventeenth century and continuing on to the mid eighteenth century. The British military establishment increased relentlessly in size during this period as it engaged in the Nine Years War (1688-97), the War of Spanish Succession (1702-13), the War of Austrian Succession (1739-48), and the Seven Years War (1756-63). These wars brought considerable additions to the British Empire. In North America alone the British victory in the Seven Years War resulted in France ceding to Britain all of its territory east of the Mississippi River as well as all of Canada and Spain surrendering its claim to Florida (Nester, 2000).

Given the sheer magnitude of the British military and its empire, the actions taken by the American colonists for independence have long fascinated scholars. Why did the colonists want independence? How were they able to achieve a victory over what was at the time the world’s preeminent military power? What were the consequences of achieving independence? These and many other questions have engaged the attention of economic, legal, military, political, and social historians. In this brief essay we will focus only on the economics of the Revolutionary War.

Economic Causes of the Revolutionary War

Prior to the conclusion of the Seven Years War there was little, if any, reason to believe that one day the American colonies would undertake a revolution in an effort to create an independent nation-state. As apart of the empire the colonies were protected from foreign invasion by the British military. In return, the colonists paid relatively few taxes and could engage in domestic economic activity without much interference from the British government. For the most part the colonists were only asked to adhere to regulations concerning foreign trade. In a series of acts passed by Parliament during the seventeenth century the Navigation Acts required that all trade within the empire be conducted on ships which were constructed, owned and largely manned by British citizens. Certain enumerated goods whether exported or imported by the colonies had to be shipped through England regardless of the final port of destination.

Western Land Policies

The movement for independence arose in the colonies following a series of critical decisions made by the British government after the end of the war with France in 1763. Two themes emerge from what was to be a fundamental change in British economic policy toward the American colonies. The first involved western land. With the acquisition from the French of the territory between the Allegheny Mountains and the Mississippi River the British decided to isolate the area from the rest of the colonies. Under the terms of the Proclamation of 1763 and the Quebec Act of 1774 colonists were not allowed to settle here or trade with the Indians without the permission of the British government. These actions nullified the claims to land in the area by a host of American colonies, individuals, and land companies. The essence of the policy was to maintain British control of the fur trade in the West by restricting settlement by the Americans.

Tax Policies

The second fundamental change involved taxation. The British victory over the French had come at a high price. Domestic taxes had been raised substantially during the war and total government debt had increased nearly twofold (Brewer, 1989). Furthermore, the British had decided in1763 to place a standing army of 10,000 men in North America. The bulk of these forces were stationed in newly acquired territory to enforce its new land policy in the West. Forts were to be built which would become the new centers of trade with the Indians. The British decided that the Americans should share the costs of the military buildup in the colonies. The reason seemed obvious. Taxes were significantly higher in Britain than in the colonies. One estimate suggests the per capita tax burden in the colonies ranged from two to four per cent of that in Britain (Palmer, 1959). It was time in the British view that the Americans began to pay a larger share of the expenses of the empire.

Accordingly, a series of tax acts were passed by Parliament the revenue from which was to be used to help pay for the standing army in America. The first was the Sugar Act of 1764. Proposed by England’s Prime Minister the act lowered tariff rates on non-British products from the West Indies as well as strengthened their collection. It was hoped this would reduce the incentive for smuggling and thereby increase tariff revenue (Bullion, 1982). The following year Parliament passed the Stamp Act that imposed a tax commonly used in England. It required stamps for a broad range of legal documents as well as newspapers and pamphlets. While the colonial stamp duties were less than those in England they were expected to generate enough revenue to finance a substantial portion of the cost the new standing army. The same year passage of the Quartering Act imposed essentially a tax in kind by requiring the colonists to provide British military units with housing, provisions, and transportation. In 1767 the Townshend Acts imposed tariffs upon a variety of imported goods and established a Board of Customs Commissioners in the colonies to collect the revenue.

Boycotts

American opposition to these acts was expressed initially in a variety of peaceful forms. While they did not have representation in Parliament, the colonists did attempt to exert some influence in it through petition and lobbying. However, it was the economic boycott that became by far the most effective means of altering the new British economic policies. In 1765 representatives from nine colonies met at the Stamp Act Congress in New York and organized a boycott of imported English goods. The boycott was so successful in reducing trade that English merchants lobbied Parliament for the repeal of the new taxes. Parliament soon responded to the political pressure. During 1766 it repealed both the Stamp and Sugar Acts (Johnson, 1997). In response to the Townshend Acts of 1767 a second major boycott started in 1768 in Boston and New York and subsequently spread to other cities leading Parliament in 1770 to repeal all of the Townshend duties except the one on tea. In addition, Parliament decided at the same time not to renew the Quartering Act.

With these actions taken by Parliament the Americans appeared to have successfully overturned the new British post war tax agenda. However, Parliament had not given up what it believed to be its right to tax the colonies. On the same day it repealed the Stamp Act, Parliament passed the Declaratory Act stating the British government had the full power and authority to make laws governing the colonies in all cases whatsoever including taxation. Policies not principles had been overturned.

The Tea Act

Three years after the repeal of the Townshend duties British policy was once again to emerge as an issue in the colonies. This time the American reaction was not peaceful. It all started when Parliament for the first time granted an exemption from the Navigation Acts. In an effort to assist the financially troubled British East India Company Parliament passed the Tea Act of 1773, which allowed the company to ship tea directly to America. The grant of a major trading advantage to an already powerful competitor meant a potential financial loss for American importers and smugglers of tea. In December a small group of colonists responded by boarding three British ships in the Boston harbor and throwing overboard several hundred chests of tea owned by the East India Company (Labaree, 1964). Stunned by the events in Boston, Parliament decided not to cave in to the colonists as it had before. In rapid order it passed the Boston Port Act, the Massachusetts Government Act, the Justice Act, and the Quartering Act. Among other things these so-called Coercive or Intolerable Acts closed the port of Boston, altered the charter of Massachusetts, and reintroduced the demand for colonial quartering of British troops. Once done Parliament then went on to pass the Quebec Act as a continuation of its policy of restricting the settlement of the West.

The First Continental Congress

Many Americans viewed all of this as a blatant abuse of power by the British government. Once again a call went out for a colonial congress to sort out a response. On September 5, 1774 delegates appointed by the colonies met in Philadelphia for the First Continental Congress. Drawing upon the successful manner in which previous acts had been overturned the first thing Congress did was to organize a comprehensive embargo of trade with Britain. It then conveyed to the British government a list of grievances that demanded the repeal of thirteen acts of Parliament. All of the acts listed had been passed after 1763 as the delegates had agreed not to question British policies made prior to the conclusion of the Seven Years War. Despite all the problems it had created, the Tea Act was not on the list. The reason for this was that Congress decided not to protest British regulation of colonial trade under the Navigation Acts. In short, the delegates were saying to Parliament take us back to 1763 and all will be well.

The Second Continental Congress

What happened then was a sequence of events that led to a significant increase in the degree of American resistance to British polices. Before the Congress adjourned in October the delegates voted to meet again in May of 1775 if Parliament did not meet their demands. Confronted by the extent of the American demands the British government decided it was time to impose a military solution to the crisis. Boston was occupied by British troops. In April a military confrontation occurred at Lexington and Concord. Within a month the Second Continental Congress was convened. Here the delegates decided to fundamentally change the nature of their resistance to British policies. Congress authorized a continental army and undertook the purchase of arms and munitions. To pay for all of this it established a continental currency. With previous political efforts by the First Continental Congress to form an alliance with Canada having failed, the Second Continental Congress took the extraordinary step of instructing its new army to invade Canada. In effect, these actions taken were those of an emerging nation-state. In October as American forces closed in on Quebec the King of England in a speech to Parliament declared that the colonists having formed their own government were now fighting for their independence. It was to be only a matter of months before Congress formally declared it.

Economic Incentives for Pursuing Independence: Taxation

Given the nature of British colonial policies, scholars have long sought to evaluate the economic incentives the Americans had in pursuing independence. In this effort economic historians initially focused on the period following the Seven Years War up to the Revolution. It turned out that making a case for the avoidance of British taxes as a major incentive for independence proved difficult. The reason was that many of the taxes imposed were later repealed. The actual level of taxation appeared to be relatively modest. After all, the Americans soon after adopting the Constitution taxed themselves at far higher rates than the British had prior to the Revolution (Perkins, 1988). Rather it seemed the incentive for independence might have been the avoidance of the British regulation of colonial trade. Unlike some of the new British taxes, the Navigation Acts had remained intact throughout this period.

The Burden of the Navigation Acts

One early attempt to quantify the economic effects of the Navigation Acts was by Thomas (1965). Building upon the previous work of Harper (1942), Thomas employed a counterfactual analysis to assess what would have happened to the American economy in the absence of the Navigation Acts. To do this he compared American trade under the Acts with that which would have occurred had America been independent following the Seven Years War. Thomas then estimated the loss of both consumer and produce surplus to the colonies as a result of shipping enumerated goods indirectly through England. These burdens were partially offset by his estimated value of the benefits of British protection and various bounties paid to the colonies. The outcome of his analysis was that the Navigation Acts imposed a net burden of less than one percent of colonial per capita income. From this he concluded the Acts were an unlikely cause of the Revolution. A long series of subsequent works questioned various parts of his analysis but not his general conclusion (Walton, 1971). The work of Thomas also appeared to be consistent with the observation that the First Continental Congress had not demanded in its list of grievances the repeal of either the Navigation Acts or the Sugar Act.

American Expectations about Future British Policy

Did this mean then that the Americans had few if any economic incentives for independence? Upon further consideration economic historians realized that perhaps more important to the colonists were not the past and present burdens but rather the expected future burdens of continued membership in the British Empire. The Declaratory Act made it clear the British government had not given up what it viewed as its right to tax the colonists. This was despite the fact that up to 1775 the Americans had employed a variety of protest measures including lobbying, petitions, boycotts, and violence. The confluence of not having representation in Parliament while confronting an aggressive new British tax policy designed to raise their relatively low taxes may have made it reasonable for the Americans to expect a substantial increase in the level of taxation in the future (Gunderson, 1976, Reid, 1978). Furthermore a recent study has argued that in 1776 not only did the future burdens of the Navigation Acts clearly exceed those of the past, but a substantial portion would have borne by those who played a major role in the Revolution (Sawers, 1992). Seen in this light the economic incentive for independence would have been avoiding the potential future costs of remaining in the British Empire.

The Americans Undertake a Revolution

1776-77

British Military Advantages

The American colonies had both strengths and weaknesses in terms of undertaking a revolution. The colonial population of well over two million was nearly one third of that in Britain (McCusker and Menard, 1985). The growth in the colonial economy had generated a remarkably high level of per capita wealth and income (Jones, 1980). Yet the hurdles confronting the Americans in achieving independence were indeed formidable. The British military had an array of advantages. With virtual control of the Atlantic its navy could attack anywhere along the American coast at will and would have borne logistical support for the army without much interference. A large core of experienced officers commanded a highly disciplined and well-drilled army in the large-unit tactics of eighteenth century European warfare. By these measures the American military would have great difficulty in defeating the British. Its navy was small. The Continental Army had relatively few officers proficient in large-unit military tactics. Lacking both the numbers and the discipline of its adversary the American army was unlikely to be able to meet the British army on equal terms on the battlefield (Higginbotham, 1977).

British Financial Advantages

In addition, the British were in a better position than the Americans to finance a war. A tax system was in place that had provided substantial revenue during previous colonial wars. Also for a variety of reasons the government had acquired an exceptional capacity to generate debt to fund wartime expenses (North and Weingast, 1989). For the Continental Congress the situation was much different. After declaring independence Congress had set about defining the institutional relationship between it and the former colonies. The powers granted to Congress were established under the Articles of Confederation. Reflecting the political environment neither the power to tax nor the power to regulate commerce was given to Congress. Having no tax system to generate revenue also made it very difficult to borrow money. According to the Articles the states were to make voluntary payments to Congress for its war efforts. This precarious revenue system was to hamper funding by Congress throughout the war (Baack, 2001).

Military and Financial Factors Determine Strategy

It was within these military and financial constraints that the war strategies by the British and the Americans were developed. In terms of military strategies both of the contestants realized that America was simply too large for the British army to occupy all of the cities and countryside. This being the case the British decided initially that they would try to impose a naval blockade and capture major American seaports. Having already occupied Boston, the British during 1776 and 1777 took New York, Newport, and Philadelphia. With plenty of room to maneuver his forces and unable to match those of the British, George Washington chose to engage in a war of attrition. The purpose was twofold. First, by not engaging in an all out offensive Washington reduced the probability of losing his army. Second, over time the British might tire of the war.

Saratoga

Frustrated without a conclusive victory, the British altered their strategy. During 1777 a plan was devised to cut off New England from the rest of the colonies, contain the Continental Army, and then defeat it. An army was assembled in Canada under the command of General Burgoyne and then sent to and down along the Hudson River. It was to link up with an army sent from New York City. Unfortunately for the British the plan totally unraveled as in October Burgoyne’s army was defeated at the battle of Saratoga and forced to surrender (Ketchum, 1997).

The American Financial Situation Deteriorates

With the victory at Saratoga the military side of the war had improved considerably for the Americans. However, the financial situation was seriously deteriorating. The states to this point had made no voluntary payments to Congress. At the same time the continental currency had to compete with a variety of other currencies for resources. The states were issuing their own individual currencies to help finance expenditures. Moreover the British in an effort to destroy the funding system of the Continental Congress had undertaken a covert program of counterfeiting the Continental dollar. These dollars were printed and then distributed throughout the former colonies by the British army and agents loyal to the Crown (Newman, 1957). Altogether this expansion of the nominal money supply in the colonies led to a rapid depreciation of the Continental dollar (Calomiris, 1988, Michener, 1988). Furthermore, inflation may have been enhanced by any negative impact upon output resulting from the disruption of markets along with the destruction of property and loss of able-bodied men (Buel, 1998). By the end of 1777 inflation had reduced the specie value of the Continental to about twenty percent of what it had been when originally issued. This rapid decline in value was becoming a serious problem for Congress in that up to this point almost ninety percent of its revenue had been generated from currency emissions.

1778-83

British Invasion of the South

The British defeat at Saratoga had a profound impact upon the nature of the war. The French government still upset by their defeat by the British in the Seven Years War and encouraged by the American victory signed a treaty of alliance with the Continental Congress in early 1778. Fearing a new war with France the British government sent a commission to negotiate a peace treaty with the Americans. The commission offered to repeal all of the legislation applying to the colonies passed since 1763. Congress rejected the offer. The British response was to give up its efforts to suppress the rebellion in the North and in turn organize an invasion of the South. The new southern campaign began with the taking of the port of Savannah in December. Pursuing their southern strategy the British won major victories at Charleston and Camden during the spring and summer of 1780.

Worsening Inflation and Financial Problems

As the American military situation deteriorated in the South so did the financial circumstances of the Continental Congress. Inflation continued as Congress and the states dramatically increased the rate of issuance of their currencies. At the same time the British continued to pursue their policy of counterfeiting the Continental dollar. In order to deal with inflation some states organized conventions for the purpose of establishing wage and price controls (Rockoff, 1984). With its currency rapidly depreciating in value Congress increasingly relied on funds from other sources such as state requisitions, domestic loans, and French loans of specie. As a last resort Congress authorized the army to confiscate property.

Yorktown

Fortunately for the Americans the British military effort collapsed before the funding system of Congress. In a combined effort during the fall of 1781 French and American forces trapped the British southern army under the command of Cornwallis at Yorktown, Virginia. Under siege by superior forces the British army surrendered on October 19. The British government had now suffered not only the defeat of its northern strategy at Saratoga but also the defeat of its southern campaign at Yorktown. Following Yorktown, Britain suspended its offensive military operations against the Americans. The war was over. All that remained was the political maneuvering over the terms for peace.

The Treaty of Paris

The Revolutionary War officially concluded with the signing of the Treaty of Paris in 1783. Under the terms of the treaty the United States was granted independence and British troops were to evacuate all American territory. While commonly viewed by historians through the lens of political science, the Treaty of Paris was indeed a momentous economic achievement by the United States. The British ceded to the Americans all of the land east of the Mississippi River which they had taken from the French during the Seven Years War. The West was now available for settlement. To the extent the Revolutionary War had been undertaken by the Americans to avoid the costs of continued membership in the British Empire, the goal had been achieved. As an independent nation the United States was no longer subject to the regulations of the Navigation Acts. There was no longer to be any economic burden from British taxation.

THE FORMATION OF A NATIONAL GOVERNMENT

When you start a revolution you have to be prepared for the possibility you might win. This means being prepared to form a new government. When the Americans declared independence their experience of governing at a national level was indeed limited. In 1765 delegates from various colonies had met for about eighteen days at the Stamp Act Congress in New York to sort out a colonial response to the new stamp duties. Nearly a decade passed before delegates from colonies once again got together to discuss a colonial response to British policies. This time the discussions lasted seven weeks at the First Continental Congress in Philadelphia during the fall of 1774. The primary action taken at both meetings was an agreement to boycott trade with England. After having been in session only a month, delegates at the Second Continental Congress for the first time began to undertake actions usually associated with a national government. However, when the colonies were declared to be free and independent states Congress had yet to define its institutional relationship with the states.

The Articles of Confederation

Following the Declaration of Independence, Congress turned to deciding the political and economic powers it would be given as well as those granted to the states. After more than a year of debate among the delegates the allocation of powers was articulated in the Articles of Confederation. Only Congress would have the authority to declare war and conduct foreign affairs. It was not given the power to tax or regulate commerce. The expenses of Congress were to be made from a common treasury with funds supplied by the states. This revenue was to be generated from exercising the power granted to the states to determine their own internal taxes. It was not until November of 1777 that Congress approved the final draft of the Articles. It took over three years for the states to ratify the Articles. The primary reason for the delay was a dispute over control of land in the West as some states had claims while others did not. Those states with claims eventually agreed to cede them to Congress. The Articles were then ratified and put into effect on March 1, 1781. This was just a few months before the American victory at Yorktown. The process of institutional development had proved so difficult that the Americans fought almost the entire Revolutionary War with a government not sanctioned by the states.

Difficulties in the 1780s

The new national government that emerged from the Revolution confronted a host of issues during the 1780s. The first major one to be addressed by Congress was what to do with all of the land acquired in the West. Starting in 1784 Congress passed a series of land ordinances that provided for land surveys, sales of land to individuals, and the institutional foundation for the creation of new states. These ordinances opened the West for settlement. While this was a major accomplishment by Congress, other issues remained unresolved. Having repudiated its own currency and no power of taxation, Congress did not have an independent source of revenue to pay off its domestic and foreign debts incurred during the war. Since the Continental Army had been demobilized no protection was being provided for settlers in the West or against foreign invasion. Domestic trade was being increasingly disrupted during the 1780s as more states began to impose tariffs on goods from other states. Unable to resolve these and other issues Congress endorsed a proposed plan to hold a convention to meet in Philadelphia in May of 1787 to revise the Articles of Confederation.

Rather than amend the Articles, the delegates to the convention voted to replace them entirely with a new form of national government under the Constitution. There are of course many ways to assess the significance of this truly remarkable achievement. One is to view the Constitution as an economic document. Among other things the Constitution specifically addressed many of the economic problems that confronted Congress during and after the Revolutionary War. Drawing upon lessons learned in financing the war, no state under the Constitution would be allowed to coin money or issue bills of credit. Only the national government could coin money and regulate its value. Punishment was to be provided for counterfeiting. The problems associated with the states contributing to a common treasury under the Articles were overcome by giving the national government the coercive power of taxation. Part of the revenue was to be used to pay for the common defense of the United States. No longer would states be allowed to impose tariffs as they had done during the 1780s. The national government was now given the power to regulate both foreign and interstate commerce. As a result the nation was to become a common market. There is a general consensus among economic historians today that the economic significance of the ratification of the Constitution was to lay the institutional foundation for long run growth. From the point of view of the former colonists, however, it meant they had succeeded in transferring the power to tax and regulate commerce from Parliament to the new national government of the United States.

TABLES
Table 1 Continental Dollar Emissions (1775-1779)

Year of Emission Nominal Dollars Emitted (000) Annual Emission As Share of Total Nominal Stock Emitted Specie Value of Annual Emission (000) Annual Emission As Share of Total Specie Value Emitted
1775 $6,000 3% $6,000 15%
1776 19,000 8 15,330 37
1777 13,000 5 4,040 10
1778 63,000 26 10,380 25
1779 140,500 58 5,270 13
Total $241,500 100% $41,020 100%

Source: Bullock (1895), 135.
Table 2 Currency Emissions by the States (1775-1781)

Year of Emission Nominal Dollars Emitted (000) Year of Emission Nominal Dollars Emitted (000)
1775 $4,740 1778 $9,118
1776 13,328 1779 17,613
1777 9,573 1780 66,813
1781 123.376
Total $27,641 Total $216,376

Source: Robinson (1969), 327-28.

References

Baack, Ben. “Forging a Nation State: The Continental Congress and the Financing of the War of American Independence.” Economic History Review 54, no.4 (2001): 639-56.

Brewer, John. The Sinews of Power: War, Money and the English State, 1688- 1783. London: Cambridge University Press, 1989.

Buel, Richard. In Irons: Britain’s Naval Supremacy and the American Revolutionary Economy. New Haven: Yale University Press, 1998.

Bullion, John L. A Great and Necessary Measure: George Grenville and the Genesis of the Stamp Act, 1763-1765. Columbia: University of Missouri Press, 1982.

Bullock, Charles J. “The Finances of the United States from 1775 to 1789, with Especial Reference to the Budget.” Bulletin of the University of Wisconsin 1 no. 2 (1895): 117-273.

Calomiris, Charles W. “Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental.” Journal of Economic History 48 no. 1 (1988): 47-68.

Egnal, Mark. A Mighty Empire: The Origins of the American Revolution. Ithaca: Cornell University Press, 1988.

Ferguson, E. James. The Power of the Purse: A History of American Public Finance, 1776-1790. Chapel Hill: University of North Carolina Press, 1961.

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From GATT to WTO: The Evolution of an Obscure Agency to One Perceived as Obstructing Democracy

Susan Ariel Aaronson, National Policy Association

Historical Roots of GATT and the Failure of the ITO

While the United States has always participated in international trade, it did not take a leadership role in global trade policy making until the Great Depression. One reason for this is that under the US Constitution, Congress has responsibility for promoting and regulating commerce, while the executive branch has responsibility for foreign policy. Thus, trade policy was a tug of war between the branches and the two branches did not always agree on the mix of trade promotion and protection. However, in 1934, the United States began an experiment, the Reciprocal Trade Agreements Act of 1934. In the hopes of expanding employment, Congress agreed to permit the executive branch to negotiate bilateral trade agreements. (Bilateral agreements are those between two parties — for example, the US and another country.)

During the 1930s, the amount of bilateral negotiation under this act was fairly limited, and in truth it did not do much to expand global or domestic trade. However, the Second World War led policy makers to experiment on a broader level. In the 1940s, working with the British government, the United States developed two innovations to expand and govern trade among nations. These mechanisms were called the General Agreement on Tariffs and Trade (GATT) and the ITO (International Trade Organization). GATT was simply a temporary multilateral agreement designed to provide a framework of rules and a forum to negotiate trade barrier reductions among nations. It was built on the Reciprocal Trade Agreements Act, which allowed the executive branch to negotiate trade agreements, with temporary authority from the Congress.

The ITO

The ITO, in contrast, set up a code of world trade principles and a formal international institution. The ITO’s architects were greatly influenced by John Maynard Keynes, the British economist. The ITO represented an internationalization of the view that governments could play a positive role in encouraging international economic growth. It was incredibly comprehensive: including chapters on commercial policy, investment, employment and even business practices (what we call antitrust or competition policies today). The ITO also included a secretariat with the power to arbitrate trade disputes. But the ITO was not popular. It also took a long time to negotiate. Its final charter was signed by 54 nations at the UN Conference on Trade and Employment in Havana in March 1948, but this was too late. The ITO missed the flurry of support for internationalism that accompanied the end of WWII and which led to the establishment of agencies such as the UN, the IMF and the World Bank. The US Congress never brought membership in the ITO to a vote, and when the president announced that he would not seek ratification of the Havana Charter, the ITO effectively died. Consequently the provisional GATT (which was not a formal international organization) governed world trade until 1994 (Aaronson, 1996, 3-5).

GATT

GATT was a club, albeit a club that was increasingly popular. But GATT was not a treaty. The United States (and other nations) joined GATT under its Protocol of Provisional Application. This meant that the provisions of GATT were binding only insofar as they are not inconsistent with a nation’s existing legislation. With this clause, the United States could spur trade liberalization or contravene the rules of GATT when politically or economically necessary (US Tariff Commission, 1950, 19-21, 20 note 4).

From 1948 until 1993, GATT’s purview and membership grew dramatically. During this period, GATT sponsored eight trade rounds where member nations, called contracting parties, agreed to mutually reduce trade barriers. But trade liberalization under the GATT came with costs to some Americans. Important industries in the United States such as textiles, television, steel and footwear suffered from foreign competition and some workers lost jobs. However, most Americans benefited from this growth in world trade; as consumers they got a cheaper and more diverse supply of goods, as producers, most found new markets and growing employment. From 1948 to about 1980 this economic growth came at little cost to the American economy as a whole or to American democracy (Aaronson, 1996, 133-134).

The Establishment of the WTO

By the late 1980s, a growing number of nations decided that GATT could better serve global trade expansion if it became a formal international organization. In 1988, the US Congress, in the Omnibus Trade and Competitiveness Act, explicitly called for more effective dispute settlement mechanisms. They pressed for negotiations to formalize GATT and to make it a more powerful and comprehensive organization. The result was the World Trade Organization, (WTO), which was established during the Uruguay Round (1986-1993) of GATT negotiations and which subsumed GATT. The WTO provides a permanent arena for member governments to address international trade issues and it oversees the implementation of the trade agreements negotiated in the Uruguay Round of trade talks

The WTO’s Powers

The WTO is not simply GATT transformed into a formal international organization. It covers a much broader purview, including subsidies, intellectual property, food safety and other policies that were once solely the subject of national governments. The WTO also has strong dispute settlement mechanisms. As under GATT, panels weigh trade disputes, but these panels have to adhere to a strict time schedule. Moreover, in contrast with GATT procedure, no country can veto or delay panel decisions. If US laws protecting the environment (such as laws requiring gas mileage standards) were found to be de facto trade impediments, the US must take action. It can either change its law, do nothing and face retaliation, or compensate the other party for lost trade if it keeps such a law (Jackson, 1994).

The WTO’s Mixed Record

Despite its broader scope and powers, the WTO has had a mixed record. Nations have clamored to join this new organization and receive the benefits of expanded trade and formalized multinational rules. Today the WTO has grown 142 members. Nations such as China, Russia, Saudi Arabia and Ukraine hope to join the WTO soon. But since the WTO was created, its members have not been able to agree on the scope of a new round of trade talks. Many developing countries believe that their industrialized trading partners have not fully granted them the benefits promised under the Uruguay Round of GATT. Some countries regret including intellectual property protections under the aegis of the WTO.

Protests

A wide range of citizens has become concerned about the effect of trade rules upon the achievement of other important policy goals. In India, Latin America, Europe, Canada and the United States, alarmed citizens have taken to the streets to protest globalization and in particular what they perceive as the undemocratic nature of the WTO. During the fiftieth anniversary of GATT in Geneva in 1998, some 30,000 people rioted. During the Seattle Ministerial Meetings in November/December 1999, again about 30,000 people protested, some violently. When the WTO attempts to kick off a new round in Doha, Qatar later this year, protestors are again planning to disrupt the proceedings (Aaronson, 2001).

Explaining Recent Protests about the WTO

During the first thirty years of GATT’s history, the relationship of trade policy to human rights, labor rights, consumer protection, and the environment were essentially “off-stage.” This is because GATT’s role was limited to governing how nations used traditional tools of economic protection — border measures such as tariffs and quotas.

GATT’s Scope Was Initially Limited

Why did policy makers limit the scope of GATT? The US could participate in GATT negotiations only by Congress granting extensions of the Reciprocal Trade Agreements Act of 1934. But this act allowed the president only to negotiate commercial policy. As a result, GATT said almost nothing about the effects of trade (whether trade degrades the environment or injures workers) or the conditions of trade (whether disparate systems of regulation, such as consumer, environmental, or labor standards, allow for fair competition). From the 1940s to the 1970s, few policy makers would admit that their systems of regulations sometimes distorted trade. Such regulations were the turf of domestic policy makers, not foreign policy makers. GATT also said little about domestic norms or regulations. In 1971, GATT established a working party on environmental measures and international trade, but it did not meet until 1991, after much pressure from some European nations (Charnovitz, 1992, 341, 348).

GATT’s Scope Widened to Include Domestic Policies

Policy makers and economists have long recognized that trade and social regulations can intersect. Although the United States did not ban trade in slaves until 1807, the US was among the first nations to ban goods manufactured by forced labor (prison labor) in the Tariff Act of 1890 (section 51) (Aaronson, 2001, 44). This provision influenced many trade agreements that followed, including GATT, which includes a similar provision. But in the 1970s, public officials began to admit that domestic regulations, such as health and safety regulations, could with or without intent, also distort trade (Keck and Sikkink, 1998, 41-47). They worked to include rules governing such regulations in the purview of GATT and other trade agreements. This process began in the Tokyo Round (1973-79) of GATT negotiations, but came to fruition during the Uruguay Round. Policy makers expanded the turf of trade agreements to include rules governing once domestic policies such as intellectual property, food safety, and subsidies (GATT Secretariat, 1993, Annex IV, 91).

Rising Importance of International Trade and Trade Policy

In 1970, the import and export of American goods and services added up to only about 11.5% of gross domestic product. This climbed swiftly to 20.5% in 1980 and at the end of the century averaged about 24%. (In addition, by the mid-1980s a persistent trade deficit emerged, with imports exceeding exports by significant amounts year after year — imports exceeded exports by 3% of GDP in 1987, for example.)

Public Opinion Has Become More Concerned about Trade Policy

Partly because of the rising importance of international trade, since at least 1980, the relationship of trade policy to the achievement of other public policy goals became an important and contentious issue. A growing number of citizens began to question whether trade agreements should include such social or environmental issues. Others argued that trade agreements had the effect of undermining domestic regulations such as environmental, food safety or consumer regulations. Still others argued that trade agreements did not sufficiently regulate the behavior of global corporations. Although relatively few Americans have taken to the streets to protest trade laws, polling data reveal that Americans agree with some of the principal concerns of the protesters. They want trade agreements to raise the environmental and labor standards in the nations with which Americans trade.

Most Agree That Trade Fuels Economic Growth

On the other hand, most people agree with analysts who argue that trade helps fuel American growth (PIPA, 1999). (For example, 93% of economists surveyed agreed that tariffs and import quotas usually reduce general economic welfare (Alston, Kearl, Vaughan, 1992).) Economists argue that the US must trade if it is to maintain its high standard of living. Autarchy is not a practical option even for America’s mighty and diversified economy. Although the US is blessed with navigable rivers, fertile soil, abundant resources, a hard working populace, and a huge internal market, Americans must trade because they cannot efficiently or sufficiently produce all the goods and services that citizens desire. Moreover, there are some goods that Americans cannot produce. That is why America from the beginning of its history has signed trade agreements with other nations.

Building a National Consensus on Trade Policy Is a Difficult Balancing Act

For the last decade, Americans have not been able to find common ground on the turf of trade policy and how to ensure that trade agreements such as those enforced by the WTO don’t thwart achievement of other important policy goals. After 1993, American business did not push for a new round of trade talks, as the global and the domestic economy prospered. But in recent months (early 2001), business has been much more active, as has George W. Bush’s Administration, in trying to develop a new round of trade talks under the WTO. Business has become more eager as economic growth has slowed. Moreover, American business leaders seem to have learned the lessons of the 1999 Seattle protests. The members of the Business Roundtable, an organization of chief executive officers from America’s largest, most prestigious companies have noted, “we must first build a national consensus on trade policy… Building this consensus will…require the careful consideration of international labor and environmental issues…that cannot be ignored.” The Roundtable concluded by noting the problem is not whether these issues are trade policy issues. They stressed that trade proponents and critics must find a strategy — a trade policy approach that allows negotiators to address these issues constructively (Business Roundtable, 2001). The Roundtable was essentially saying that we must find common ground and must acknowledge the relationship of trade policy to the achievement of other policy goals. The Roundtable was not alone. Other formal and informal business groups such as the National Association of Manufacturers, as well as environmental and labor groups, have tried to develop an inventory of ideas on how to proceed in pursuing trade agreements while also promoting other important policy goals such as environmental protection or labor rights. Republican members of Congress responded publicly to these efforts with a warning that such efforts could compromise the President’s strategy for
trade liberalization. As of this writing, however, the US Trade Representative has not announced how it will resolve the relationship between trade and social/environmental policy goals within specific trade agreements, such as the WTO. Resolving these issues will undoubtedly be very difficult, so the WTO will probably remain the source of contention.

References

Aaronson, Susan. Trade and the American Dream: A Social History of Postwar Trade Policy. Lexington, KY: University Press of Kentucky, 1996.

Aaronson, Susan. Taking Trade to the Streets: The Lost History of Efforts to Shape Globalization. Ann Arbor: University of Michigan Press, 2001.

Alston, Richard M., J.R. Kearl, and Michael B. Vaughan. “Is There a Consensus among Economists in the 1990’s?” American Economic Review: Papers and Proceedings 82 (1992): 203-209.

Business Roundtable. “The Case for US Trade Leadership: The United States is Falling Behind.” Statement 2/9/2001. www.brt.org.

Charnovitz, Steve. “Environmental and Labour Standards in Trade.” World Economy 15 (1992).

GATT Secretariat. “Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations.” December 15, 1993.

Jackson, John H. “The World Trade Organization, Dispute Settlement and Codes of Conduct.” In The New GATT: Implications for the United States, edited by Susan M. Collins and Barry P. Bosworth, 63-75. Washington: Brookings, 1994.

Keck, Margaret E. and Kathryn Sikkink. Activists beyond Borders: Advocacy Networks in International Politics. Ithaca: Cornell University Press, 1998.

Program on International Policy Attitudes. “Americans on Globalization.” Poll conducted October 21-October 29, 1999 with 18,126 adults. See www.pipa.org/OnlineReports/Globalization/executive_summary.html

US Tariff Commission. Operation of the Trades Agreements Program, Second Report,

An Overview of the Economic History of Uruguay since the 1870s

Luis Bértola, Universidad de la República — Uruguay

Uruguay’s Early History

Without silver or gold, without valuable species, scarcely peopled by gatherers and fishers, the Eastern Strand of the Uruguay River (Banda Oriental was the colonial name; República Oriental del Uruguay is the official name today) was, in the sixteenth and seventeenth centuries, distant and unattractive to the European nations that conquered the region. The major export product was the leather of wild descendants of cattle introduced in the early 1600s by the Spaniards. As cattle preceded humans, the state preceded society: Uruguay’s first settlement was Colonia del Sacramento, a Portuguese military fortress founded in 1680, placed precisely across from Buenos Aires, Argentina. Montevideo, also a fortress, was founded by the Spaniards in 1724. Uruguay was on the border between the Spanish and Portuguese empires, a feature which would be decisive for the creation, with strong British involvement, in 1828-1830, of an independent state.

Montevideo had the best natural harbor in the region, and rapidly became the end-point of the trans-Atlantic routes into the region, the base for a strong commercial elite, and for the Spanish navy in the region. During the first decades after independence, however, Uruguay was plagued by political instability, precarious institution building and economic retardation. Recurrent civil wars with intensive involvement by Britain, France, Portugal-Brazil and Argentina, made Uruguay a center for international conflicts, the most important being the Great War (Guerra Grande), which lasted from 1839 to 1851. At its end Uruguay had only about 130,000 inhabitants.

“Around the middle of the nineteenth century, Uruguay was dominated by the latifundium, with its ill-defined boundaries and enormous herds of native cattle, from which only the hides were exported to Great Britain and part of the meat, as jerky, to Brazil and Cuba. There was a shifting rural population that worked on the large estates and lived largely on the parts of beef carcasses that could not be marketed abroad. Often the landowners were also the caudillos of the Blanco or Colorado political parties, the protagonists of civil wars that a weak government was unable to prevent” (Barrán and Nahum, 1984, 655). This picture still holds, even if it has been excessively stylized, neglecting the importance of subsistence or domestic-market oriented peasant production.

Economic Performance in the Long Run

Despite its precarious beginnings, Uruguay’s per capita gross domestic product (GDP) growth from 1870 to 2002 shows an amazing persistence, with the long-run rate averaging around one percent per year. However, this apparent stability hides some important shifts. As shown in Figure 1, both GDP and population grew much faster before the 1930s; from 1930 to 1960 immigration vanished and population grew much more slowly, while decades of GDP stagnation and fast growth alternated; after the 1960s Uruguay became a net-emigration country, with low natural growth rates and a still spasmodic GDP growth.

GDP growth shows a pattern featured by Kuznets-like swings (Bértola and Lorenzo 2004), with extremely destructive downward phases, as shown in Table 1. This cyclical pattern is correlated with movements of the terms of trade (the relative price of exports versus imports), world demand and international capital flows. In the expansive phases exports performed well, due to increased demand and/or positive terms of trade shocks (1880s, 1900s, 1920s, 1940s and even during the Mercosur years from 1991 to 1998). Capital flows would sometimes follow these booms and prolong the cycle, or even be a decisive force to set the cycle up, as were financial flows in the 1970s and 1990s. The usual outcome, however, has been an overvalued currency, which blurred the debt problem and threatened the balance of trade by overpricing exports. Crises have been the result of a combination of changing trade conditions, devaluation and over-indebtedness, as in the 1880s, early 1910s, late 1920s, 1950s, early 1980s and late 1990s.

Population and per capita GDP of Uruguay, 1870-2002 (1913=100)

Table 1: Swings in the Uruguayan Economy, 1870-2003

Per capita GDP fall (%) Length of recession (years) Time to pre-crisis levels (years) Time to next crisis (years)
1872-1875 26 3 15 16
1888-1890 21 2 19 25
1912-1915 30 3 15 19
1930-1933 36 3 17 24-27
1954/57-59 9 2-5 18-21 27-24
1981-1984 17 3 11 17
1998-2003 21 5

Sources: See Figure 1.

Besides its cyclical movement, the terms of trade showed a sharp positive trend in 1870-1913, a strongly fluctuating pattern around similar levels in 1913-1960 and a deteriorating trend since then. While the volume of exports grew quickly up to the 1920s, it stagnated in 1930-1960 and started to grow again after 1970. As a result, the purchasing power of exports grew fourfold in 1870-1913, fluctuated along with the terms of trade in 1930-1960, and exhibited a moderate growth in 1970-2002.

The Uruguayan economy was very open to trade in the period up to 1913, featuring high export shares, which naturally declined as the rapidly growing population filled in rather empty areas. In 1930-1960 the economy was increasingly and markedly closed to international trade, but since the 1970s the economy opened up to trade again. Nevertheless, exports, which earlier were mainly directed to Europe (beef, wool, leather, linseed, etc.), were increasingly oriented to Argentina and Brazil, in the context of bilateral trade agreements in the 1970s and 1980s and of Mercosur (the trading zone encompassing Argentina, Brazil, Paraguay and Uruguay) in the 1990s.

While industrial output kept pace with agrarian export-led growth during the first globalization boom before World War I, the industrial share in GDP increased in 1930-54, and was mainly domestic-market orientated. Deindustrialization has been profound since the mid-1980s. The service sector was always large: focusing on commerce, transport and traditional state bureaucracy during the first globalization boom; focusing on health care, education and social services, during the import-substituting industrialization (ISI) period in the middle of the twentieth century; and focusing on military expenditure, tourism and finance since the 1970s.

The income distribution changed markedly over time. During the first globalization boom before World War I, an already uneven distribution of income and wealth seems to have worsened, due to massive immigration and increasing demand for land, both rural and urban. However, by the 1920s the relative prices of land and labor changed their previous trend, reducing income inequality. The trend later favored industrialization policies, democratization, introduction of wage councils, and the expansion of the welfare state based on an egalitarian ideology. Inequality diminished in many respects: between sectors, within sectors, between genders and between workers and pensioners. While the military dictatorship and the liberal economic policy implemented since the 1970s initiated a drastic reversal of the trend toward economic equality, the globalizing movements of the 1980s and 1990s under democratic rule didn’t increase equality. Thus, inequality remains at the higher levels reached during the period of dictatorship (1973-85).

Comparative Long-run Performance

If the stable long-run rate of Uruguayan per capita GDP growth hides important internal transformations, Uruguay’s changing position in the international scene is even more remarkable. During the first globalization boom the world became more unequal: the United States forged ahead as the world leader (nearly followed by other settler economies); Asia and Africa lagged far behind. Latin America showed a confusing map, in which countries as Argentina and Uruguay performed rather well, and others, such as the Andean region, lagged far behind (Bértola and Williamson 2003). Uruguay’s strong initial position tended to deteriorate in relation to the successful core countries during the late 1800s, as shown in Figure 2. This trend of negative relative growth was somewhat weak during the first half of the twentieth century, improved significantly during the 1960s, as the import-substituting industrialization model got exhausted, and has continued since the 1970s, despite policies favoring increased integration into the global economy.

 Per capita GDP of Uruguay relative to four core countries,  1870-2002

If school enrollment and literacy rates are reasonable proxies for human capital, in late 1800s both Argentina and Uruguay had a great handicap in relation to the United States, as shown in Table 2. The gap in literacy rates tended to disappear — as well as this proxy’s ability to measure comparative levels of human capital. Nevertheless, school enrollment, which includes college-level and technical education, showed a catching-up trend until the 1960’s, but reverted afterwards.

The gap in life-expectancy at birth has always been much smaller than the other development indicators. Nevertheless, some trends are noticeable: the gap increased in 1900-1930; decreased in 1930-1950; and increased again after the 1970s.

Table 2: Uruguayan Performance in Comparative Perspective, 1870-2000 (US = 100)

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
GDP per capita

Uruguay

101 65 63 27 32 27 33 27 26 24 19 18 15 16

Argentina

63 34 38 31 32 29 25 25 24 21 15 16

Brazil

23 8 8 8 8 8 7 9 9 13 11 10
Latin America 13 12 13 10 9 9 9 6 6

USA

100 100 100 100 100 100 100 100 100 100 100 100 100 100
Literacy rates

Uruguay

57 65 72 79 85 91 92 94 95 97 99

Argentina

57 65 72 79 85 91 93 94 94 96 98

Brazil

39 38 37 42 46 51 61 69 76 81 86

Latin America

28 30 34 37 42 47 56 65 71 77 83

USA

100 100 100 100 100 100 100 100 100 100 100
School enrollment

Uruguay

23 31 31 30 34 42 52 46 43

Argentina

28 41 42 36 39 43 55 44 45

Brazil

12 11 12 14 18 22 30 42

Latin America

USA

100 100 100 100 100 100 100 100 100
Life expectancy at birth

Uruguay

102 100 91 85 91 97 97 97 95 96 96

Argentina

81 85 86 90 88 90 93 94 95 96 95
Brazil 60 60 56 58 58 63 79 83 85 88 88
Latin America 65 63 58 58 59 63 71 77 81 88 87
USA 100 100 100 100 100 100 100 100 100 100 100

Sources: Per capita GDP: Maddison (2001) and Astorga, Bergés and FitzGerald (2003). Literacy rates and life expectancy; Astorga, Bergés and FitzGerald (2003). School enrollment; Bértola and Bertoni (1998).

Uruguay during the First Globalization Boom: Challenge and Response

During the post-Great-War reconstruction after 1851, Uruguayan population grew rapidly (fueled by high natural rates and immigration) and so did per capita output. Productivity grew due to several causes including: the steam ship revolution, which critically reduced the price spread between Europe and America and eased access to the European market; railways, which contributed to the unification of domestic markets and reduced domestic transport costs; the diffusion and adaptation to domestic conditions of innovations in cattle-breeding and services; a significant reduction in transaction costs, related to a fluctuating but noticeable process of institutional building and strengthening of the coercive power of the state.

Wool and woolen products, hides and leather were exported mainly to Europe; salted beef (tasajo) to Brazil and Cuba. Livestock-breeding (both cattle and sheep) was intensive in natural resources and dominated by large estates. By the 1880s, the agrarian frontier was exhausted, land properties were fenced and property rights strengthened. Labor became abundant and concentrated in urban areas, especially around Montevideo’s harbor, which played an important role as a regional (supranational) commercial center. By 1908, it contained 40 percent of the nation’s population, which had risen to more than a million inhabitants, and provided the main part of Uruguay’s services, civil servants and the weak and handicraft-dominated manufacturing sector.

By the 1910s, Uruguayan competitiveness started to weaken. As the benefits of the old technological paradigm were eroding, the new one was not particularly beneficial for resource-intensive countries such as Uruguay. International demand shifted away from primary consumption, the population of Europe grew slowly and European countries struggled for self-sufficiency in primary production in a context of soaring world supply. Beginning in the 1920s, the cattle-breeding sector showed a very poor performance, due to lack of innovation away from natural pastures. In the 1930’s, its performance deteriorated mainly due to unfavorable international conditions. Export volumes stagnated until the 1970s, while purchasing power fluctuated strongly following the terms of trade.

Inward-looking Growth and Structural Change

The Uruguayan economy grew inwards until the 1950s. The multiple exchange rate system was the main economic policy tool. Agrarian production was re-oriented towards wool, crops, dairy products and other industrial inputs, away from beef. The manufacturing industry grew rapidly and diversified significantly, with the help of protectionist tariffs. It was light, and lacked capital goods or technology-intensive sectors. Productivity growth hinged upon technology transfers embodied in imported capital goods and an intensive domestic adaptation process of mature technologies. Domestic demand grew also through an expanding public sector and the expansion of a corporate welfare state. The terms of trade substantially impacted protectionism, productivity growth and domestic demand — the government raised money by manipulating exchange rates, so that when export prices rose the state had a greater capacity to protect the manufacturing sector through low exchange rates for capital goods, raw material and fuel imports and to spur productivity increases by imports of capital, while protection allowed industry to pay higher wages and thus expand domestic demand.

However, rent-seeking industries searching for protectionism and a weak clienteslist state, crowded by civil servants recruited in exchange for political favors to the political parties, directed structural change towards a closed economy and inefficient management. The obvious limits to inward looking growth of a country peopled by only about two million inhabitants were exacerbated in the late 1950s as terms of trade deteriorated. The clientelist political system, which was created by both traditional parties while the state was expanding at the national and local level, was now not able to absorb the increasing social conflicts, dyed by stringent ideological confrontation, in a context of stagnation and huge fiscal deficits.

Re-globalization and Regional Integration

The dictatorship (1973-1985) started a period of increasing openness to trade and deregulation which has persisted until the present. Dynamic integration into the world market is still incomplete, however. An attempt to return to cattle-breeding exports, as the engine of growth, was hindered by the oil crises and the ensuing European response, which restricted meat exports to that destination. The export sector was re-orientated towards “non-traditional exports” — i.e., exports of industrial goods made of traditional raw materials, to which low-quality and low-wage labor was added. Exports were also stimulated by means of strong fiscal exemptions and negative real interest rates and were re-orientated to the regional market (Argentina and Brazil) and to other developing regions. At the end of the 1970s, this policy was replaced by the monetarist approach to the balance of payments. The main goal was to defeat inflation (which had continued above 50% since the 1960s) through deregulation of foreign trade and a pre-announced exchange rate, the “tablita.” A strong wave of capital inflows led to a transitory success, but the Uruguayan peso became more and more overvalued, thus limiting exports, encouraging imports and deepening the chronic balance of trade deficit. The “tablita” remained dependent on increasing capital inflows and obviously collapsed when the risk of a huge devaluation became real. Recession and the debt crisis dominated the scene of the early 1980s.

Democratic regimes since 1985 have combined natural resource intensive exports to the region and other emergent markets, with a modest intra-industrial trade mainly with Argentina. In the 1990s, once again, Uruguay was overexposed to financial capital inflows which fueled a rather volatile growth period. However, by the year 2000, Uruguay had a much worse position in relation to the leaders of the world economy as measured by per capita GDP, real wages, equity and education coverage, than it had fifty years earlier.

Medium-run Prospects

In the 1990s Mercosur as a whole and each of its member countries exhibited a strong trade deficit with non-Mercosur countries. This was the result of a growth pattern fueled by and highly dependent on foreign capital inflows, combined with the traditional specialization in commodities. The whole Mercosur project is still mainly oriented toward price competitiveness. Nevertheless, the strongly divergent macroeconomic policies within Mercosur during the deep Argentine and Uruguayan crisis of the beginning of the twenty-first century, seem to have given place to increased coordination between Argentina and Brazil, thus making of the region a more stable environment.

The big question is whether the ongoing political revival of Mercosur will be able to achieve convergent macroeconomic policies, success in international trade negotiations, and, above all, achievements in developing productive networks which may allow Mercosur to compete outside its home market with knowledge-intensive goods and services. Over that hangs Uruguay’s chance to break away from its long-run divergent siesta.

References

Astorga, Pablo, Ame R. Bergés and Valpy FitzGerald. “The Standard of Living in Latin America during the Twentieth Century.” University of Oxford Discussion Papers in Economic and Social History 54 (2004).

Barrán, José P. and Benjamín Nahum. “Uruguayan Rural History.” Latin American Historical Review, 1985.

Bértola, Luis. The Manufacturing Industry of Uruguay, 1913-1961: A Sectoral Approach to Growth, Fluctuations and Crisis. Publications of the Department of Economic History, University of Göteborg, 61; Institute of Latin American Studies of Stockholm University, Monograph No. 20, 1990.

Bértola, Luis and Reto Bertoni. “Educación y aprendizaje en escenarios de convergencia y divergencia.” Documento de Trabajo, no. 46, Unidad Multidisciplinaria, Facultad de Ciencias Sociales, Universidad de la República, 1998.

Bértola, Luis and Fernando Lorenzo. “Witches in the South: Kuznets-like Swings in Argentina, Brazil and Uruguay since the 1870s.” In The Experience of Economic Growth, edited by J.L. van Zanden and S. Heikenen. Amsterdam: Aksant, 2004.

Bértola, Luis and Gabriel Porcile. “Argentina, Brasil, Uruguay y la Economía Mundial: una aproximación a diferentes regímenes de convergencia y divergencia.” In Ensayos de Historia Económica by Luis Bertola. Montevideo: Uruguay en la región y el mundo, 2000.

Bértola, Luis and Jeffrey Williamson. “Globalization in Latin America before 1940.” National Bureau of Economic Research Working Paper, no. 9687 (2003).

Bértola, Luis and others. El PBI uruguayo 1870-1936 y otras estimaciones. Montevideo, 1998.

Maddison, A. Monitoring the World Economy, 1820-1992. Paris: OECD, 1995.

Maddison, A. The World Economy: A Millennial

Citation: Bertola, Luis. “An Overview of the Economic History of Uruguay since the 1870s”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/article/Bertola.Uruguay.final