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The Road from Ruin: How to Revive Capitalism and Put America Back on Top

Author(s):Bishop, Matthew
Green, Michael
Reviewer(s):Neill, Robin F.

Published by EH.NET (June 2010)

Matthew Bishop and Michael Green, The Road from Ruin: How to Revive Capitalism and Put America Back on Top.? New York: Crown Business [Random House], 2010. viii + 373 pp. $27 (hardcover), ISBN: 978-0-307-46422-4.?

Reviewed for EH.NET by Robin F. Neill, Department of Economics, Carleton University, Ottawa and University of Prince Edward Island.


There are three separate narratives in The Road from Ruin.? The first is an account of the events immediately leading up to the crash of 2008 (chapters one through five).? The third is a set of proposals to rectify the causes of the crash (chapters six through ten).? Giving point to these is a pervasive third narrative, a case-substantiated thesis about a fundamental element in all sudden economic downturns.? The first case presented is the collapse of ?tulip mania? in 1637.? The last cases are the deflating of the dot com bubble in 2000, and the subprime mortgage debacle of 2008.? Apart from the substantiation of the thesis, there is little in the narrative of the immediate causes of the crash of 2008 that cannot be found in any number of other works.?

The set of proposals in the second half of the book indicates that the commentaries flowing from the 2008 crash have turned from simple chronologies of events and the assignment of blame to more sober second thoughts about correcting the deficiencies in the system in which the crash occurred. There are two elements in the set of proposals, a number of suggested polices growing out of the historical thesis, and a general injunction about the reformation of the capitalist system.? The latter is a theme previously put forward by the authors in book form and on the web under the title Philanthrocapitalism (Bloomsbury Press, London, 2008).? The Road from Ruin adds nothing new to this proposed possible reformation of the capitalist market system of economic organization.

The main contribution of The Road from Ruin is its historical thesis, though saying even that is saying too much; because similar theses have been put forward by Charles P. Kindleberger (Manias, Panics, and Crashes: A History of Financial Crises, 2005), Carlota Perez (Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, 2003), Carmen Reinhart and Kenneth Rogoff (This Time It?s Different: Eight Centuries of Financial Folly, 2009), and Richard Lipsey, Kenneth Carlaw, and Clifford Bekar (Economic Transformations: General Purpose Technologies and Long Term Economic Growth, 2005).

What is distinctive in this particular book is its very readable exhaustive listing and description of the historical events that support its substantial thesis.? For example, the 1636 tulip bubble followed the first appearance of limited liability ownership of shares in business enterprises, and the first appearance of a market for shares that included contracts to be fulfilled at some future time.? The South Sea Bubble collapse of 1720 followed the introduction of government support for the value of shares in a particular enterprise. The crash of 1920 followed the introduction of the ticker tape, stock brokers? loans, investment trusts, and the Federal Reserve system.? The crash of 1987 followed the introduction of portfolio insurance and computerized formula trading.? Late twentieth century and early twenty first century crashes followed the introduction of derivatives, hedge funds, credit default swaps, subprime mortgages, and mark-to-market valuations.? Accounts of a number of nineteenth century banking crises and panics and of innovations in financial instruments and institutions associated with them provide material filling in the narrative.

The point being made is that, for the most part, the intruding new instruments and institutions that at first were written down as the causes of financial collapse survived the calamities with which they were associated.? When the smoke cleared they proved to be useful, efficiency generating, innovations.? In fact, their continuing use facilitated and has continued to facilitate the progressive development of the capitalist market system.? Accordingly, the moral with respect to reform following the crash of 2008 is ?don?t throw the baby out with the dirty bath water?.? On the one hand, adjustments in regulation and in the behavior in the private sector will be required to tame the excessive hubris associated with the arrival of new opportunities.? On the other hand, legislation emerging from personalized blame, from political accommodation of an emotional demos, and from a simple reversion to something that worked in a past and obsolescent world will do more damage than good.?

Evidently, Bishop and Green have placed the suggestions of both Paul Krugman (The Return of Depression Economics and the Crash of 2008), and John Brian Taylor (Getting off the Track: How Government Actions Caused, Prolonged and Worsened the Financial Crisis) on the not-useful list.


Note on the authors: Matthew Bishop is U.S. Business Editor of the Economist and a former faculty member of the London Business School.? Michael Green is a London-based writer who previously taught economics at Warsaw University and was a senior official in the British government.

Robin F. Neill, Professor Emeritus, Economics, Carleton University, Ottawa; Adjunct Professor of Economics, University of Prince Edward Island.? Recent publication: ?Varieties of Scientific System: From Veblen to the Postmoderns,? Journal of Economic Issues, September, 2006, pp. 673-691.? Current interest: the principles of Economics.? E-mail:

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
North America
Time Period(s):17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Finance and Modernization: A Transnational and Transcontinental Perspective for the Nineteenth and Twentieth Centuries

Author(s):Feldman, Gerald D.
Hertner, Peter
Reviewer(s):Fear, Jeffrey

Published by EH.NET (January 2010)

Gerald D. Feldman and Peter Hertner, editors, Finance and Modernization: A Transnational and Transcontinental Perspective for the Nineteenth and Twentieth Centuries. Farnham, Surrey, UK: Ashgate, 2008. xviii + 300 pp. $115 (hardcover), ISBN: 978-0-7546-6271-6.

Reviewed for EH.NET by Jeffrey Fear, Department of Business Administration, University of Redlands.

This edited volume is based on a set of papers presented in 2005 at a Vienna conference organized by the European Association for Banking and Financial History. The meeting hosted by the Bank Austria Creditanstalt coincided with the bank?s 150th anniversary. Sadly, the volume is one of the last publications associated with the late Gerald Feldman of the University of California, Berkeley. Peter Hertner of the University of Halle has picked up the proverbial editorial ball to bring this collection of twelve articles to goal. The collection is timely because it reminds us that the period prior to 1914 and the period after the 1980s parallel one another in their trends toward greater liberalization and regionalization. Prior to 1914 Vienna was the fourth largest banking center in Europe behind London, Paris, and Berlin (p. 38). Austrian banks hold a similar position today that they had a century ago (Deiter Stiefel, p. 28). The volume also reminds us that exposure to central eastern European governments and commercial ventures sometimes sparked periodic financial crises that the Viennese financial hub then passed on to global stock exchanges (1873, 1931). Those two crises act as a frame for most of the articles.

The book has four sections. Not surprisingly, the most coherent section centers on banking in Vienna/Austria (Dieter Stiefel, Peter Eigner, Aurel Schubert, and Fritz Weber). The second section has three thematically-oriented articles regarding the efficiency of German stock markets before 1848 (Hartmut Kiehling), Balkan railways and their international financing (Peter Hertner), and the information networks of the Rothschild bank (Rainer Liedtke). The third part consists of three articles on Swedish joint-stock companies (Oskar Broberg), the Holland-based Twentsche Bank (Douwe C.J. van der Werf), and the Ergasias Bank in Greece post-1975 (Margarita Dritsas). The fourth consists of two articles on the Sino-French Banque industrielle de Chine between 1900-1922 (Frank H.H. King) and a short, broad two-century survey of the State Bank of India (Abhik Ray).

This volume highlights some new directions in banking literature that need further research. In line with much historiography on German banking (pp. 42-45), Peter Eigner finds Alexander Gerschenkron?s notion of the universal bank as an institutional substitute for the missing prerequisite of ?original accumulation? wanting. Especially after the 1873 crash, Austrian universal banks were risk-averse, preferring safer public borrowing rather than industrial financing (p. 31) and with an ?aversion to shares? (p. 33). Not until the post-1900 boom did banks turn to industrial lending, but still could not be said to play the role of true venture capitalists (p. 35); more often banks had to rescue industrial firms rather than promote them (p. 47). Aurel Schubert stresses the contradictions during banking crises between monetary and financial stability, whereby the lender-of-last resort policy that might help maintain (short-term) bank and financial stability potentially harms monetary, i.e. currency and price, stability over the long-term ? a dilemma all too real in the crisis of 2009/2010. Schubert argues that during periods of intense crisis, central bankers made decisions under considerable uncertainty so that the risks of lending were often less than the risks of not lending, especially when political pressure comes to bear. With a subtle reading of bank balance sheets, Fritz Weber demonstrates how the 1931 crash that marked a new stage in the Great Depression (unlike the 1873 crash that purified the air); the 1931 crisis was a culmination of a long erosion of bank solvency (a ?creeping crisis,? p. 93) beginning with World War I and the collapse of the Monarchy. Eigner, Schubert, and Weber tend to view the conflation of banking and industry capital not as an efficient solution to informational asymmetries or as a solution to agency problems nor as a way in which banks ?dominated? industry, but as a highly leveraged, inefficient, and downright dangerous institutional arrangement; especially during downturns such bank gearing quickly translated downturns into systemic crises (contagion) and into the domestic ?real economy.? The entwinement of large weakened banks with a deteriorating industrial sector heightened systemic risk levels by the very act of trying to reduce them.

As a whole, the volume lacks a broader theoretical framing and misses a number of opportunities to examine important questions in spite of the virtues of the individual contributions. What might these interlocks and banks at the heart of industrial groups (keiretsu, chaebol, Indian or Mexican family groups with tight ties to banks, or even Swedish Wallenbergs with its myriad interlocks with major industrial firms) mean for understanding financial crises more generally? Did universal banks crowd out or weaken stock exchanges? In spite of/because of (?) the purest forms of universal banking that inspired both Rudolf Hilferding and Joseph Schumpeter, both Berlin and Vienna were important stock exchanges prior to 1914. Hartmut Kiehling tests efficient market hypothesis assumptions and argues that early German stock markets before 1848 began approaching a level of efficiency, broadness, and transparency that enabled a certain volume of fair trading for important stocks. What exactly is the relationship between universal banking and stock exchanges? Vienna would be an important test case.

What ?lessons? does the Vienna story tell us about the rise and fall of financial centers more generally? First, it appears that finance and international diplomacy are important. Vienna could only remain a major financial center as long it was part of the Empire. At most it could become a regional player after the empire collapsed, but its historical importance made it a particularly crucial but weakened player with more potential for crisis than other centers. In spite of the inclusion of two articles on India and China and some references to the 1997/98 Asian financial crisis, more contextualization, theorization, or reflection would have been helpful. Large banks apparently play a special role in the economy as a flywheel between the macroeconomic and microeconomic, most explicit in Fritz Weber?s contribution about the Austrian Creditanstalt (p. 79).

The volume could use greater analytical sharpness on its own themes of modernization and transnationalism. It is stronger on issues of personal and limited liability, systemic risk and contagion. In the concluding remarks, Alice Teichova notes that the contributors made ?no special attempt? to define a concept of modernization (p. 273). Except for Peter Hertner?s contribution on international capital flows into railway corporations of southeastern Europe or Frank King?s on French banking in China, the transnational perspective promised in the subtitle is not highlighted or theorized beyond the individual, local contribution ? somewhat disappointing considering Vienna was one of the most multiethnic cities in Europe with pan-European political and financial connections.

Yet the individual contributions offer many chances to theorize issues of transnational relations ? often within one firm or family. Peter Hertner follows the truly remarkable business ventures of Moritz von Hirsch, whose family connections bridged most of the main western European banking centers, whose business executives were hired all over Europe to promote a railroad to ?European Turkey? ? from Vienna to Constantinople ? that eventually became known as the ?Orient Express.? To help finance it, von Hirsch innovated a new type of Turkish lottery bond that became popular ? and controversial ? all over Europe with small investors. Its directors ranged from Paris, Zurich, and Vienna to Constantinople (Istanbul). Its headquarters lay in Zurich with Credit Suisse handling the day-to-day administration as a ?neutral instance? (pp. 140-142). Hertner?s weaving of financial, business, and diplomatic threads that undergird this venture is impressive. The story of the Orient Express and other Balkan railroads is truly a pan-European one, a European one that we are again seeing today but that was destroyed by increasingly virulent nationalist sentiment, for instance, Macedonian nationalism that targeted the symbol of foreign imperialism ? the railway ? much as terrorists target airlines today.

Frank King focuses on the failed Sino-French joint-venture Banque industrielle de Chine between 1900 and 1922 ? which should have asserted French influence in China. King notes how the ?Powers? attempt to control China?s financial development actually undermined China?s creditworthiness and stunted its modernization. Abhik Ray examines ?two centuries of apex banking? of the State Bank of India, but it had its origins as the Bank of Calcutta/Bank of Bengal by the British. Ray argues that these apex banks built on Scottish banking principles, provided the ?best banking service obtainable in India,? stressing customer service and once going so far as to rebuke a European officer for rudeness vis-?-vis a Indian native clerk who wrote and spoke English (baboo) (p. 265). Douwe C.J. van der Werf, examines the relationship between family succession, legal liability issues, and corporate governance, yet the Twentsche Bank had offices and branches in Amsterdam, Rotterdam, London, Paris, and northwest Germany. What exactly does it mean to operate trans-nationally during this period of globalization? Rainer Liedtke analyzes the pan-European quality of the Rothschilds? network of agents; the Rothschilds needed a multiethnic network of agents to operate in a multi-ethnic world to improve the quality of the information received (p. 158). The Rothschild advantage was not speed ? initially wary about the telegraph ? but the ?precision, the reliability and most importantly the exclusiveness of the information? based on their agents? network. Oskar Broberg examines the rise of the modern joint-stock company with limited liability laws for Sweden, but contextualizes Sweden in the broader pattern of its introduction throughout Europe and America. How exactly did this transnational diffusion process occur? What and how did Sweden learn from these other countries? Broberg?s article highlights that an intellectual-legal history of the diffusion of limited liability throughout Europe is still needed. Margarita Dritsas breaks the general timeframe of the volume yet provides a fascinating account of the Ergasias Bank in Greece since its founding in 1975. Constantinos Kapsaskis conceived of the new bank as one dedicated to small-and-medium sized businesses and drew upon American models of banking, including that of the Small Business Administration, and forced a widely dispersed shareholding (no more than 5% by one person) and transparency based on international accounting standards. Before its merger into Eurobank in 2000, it became one of the largest and most profitable in Greece, if not Europe. In all of these contributions, the transnational element could have been highlighted more.

One remarkable quote taken from Austria Creditanstalt?s 1872 report, written at the height of the speculative wave of company promotions might act as a timely reminder (p. 79): ?It would not have been hard for us to raise our margins through extraordinary profits, had we gone on to found new commercial or industrial enterprises with a laxer method of selection as we had such frequent opportunities, and if we had thought to follow the general mood, only thinking of the momentary advantage to turn our activities to the creation of value that offered only more material for the day-to-day speculation instead of encouraging participation of the public who possessed capital in solidly established corporations.? This volume reminds us how much banks play a special role in the economy between macroeconomics and microeconomics, special intermediaries between depositors and investors, potential guardians of investors on boards of firms, as transmission mechanism between national and international economic developments, and balancing rewards and risks. Woe to those economies whose bankers fail them.

Jeffrey Fear authored Organizing Control: August Thyssen and the Construction of German Management (2005) and ?Cartels? in the Oxford Handbook of Business History, edited by Geoffrey Jones and Jonathan Zeitlin. He is working on a series of comparative articles on German and American banking and corporate governance.

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

Genres of the Credit Economy: Mediating Value in Eighteenth- and Nineteenth-Century Britain

Author(s):Poovey, Mary
Reviewer(s):Mitch, David

Published by EH.NET (January 2009)

Mary Poovey, Genres of the Credit Economy: Mediating Value in Eighteenth- and Nineteenth-Century Britain. Chicago: University of Chicago Press, 2008. x + 511 pp. $59 (cloth), ISBN: 978-0-226-67532-9.

Reviewed for EH.NET by David Mitch, Department of Economics, University of Maryland ?- Baltimore County.

In recent decades, literary critics have generated a body of scholarship that they have come to label the New Economic Criticism. This body of work defies ready summary but suffice it to say that it represents the interest of literary critics in economic literature and matters economic from a variety of perspectives. It has become sufficiently extensive to be the subject of the edited volume by Woodmansee and Osteen (1999). New economic critics are publishing book length studies with major academic presses, hold important chairs in university literature departments (e.g. Marc Shell at Harvard, Catherine Gallagher at Berkeley), and are producing new generations of literature doctorates. Mary Poovey (Samuel Rudin Professor in the Humanities and Professor of English, New York University) is one of the leading new economic critics and her latest work Genres of the Credit Economy can be seen as a contribution to this field and certainly draws heavily on it; on pages 10-14 she provides her own distinctive overview of this field of literary criticism.

Poovey?s book itself is an exercise in what could be called genre analysis and it is both apt and ironic as she herself notes on p. 14 that her latest work further confirms her own originality in producing new intellectual genres. This ability is already on display in one of her earlier books, A History of the Modern Fact (1998), which can be described as a history of epistemology in work on economic and social affairs. That book put forward the plausible, albeit provocative, claim that by the first half of the nineteenth century, writers on economic and social affairs had come to emphasize quantitative measures regarded as objective facts as the foundation of knowledge and policy discussion in contrast with a previous skepticism of such facts. The social constructionist perspective evident in her 1998 book is amply on display in her latest effort. To my mind, she is fundamentally correct in the underlying premises both of her earlier book and of her new one. A History of the Modern Fact presumes that ?quantitative objective facts? in actuality entail considerable amounts of political and social interpretation (e.g. election vote counts, census population totals, national income measures, cost of living and poverty indexes). Her latest book presumes that the functioning of a modern credit economy fundamentally entails elements of trust. I suspect that one could readily find widespread agreement with both premises with the latter in particular being perhaps self-evident. However, in the case of her earlier book there are issues to be raised regarding her chronology of changing cultural attitudes towards quantification in social affairs, her degree of mastery of vast bodies of both contemporaneous literature and more recent historiography, and the extent to which the changes in epistemological cultural attitudes she maps out are primarily relativistic or have entailed genuine social progress. For a quite skeptical take on Poovey?s earlier book by a leading historian of science see Margaret Jacob?s essay in History and Theory (2001).

?Genres of the Credit Economy states in its opening sentences that it tries to address two questions that arise from Poovey?s earlier book: ?If the kind of knowledge that contemporary society values is really the modern fact, then why does the discipline of Literary studies matter? What can Literary scholars do?? (p. 1). As Poovey explains in a footnote to this passage, these dilemmas arise insofar as prioritizing facts tends to devalue the activity of interpretation, the activity that would seem the focus of Literary studies. Although Poovey at points (p. 14) labels her latest book as a history, its chronological development is less linear than in her previous History of the Modern Fact. Her latest book alternates between tracing general intellectual trends and fine-grained textual analysis of specific works; she jumps back and forth in time in her consideration of various genres. After setting forth her general thesis that imaginative, economic, and monetary forms all emerged as distinctive genres in response to the rise of a credit economy, the core of Poovey?s text consists of detailed readings concentrating on modes of argumentation, organization, and style in selected works of economic and imaginative literature written in Britain between 1650 and 1870.

Poovey acknowledges that other intellectual genres that she does not consider were involved in the modern differentiation of economics and literary criticism; she points in particular to natural philosophy (p. 5). However, she notes ?a conviction that many contemporary scholars share ? that economics and Literary studies have some special relationship to each other.? She goes on to argue that the two fields should be studied together because of a common concern with what literary critics term the problematic of representation. Poovey defines the problematic of representation as ?one way scholars describe the gap that separates the sign from its referrant or ground (of value or meaning), whether the gap takes the form of deferral, substitution, obscurity? (p.5). It is perhaps apparent why the relation between sign and referrant should be an on-going concern of literary scholars; however, she argues that financial crises have also brought this problem to the fore in the fields of economics and finance and that it is useful to consider the parallel treatments of this problem in the cases of the two disciplines. She also takes note of the frequent employment of financial themes by nineteenth century British novelists.

Another term sometimes used by literary critics also recurs throughout her discussion: naturalized (or alternatively naturalization). By naturalization Poovey means a process by which behaviors which are initially new and strange and hence subject to suspicion and scrutiny become customary and taken for granted. She emphasizes its importance for the use of new types of monetary instruments in a credit economy: ?money has been naturalized: through the social process that I describe in this book, money has become so familiar that its writing has seemed to disappear and it has seemed to lose its history as (various forms of) writing? (p.3). To highlight the significance she attaches to these two terms, she introduces each of them by placing them in italics in the text (pp. 3, 5). And one of Poovey?s central claims is that both naturalization and the problematic of representation were central to functioning of money in the rise of the modern credit economy.

In a preamble, she describes the emergence of imaginative literature, financial writing, and monetary instruments as distinctive written genres over the course of the eighteenth century in Britain. She argues that all three genres developed as ways of ?naturalizing? the use of money and hence of dealing with the problematic of representation inherent in monetary instruments: that such instruments frequently only symbolize some underlying item of value without guaranteeing access to the item itself.

The first two self-identified chapters of the book consider writing about money in the seventeenth and eighteenth centuries. The first chapter takes up the attention given by contemporaries between the late seventeenth and early nineteenth century to the problematic of representation inherent in money. She backs into this through looking at J.R. McCullough?s collection of pamphlets dealing with money. She gives particular attention to Joseph Harris? ?An Essay upon Money and Coins? published in 1757-58, in which he challenges the ideas that either the imprint on a coin?s face or its metallic content is its source of value. Then after quickly touching on Locke?s views on the nature of money, she fast-forwards to debates in the early nineteenth century involving Ricardo, McCullough, and Macaulay among others on the desirability of convertibility between coins, paper money, and bank notes. In the last section of the chapter, Poovey offers the intriguing suggestion that writing regarding money in the eighteenth century frequently blurred the distinction between fact and fiction and she identifies a fact/fiction continuum in this regard. The second chapter looks at episodes in what she identifies as generic differentiation of treatments of Money. She notes that Defoe?s work frequently blurred fact/fiction distinctions and in particular focuses on a manuscript of his since labeled Roxanne. Poovey argues that it was later editors who classified this work as fiction; she suggests that one of Defoe?s aims in this text was the non-fictional one of explaining the workings of credit. One example of the insights her literary background provides is her observation (p. 98) that Defoe employed the classical oral rhetorical device of elaboration, i.e. offering long lists in order to engage listeners in an imaginative flight, in written form, with a similar aim of engaging the reader?s imagination. She turns to parallels between James Steuart?s work on Political Economy and Fielding?s novel Tom Jones, noting similarities in the treatment of personal character in each. She then notes Adam Smith?s more abstract mode of argumentation in contrast with Steuart?s more fictionalized narrative. The chapter concludes with observations on the blend of fact and fiction in Thomas Bridges? Adventures of a Bank-Note (1770-71), a work based on depicting the perspective on passing surroundings a bank note might have as it made its way from holder to holder, including intervals when tucked in a woman?s bosom (p. 149).

A first ?interchapter? then takes up the rise of book publishing and of the issuance of bank commercial paper. This really constitutes her brief notes on matters that are pertinent to issues elsewhere in the book; as she notes herself, these issues have been taken up in much greater depth by other authors; indeed each of these topics deserves and has been given book length treatment by others and I did not find the 17 pages she devotes to them sufficient to add much further insight to this other work.

Chapters three and four take up the emergence of economic writing as a distinctive set of genres in the early nineteenth century. Chapter three takes note of increasing skepticism about the workings of the growing credit economy. It examines publications by critics of paper money such as William Cobbett and John Francis Bray. Chapter four takes up the differentiation of writing on economic theory from financial journalism. After giving relatively brief attention to David Ricardo?s employment of abstraction in his theoretical work, she focuses at some length on J.R. McCullough as a writer engaged in both economic theory and journalism. She then turns to Walter Bagehot?s and D. Morier Evans? emergence as specialized economic journalists while attributing to William Stanley Jevons the effort to define economics as a narrow specialist science, giving particular attention to his interest in developing a sun spot theory of the business cycle. Poovey?s general argument in this chapter is that economic journalism and abstract economic theory became increasingly differentiated in the early to mid nineteenth century as part of a social process of naturalizing credit instruments. Economic journalists such as Bagehot and Evans instilled familiarity with the financial system and depicted the occasional crash or panic as an aberration from normal stability. At the same time the emergence of abstract economic science as practiced by Jevons with his work on sunspot theory ? precisely because it employed arcane, mysterious techniques apparently at variance with observable reality ? in Poovey?s view helped establish an expertise which could testify to the value of bank money. This authority provided a way of dispelling doubts about credit instruments implied by the problematic of representation.

Chapter Five then turns to literary authors and suggests that Wordsworth and Coleridge were keen to separate aesthetic from commercial value in literature. Poovey suggests that their concerns were motivated by the growth in demand for cheap popular publications. In a second interchapter, Poovey notes that recent work by literary critics on Harriet Martineau employs formal aesthetic criteria of organic unity in evaluating Martineau?s work though claiming to deviate from literary formalism. She then proposes an alternative approach to interpretation she labels ?historical description? as a means of engaging with texts while placing them in a larger historical narrative. She illustrates her approach in Chapter Six which offers meticulous readings of novels by Austen, Dickens, Eliot, and Trollope focusing on passages in which financial matters come to the fore. Her arguments include the audacious economic determinist claim that Jane Austen?s Pride and Prejudice was in large degree a response to the Bank Restriction Act of 1797: the breach of promise to redeem bank notes with gold explicit in the Bank Restriction Act according to Poovey motivated Austen?s interest in portraying Elizabeth Bennett?s concern about her potential broken promise to thank Mr. Darcy.

The book concludes with a four page ?Coda? in which Poovey bemoans both the low current prestige of literary studies in comparison with that of economics in modern American and British universities and the divide that has arisen between the two disciplines.

Recent economic events would seem to make it abundantly evident that the modern economy is a credit economy and that loss of confidence in credit instruments and their underlying connection to value can wreak economic havoc. Thus, Poovey?s theme is certainly timely. The book itself raises numerous stimulating questions and surveys a wealth of literature both past and more contemporary with which I, for one, was not previously familiar.

One general issue of evaluation posed by her book is that implied by the questions she poses in her introduction ? namely whether a post-modernist literary critic can bring any useful tools to bear in understanding the history of economics, economic history or modern economics. Quite possibly, new economic critics, including Poovey, are aiming their work primarily at fellow literary critics; but as Poovey herself wonders in the passage cited above from her introduction, should those outside of this guild take the burgeoning body of work by new economic critics seriously?

Difficulties are certainly evident with the scope of Poovey?s book. While the range of her reading is impressive both in contemporary sources and in the more recent historiography both of social scientists and literary critics, there are notable omissions in her surveys of relevant literature. Moreover, at points she openly acknowledges not having completed her scholarly homework and assumes an alarmingly nonchalant attitude about not having done so. These issues surface when at points she fails to distinguish or at least elides the fields of economic history and the history of economic thought. This shows up in a particularly egregious manner in her introduction (pp. 9-10) in which she admits her inability to trace out the relationship between the modern discipline of economics and its nineteenth century precursors and blames this on the lack of interest of modern economists in the history of their discipline. She then states (p. 10), ?I can only hope that some day an economic historian will write a version of this history from the other side so that Literary scholars like myself can see how this discipline?s present informs the way we understand its past.? I presume that she means ?historian of economics? rather than ?economic historian? in this passage. Poovey clearly has done some reading in the history of economics and indeed even cites such standard works as Schumpeter?s History of Economic Analysis. I am not clear on what are the requirements for Poovey?s desired ?history from the other side? or why Schumpeter?s work or Mark Blaug?s less compendious Economic Theory in Retrospect or the Warren Samuels, Jeff Biddle, and John Davis edited Companion to the History of Economic Thought would not suffice. It would seem that Poovey simply ran out of energy in trying to master the history of economics as well as modern economics. So why undertake to write the parallel histories of economics and literary criticism from a modern perspective unless one is prepared to take on the admittedly formidable task of reading reasonably deeply in the comparison discipline as well as one?s own discipline? Later (p. 94) she claims that ?economic historians rarely consider Defoe?s writing at any length.? However, the works she cites to illustrate this are all histories of economics. No mention is made of early modern economic historian Peter Earle?s book entitled The World of Defoe.

Given Poovey?s focus on the rise of the credit economy, a particularly glaring omission from her bibliography is Anne Goldgar?s Tulipmania (2007), which provides particularly rich documentation of the psychological reactions and issues of trust and betrayal associated with the mid-seventeenth century Dutch tulip bubble. Perhaps Goldgar?s book came out too late for Poovey to incorporate it in her own analysis. In her discussion of the problem of monetary shortage no mention is made of the important study by Thomas Sargent and Francois Velde, The Big Problem of Small Change (Princeton, 2002).

Central parts of Poovey?s argument are often based on a complex and extensive secondary literature. While she does have her own distinctive take or twist in most of these instances, she frequently does not succeed in the space she has allotted in convincingly expounding the arguments and evidence in question. For example, her claim that money is simply one form of written literary genre comes across as a bit contrived in the 25 pages she devotes to it in comparison with Deborah Valenze?s book length study, The Social Life of Money in the English Past or Carl Wennerlind?s article ?Money Talks but What Is It Saying? Semiotics of Money and Social Control.? Poovey (p. 59) does acknowledge and cite extensively from Valenze?s work while arguing for her own greater emphasis on the role of other written genres in naturalizing money as a genre.

I found the organization and coverage of Poovey?s book rather fragmented and indeed cubist in nature; by cubist, I mean offering shifting perspectives on a given object rather than a cohesive, continuous overview. This may in large part reflect her unabashed use of the tools of literary criticism. Rather than attempting any sort of comprehensive or connected overview, Poovey picks and chooses particular works for intensive analysis. While her choices are intriguing, they also seem idiosyncratic. I was unaware before reading Poovey?s book of Thomas Bridges? Adventures of a Bank Note; and its premise of a banknote?s eye view of the world is interesting. However, it is less evident to me that this work is central to understanding eighteenth century literature on finance.

Although Genres of the Credit Economy considers examples of how the fields of economics and literary criticism treat the problematic of representation, at the end of the day it doesn?t really develop the comparisons and contrasts between them. This, in part, stems from the book?s cubist organization as it jumps back and forth between time periods and subject areas and genres without offering a developed concluding chapter that pulls together her take on how writing on finance and economics has dealt with the problematic of representation inherent in financial markets in comparison with how literary studies have done so.

Poovey?s book itself has the phrase ?mediating value? in its subtitle; at points she does take up the contrast between market value and aesthetic value. And she does note issues regarding the influence of market criteria on aesthetic values raised both by nineteenth century authors and subsequent critics; both groups of writers essentially employed aesthetic values to assess the workings of the market. Yet she does not consider work by economists that discuss the engagement between the market and the aesthetic, both using the market to evaluate aesthetics and the use of aesthetics to evaluate the market. Thus no mention is made of the work of David Galenson, among others, that uses art auction prices as a means of assessing relative artistic or aesthetic merit or the work of Tyler Cowen that argues that market forces of competition lead to cultural richness and diversity rather than bland homogeneity, as is commonly alleged. Nor does she consider arguments by Cowen (2008) regarding how literary works can provide fodder for developing economic models, nor Frank Knight?s claim that ?economics is a branch of aesthetics and ethics to a larger degree than of mechanics? (1935, p. 97) ? and she only briefly touches on the work by McCloskey regarding rhetorical forms in economic argument.

Poovey?s choice of end point for her study in the 1870s would seem to derive from her focus on the relationship between the problematic of representation and the rise of the credit economy. She argues that by the 1870s the field of economic theory had become differentiated from financial journalism. Both endeavors in her view served to naturalize how the credit economy deals with the problematic of representation ? financial journalism by providing familiarity and economic theory by providing the authority of the technical expert. In the meantime, imaginative writing and literary criticism had begun to develop its own distinctive approach to the problematic of representation through emphasizing elite aesthetic values over popular taste in literature.

However, by abruptly ending her account of disciplinary differentiation in the 1870s, it seems to me that Poovey forestalls consideration of important aspects of both continuity and change central to understanding evolving contrasts and relationships between the economic and literary fields of endeavor. One literary genre that has been persistently used by economists and writers on economics over the centuries as a means of reaching general audiences is the parable and its kindred, the fable and the allegory. She does give some mention to Daniel Defoe?s and Harriet Martineau?s use of the parable. Yet the continuity of this tradition would seem worthy of further consideration. She makes no mention of Mandeville?s Fable of the Bees (though she does give brief attention to Mandeville in History of the Modern Fact). And after taking up Martineau in the second interchapter, Poovey drops further consideration of this genre. But notable nineteenth century practitioners include Frederic Bastiat in France and more recently in the U.S. Paul Heyne and Russell Roberts, as well as the pseudo-nominal Angus Black and Marshall Jevons among others. (Richard Stern, the novelist, was invited to review Marshall Jevons? Fatal Equilibrium for the Journal of Political Economy under George Stigler?s editorship and Stern did not give it very high literary marks.) Perhaps Poovey?s focus on the financial sector accounts for her decision to treat this genre only briefly. However, Hugh Rockoff?s article on the Wizard of Oz as a monetary allegory and subsequent literature (Hansen 2002; Dighe 2002) suggests scope for literary critics to consider the persistence of this genre even with a narrower focus on financial and monetary matters.

The employment of the genres of the parable, fable, and allegory in economic writing raises the more general question of whether an examination of the relationship between economics and literature should focus on how each field has engaged with ethics, the nature of human happiness, politics, and social policy. It can be argued that increasing concerns to establish economics as a science, with strong empirical and formal foundations ? i.e., to distinguish economics from political economy on the one hand and to emphasize the importance of aesthetic, conceptual and formalistic concerns in the study of literature on the other ? have displaced or at least obscured an underlying concern with ethics and human well-being common to both economics and literary studies. These are issues of long standing pedigree (see for example the work of Frank Knight, Lionel Robbins, Matthew Arnold, Chris Baldick, Wayne Booth, and Deirdre McCloskey). While this theme is not given much consideration in Poovey?s book, it is a central focus in the book by Poovey?s student, Claudia Klaver, A/Moral Economics. However, many of the key developments in this regard in both disciplines seem to me to have occurred in the later nineteenth and early twentieth century as each became increasingly centered in academic institutions. Despite Poovey?s claim that it is common concern with the problematic of representation that leads to an inherent affinity between economics and literature, one might well think that the underlying architectonic discipline is ethics rather than economics or literary criticism despite intellectual imperialistic tendencies of each of these latter two disciplines. But Poovey?s 1870 cutoff for her study would seem to preclude examination of this issue.

Poovey?s take on the differentiation of economics and literary studies does allow for both external, societal influences and internal disciplinary considerations in both fields. However, it seems to me that she does put more emphasis on external social influences in the cases of economics and financial journalism than literary studies, casting British economists and financial journalists as running-dog lackey apologists for an emerging credit economy. One danger of genre analysis is that genres themselves become reifications based on overly rigid boundaries between fields of intellectual endeavor. One central issue she poses is the degree of specialization which has occurred not only between such broad spheres of endeavor as writing on economic affairs and imaginative literature but also within such spheres. One of the chief merits of Poovey?s study is bringing into play a rich array of ephemeral and journalistic publications in conjunction with more enduring classics of economic theory. Poovey?s underlying premise is the common presumption of the inevitability of increasing intellectual specialization. In her account, eighteenth century writers such as Defoe and Smith covered a broad range of topics even within a given work ? with Defoe in particular blurring the fact and fiction distinction in his coverage of financial affairs. Then in the early nineteenth century, in her view, work on economic theory came to be distinguished from writing aimed at popular audiences, in turn distinguished from coverage offered by financial journalists. Similarly, literary writers were increasingly concerned to emphasize the importance of distinctive aesthetic imperatives from those of the market for popular literature. In her concluding ?Coda,? she suggests that in the early twenty-first century, it is unusual for academic economists to produce work aimed at a general audience, citing in a footnote Steven Levitt?s Freakonomics and Robert Shiller?s Irrational Exuberance as exceptions, while it is even rarer in her reckoning for literary critics to write for general audiences.

However, taking the case of economics, it is of interest to consider longer term trends in the extent to which prominent economists have continued to cross the borders or even simultaneously engage in not only academic work on economics but also economic policy making, business endeavors, and writing aimed at student and general audiences, even if economists in general are not necessarily renaissance people. One can begin with the case of David Ricardo, who at various points in his career engaged in stock broking and service in Parliament as well as writing on economics. If Ricardo?s writing on economics was in some sense more intellectually specialized than Adam Smith?s, he was far more engaged than Smith in business and political endeavors. And although Poovey depicts William Stanley Jevons as emblematic of the narrowing of economics into a largely theoretical, mathematical, and university-centered discipline, she considers only his work on marginal utility and sun spot theory. She makes no mention of Jevons? influential policy-oriented publications including Methods of Social Reform, The State in Relation to Labour, and The Coal Question. And there is certainly a long line forward of prominent academic economists who have been active in policy circles as well as producing introductory textbooks and other literature aimed at general audiences such as Alfred Marshall, John Maynard Keynes, Paul Samuelson, and Milton Friedman. Currently Ben Bernanke?s introductory economics textbook is still in print and coming out in new editions while he serves as Federal Reserve chairman following his quite successful academic career at Princeton and another Princeton academic, Paul Krugman, the latest Nobel laureate in economics, is also an introductory textbook author, New York Times columnist, and television talking head ? to name just a couple of many possible current examples. And academic economists have also pursued financial ventures, as the notorious 1997 episode of Nobel-laureates Robert C. Merton?s and Myron Scholes? involvement in the Long-term Capital Management debacle illustrate. In other words, the increasing specialization of texts by genre does not necessarily reflect a corresponding specialization of the authors who write them. In the case of economics, one could explain some of this by the extensive market both for textbooks and popular economic commentary in contrast with, say, fine imaginative literature. Publishers, perhaps, have much stronger economic incentives to induce leading economists to produce introductory textbooks and work aimed at popular audiences than to do the same for literary critics. Books by Jacques Derrida, Michel Foucault, or Stanley Fish may not have the sales potential of those by Milton Friedman or Paul Krugman. But this still leaves the ongoing pattern of those who have pursued successful careers in both academic economics and economic policy-making from John Maynard Keynes to Lawrence Summers.

A parallel issue unexplored by Poovey and presumably occurring after her end period of the 1870s is the apparent increasing separation between those who write imaginative literature and those who produce criticism of it. The examples of literary criticism she cites in chapters 5 and 6 are primarily by those also engaged in imaginative writing such as Wordsworth, Coleridge, and Trollope. This raises the question of whether the divide between those who write imaginative literature and those who produce literary criticism has become wider than the gap between those who write on economic theory, those who craft economic policy, those who write economic journalism, and those who engage in financial affairs. And if this is the case, what accounts for the greater degree of specialization by those engaging in literary studies than in economic studies? Have the underlying ethical commitments of economists to social well being been stronger than those of more ivory tower literary critics? Although Poovey does not explore these issues, her mode of genre analysis should at least be credited for giving rise to them.

Poovey mentions J.R.McCullough?s activity as a book and pamphlet collector but omits consideration of those in subsequent generations who engaged in this activity. Some might infer that an increasingly analytical mind set resulted in the extinction of the economist bibliophile, although Poovey herself does not explicitly state this. However, W.S. Jevons, who in the eyes of literary scholars such as Claudia Klaver and Poovey had quite narrow analytical interests, in fact appears to have been a quite keen economics bibliophile. By Keynes? account, Jevons transmitted this bug onto the famed economics book collector and Cambridge economist, Herbert Foxwell. And Keynes himself was an avid antiquarian book collector (Keynes, Essays in Biography; Harrod, Life of Keynes). The importance of the book and pamphlet collector for establishing the dimensions of various intellectual realms and genres may warrant further consideration. Foxwell?s collections formed the basis for both the Goldsmith?s and Kress libraries and these collections have now entered electronically searchable cyberspace as the Making of the Modern World database. Keynes thought highly enough of Foxwell?s contributions to economic science as to pen a 23-page obituary for the Economic Journal on Foxwell?s demise in 1936.

Despite the limitations that I think are evident in Poovey?s book, the genre perspective she offers is worthwhile for pointing to alternative intellectual boundaries and for posing questions that may not readily occur to those working within the disciplines she considers. She usefully brings into play a rich array of contemporary and ephemeral literature bearing on economic and financial matters. And her notion of the fact-fiction continuum raises interesting issues about alternative relationships between evidence and theory. The new economic criticism more generally can be seen as providing economists and more specifically historians of economics and economic historians a means of addressing what could be called the Robert Burns problem: seeing ourselves as others see us. My own impression is that while historians of economics and economic historians have not totally ignored the new economic criticism, they have hardly embraced it with enthusiasm. Offsetting any inclination to welcome those with an interest in one?s own subject matter, are likely primordial instincts to defend professional turf boundaries and claims of scholarly expertise. Furthermore, I suspect that much of the new economic criticism is grounded in an ideological outlook that some historians of economics would perceive as uncongenial. Thus Poovey in her concluding Coda (p. 419) refers to ?the longing for an alternative to the market model.? The extent and complexity of this body of work is a further reason for outsiders to neglect it; the new economic criticism, at least from this reviewer?s limited experience, is not an easy read yet there seems lots of it to process before one can claim to have much sense of it. Nevertheless, the new economic criticism probably does deserve further attention by historians of economics and economic historians. As Robert Burns reminds, seeing ourselves as others see us can free us from many a blunder and foolish notion as we become more aware of the louses crawling on our own bonnets.


Matthew Arnold (1869), Culture and Anarchy.

Chris Baldick (1983), The Social Mission of English Criticism 1848-1932, Oxford: Clarendon Press.

Frederic Bastiat (1845), ?The Candle Makers? Petition,? Economic Sophisms.

Mark Blaug (1997), Economic Theory in Retrospect (fifth edition), Cambridge: Cambridge University Press.

Wayne C. Booth (1988), The Company We Keep: An Ethics of Fiction, Berkeley: University of California Press.

Angus Black (1970), A Radical?s Guide to Economic Reality, New York: Holt, Rinehart & Winston.

Angus Black (1971), A Radical?s Guide to Self-Destruction. New York: Holt, Rinehart, & Winston.

Thomas Bridges (1770-71), Adventures of a Banknote (four volumes). Reprint: New York: Garland, 1975.

Robert Burns (1786), ?To a Louse: On Seeing One On a Lady?s Bonnet, At Church.?

Tyler Cowen (2000), In Praise of Commercial Culture, Cambridge: Harvard University Press.

Tyler Cowen (2004), Creative Destruction: How Globalization Is Changing the Worlds? Cultures, Princeton: Princeton University Press.

Tyler Cowen (2008), ?Is a Novel a Model? in Sandra J. Peart and David M. Levy eds. The Street Porter and the Philosopher: Conversations on Analytical Egalitarianism, Ann Arbor: University of Michigan Press.

Ranjit Dighe (2002), The Historian?s Wizard of Oz: Reading L.Frank Baum?s Classic as Political and Monetary Allegory, Westport, CT: Praeger Publishers.

Peter Earle (1977), The World of Defoe, New York: Atheneum.

Robert Frank and Ben Bernanke (2008), Principles of Macroeconomics, New York: McGraw-Hill/Irwin.

David Galenson (2001), Painting Outside the Lines: Patterns of Creativity in Modern Art, Cambridge: MA: Harvard University Press.

Anne Goldgar (2007), Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age, Chicago: University of Chicago Press.

Bradley Hansen (2002), ?The Fable of the Allegory: tThe Wizard of Oz in Economics,? Journal of Economic Education, 33 (3): 254-64.

Roy Harrod (1951), The Life of John Maynard Keynes, London: Macmillan.

Paul Heyne (1973), The Economic Way of Thinking, Chicago: Science Research Associates.

Margaret Jacob (2001), ?Factoring Mary Poovey?s A History of the Modern Fact,? History and Theory, 40 (May): 280-89.

Marshall Jevons (1985), The Fatal Equilibrium, Cambridge, MA: M.I.T. Press

William Stanley Jevons (1866), The Coal Question: An Enquiry Concerning the Progress of the Nation and the Probable Exhaustion of Our Coal-mines, London: Macmillan.

William Stanley Jevons (1882), The State in Relation to Labour, London: Macmillan.

William Stanley Jevons (1883), Methods of Social Reform and Other Papers, London: Macmillan.

John Maynard Keynes (1936), ?William Stanley Jevons,? Journal of the Royal Statistical Society.

John Maynard Keynes (1936), ?Herbert Somerton Foxwell,? Economic Journal. Reprinted in The Collected Writings of John Maynard Keynes. Vol.X, Essays in Biography, London: MacMillan St. Martin?s Press.

Claudia C. Klaver (2003), A/Moral Economics: Classical Political Economy and Cultural Authority in Nineteenth-Century England, Columbus: Ohio State University Press.

Frank Knight (1935), ?The Ethics of Competition.? Reprinted in The Ethics of Competition and Other Essays, New York: Harper.

Frank Knight (1935), ?Economic Psychology and the Value Problem.? Reprinted in The Ethics of Competition and Other Essays, New York: Harper.

Paul Krugman and Robin Wells (2009), Macroeconomics (second edition), Worth Publishing.

Steven Levitt and Stephen J. Dubner (2005), Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, New York: Harper Collins.

Making of the Modern World: The Goldsmith?s-Kress Library of Economic Literature/ Cengage Learning.

Bernard Mandeville (1924), Fable of the Bees: or, Private Vices, Publick Benefits (With a Commentary Critical, Historical, and Explanatory by F.B.Kaye), Oxford: Clarendon Press.

Deirdre McCloskey (2006), The Bourgeois Virtues: Ethics for an Age of Commerce, Chicago: University of Chicago Press.

Donald McCloskey (1985), The Rhetoric of Economics, Madison: University of Wisconsin Press.

Mary Poovey (1998), A History of the Modern Fact: Problems of Knowledge in the Sciences of Wealth and Society, Chicago: University of Chicago Press.

Lionel Robbins (1932), An Essay on the Nature and Significance of Economic Science, London: Macmillan.

Russell Roberts (2002), The Invisible Heart: An Economic Romance, Cambridge, MA: M.I.T. Press.

Russell Roberts (2006), The Choice: A Fable of Free Trade and Protectionism (third edition), Prentice Hall.

Russell Roberts (2008), The Price of Everything: A Parable of Possibility and Prosperity. Princeton: Princeton University Press.

Hugh Rockoff (1990), ?The Wizard of Oz as a Monetary Allegory,? Journal of Political Economy 98 (4): 739-60.

Warren J. Samuels, Jeff E. Biddle, John B. Davis, editors, (2003), A Companion to the History of Economic Thought, Malden, MA: Blackwell Publishing.

Thomas J. Sargent and Francois R. Velde (2002), The Big Problem of Small Change, Princeton: Princeton University Press.

Joseph Schumpeter (1954), History of Economic Analysis, London: Allen and Unwin.

Robert J. Shiller (2000), Irrational Exuberance, Princeton: Princeton University Press.

Richard G. Stern (1986), ?Review of The Fatal Equilibrium by Marshall Jevons,? Journal of Political Economy 94 (3): 683-84

Deborah Valenze (2006), The Social Life of Money in the English Past, Cambridge: Cambridge University Press.

Carl Wennerlind (2001), ?Money Talks, But What Is It Saying? Semiotics of Money and Social Control,? Journal of Economic Issues 35 (3): 557-74.

Martha Woodmansee and Mark Osteen, editors (1999), The New Economic Criticism: Studies in the Intersection of Literature and Economics, London: Routledge.

David Mitch is Professor of Economics, University of Maryland, Baltimore County (email: He is the author of ?Market Forces and Market Failure in Antebellum American Education: A Commentary? Social Science History (Spring, 2008). He is currently revising an essay on ?Chicago and Economic History? for the forthcoming Elgar Companion to the Chicago School of Economics and is also working on high stakes educational testing in Victorian England.

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):Europe
Time Period(s):19th Century

Die Kreditbanken in der Gr?nderzeit

Author(s):Burhop, Carsten
Reviewer(s):Guinnane, Timothy W.

Published by EH.NET (February 2008)

Carsten Burhop, Die Kreditbanken in der Gr?nderzeit. Stuttgart: Franz Steiner Verlag, 2004. 279 pp. ?38 (paperback), ISBN: 3-515-08413-4.

Reviewed for EH.NET by Timothy W. Guinnane, Department of Economics, Yale University.

Ever since their appearance in the 1850s, Germany?s large, universal banks have been the object of admiration, fascination, and sometimes fear. Throughout the nineteenth century they grew in size and influence, provoking worries that they were responsible for an unhealthy concentration of wealth and power. A long tradition assigns to these banks a central role in Germany?s late but rapid industrialization. Most economic historians have at least heard of them via the work of Alexander Gerschenkron, although for some reason, Anglo-Saxon scholars are only aware of Gerschenkron?s admiring comments. He, too, was skeptical of their power in the Germany economy, a point that usually gets lost in secondary accounts.

Despite all the interest, many discussions of the Kreditbanken, as they are known, rested on a weak scholarly basis. Most accounts relied on close knowledge of a small number of banks, usually the very largest. Richard Tilly began to remedy this weakness in the 1960s (Tilly 1966, 1986). More recent studies have been even more skeptical of earlier claims about the banks; Edwards and Ogilvie (1996), for example, effectively demonstrate the implausibility of most admiring claims about the Kreditbanken. In an extended project that began with her dissertation, Caroline Fohlin has zeroed in on several of the main claims about these banks? distinctiveness. Her recent book (Fohlin 2007) extends her original focus on the bank?s role in firm governance to broader questions, including the connection between the banks and the performance of German securities markets.[1]

The book under review here is part of this re-assessment. Die Kreditbanken in der Gr?nderzeit was originally a doctoral dissertation completed at the University of Bonn in 2004, but has served as the starting point and basis for a great deal of subsequent, detailed research on this theme. The dissertation itself reports the basic results of extensive, well-conceived primary research on the banks. The later papers draw on this research to examine several specific features of the way the banks operated. Not all of the later papers have been published yet, but I expect them to appear in due course in international journals. The dissertation itself will probably never appear in English. Given its quality, it warrants extensive comment.

The book has four substantive sections. The first section provides an outline of the economics of banking and the German economy in the period of this study, usually 1870-1879. Burhop is to be commended for a clear, cogent explanation of the central role of informational asymmetries in banking structure. The second section works through the basic accounting measures of bank size and performance, illustrating how different business strategies led to different types of risks and returns. Many readers will find this dry, but its clarity makes it worth close reading. The third section traces the early days of selected Kreditbanken. The strength of this section is to demonstrate, as only a series of case studies can, the great diversity in the origins, strategy, and early results of the several banks. The fourth substantive section focuses on the defining feature of universal banks, which is their role in underwriting securities. Here Burhop again relies on a selection of specific bank histories to make his points about the role of the banks in German securities markets.

The dissertation per se has two great strengths, both of which will spill over into the later research. The first is the care with selecting the banks for study. Burhop starts with a ?universe? of all credit banks defined by earlier studies, but is unusually careful in accounting for the fact that some are missing crucial information, and some exit the sample before the end of his period because they failed. By augmenting this information with archival material for a selection of banks, he has achieved a good representation of the best of both worlds: completeness of coverage, but also depth on some banks. The second strength is his ability to bring to bear on the German banking literature what in another context might be viewed as simply good accounting. Burhop carefully and clearly explains how different banking strategies, and experiences, led to different returns on invested capital, and difference sources for those returns.

The dissertation is long on specifics and short on generalizations. But two themes run through the results. First, two historical events combined to produce the Gr?nderboom in which the early Kreditbanken flourished. The first was France?s quick payment of the indemnity imposed after the Franco-Prussian War; many German governments paid off most of their debts, leaving investors looking for new places to park their money. Bankers were happy to oblige. The second, and less emphasized, event was the introduction of general incorporation. Prior to 1867, entrepreneurs could not form a joint-stock firm without the specific permission of the state. Prussia and other German states had been very tough about granting this concession. With liberalization many new firms were formed, some of them Burhop?s banks. Just as importantly, founding new firms was an important activity for the new banks. The literature on German banking history has always stressed the role of the French indemnity, but has had less to say about the important change in company law.

Burhop also is fond of noting some ironies in the timing of bank formation. Banks that were started in 1870 and quickly got involved in the securities business often just as quickly regretted it ? the equity market crashed in 1873, leaving some banks with securities they had underwritten and could not sell. Banks that had the ?misfortune? of a late start actually did better than those who got a head start.

Two articles that emerged from the dissertation project give a sense of the range of questions these banks raise. One article uses the methods of time-series econometrics to ask whether the banks ?caused,? in the statistical sense, Germany?s industrialization (Burhop 2006). What one thinks of such exercises is partly a matter of taste; for my money, this kind of research has a useful but limited role to play in developing our understanding of the way financial institutions contribute to economic development. Burhop (2004) digs into the way the banks compensated their executives, more than a few of whom were among the bank?s founders. Many readers will be amazed to learn that the banks often devoted large proportions of their net revenues to incentive schemes for managers. In the early 1870s the managers (Vorstand) of the D?rmstadter Bank, for example, took around ten percent of bank profits in their capacity as managers, and not as share owners. These incentive payments were a huge proportion of their total pay from the bank; for the top managers, incentive pay was more than 80 percent of total compensation. This payment system raises all the questions we associate with the stock-options scandals of the 1990s and early twenty-first century in the United States. One could ask how much these payments were really the fruit of high-powered incentives needed to propel managers to hard work, and how much reflected cozy relations with the entities responsible for setting their pay.

The dissertation and later articles mark an important step in our better understanding of the German Kreditbanken and their role in the German economy. The combination of careful empirical work, sensible use of economic and financial theory, and broader understanding of the German economy are just what is needed in research on these and other financial institutions.

A Bigger Picture

Much of the recent literature on the German Kreditbanken has maintained an almost claustrophobic focus on these banks alone, to the exclusion of the rest of the German banking system.[2] There are good and bad reasons for doing so. Burhop (and Fohlin, and others) are certainly justified in arguing, explicitly or implicitly, that the Kreditbanken were the only part of the system that were individually large institutions, that they were the only banks that usually had a country-wide presence, and that they were the primary source of finance for industry especially. And while they might not have been entirely unique (in the strict sense of that word) the German Kreditbanken?s methods were sufficiently different from banks in other major economies in the nineteenth century that it is understandable that scholars such as Alexander Gerschenkron assigned to the Kreditbanken a major role in Germany?s industrialization and development. As such they are worthy of detailed study. In any case, we all have to specialize, and there is no sense in which a scholar of these banks should be criticized for not studying something else.

But we should not accept the implication (by omission, at least) that the other parts of the banking system are not worth close study. In addition to a number of specialized banks for mortgages and other purposes, the German banking system had two other classes of institutions largely unfamiliar in the Anglo-Saxon world: credit cooperatives (Kreditgenossenschaften, but also called by several other names) and savings banks (Sparkassen). For the cooperatives the reader can refer to my own work (see, for example, Guinnane 2001 and 2003). One would be hard-pressed to assign to these individually very small institutions any major role in German economic development; their importance (at least to me) rests on the intellectual issues they raise, although they clearly mattered to their owners, borrowers, and depositors.

The more important current lacuna in the literature concerns the Sparkassen.[3] The Sparkassen were, collectively, larger than the Kreditbanken, taken together (see Guinnane 2002, Table 1). The Sparkassen and their regional affiliates, the Landesbanken, were owned and controlled by local authorities, either a city or a regional government. As such their depositors enjoyed an iron-clad deposit guarantee (unless the government itself went bankrupt, which was not a realistic fear until after World War I). The Sparkassen were intended to provide a safe place for working-class deposits, but contemporaries were aware that most Sparkassen deposits actually came from middle-class and professional households who lacked good alternatives at other banks. Here we see the first question one might pose about the relationship among the various classes of German banks: as Burhop notes, the Kreditbanken did not begin to take deposits in the modern sense until the 1870s, and as late as World War I, retail deposits were not a significant part of their liabilities. Instead, most large German banks had very low leverage ratios; they were, in effect, lending mostly their own money. This meant the banks had to worry less about the liquidity of their loan portfolios (owners cannot as easily ?run? on the bank as can depositors) and reduced the information problems associated with lending someone else?s money.

Burhop and others have noted the importance of this fact for the lending practices of these banks, but none, to my knowledge, ask what it had to do with the strength of the Sparkassen (and to a less extent, the credit cooperatives). I can think of two hypotheses to explore. First, how much of the Kreditbanken?s policies were in effect forced on them by the difficulty of raising deposits in the face of these competitors? One might think that Kreditbanken would not only have to pay higher interest rates to pry depositors away from the Sparkassen; such depositors might also be more likely to ?run,? given the safe haven of the Sparkasse, often literally down the street.[4] Second, as in most countries, the German banks were periodically the objects of political fears about their size and power. In the United States, the development and persistence of the unit banking system owes much to two specific concerns. One was the generalized fear of large financial institutions. A second was the more specific fear that regional banks would ?siphon? capital out of an area to invest at higher rates elsewhere; that is, local savings would not be available to fund local investments. Scholars familiar with the history of banking in the United States will wonder whether the credit cooperatives and the Sparkassen reduced the fear of large, centralized banking institutions in part by giving any locality in Germany a simple way to create its own banking institution that would provide services even if Berlin bankers were not interested.[5]

Another important outstanding question concerns Sparkassen loan portfolios. Most scholars simply repeat the assertion that the Sparkassen lent most of their funds to governments and put the rest in very safe mortgages. Most accounts claim these banks almost never lent to industry. A few accounts, on the other hand, claim just as baldly that they routinely did. I know of no study what would justify either opinion. We can probably safely assume that prior to World War I, when the Sparkassen were empowered to take on many of the roles of a universal bank, their involvement with industrial lending was minimal. But there are two possible objections here. First, we need to know more about what the Sparkassen actually did on the lending side. Assertions, no matter how confident or time-worn, are not a good substitute for research. Second, we need to ask what indirect roles the other parts of the system played in industrial lending. Here the questions become more speculative. One could imagine, for example, that a well-functioning system for mortgage lending made it easier for firms and cities to finance the large-scale infrastructure projects (such as electrification) that were so important to the Kreditbanken?s customers. In any case, even if the Sparkassen did little direct lending to industrial firms, it strains credulity to believe that institutions of this size had no indirect impact on German industrialization.

Burhop (and Fohlin, and the others who have built this reassessment of the Kreditbanken) are to be commended for setting the operation and characteristics of these banks on much firmer empirical and theoretical foundations than had ever before been the case. Burhop in particular has, in my judgment, made a major advance in the research reported here and elsewhere. But we need someone else, probably several scholars, to follow up on the Sparkassen. When I began my research on the credit cooperatives, a number of German economic historians were overtly contemptuous of the idea of spending any time on what they viewed as quaint, irrelevant institutions. I can only hope that those embarking on a career in banking history today will not be put off by the similar attitude toward the Sparkassen. If we are going to understand how banks contributed to the development of the German economy, we need close study of all its banks.


1. Fohlin wrote several articles before combining and extending her work in a recent book (Fohlin 2007). Fohlin?s book has been reviewed recently in a number of outlets, and will not be discussed further here. Burhop reviewed it at and Dieter Ziegler, another German historian of banks, reviewed it There is of course a more extensive literature on the banks in German, which I will not discuss here. Guinnane (2002) contains references to much of that until that date. Much of the most recent research on Kreditbanken focuses on their role in the Nazi era.

2. In reading the next few paragraphs, the reader might notice a slightly irritating sound in the background. That sound is the grinding of an ax. Guinnane (2002) is the complete recording.

3. In addition to specialized institutions such as mortgage banks, Germany also had private banks that thrived even after the development of the large, joint-stock bank. Scholars are well aware of the role these private banks played, often working closely with Kreditbanken. See Wixforth and Ziegler (1994).

4. Burhop quotes a decision by the Schaffhausen, the first of the large, joint-stock banks, to decline to take deposits and instead rely on its own resources (note 201, pp. 80-81). The Schaffhausen was formed out of an earlier private bank that had failed in the panic of 1848. I know of no connection to Sparkassen in this incident, but surely the bank?s managers were acutely aware of the problems panics could pose to banking institutions.

5. A recent paper argues a version of just this: Hakenes and Schnabel (2006) argue that the main reason for public banks such as Sparkassen is that they constrain capital from leaving the area where depositors live.


Burhop, Carsten, 2004. ?Executive Remuneration and Firm Performance: The Case of Large German Banks, 1854-1910.? Business History, 46 (4), October 2004, 525-43

Burhop, Carsten, 2006. ?Did Banks Cause the German Industrialization?? Explorations in Economic History, 43 (1), January 2006, 39-63

Edwards, Jeremy and Sheilagh Ogilvie, 1996. ?Universal Banks and German Industrialization: A Reappraisal.? Economic History Review 49 (3): 427-446.

Fohlin, Caroline, 2007. Finance Capitalism and Germany?s Rise to Industrial Power. New York: Cambridge University Press.

Gerschenkron, Alexander, 1962. ?Economic Backwardness in Historical Perspective,? in Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge, MA: Harvard University Press.

Guinnane, Timothy W., 2001. ?Cooperatives as Information Machines: German Rural Credit Cooperatives, 1883-1914.? Journal of Economic History 61(2): 366-389.

Guinnane, Timothy W., 2002. ?Delegated Monitors, Large and Small: Germany?s Banking System, 1800-1914.? Journal of Economic Literature 40: 73-124.

Guinnane, Timothy W., 2003. ?A ?Friend and Advisor?: External Auditing and Confidence in Germany?s Credit Cooperatives, 1889-1914.? Business History Review 77: 235-264.

Hakenes, Hendrik, and Isabel Schnabel, 2006. ?The Threat of Capital Drain: A Rational for Public Banks?? Preprints of the Max Planck Institute for Research on Collective Goods.

Tilly, Richard, 1966. Financial Institutions and Industrialization in the Rhineland, 1815-1870. Madison: University of Wisconsin Press. Tilly, Richard, 1986. ?German Banking, 1850-1914: Development Assistance for the Strong.? Journal of European Economic History 15 (1): 113-152.

Wixforth, Harald and Dieter Ziegler, 1994. ?The Niche in the Universal Banking System: The Role and Significance of Private Bankers within Germany Industry, 1900-1933.? Financial History Review 1(2): 99-120

Timothy W. Guinnane is the Philipp Golden Bartlett Professor of Economic History in the Department of Economics at Yale University. Current projects include a comparative history of company law, with Ron Harris, Naomi Lamoreaux and Jean-Laurent Rosenthal, focusing on France, Germany, the United Kingdom and the United States in the period 1800-2000 (see ?Droit et capital ? l??preuve de l?histoire: l?essor des soci?t?s ? responsibilit? limit?e? forthcoming in Annales E.S.C., and available in English as SSRN paper #1071007); and continuing work on German cooperatives and their role in the banking system.

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

The Age of Turbulence: Adventures in a New World

Author(s):Greenspan, Alan
Reviewer(s):Field, Alexander J.

Published by EH.NET (December 2007)

Alan Greenspan, The Age of Turbulence: Adventures in a New World. New York: Penguin, 2007. 531 pp. $35 (cloth), ISBN: 978-1594201318.

Reviewed for EH.NET by Alexander J. Field, Department of Economics, Santa Clara University.

Alan Greenspan’s new book is really two: the first, of most interest to a popular audience, describes his career in the private sector and subsequently as a government economist who served in one capacity or another as an advisor to six presidents. His up front observations of political leaders (he got along best with Gerald Ford and Bill Clinton) are of considerable interest, and his autobiography provides an interesting and valuable overview of U.S. economic growth from a macro perspective since the Second World War. The second part of the book is a broader discussion of recent world economic history and prospects, with detailed discussions of China, Russia, India, and Latin America (but virtually nothing on Africa), along with chapters offering his perspective on major policy questions facing the United States.

Political memoirs are not usually good grist for the economic historian’s mill, but Greenspan is sui generis, and the book is well worth reading. Economists will have the advantage over the general reader of being able to follow without difficulty the discussion of policy issues, such as those surrounding the causes and challenges created by current account deficits, and identify areas of possible weakness in the analysis. You are also sure to learn several arcane economic details about which you were previously innocent, such as the role of the Henry Hub in natural gas pricing, and you will get fresh perspectives on many aspects of economic policy and recent macroeconomic history.

Although central bankers have no direct responsibility for fiscal policy, the greatest blight on Greenspan’s record is surely his political support for tax cuts in the early 1980s and early 2000s, and the large peacetime deficits they created. Under President Reagan, when David Stockman and Don Regan expressed doubts about the wisdom of pushing forward with tax reductions in advance of commitments for spending restraint, Greenspan joined in the advice of the economics advisory board chaired by George Schultz, telling the President that “under no circumstances should you delay the tax cut” (92). As an influential chairman of the Fed under our current President he bears even more responsibility for greenlighting the 2001 cuts. Counseled by former Treasury Secretary Robert Rubin and Senator Kent Conrad that his testimony would be perceived as providing cover for expanded deficits, Greenspan went ahead anyway, claiming he couldn’t control how his testimony would be perceived (220). He now admits that Rubin and Conrad were right. Philosophically, Greenspan can claim consistency in being against peacetime budget blowouts but it is clear in retrospect that he facilitated massive deficit spending under Reagan and George W. Bush, while preaching fiscal conservatism to Clinton. While Greenspan rightly bemoans the lack of spending restraint, he does not fully accept responsibility for his role in facilitating these outcomes.

Greenspan also, in my view, is far too sanguine about the current account deficit and our increased international indebtedness. Chapter 18, which treats these matters, will be impenetrable to the general reader and tough going even for some economists. His command of the issues and history here is weaker than in chapters that focus on purely domestic analysis.

Throughout most of the twentieth century (and in contrast with the nineteenth), the United States ran current account surpluses. This has been the standard pattern for an advanced developed country. As did Britain in the nineteenth century, the U.S. exported capital, using part of its domestic saving to fuel development outside of the country and in the process building up a large stock of net overseas international assets. This apple cart was overturned in the first half of the 1980s by President Reagan’s unprecedented peacetime federal government deficits, the result of a collision between supply side tax cuts that implausibly promised to pay for themselves, the commitment to a rise in defense spending including Star Wars and a six hundred ship Navy, and an unwillingness to reduce entitlement spending or corporate welfare. These deficits pushed up real U.S. interest rates (nominal rates were falling but inflation was falling faster in part as the result of Chairman Volcker’s monetary stringency). Within the context of a flexible exchange rate regime, the high real interest rates led to an inflow of funds from outside of the country, generating a capital account surplus and an appreciated dollar that in turn produced the deterioration of the current account, reflecting the real transfer of resources from the rest of the world to the U.S.

Greenspan, however, inexplicably begins his current account narrative in 1991. It is true that the deficit had again become quite low in that year, but this was principally due to the U.S. recession. Starting the narrative in that year conveniently or inadvertently ignores the role of fiscal policies in the 1980s, which by the middle of the decade had already resulted in the effective liquidation (on net) of the U.S. overseas economic empire. It is true of course that the current account deficit persisted and widened, even in 1998-2001, when the federal budget was in surplus, so there were and are other forces involved, particularly capital flight associated with the transfer of Hong Kong to Communist China, and political instability elsewhere in the world.

Thus, it is clearly not just international crowding out that led to the rise in U.S. international indebtedness over the past quarter century. That mechanism ? dominant in the 1980s ? “pulled” funds into the U.S. by generating attractive risk adjusted returns. But it is also clearly the case that a rise in global saving has, particularly in the last decade, “pushed” funds into U.S. asset markets. The consequence is that current account deficits were associated with high real interest rates in the 1980s but relatively low ones in the 2000s. Greenspan is at his strongest in articulating the underpinnings of the global saving glut hypothesis that both he and Ben Bernanke have championed.

The argument is that globalization has brought rapid economic growth to parts of the developing world, and that these countries lack either well developed social safety nets or an entrenched consumer culture, so that their saving flows have risen. In the presence of rising incomes and strong motives for precautionary saving, and in the absence of an established consumer culture or attractive and accessible domestic financial assets or direct investment opportunities, these flows have ultimately been absorbed by sales of U.S. assets. There is of course considerable merit to this analysis, but it is still remarkable that although Greenspan discusses at length the role of household dissaving in the U.S., he avoids discussing the role of government dissaving, which reemerged with renewed force under our current president.

In a humorous vein Greenspan recalls that he can think of many times he was criticized for raising interest rates but never once for lowering them: “During my eighteen-and-a -half year tenure I cannot remember many calls from presidents or Capitol Hill to raise interest rates. In fact I believe there was none” (478). But in terms of post-mortems on his conduct of monetary policy, he seems to have this exactly backwards. The persistent criticism one hears today is that his policy was too easy, first in the 1990s, and then again in the 2000s. Greenspan is faulted, at least in retrospect, for enabling, with cheap credit, first a stock market and subsequently a real estate boom. The force of the indictment here is less straightforward, however. It is, as Greenspan suggests, and as Bernanke has reaffirmed, not obvious that the central bank should view control of asset prices as part of its mandate. It is in any event not an easy matter to deflate an asset price bubble without significantly damaging the real economy. Others, however, believe these issues can and should be addressed by central banks, if not through interest rate policy then through bank regulation and supervision.

Greenspan was conflicted over the issue. He spends considerable time discussing his “irrational exuberance” remarks, and how he subsequently got religion about the delayed role of IT investment in advancing productivity growth and possibly justifying high stock market valuations. In contrast, there is surprisingly little discussion of the recent real estate boom and crash, and little attempt to justify his apparent lack of concern about declining lending standards, or the degree to which easy money may have fueled the boom. It remains to be seen how well the U.S. economy will weather the collapse of housing investment, the drop in housing prices, the rise in foreclosure rates, and the threat to financial institutions and possible systemic risk this has generated.

Another tension in his analysis involves the treatment of the challenges posed to Social Security by the impending retirement of baby boomers. Much of the decline in the ratio of those paying into and those drawing from the system (it currently stands at about 3:2) has already taken place, but a further decline to rough parity is still ahead. So the challenge is how to support a growing nonworking population without levying payroll taxes so high that the living standards of those remaining in the labor force fall. The solution, all agree, is to raise national saving (private sector saving plus the government surplus) and thus facilitate private sector capital deepening that will leave the working population with a higher per capita stock of capital (and higher output per hour) in the future, so that even taxed heavily to support baby boom retirees, their incomes can still rise. The point of the Greenspan commission reforms (1983) was to achieve this, principally by raising payroll taxes.

But the boost to national saving that might otherwise have ensued was undone by the Reagan and subsequent Bush tax cuts, so the net effect, since these cuts were skewed toward the wealthy, has been simply to shift the overall tax burden toward lower paid workers. If the government bonds in the Social Security trust fund are backed by the full faith and credit of the United States (and if they are not, all holders of U.S. paper ought to be concerned, because we will be undoing what Hamilton worked so hard to achieve in the early national period), then we will in the future still need to cut into the living standards of those working by raising enough general tax revenues to service the debt.

Although, over the past quarter century, and ignoring the last few years of the twentieth century, there has been little long term boost to national saving from fiscal policy, there is also little evidence that budget deficits adversely affected the accumulation of domestic physical capital. That is because we tapped into massive flows of foreign saving, which enabled us to finance both government deficits and increases in gross private domestic investment.

Our systemic needs in this area, particularly its nonresidential component, have, nevertheless, grown remarkably slowly. Investment in such capital increased hardly at all between 2000 and 2005. This was not due to credit stringency, since both long and short term interest rates were at historically low levels. Given the choice, private sector decision makers flowed credit instead to housing, investment in which increased 70 percent (nominal) over the same period.

What accounts for the low increase in the manifested demand for nonresidential fixed capital? Greenspan suggests that part of the explanation lies in capital saving technical change: “Thin fiber optic cable, for example, has replaced huge tonnages of copper wire. New architectural, engineering and materials technologies have enabled the construction of buildings enclosing the same space with far less physical material than was required fifty or one hundred years ago ” (492). A related manifestation of these trends, he notes, is that the physical weight (in kilograms) of U.S. GDP is currently about what it was after the Second World War, although its value is much higher.

These trends mean that even if in the future we are successful in raising national saving, the typical pattern of capital deepening ? rises in the ratio of the nonresidential fixed capital stock to labor input– may not be as operative as in the past. Rising saving flows may, as they have recently, augment living standards by raising the housing stock, which increases the flow of real housing services. If that option is no longer attractive, they will by default finance accumulation (or reduced decumulation) of foreign assets or, if we take a somewhat broader definition of saving, investment in government infrastructure or R&D which is complementary to private sector capital.

Given the record since 2000, the challenge for the U.S. standard of living looking ahead is evidently not that we have accumulated too little private sector physical capital. It might be that we have invested inadequately in government infrastructure and R&D, although the current political dynamics of earmarks and pork barrel spending do not suggest such funds are being well allocated from the standpoint of economic growth. It’s possible that we have left money on the table by not adequately resourcing education (human capital formation). What is certain, however, is that we have liquidated (on net) our overseas economic empire and instead of receiving net payments from the rest of the world we can now count on making them. It is true that absent the government deficits, we would most likely still have had capital account surpluses, particularly in the last fifteen years, but they would not have been as large, and U.S. indebtedness to the rest of the world would not have grown as rapidly.

If our net international investment income has become only modestly negative it is only because the gross U.S. holdings of overseas assets are heavily skewed toward direct rather than portfolio investment (and we earn a relatively high rate of return on the former), whereas foreign holdings of U.S. assets are heavily weighted toward portfolio investments, particularly safe but low yielding Treasuries. Still, with U.S. net international indebtedness in the range of $2.5 trillion, and with current account deficits of 6 percent of GDP a year adding to this, the mathematics are inexorable: the burden of servicing this debt will adversely affect the U.S. standard of living in the future just as much as would have a slower rate of accumulation of domestic fixed capital, although through a different mechanism.

Greenspan’s neglect of the contribution of government dissaving to this outcome is a weakness of this book, just as his role in facilitating such dissaving is a weakness in his policy making record. His calls to solve the entitlement problem by increasing national saving sound somewhat hollow in light of his record over the quarter century (with the exception of the Clinton years) in contributing as a political actor to its reduction.

One of the most interesting aspects of the book from the standpoint of an economic historian or a macroeconomist is his treatment of globalization as a positive supply shock that facilitated the world wide disinflation that began in the 1980s. Perhaps surprisingly, he does not credit central bank monetary policy for this, or at least does not credit it very much (391). He suggests that growth with low inflation has been too easy to achieve. This perhaps takes too much from the accomplishments of his predecessor, Paul Volcker, who helped pave the way for the single digit inflation of the last quarter century by slowing the growth of U.S. monetary aggregates, in the process producing the most serious recession in the country since the Great Depression (Greenspan didn’t take over until 1987). Greenspan notes that aside from Venezuela, Iran, Argentina, and Zimbabwe, the world today is remarkably free of inflation. But how much of this is due to central bank learning and how much to the positive supply shock of globalization, which has brought hundreds of millions of people into contact with the world economy, remains to be sorted out.

Greenspan is not a card carrying economic historian, but he has a serious interest in it, and this is evident throughout the book. The acknowledgments indicate that along with Bill Clinton, Steven Breyer, and Bob Rubin, Greenspan interviewed Paul David, who is credited, through his work on the diffusion of electric power, with helping Greenspan buy in to the idea that IT investments might impact productivity growth with a substantial delay. Thus, if the speed limit for the U.S. economy had as a consequence gone up, one could have faster monetary growth without necessarily risking inflation. Still, in terms of supply shocks that might have facilitated low inflation growth, there is less discussion of the impact of IT on total factor productivity growth than there was in Greenspan’s speeches in the late 1990s, and more emphasis on the role of globalization as a world wide positive supply shock. He sees this ultimately as a one time transition, and in his forecast for the future, Greenspan anticipates some upswing in inflationary pressures, which will raise nominal interest rates from their current levels.

Much of his policy discussion is sensible and relatively nonideological. For example, he appears to endorse, with some reluctance, a $3 a gallon tax on gasoline (461) and he supported the requirement that stock options be expensed, in spite of the entreaties of people like Intel’s Craig Barrett. He repeatedly emphasizes his concern for worsening economic inequality and the threat this may pose to the market systems that generate economic growth. He favors some form of private accounts for Social Security, but spends little time trying to justify the position or support the President’s failed initiative in this area. He correctly notes that the problems of Social Security are relatively small and manageable in comparison with those associated with Medicare and Medicaid. And, though a libertarian and a onetime acolyte of Ayn Rand, he acknowledges that there can be a positive role for some government regulation and infrastructure, describing, for example, his realization that the Fedwire system has advantages over what a private sector payment system could provide (374).

Greenspan has clearly been a creature of politics as well as economics. That said, what emerges in this book is a picture of the author as a man of great intellectual curiosity about how the economy works, a curiosity he has sustained for over half a century.

Alex Field is the Michel and Mary Orradre Professor of Economics at Santa Clara University and Executive Director, Economic History Association, His most recent publications are “Beyond Foraging: Behavioral Science and the Future of Institutional Economics” Journal of Institutional Economics 3 (December 2007): 265-91 and “The Impact of the Second World War on U.S. Productivity Growth.” Economic History Review 61 (February 2008).

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

The Money Men: Capitalism, Democracy, and the Hundred Years’ War over the American Dollar

Author(s):Brands, H.W.
Reviewer(s):Cowen, David J.

Published by EH.NET (October 2007)

H.W. Brands, The Money Men: Capitalism, Democracy, and the Hundred Years’ War over the American Dollar. New York: W.W. Norton, 2006. 239 pp. $24 (hardcover), ISBN: 978-0-393-06184-0.

Reviewed for EH.NET by David J. Cowen, Quasar Capital Partners.

The previous twenty-one works of H.W. Brands, the Dickson Allen Anderson Centennial Professor of History at the University of Texas, have covered a wide range of topics and eras. His books have spanned the gamut of American history, from the eighteenth century and a biography of Benjamin Franklin to the nineteenth century and a history of the California Gold Rush, and then on to the twentieth century and a discourse on the United States in the Middle East. He is a comfortable storyteller and this extends to biography, with tomes to his credit about Andrew Jackson and Woodrow Wilson. In his most recent work, The Money Men: Capitalism, Democracy, and the Hundred Years’ War over the American Dollar, Brands combines his skill sets of biography and history to render a flowing work about early American finance, a period covering roughly the beginning of the finance system under the stewardship of Alexander Hamilton to the 1907 financial panic and its aftermath.

The opening chapter logically starts with Hamilton and is called “The Aristocracy of Capital.” It moves quickly through his early years on Nevis and days as a young officer in the continental army. The theme that remains constant is that Hamilton “contended that economics ruled the world, eventually if not at once” (p. 21). The resourceful Hamilton is followed as he seizes the opportunity where others might see failure; for instance Brands describes Hamilton’s leadership after the conclusion of the Revolutionary War at the Annapolis Convention, which laid the groundwork for the Constitutional Convention; and the subsequent creation of the National Government, when his appointment as Secretary of the Treasury led to his promotion of funding and bank legislation. Brands does not break any new ground on these topics and is simply retelling the story. He reminds us that Hamilton’s funding and banking plans were an all-or-nothing proposition for “wound one limb and the whole tree shrinks and decays” (p. 46). Given Brands’ writing style, which is telling a broader story, it is inevitable that some matters will be marginalized or forgotten. For instance, he has omitted any mention of the creation of the Mint, which defined the dollar as the measure of money.

In the second chapter called “The Bank War,” we are introduced to the two warring factions: the capitalists championed by Hamilton and the democrats led by Thomas Jefferson. Brands opts to gloss over the stormy closure of the First Bank, simply rolls the discussion forward quickly to the Second Bank, and focuses on the autocratic President, Nicholas Biddle, representing capitalism, versus President Andrew Jackson, representative of the democrats. The fabled Bank War moves quickly and is an enjoyable read. In some parts of the book Brands leans too heavily on quotes, some of which fill over half a page, but here the quotes add to the action in what is history articulated in an enjoyable fashion. As Brands explains, it became personal between the two as Jackson thundered that “The Bank … is trying to kill me, but I will kill it!” (p. 91). With Jackson’s victory “the lesson seemed clear … when democracy and capitalism collided at the ballot box, democracy won” (p. 85). When Jackson gave the order to withdraw federal deposits and redeploy them to state banks, Biddle, to his eternal shame, exacerbated tensions by constricting bank loans and curtailing money. Brands labels Biddle the bad apple, devoting much space pinning the blame on him, and hence championing democracy rather than capitalism. But here is where we need clarification, for there is another way to look at the aftermath of the Bank War: it was not democracy vs. capitalism, but rather with the reshuffling of the Federal deposits it was simply the State Banks winning at the expense of the Federal Bank, or one brand of capitalism versus another brand of capitalism. Furthermore, he has lumped both Bank Wars together; however, recall that the First Bank was a Federalist institution destroyed by the Jeffersonian Republicans, and yet these were the same Republicans who pushed for and chartered the Second Bank when in the wake of the War of 1812 the nation’s finances were asunder.

The third chapter, entitled “The Bonds of the Union,” discusses the strong growth and revolutions in transportation, industry and markets seen in the years roughly between 1825 and 1850. It was about connectivity, brought about by canals and then the railroads, bringing together distant locales to the eastern seaboard, and the wealth that was subsequently produced for the few. Brand next presents the California Gold Rush and that precious metal is introduced, which provides segue into our third ‘money man,’ financier Jay Cooke. He became synonymous with the selling of war bonds at a time when the cost of the war to the Union was $1 million per day. Cooke’s ingenious plan to sidestep the banks and sell bonds directly to the public exceeded all expectations and Brands tell us “Cooke may have become the person most vital to the Union war effort, after Lincoln” (p. 121). By the final tally, Cooke & Company placed a staggering $1 billion plus in U.S. Government Bonds.

The fourth chapter is called “The Great Gold Conspiracy” and is the shortest chapter in the book. We meet again Jay Cooke, who in concert with Jim Fisk, Jr. and Jay Gould, attempted to corner the market in gold in 1869. The plan ended in disaster when the government stepped in to sell to the bulls, but Gould escaped ruin when he surreptitiously switched allegiances and himself became a seller. We learn more about the mechanics of the market in this chapter: and not just the gold market but also how the equity market functioned in this age of railroad wars, with various consortiums and individual operators looking for personal gains at the expense of any level of morality and legislation. But capitalism is a loser in this chapter for we learn about its seamier side as the standards of insider trading and stock manipulation are revealed.

The fifth chapter is entitled the “Transit of Jupiter” and we are left guessing as to why it is called that (unfortunately it is never answered). The chapter encompasses much ground, from the gold scandal introduced in Chapter Four all the way through the aftermath of the Panic of 1907, all covered in a fleeting forty pages. We see more scandal and rapidly move from financial panic in 1873 to financial crisis in 1893. J.P. Morgan emerges as a financier, amasser of capital, savior of the financial system, and enigmatic greedy capitalist all rolled into one. Morgan reorganizes the railroads and insists on seats on the boards of the companies he invests in. He hosts summit meetings in various industries, leading one to believe that he alone is pulling the purse strings on the capitalist system. Because this is top down history, we do not first hand see or feel the pain and difficulty of the man on the street or farm impacted by this money interest.

Brands does try to bring this struggle to the fore in the great gold and silver debate, whereby the capitalists and hard money men line up in favor of gold and the western farm interest and debtors prefer silver. In short, silver was perceived as the money of the people and gold the money of the wealthy. For Brands then “gold and silver were simply the latest proxies in the historic contest between capitalism and democracy, between wealth and commonwealth” (p. 175). There is a juxtaposition between Morgan on one side, stepping in to rescue the financial system time and again when it hiccups, and William Jennings Bryan on the other, champion of the people, with his famous indictment against the gold standard: “you shall not press down upon the brow of labor this crown of thorns! You shall not crucify mankind upon a cross of gold!” (p. 184).

The Money Trust, led by Morgan, became too pervasive and too powerful not to escape notice. By the early twentieth century and with Theodore Roosevelt in the White House, the handwriting was on the wall for Morgan and the Money Men. But not before one final climatic incident, when in 1907 a financial panic caused Morgan to ride in again on his proverbial white horse to stem the tide. But this play has been seen before, a system on the brink of financial ruin only to be rescued by the same Money Men some believe caused the convulsions in the first place. The Senate convened a committee in 1912 to look into the ‘money trust’ question, hauling Morgan and others in front of their committee. Morgan died in the next year, many believe from the stress of being embarrassed in front of the committee.

The “Epilogue” argues how the money question concluded with the creation of the Federal Reserve System, a central bank that could set the interest rate level and bear ultimate responsibility for the fiscal system. The Fed was in reality the Third Central Bank of the United States, having birthed 77 years after the Biddle/Jackson fight shuttered the Second Bank of the United States. Brands concludes that in spite of the Federal Reserve’s missteps in the aftermath of the 1929 Great Crash, the central bankers have done a credible job and therefore the money question, once so central to the politics of the United States, has been resolved and is out of the main of the political debate.

There are only a few illustrations in the book, but the cover is interesting, as the faces of the main subjects are in a similar vein to the portraits of the luminaries on our currency. Of course Hamilton is the only one of the Money Men described who is actually on our legal tender as he graces the $10 bill, and his picture on the cover is top billing along with Morgan. The faces of Biddle, Gould and Cooke are smaller and relegated to the lower portion of the cover.

Brands should be applauded for writing about the money question, which has often been overlooked in U.S. history. He tackles head-on the intrinsic strain between democracy and capitalism for “the driving force of democracy is equality, of capitalism inequality” (p. 16). In short, we can ask the question does capitalism have a conscience? We are left after reading this saying that if it does, it certainly takes a lot of turns to achieve it.

Brands’ style is to liberally intersperse quotes into the text. These quotes are cited in the end notes, which has the benefit of making the book much easier to read. Of course, the shortcoming is for the serious scholar who sees a quote about Hamilton such as “that power which holds the purse strings absolutely, must rule” (p.25) and will wonder exactly when he said this ? when he was a soldier pointing fingers at a feckless Congress, or later when he was Secretary of the Treasury? Turning to the end notes we see that it can come from any part of thirteen pages in Joanne Freeman’s Writings of Alexander Hamilton (2001), and as a secondary source that question is not easily answered. A second drawback to this style is that he can overuse quotes and therefore they lose their impact. For instance, Brands so liberally uses quotes from a lecturer from the University of Chicago under the nom de plume “Coin,” that most of the pages 167-173 feel like a string of quotes.

This is history seen through the leadership’s eyes and that makes sense if one is writing to a general audience. This is introductory history that is story telling, and as a result big omissions occur, like the First Bank scrip bubble 1792 or the First Bank War conclusion of 1811, or the irony that many Republicans liked banks, especially if they could receive the loans of those banks for themselves. Brands is trying to sell the point as democracy vs. capitalism, as if one has to win. But isn’t the winner the system itself? Our democratic capitalism has produced a system of government that has produced an amazing relative standard of living for its citizens, and if there is a winner that is where the gold medal lies.

But these flaws are minor for the audience that Brands is trying to reach. This book is an easy read and contains a lot of enjoyable prose. It is a likeable and painless read for just about anyone with an interest in American History.

David J. Cowen is an independent scholar in the New York City area. He is the Managing Partner of Quasar Capital Partners, a macro hedge fund. He is co-author (with Robert E. Wright) of Financial Founding Fathers: The Men Who Made America Rich, published by the University of Chicago in 2006 and of “The First Bank of the United States and the Securities Market Crash of 1792,” Journal of Economic History 60 (December 2000).

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

Native Capital: Financial Institutions and Economic Development in S?o Paulo, Brazil, 1850-1920

Author(s):Hanley, Anne G.
Reviewer(s):Triner, Gail D.

Published by EH.NET (March 2006)

Anne G. Hanley, Native Capital: Financial Institutions and Economic Development in S?o Paulo, Brazil, 1850-1920. Stanford, CA: Stanford University Press, 2005. xviii + 286 pp. $55 (cloth), ISBN: 0-8047-5072-6.

Reviewed for EH.NET by Gail D. Triner, Department of History, Rutgers University.

Native Capital: Financial Institutions and Economic Development in S?o Paulo, Brazil offers an incisive history of the origins of modern financial institutions in a region that became, by the middle of the twentieth century, one of the largest urban and industrial centers of the “third world.” Anne G. Hanley, Associate Professor of History at Northern Illinois University, has constructed an excellent, detailed history of the organizations and legal structures that fueled an extraordinary period of financial innovation in S?o Paulo. In doing so, she finds dynamic entrepreneurialism bringing Brazilians together to pool their resources in constructive ways to fund explosive growth of financial markets at the end of the nineteenth and beginning of the twentieth centuries.

During the late nineteenth century, while the Brazilian state was organized as an “empire,” slow developments in the forms of joint stock companies, debenture issues, and banking were limited by the scale of financial requirements and by regulation at the national level. However, the expansion of coffee production, which ultimately fueled regional growth, the shift from slave to free (Brazilian and immigrant) labor and increasing demand for industrial capacity, provided incentive for entrepreneurs in S?o Paulo to seek new forms of financial organization.

In January 1890, almost simultaneously, and closely associated, with the introduction of republican government in November 1889, financial reforms opened the way for massive expansion in the forms and scale of corporate finance. Eased legal and capital requirements for limited liability corporations resulted in large numbers of new companies and banks opening their doors. Capital markets for equities and debentures and banks emerged from the reforms. As Hanley adroitly demonstrates, these reforms allowed existing economic elites to expand their activities at the same time that wider groups could participate in the boom, by investing their smaller pools of savings.

The securities exchange for equities and debentures (the Bolsa de Valores) suffered a rapid crash in 1891, but re-emerged strongly after a national debt re-scheduling in 1898 and additional reforms in 1905. Then, its “vigor disappeared after 1913″ (p. 111) in the light of disruptions that World War I created in Brazil’s trading and financial networks. Hanley emphasizes the surviving companies and banks, rather than the many bankruptcies, acquisitions and liquidations. Without explicit quantification, it is difficult to determine the most common outcome for the companies newly formed during the 1890s. It is possible that opportunity for financial dynamism (with many regulatory loopholes) supported both real growth and widespread failures simultaneously.

In analyzing banking, Hanley makes a useful distinction between commercial and universal banks. The sample of universal banks is small (n=3), reflecting their inability to gain a foothold in the prevailing business environment. The few universal banks pursued long-term finance through mortgage and construction lending; they tried to raise long-term funding with mortgage-backed notes. The discussion of their failure raises more questions than it answers. Low profitability may have been the proximate cause of their demise. But, the theoretical discussion, leading to expectations of beneficial success, and findings of problems with asset valuation, suggest deeply seated business or regulatory problems that deserve attention. Commercial banks fared better: more of them served the S?o Paulo economy and they survived longer than universal banks. Although deprived of easy branch banking and long-term facilities, the liquidity and secure collateral that characterized commercial banks’ conservative portfolios served them well.

The causes and effects of the crises of 1891 and 1913/14, debt rescheduling of 1898, bank reforms and failures of 1900; the role (and feasible alternatives) of national monetary policy, and the relationship of S?o Paulo’s with the national economy receive cursory attention in Native Capital. But, given the importance of S?o Paulo for the economy and politics of Brazil, detailed questions relating the macroeconomic setting, the dynamics of national policy decisions and the trajectory of paulista business development arise. As examples, the specific “macroeconomic instability” that contributed to the failure of universal banks, as distinct from commercial banks (p. 148), the relationships between debt re-financing in 1898, bank failures of 1900-01, banking reform of 1905 (Chapter 6), and the formation of business enterprises could benefit from more exploration. Perhaps most importantly, reconciling the beneficial linkages of vastly expanded coffee production that Hanley refers to throughout the book, with seriously depressed world coffee prices from the mid-1890s through much of the first decade of the twentieth century and public sector support for coffee (with price supports and monetary reforms in 1905) may go a long way towards identifying the ways in which paulista entrepreneurs could apply their innovative dynamism.

Native Capital carefully describes the development of financial institutions and markets within S?o Paulo at the turn of the twentieth century, and it convincingly demonstrates a period of intense dynamism. However, the introduction’s claim that “the financial institutions so neglected in the Brazilian literature were precisely what made S?o Paulo’s development so successful” (p. 19) has broader implications on two interrelated counts that deserve attention. First, the implicit counterfactual — the possibility of other sources for successful development — is not the subject of empirical or analytical exploration. This concern taps into a very long-standing debate in financial theory and history about the causal relationship between finance and economic development; that it remains unresolved here only demonstrates its continued difficulty.

Second, and of more immediate concern for Hanley’s research, the relationship between these findings of financial and economic dynamism during this period and long-term development in S?o Paulo come into question. The period of financial dynamism was short-lived. After the early spectacular growth of the Bolsa, and especially after 1913, the story became very different. By the 1990s, when S?o Paulo boasted one of the largest, most modern industrial sectors in the developing world, its Bolsa listed only three-and-a-half times the number of companies that it had in 1917 (p. 189). While some aspects of early industrial structure saw their impetus in S?o Paulo during the decades surrounding the turn of the twentieth century, the volume of industrial growth can be traced to the post-World War II years. Therefore, if Brazilian financial markets remained moribund through much of the twentieth century after World War I (as seems to have been the case), can the financial dynamism of the earlier period really explain the success of S?o Paulo’s long-term development? What prevented sustained institutional dynamism? Attention to these questions provides an interesting challenge for future research.

Finally, the title of this book deserves more attention than it receives. Brazilian capital and money markets relied on Brazilian capital for their formation. This finding taps into one of the fundamental debates underlying Latin American economic history, the question of “dependency.” While Hanley alludes to the debate, an explicit discussion of the implications she draws for the finding of “native” capital would help both Latin Americanists with vested interests in varying sides of the debate and non-Latin-Americanists. From an empirical perspective, a useful subsequent question is whether, or how, the access that Brazilians had to international capital during the years of domestic financial innovation affected the dynamism of the S?o Paulo market.

Native Capital is very well-written. The prose is clear, and free of unexplained financial or theoretical jargon. The quantitative methods of the book rely on accounting principles that allow Hanley to explicate clearly the underlying businesses of financial institutions. The text situates the S?o Paulo case in the larger context of comparative financial history. The discursive footnotes are informative. Hanley is fully convincing on her theme of the extraordinary surge of entrepreneurialism in S?o Paulo during the late nineteenth and early twentieth centuries. Native Capital provides an important case study for very important questions in Brazilian and financial history. That the book raises provocative questions is a measure of its success.

Gail D. Triner, Associate Professor of History at Rutgers University, is author of Banking and Economic Development: Brazil, 1889-1930 (New York: Palgrave Press 2000) and a variety of articles on Brazilian economic and financial history, most recently, with Kirsten Wandschneider, “The Baring Crisis and the Brazilian Encilhamento, 1889-1891: An Early Example of Contagion among Emerging Capital Markets?” Financial History Review, Vol. 12, no.2, October 2005.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: Pre WWII

Deflation: Current and Historical Perspectives

Author(s):Burdekin, Richard C.K.
Siklos, Pierre L.
Reviewer(s):Mitchener, Kris James

Published by EH.NET (November 2005)


Richard C.K. Burdekin and Pierre L. Siklos, editors, Deflation: Current and Historical Perspectives. Cambridge: Cambridge University Press, 2004. xxii + 359 pp. $75 (cloth), ISBN: 0-521-83799-5.

Reviewed for EH.NET by Kris James Mitchener, Department of Economics, Santa Clara University,

With oil prices accelerating rapidly over the past year, housing prices “frothing” in coastal areas, and the Federal Reserve raising the federal funds rate twelve times since the end of the most recent recession, the timing of a new book addressing the topic of deflation seems somewhat inopportune. Nevertheless, it is worth remembering that, as little as two years ago, American policy makers were seriously pondering the possibility of deflation. Improvements in labor productivity and the expanding use of global supply chains to manage input costs were holding the lid on the overall price level, and short-term interest rates were approaching the zero bound in the wake of the 2001 recession and the collapse in spending on information technologies. Such circumstances warranted the consideration of the small-probability event of sustained deflation, given Alan Greenspan’s risk-management approach to central banking. Deflation and related issues such as asset price booms and busts, liquidity traps, and the operation of monetary policy in extremely low interest-rate environments consequently received renewed attention from domestic policymakers and economists. Moreover, policy debates over the effects of deflation and the appropriate response to it had been taking place for some time in other parts of the world. In particular, Japan was bearing witness to the first recorded deflation in an industrialized country since the Great Depression. These issues and policy debates form the backdrop for the edited volume by Richard Burdekin and Pierre Siklos, which offers a critical evaluation of historical episodes of deflation and some long-run perspective on more recent events.

The edited conference volume consists of twelve chapters that examine deflation by drawing on theory, history, and empirical evidence. The book features interesting contributions by many eminent financial and economic historians. This alone would make it appealing to specialists working in macroeconomic history, but it ought to attract a broader readership, including macroeconomists, central bankers, and policymakers, since the editors were careful to include papers that employ more recent data and theory. Indeed, one of the strengths of the volume is that the contributors employ a variety of methodological perspectives to analyze monetary phenomena and compare present issues with past episodes of deflation.

After an introductory chapter that provides a useful summary by the editors, the book is divided into four sections. The first part of the book, entitled “Fears of Deflation and the Role of Monetary Policy,” begins with an essay by Hugh Rockoff. He suggests that the U.S. bank failures of the 1930s exhibit characteristics that are similar to twin crises (banking and exchange rate crises) that have occurred more recently in national economies. Rural regions in the U.S. experienced “capital flight” because depositors feared that declining export prices and demand would undermine the ability of borrowers to repay; this eventually prompted runs on some banks and led authorities to impose restrictions on withdrawals (bank holidays). Rockoff contributes to the growing literature on regional differences in bank performance during the Great Depression by focusing on “silent runs” — the withdrawal of deposits from rural areas and their movement to Eastern financial centers — a process that was driven in part by declining prices and deflation. The interregional evidence is consistent with his argument, although individual bank data showing that losses of deposits had important consequences for the survival of banks would further strengthen his argument.

In the second chapter of this section, Forrest Capie and Geoffrey Wood take a longer-run perspective and examine whether debt-deflation had damaging effects on the British economy between 1870 and the 1930s. J.M. Keynes’ views on debt deflation suggested that expected real rates are important for generating real effects, whereas Fisher emphasized that rising realized rates produced dilatory effects on existing debtors. The authors use simple time-series analysis to produce price-expectation series and then construct real interest rates that take into account either expected inflation or actual inflation, according to the respective ideas of Keynes and Fisher. They use these series as well as bond spreads to assess the effects of debt deflation, and find little statistical evidence that debt-deflation in Britain created adverse effects for the real economy (or for financial stability). The authors rightly point out, however, that Britain’s experience with deflation was much milder than that which occurred in the U.S., so it is difficult to rule out the debt-deflation hypothesis in general.

Klas Fregert and Lars Jonung close out the first section of the book by examining two cases of interwar deflation in Sweden, 1921-23 and 1931-33. They use the relatively short interval of time between these two episodes to assess how policymaking and macroeconomic outcomes in the first episode were influenced by the inflationary period of World War I, and how this deflationary episode (and the persistent and high unemployment that emerged in the 1920s) in turn influenced beliefs and behavior ten years later. Fregert and Jonung employ qualitative evidence to argue that the large deflation in the early 1920s greatly influenced the thinking of economists, policymakers, and wage setters in the latter episode. Heterogeneous expectations across these groups limited the deflation of 1931-33 as wage contracts were shortened and, in some cases, abandoned.

The second section of the book, entitled “Deflation and Asset Prices,” provides new contributions to the growing literature examining the relationship between monetary policy and asset prices. The first, by Michael Bordo and Olivier Jeanne, develops a model to assess whether monetary policymakers should respond to an asset price “boom” — a term which, according to the authors, differs from a “bubble” in that it is not necessary for policymakers to determine if asset prices reflect fundamentals in order to act. If monetary policies decide not to lean against the wind, they run the risk of a boom being followed by a bust, and a collateral-induced credit crunch dampening the real economy. On the other hand, pursuing restrictive monetary policy implies immediate costs in terms of lower output and inflation. Although the model is very stylized, they find that a proactive monetary policy is optimal when the risk of a bust is large and the monetary authorities can let the air out at a low cost; moreover, they argue that such a policy rule will not look like a Taylor rule in that it will depend on the risks in the balance sheets of the private sector. They then present some preliminary empirical evidence that the boom-bust cycles of their model appear to be much more frequent in real property prices than in stock prices and more common in small countries than in large. (The obvious exceptions to this are Japan’s experience in the 1990s and the U.S. during the Great Depression.) Moreover, they suggest that such busts can create banking crises and lead to severe reductions in output.

The second chapter in this section also examines boom-bust cycles in credit markets, but focuses on the linkages between bank lending and asset prices. Using vector autoregressions, Charles Goodhart and Boris Hofmann argue that movements in property prices during the period 1985-2001 had significant effects on bank lending in a sample of twelve developed countries. Their impulse response functions, however, show that bank lending appears to be insensitive to changes in interest rates. On the other hand, asset prices seem to respond negatively to interest-rate movements. The authors provocatively conclude that there is limited scope for effectively using monetary policy as an instrument to provide financial stability in periods when there are asset-price swings, in part because the effects of interest rates on asset prices and bank lending are highly nonlinear. One challenge to their interpretation of the evidence is that monetary policy is treated in isolation from changes in bank regulation that also took place during this period. Regulatory changes likely also influenced bank lending decisions. One prominent example of this was the adoption of BIS capital-asset requirements in 1988 by Japanese banks, which strengthened the relationship between bank lending and equity prices. Banks could count 45 percent of latent capital as part of tier-II capital requirements; this ensured that increases in equity prices increased bank capital, which in turn, encouraged banks to lend more on real estate and supported rising asset prices.

The third part of the book provides additional case studies of deflation. Michael Bordo and Angela Redish point out that “good” deflations are often defined as periods when prices are falling as a result of positive supply shocks (like technological progress); hence, aggregate supply outpaces aggregate demand. “Bad deflations” are periods when prices fall because aggregate demand increases faster than aggregate supply; this can occur when there are money demand shocks. They suggest, however, that this simple classification can be difficult to square with empirical evidence. Examining the United States and Canada during the classical gold standard period, they find some evidence that both negative demand shocks and positive supply shocks drove prices downward between 1870 and 1896. Output growth was more rapid during the inflationary period of 1896-1913 than the preceding period of deflation, but their time series evidence suggests that there was no causal relationship: price changes were not driving the determination of output.

Michele Fratianni and Franco Spinelli look at Italian deflation and exchange-rate policy during the interwar period, and Michael Hutchinson analyzes Japan in the 1990s. These two chapters make use of a comparative historical approach. Fratianni and Spinelli compare and contrast the Italian deflation of 1927-33 with the disinflation that took place during the adoption of the EMS (1987-92) to argue that fixed exchange rates became unsustainable as economic fundamentals deteriorated. In particular, the interwar gold-exchange standard imparted a deflationary bias, which eventually led authorities to abandon the fixed exchange rate regime in order to pursue lender of last resort activities (thereby assisting failing banks and preventing banking panics) and stabilize the money supply. Hutchinson provides a nice overview of the most important recent episode of deflation, Japan, and shows how injections of liquidity by the central bank (which eventually reduced nominal rates to zero) have not been very effective at improving the growth in broad money aggregates (at least until the last few years). He examines both the liquidity trap and “credit crunch” views of the Heisei Malaise, and argues that, in spite of some policy mistakes that prolonged the deflation and made it more costly, Japan’s deflationary experience has been nowhere near as disastrous as the experience of the U.S. in the 1930s. However, Hutchinson suggests that Japanese policymakers could have made their commitment to zero-interest-rate policy more effective by also adopting an explicit inflation target.

The last section provides three studies that explore the behavior of asset prices during deflations. Lance Davis, Larry Neal, and Eugene White examine how the 1890s deflation affected the core financial markets of the time. Largely narrative in its treatment, this chapter examines how the corresponding financial crisis of that decade prompted different degrees of institutional redesign and regulation in the financial markets of Paris, Berlin, New York, and London. In the next chapter, Martin Bohl and Pierre Siklos study the behavior of German equity prices during the 1910s and 1920s. They argue that this period of German history is particularly useful for analyzing the long-run validity of the present value model of asset price determination because the model can be studied for periods of deflation and hyperinflation. Their empirical results suggest that, while the theory holds for the long run, German share prices exhibited large and persistent deviations in the short run, perhaps the result of noise trading or bubbles. The final chapter by Richard Burdekin and Marc Weidenmier suggests that gold stocks might be a useful hedge against asset price deflation. They find evidence of excess returns on gold stocks after the 1929 and 2000 equity-market declines, but scant evidence of excess returns after the 1987 crash, and interpret these results as indicating that gold stocks only serve a useful hedge if asset price reversals are prolonged.

Even though deflation has lost some of its immediate relevance to policymakers, there is much to be commended in the editors’ efforts to design a book that demonstrates the importance of developing a greater empirical and theoretical understanding of deflation. Although one can always quibble with the compromises that occur when assembling such a volume (for example, in this book, despite the fact that many of the chapters discuss the interwar period, there is no single chapter that attempts to examine deflation using a true panel-data approach), this book’s chapters certainly have enough thematic overlap that the sum of the articles still ends up being of greater value than the individual parts — something that is often difficult to achieve in conference volumes. In this respect, it is a welcome addition to the literature for those interested in monetary economics or those wanting an enhanced historical perspective on recent policy debates.

Kris James Mitchener is assistant professor of economics and Dean Witter Foundation Fellow in the Leavey School of Business, Santa Clara University, as well as a Faculty Research Fellow with the National Bureau of Economic Research. He is currently researching sovereign debt crises during the classical gold standard period and the effects of supervision and regulation on financial stability and growth. Recent publications include “Bank Supervision, Regulation, and Financial Instability during the Great Depression,” Journal of Economic History (March 2005) and “Empire, Public Goods, and the Roosevelt Corollary” (with Marc Weidenmier), Journal of Economic History (September 2005).


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

Peddling Panaceas: Popular Economists in the New Deal Era

Author(s):Best, Gary Dean
Reviewer(s):Dighe, Ranjit S.

Published by EH.NET (October 2005)

Gary Dean Best, Peddling Panaceas: Popular Economists in the New Deal Era. New Brunswick, NJ: Transaction Publishers, 2005. xii + 270 pp. $49.95 (cloth), ISBN: 0-7658-0288-0.

Reviewed for EH.NET by Ranjit S. Dighe, Department of Economics, State University of New York at Oswego.

The most popular economist in the New Deal era was John Maynard Keynes, right? Of course not. While many New Deal policies would later be called Keynesian, Keynes was little known to the American public prior to the publication of The General Theory in 1936, and his influence in New Deal policy circles was minimal. The story of Keynes’s 1934 audience with President Franklin D. Roosevelt is often recounted: Keynes came away wishing Roosevelt “was more literate, economically speaking,” while Roosevelt dismissed Keynes as “a mathematician rather than a political economist.”[1]

The classical or “orthodox” economists of the time fared even less well with the Roosevelt Administration and the public. It seemed natural to associate them with the old economic order and its collapse in the first four years of the Depression. Moreover, orthodox prescriptions like liquidating labor and commodities, hewing to the gold standard, and balancing the budget were pure castor oil — hardly a welcome tonic for people seeking relief. Those prescriptions, with some notable exceptions like the widespread opposition of economists to the Smoot-Hawley tariff, may also have sounded too similar to those of the discarded and discredited Hoover Administration.

Instead, the most popular economists of the time were liberal-leaning amateur economists who beat the drums for various reforms in the popular press. While the Depression spawned a host of would-be economists, offering reforms ranging from the radical to the reactionary, a few of these amateur economists exerted tangible influence. They pressed for policies that the Roosevelt administration eventually adopted and promoted them among the general public. Gary Dean Best’s new book, Peddling Panaceas: Popular Economists in the New Deal Era, deals with three of the most influential of these writers: Edward A. Rumely (and his Committee for the Nation), Stuart Chase, and David Cushman Coyle.

Best, a retired professor of history in the University of Hawaii system, is the author of a dozen books that deal directly or indirectly with interwar America, including five books on the New Deal. Despite his own prolific output on this era, Best is remarkably un-self-referential in this book, though the book does continue the policy grouping from his 1990 book Pride, Prejudice, and Politics. That book broke down Roosevelt’s advisers into three groups, and this one treats each of its subjects as a representative of one of those groups. Rumely and the Committee for the Nation were reflationists, whose great victory came early with Roosevelt’s decision to take the country off the gold standard in 1933; Chase was a planner, like Raymond Moley and Rexford Tugwell, who favored more centralized control of industry and agriculture, as embodied in the National Recovery Administration (NRA) and the Agricultural Adjustment Administration (AAA); Coyle was a “Brandeisian,” a trust-buster in the mold of Louis Brandeis, with a deep distrust of big business and high finance.

The title Peddling Panaceas, recalling as it does Paul Krugman’s caustic Peddling Prosperity (1995), may lead the reader to suspect that Best holds little brief for these “popular economists” and the New Deal policies they advocated. Such suspicions are correct, as is evident from the full title of Best’s 1990 book, Pride, Prejudice, and Politics: Roosevelt versus Recovery, 1933-1938. In that book and in a provocative interview with The Objectivist Center in 1990 [2], Best condemns the New Deal from a conservative economic perspective similar to that of Robert Higgs [3]; in a nutshell, both say the New Deal retarded recovery because it provided a poor investment climate for business. In this new book Best mostly soft-pedals his negative assessment of the New Deal in favor of relatively neutral histories of Chase, Coyle, and the Committee for the Nation and their respective beliefs and influences with the public and the administration.

The book is organized tidily, perhaps too tidily, into nine chapters, three each for Chase, Coyle, and Rumely’s Committee for the Nation. While this arrangement is numerically elegant, it sacrifices some context and clarity. The introductory and concluding sections are just a few pages each (and are not numbered as chapters), with the result that the general reader may be frustrated by the lack of background. A non-specialist would likely feel bewildered by the opening sentence of chapter 1, with its referencing of “the ‘war’ between the planners and the Brandeisians” and of the miscategorization of reflationists as inflationists. A longer introductory chapter, numbered as chapter 1, would have been helpful.

The first three chapters deal with Rumely and the Committee for the Nation, whose program Best clearly sees as the most reasonable. Rumely’s colorful resume included editing and publishing the New York Evening Mail, promoting vitamins and other products in the 1920s, and working in his family’s agricultural machinery business. From his background Rumely was acutely aware of the farm depression that had begun in the 1920s and reached new depths in the early 1930s. Like the Greenbackers and some of the Populists two and three generations earlier, he believed that deflation was devastating the farm sector and the economy as a whole, and that the solution was to take the dollar off the gold standard and regulate its value so as to stabilize prices at an earlier, pre-deflation level. This monetarist prescription was too radical for even William Jennings Bryan and his fellow bimetallists in 1896, but by the early 1930s it would receive strong support from two of America’s leading academic economists, George F. Warren (of Warren-Pearson Index fame) of Cornell and Irving Fisher of Yale. Rumely began forming his committee in the summer of 1932 and managed to recruit a number of prominent businessmen. He wrote frequently to President-elect Roosevelt, influential congressmen like Senator Elmer Thomas of Oklahoma, and Henry Wallace, who joined the group’s executive committee shortly before he became Secretary of Agriculture. By January 1933 he had settled on the name Committee for the Nation for Rebuilding Purchasing Power and Prices, or Committee for the Nation for short, and taken the group public. The group lobbied Congress and the White House, and added numerous economists and businessmen to its ranks. Its efforts bore fruit almost immediately, as Roosevelt took the country off the gold standard in April and the Agricultural Adjustment Act, signed into law in May, included Senator Thomas’s “inflation amendment,” authorizing the president to inflate prices using any of six methods. Rumely declared victory in a letter to his daughter that month: “The Administration has adopted the Committee’s policy and this country is on the way to restoration of the 1926 price level, we believe” (p. 21).

Dissatisfaction soon set in among Committee members, however. Merely de-linking the dollar and gold, and ending the deflation, was not the group’s whole agenda. Fisher and many others favored a “commodity-backed dollar,” with its value tied to an index of commodity prices, and were disappointed when the administration and Congress did not enact such a plan. Probably most Committee members thought the NRA and AAA approaches of raising prices by restricting production were counterproductive. Most demoralizing of all was the failure of prices to return to their talismanic 1926 level (the average of the Prosperity Decade price levels). The Committee won perhaps its greatest victory in January 1934 when Roosevelt raised the dollar price of gold to the level commensurate with a “1926 dollar,” but even with the simultaneous pledge to buy up unlimited quantities of gold that price, the price level rose only partway toward that target. (And of course, once prices finally did reach that level, they kept on rising. Small wonder, then, that the reflationists were often called inflationists.) Committee members pushed for further devaluation of the dollar relative to gold, but to no avail. By 1936, Rumely and others on the Committee continued to press for reflation but believed the country had a bigger problem, namely the New Deal itself, which they found coercive, anti-business, and socialistic. Like the Association against the Prohibition Amendment, another business-heavy lobby that allied itself with Roosevelt on a single issue and reconstituted itself later as an anti-New Deal group (the American Liberty League), the Committee transformed itself in 1937 into an anti-Roosevelt group, the National Committee to Uphold Constitutional Government. The group helped block Roosevelt’s court-packing scheme and raised money in 1938 to defeat congressmen who had supported it and re-elect those who had opposed it. When the “Roosevelt depression” began in late 1937, the National Committee called once again for a reflationary monetary stimulus but derided the administration’s planned fiscal “pump-priming” as an “economic fallacy” which will eventually and “inevitably lead to destruction of democracy and to one-man government” (p. 84).

Stuart Chase, unlike Rumely, found a natural affinity with the New Deal program in general. His most common complaint was that it did not go far enough. An engineer turned accountant turned social critic, and a gifted prose stylist, Chase may well have been America’s most popular economist in the 1930s despite having no formal training as an economist. (The closest he came was spending several years researching the meat-packing industry for the government. To be fair, the Ph.D. credential was less important in Chase’s time than it is now.) He was technically employed as a research economist by the Labor Bureau, Inc., from 1922 to 1939, but for all practical purposes he was a professional pundit, as the nature of the research seemed to be to advocate for various liberal economic reforms in books and magazine articles for popular consumption. In scores of opinion pieces in magazines like The Nation, The New Republic, and Harper’s, Chase attacked waste, deplored the phenomenon of poverty amidst plenty, and cheered the New Deal. A technocrat by nature, Chase found the decentralized American economy hopelessly chaotic, wasteful, and unstable. His timing was perfect, for he had been making these charges all through the 1920s, most notably in a book written just before the crash and published just after, Prosperity: Fact or Myth?. As the Depression deepened and people lost faith in the economy’s ability to right itself, Chase became the pop prophet of economic planning.

Chase’s 1932 book A New Deal was especially prophetic. It may even have been the source of the phrase “new deal” as used by Roosevelt for the first time a few months later at the Democratic convention. Unlike the orthodox economic planks in the Democratic platform, which bore little resemblance to the eventual New Deal policies, Chase’s proposals amounted to a comprehensive reform program that did look a lot like the First New Deal. Chase called for a managed currency to replace the gold standard, drastic curbs on stock speculation, higher wages and shorter work weeks, a massive public works program, and rural electrification. Most strikingly, Chase, a self-proclaimed “collectivist,” called for national and regional planning boards and collectivized production in moribund sectors like railroads, coal, oil, electric power, steel, meat packing, wheat, and cotton. He refined those recommendations in subsequent articles in 1932 and said the ideal would be to shepherd “all basic industries into state trusts, under government supervision but operating as independent units as far as possible.” While these ideas did not originate with Chase, his eloquent exposition of them surely helped popularize them, making for a ready reception when Roosevelt finally proposed them himself.

Like the administration, Chase thought much about the twin evils of overproduction and underconsumption. To Chase, industrial overcapacity was a problem that would only get worse without new restrictions and regulations on private investment. He seemed to view new capital investment as something that firms undertook blindly, without considering whether idle plant and equipment could be obtained more cheaply or whether new goods in the industry could be sold. While viewing the Depression economy as well below full employment, he seemed to regard full-employment output as a fixed value, not one that grew a few percent each year. “Gentlemen, the market has come to the end of its adolescent growth,” he wrote in his 1934 book The Economy of Abundance. “The boy has reached maturity.” Toward solving the problem of overproduction, Chase also recommended shorter working hours for all. His main approach toward bringing production and consumption into balance, however, was to raise mass purchasing power through expanded public-works employment, higher minimum wages, and guaranteed subsistence income for everyone willing to work.

Chase’s faith in collectivism was little shaken by the mounting evidence that the NRA philosophy of restricting production was also retarding recovery, nor by the rising tide of public and business disaffection with the NRA, nor by the Supreme Court’s invalidation of the NRA in May 1935, which effectively ended the First New Deal. By this time business and the administration had grown exasperated with each other, and no attempt to revive the NRA was made. The Second New Deal, which commenced almost immediately thereafter, was characterized by a decided preference for labor over capital and a zeal for permanent reform. Chase remained loyal to the New Deal, and even did some consulting work for various New Deal agencies from 1935 to 1939, but by this time he was swimming against the tide. Regulation had become the order of the day, whereas Chase in 1935 and 1936 was still pushing as hard as ever for more direct government control of production and investment. By 1938, however, he was back on the same page as the administration, muting his support for collectivism and arguing for more of what the administration was already doing: enlarged and permanent public-works programs to absorb the remaining unemployed, greater progressivity in tax and transfer programs so as to redistribute income from savers to spenders, and a more expansionary fiscal policy in general. As fascism engulfed Europe, Chase made the by-now-commonplace argument that Roosevelt’s New Deal had saved America from a similar fate. “It is a safety valve which protects us against the explosion of totalitarianism.”

David Cushman Coyle, though less well remembered than Chase, was possibly even more influential, especially within the administration. Another engineer with a utopian bent and a talent for getting his message out, Coyle published at least three books that sold over a million copies, countless articles in the popular press, and a number of articles in scholarly and semi-scholarly journals as well. Coyle shared much of Chase’s agenda, though he never embraced collectivism, and like Chase he did some advisory work for various New Deal agencies. Best describes Coyle’s program as a synthesis of the proto-Keynesian writings of 1920s “popular economists” William T. Foster and Waddill Catchings and the anti-big-business, social democratic views of Supreme Court Justice Louis Brandeis. The basic prescriptions of Foster and Catchings, including large-scale countercyclical public works, were broadly consistent with the New Deal. But Brandeis’s Jeffersonian disdain for “bigness” was at odds with the First New Deal, in particular the NRA. After the NRA’s court-ordered dissolution in 1935, Brandeis exerted tremendous influence on the New Deal, most of it indirectly through his close friend Felix Frankfurter and Frankfurter’s New Deal prot?g?s, Thomas G. Corcoran and Benjamin V. Cohen. But nobody articulated the Brandeisian aspect of the New Deal better than Coyle, whom Moley called the “economic philosopher” of the Second New Deal.

Coyle’s influence on the New Deal began early, with a 1932 article in Corporate Practice Review that caught the eye of Frankfurter, then a Harvard law professor and Roosevelt adviser. The article argued that the key economic problem was how to divert money from saving and investment to “consumption of the goods that business is trying to sell.” The interests of business and finance were irreconcilable, he believed, because the “man-eating ogre Finance” thrived on high levels of saving and investment, which inevitably led to overbuilding, underconsumption, and instability. Such investment helped only Wall Street, not Main Street. “The normal processes of finance are poisonous to business.” Coyle recommended higher taxes on large incomes and inheritances as a way to soak up those unproductive savings, so that they would not be invested in overcapacity. Frankfurter was so impressed that he helped Coyle distribute a thousand copies of the article, under the new title The Irrepressible Conflict: Business and Finance. It ended up circulating through the Roosevelt White House as well, attracting the attention of the president himself. Coyle quickly became a New Deal insider, celebrated by the Brandeisian faction of the administration and also popular with Federal Reserve Chair Mariner Eccles.

Coyle was much more at home in the Second New Deal than in the First, and 1935 produced a bumper crop of laws that were in line with his recommendations. Social security legislation had been part of his program to raise mass purchasing power, and the Social Security Act made it a reality (though he objected to the Social Security tax, which he thought should not fall on wage-earning consumers but on the rich). The Wheeler-Rayburn Public Utility Holding Bill, aimed at breaking up large holding companies, made life difficult for Big Finance. The Banking Act of 1935 gave the Federal Reserve greater control over bank credit and imposed interest-rate ceilings on deposits, possibly deterring saving. The Revenue Act of 1935 was the “soak the rich” bill Coyle had long wanted, as it raised taxes on top earners, corporations, and estates. In 1936 Coyle saw another cherished cause become law, when Congress imposed a tax on undistributed corporate profits. Although Roosevelt said the tax was intended to raise revenue, it seems likely that part of the administration’s rationale for it and the new taxes in the Revenue Act was the same as Coyle’s: a penny saved (or re-invested) is a penny wasted. If this is so, then, from the New Dealers’ perspective, the much-noted failure of investment during the New Deal was actually a success!

The severe economic contraction that began in the summer of 1937 seems to have brought the New Deal’s legislative activism to a halt. With the government hemorrhaging revenue and the public growing impatient with the administration’s management of the economy, there was little support for bold new spending proposals of the type Coyle was advocating. Coyle had become passionate about natural resource conservation, and sought a massive expansion of programs like the Civilian Conservation Corps, as well as big federal subsidies for education and public health. Needless to say, this latest wish list went unfulfilled. Coyle had insisted all along that a program like his was necessary to keep capitalism alive, with “adequate markets free of paralytic spasms,” and in late 1939 he warned that continued paralysis could push America toward a fascist system of centralized production and dictatorship.

What are we to make of Coyle, Chase, and Rumely? Even though none of them spoke for the administration directly, Coyle and Chase served as key popularizers of its economic program and all three exerted some influence on that program, at least indirectly. While it is easy in hindsight to dismiss some of their proposals as quackery, in the crisis of the Depression the line between quackery and “bold, persistent experimentation” must have been hard to discern. And few would deny that some of that quackery became law (e.g., the NRA). As for Rumely and the Committee for the Nation, one might argue that they do not belong in the same category as Chase and Coyle, since the Committee not only included top-flight economists like Fisher and Warren but had a goal (taking the dollar off the gold standard) that seems entirely orthodox today. But in the financial circles of 1932-33, a monetary crank was probably defined as someone who favored going off the gold standard. By doing more to highlight the Committee’s orthodox opposition, which must have been considerable, Best could have established a greater commonality between Coyle, Chase, and the Committee.

A bigger complaint is that Best’s disdain for Roosevelt too often gets the better of him. For example, he characterizes Roosevelt’s first inaugural address as “a speech more worthy of a backwoods rabble rouser … Unfortunately, it was not simply a wild shot, but the opening gun in a prolonged assault that would prolong the tragedy of the depression for another eight years.” More worrisome for an economic historian is when Best mentions various phases of the Depression business cycle and crudely connects them to the New Deal without supporting detail. It is simplistic to say, as he does, that the apparent reason for the economy’s continued slide after a minor uptick in mid-1932 was anxiety over the possible policies of the Roosevelt administration. Net investment was already negative by then, and the monetary collapse of that period, brought on by general runs on the banks, seems hard to pin on the election returns alone. The debt-deflation of 1929-33, exacerbated by real wage deflation in 1932, was also a likely factor in the decline. (Also, if anxiety over Roosevelt was to blame for the ten percent drop in industrial production in the four months before his inauguration, then shouldn’t he receive at least some credit for the 69 percent increase in industrial production in the four months right after his inauguration?) Still dicier is Best’s statement that the 1937-38 contraction occurred because “the massive spending in [1936] to ensure Roosevelt’s reelection had triggered an inflationary wage-price spiral that triggered a collapse of the economy in late 1937.” It is by now well established that the 1937-38 contraction was preceded by severely contractionary monetary and fiscal policies, including a doubling of bank reserve requirements and a sharp swing of the full-employment budget from a small deficit to a huge surplus.[4] Best seems less interested in a careful examination of these fluctuations than in telling tales of crime and punishment.

All told, these flaws are easy enough to overlook. Peddling Panaceas offers a coherent and compelling alternative intellectual history of the New Deal (a “public intellectual history”?) and provides new detail on three important factions of New Deal policymaking. The chapters on the Committee for the Nation will be of particular interest to anyone researching the political economy of the end of the gold standard. The book would make a useful counterpart to more sympathetic histories of New Deal policymaking such as Arthur M. Schlesinger, Jr.’s classic The Age of Roosevelt trilogy (1960) or Irving Bernstein’s A Caring Society (1985). Perhaps an even better match would be William J. Barber’s Designs within Disorder (1996), a history of Roosevelt and the “real” economists.

Notes: 1. Irving Bernstein, A Caring Society (Boston: Houghton Mifflin, 1985), p. 109.

2. “The New Deal’s War against Economic Recovery” (interview with Gary Dean Best), The Objectivist Center, July 2000. Internet:

3. Robert Higgs, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War,” The Independent Review 1(4): 561-90 (Spring 1997).

4. Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960 (New York: Princeton University Press, 1963), p. 545; Larry C. Peppers, “Full-Employment Surplus Analysis and Structural Change: The 1930s,” Explorations in Economic History 10: 197-210 (1973), p. 200.

Ranjit S. Dighe is Associate Professor of Economics at the State University of New York at Oswego. He is the author of several papers on American labor markets in the Great Depression, as well as The Historian’s Wizard of Oz: Reading L. Frank Baum’s Classic as a Political and Monetary Allegory (2002). He is currently researching business support for Prohibition.

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Money and the Rise of the Modern Papacy: Financing the Vatican, 1850-1950

Author(s):Pollard, Stephen F.
Reviewer(s):Hayes, Patrick J.

Published by EH.NET (June 2005)

Stephen F. Pollard, Money and the Rise of the Modern Papacy: Financing the Vatican, 1850-1950. New York: Cambridge University Press, 2005. xx + 263 pp. $85 (cloth), ISBN: 0-521-81204-6.

Reviewed for EH.NET by Patrick J. Hayes, Department of Theology/Philosophy, Marymount College of Fordham University.

Someone once let it slip to Yves Congar, the influential Dominican friar and peritus at the Second Vatican Council (1961-1965), that the cost of the conciliar proceedings to the Holy See amounted every year to 1,400,000 lire (about $2,250,000).[1] This does not include travel by the bishops and their experts, the costs of which were mainly borne by the national episcopal conferences. One can imagine the sum for the First Vatican Council (1870) when the financial resources of the Holy See were all the more meager, and when there were only a handful of organized episcopal conferences.

However, imagining such costs is now made considerably clearer by Stephen Pollard, a Fellow at Trinity Hall, Cambridge University. This historian of Italian fascism and biographer of Pope Benedict XV (1914-1922) has prepared a study on Vatican financial institutions that sheds light on the emergence of the modern papacy in its ecclesial and international affairs. In both instances, money is the common denominator. The Church’s mission is not served without recourse to Peter’s Pence. The Vatican’s relationship with foreign states, particularly Italy, depends in part for its diplomatic leverage on the investments it keeps abroad. Pollard follows a vast money trail over three continents and even peeks into the popes’ desk drawer or under his bed where, legend has it, varying sums of petty cash were stored and only to be used in the event of an emergency or a pontiff’s death.

It should not be assumed that the popes were wheeler-dealers. In fact, Pollard makes his case that they were more often hemmed by their ignorance of financial markets and that whatever success the Holy See demonstrated in remaining in the black could be traced to the heads of the Amministrazione per i Beni Santa Sede before 1929 or its successor agencies. Thus, while Pollard’s book is about the papacy, it is more often about the managers of the pope’s finances, a highly select group of ecclesiastics and lay people well disposed toward keeping the Vatican solvent. They are a fascinating lot, in part because they hold the ear of those who occupy the chair of Peter unlike any other bureaucrat excepting the Secretary of State. In at least one instance, the pope’s chief financier and the Secretary of State were one and the same: Giacomo Antonelli, who oversaw the Papal Treasury from 1850-1876. Described by one author as the Italian Richelieu, not only was Antonelli one of the main architects of the Holy See’s intransigence over nationalism, liberalism, and modernity, he attempted a massive reorganization of the budget for the Papal States.[2] His efforts at balancing the budget depended upon borrowing from the Rothschild’s banking house which, though many saw it as unseemly to accept Jewish lending practices, seemed to fit the needs of the Vatican quite well. The relationship gives a first instance of selective amnesia on the part of Church officials, who seemed nonplussed by usury, or even the rights of labor or the common good — staples of the Church’s emerging social ethic.

The book moves in chronological order beginning with the reign of Pius IX, whose early “liberal” period gives way, in 1850, to a series of measures designed to solidify papal power. It proceeds in due course through the reigns of Leo XIII (1878-1903), Pius X (1903-1914), Benedict XV (1914-1922), Pius XI (1922-1939) which is marked by an excurses on the fallout from the Wall Street crash (1929) before moving into the penultimate chapter on Pius XII (1939-1959). After Italian unification in 1870, income could have jumped if only the Vatican had acquiesced and accepted the subsidy promised by the Italian government. But on principle, the Holy See refused such overtures and still maintained the spiritual and temporal trappings of pope-kings — a burgeoning papal household staff and their pensions, ceremonial spectacles, and increasingly generous grants to relief and development programs around the world and at home.

The intermingling of political, economic, and ecclesial policies became more pronounced in the years after Pio Nono, but the capabilities of the Vatican’s money managers was, in the main, equal to the task. Under Leo, the appointment of Monsignor Enrico Folchi dedicated one person to administering the income generated from the Vatican property holdings. He was also placed in charge of investing the surplus from Peter’s Pence. A model of caution, Folchi was replaced by a layman, Ernesto Pacelli, whose family would assist in the negotiation of the Lateran Pacts of 1929 (a windfall for the Vatican) and produce the future Pope Pius XII. With Pacelli, Leo had a confidant and a willing capitalist. Funds were moved off Italian shores and diversified in properties and companies throughout Europe. However, by the time of Pius X’s death, Pacelli’s interests in the Banco di Roma (of which he was a co-founder) would seriously jeopardize the solvency of the Holy See’s portfolio. Under Benedict, who Pollard and other writers view as a shrewd politician and churchman, but a hapless financial manager, the Vatican’s income declined precipitously. Doubtless, the war years (Italy declared war in May 1915) contributed to this, given the virtual absence of large numbers of faithful able to attend papal audiences and the inability of bishops to make their ad limina visits and so carry the funds from Peter’s Pence from their home diocese to the pope. A series of losses as a result of collapsed banks or poor stock investments, suggests Pollard, meant that “Benedict did not leave the Vatican with a cash reserve at the end of his reign” (125). Increasingly, the ensuing decades found the popes turning to the American Church for assistance in meeting its shortfalls, especially the sees in Boston, New York, and Chicago. America was no longer the backwater that it was once considered in Roman circles. It soon became the cavalry for near monthly setbacks, brought on by repeated deficits run by Vatican Radio and L’Osservatore Romano. Profits from the sale of Vatican stamps could hardly be expected to offset these cost overruns.

Both Pius XI and Pius XII had pontificates that built upon the concordats begun under Benedict. The diplomatic front was the future of the Vatican’s economic gains and the outreach carried on by the Holy See in those nations where emergency contributions were disbursed, were often motivated by a return of future good will by those countries. The most tangible expression of the return on this investment was a government’s swift, and often bloody, crackdown on communism. Fascist governments were tolerated and used toward entrepreneurial means and ends, which included policies of non-interference in the Vatican’s banking, investment, or building projects abroad. By the 1930s, a web of such projects extended throughout Europe, the financial centers in the United States and South America. Profits were quickly used to construct a number of new buildings in and around the Vatican. New infusions of cash from America and a softening of relations with Italy allowed for further improvements, including the completion of several construction projects (e.g., the Railway Station and the Ethiopian College), and later the restructuring of the Via Conciliazione, the Roman thoroughfare leading from the tips of the Bernini colonnade in the Vatican to the Tiber River. “After sixty years of uncertainty and difficulty, the papacy would never be poor again” (148).

Pollard points to the influence of Bernardino Nogara as the principal agent in this transformation. Nogara was the first non-Roman to assume control of the Vatican’s finances. This son of Milan came to the job with a number of international contacts and continued to view the diplomatic and economic spheres as one and the same. The Vatican was the center of a global Church. It should thrive in financial markets worldwide. Nogara’s commercial activity has several hallmarks: the appointment of family to key posts in Vatican offices (his brother Bartolomeo ran the Vatican Museums); the installation of Milanese colleagues on boards of corporations where the Vatican had a significant or controlling stake (especially in South America); and the handling of sensitive information through use of the diplomatic pouch, a procedure that proved to be useless during the Second World War, when allied intercepts were routine. For his Italian loyalties during the war, Nogara was often placed in a precarious position with Pius XII, to say nothing of the allied forces, who tracked his activities with great vigilance. Pollard notes that Nogara’s impact on Vatican financial matters has had the unavoidable stamp of his successes for all future achievements. “The ‘wind from the North,’ as Italians describe influences from Milan and the other financial centers, had brought about a permanent change in Vatican financial culture and practice that would survive even Nogara’s death in 1958. Nogara had finally inserted the Church into the structures of international capitalism” (215).

This is quite a claim and one that will be borne out or refuted only in the coming decades. The last thirty years of Pollard’s study is seriously handicapped by not having access to the archives for those offices dealing with the papal finances since 1870 and other Vatican archives after 1922. Nevertheless, Pollard is to be credited with providing a conservative reading of the many journalistic or popular accounts of the Holy See’s economic state, such as George Seldes’ book The Vatican: Yesterday, Today, and Tomorrow.[3] Pollard frequently supplements his analysis of these works through published diaries or archival materials from countries other than the Vatican.

Such synthetic skills are, however, often marred by several typographical errors or noticeable errors of fact. For instance, St. Thomas Aquinas did not live in the fourteenth century but in the thirteenth (75), the motu proprio Sapienti Consiglio of June 1908 would not have appeared in the Acta Apostolicae Sedis for the year 1900 (83, n. 17; the AAS begins its run in 1909), Pollard misspells the name of former America editor Thomas Reese, SJ, on a number of occasions (e.g., 83, n. 18 and in the bibliography) and misspells Berkeley, California (104, n. 140), and so on. I find that Pollard lacks a certain sensitivity toward the Church in America for the period of his study, particularly from the nineteenth century. Much more could be said, for instance, about the Knights of Columbus (whose archives in New Haven, Connecticut, are woefully under-utilized, especially those materials related to Count Enrico Galeazzi and the administration of Vatican City) or about the links between the American sees, the Austrian Leopoldine Society, and the Congregation of the Propaganda.

Yet, for its main purposes, the present study does supply a realistic picture of how the Vatican economy remains viable, despite its occasional scandals, fickle global markets, political unrest, and the Church’s own social teaching. As one Vatican pictorial put it years ago: “Questions concerning the finances of the Holy See are met with the cold answer: ‘The Holy Father does not publish a budget.’ And it is true that there are not a half-dozen men in the world who know how much the Vatican has or where it goes.”[4] John Pollard widens the circle.


1. Cf. Joseph Komonchak, citing Congar’s journal, in Giuseppe Alberigo and Joseph Komonchak, eds., History of Vatican II (Maryknoll and Leuven: Orbis and Peeters Press, 2003), IV: 1 n. 1.

2. Cf. Carlo Falconi, Il cardinale Antonelli: vita e carriera del Richelieu italiano nella Chiesa di Pio IX (Milan: A. Mondadori, 1983). For more on Antonelli, Frank Coppa, Cardinal Giacomo Antonelli and Papal Politics in European Affairs (Albany: SUNY Press, 1990).

3. Cf. George Seldes, The Vatican: Yesterday, Today, and Tomorrow (New York: Harper and Brothers, 1934). More recent studies, from which Pollard frequently borrows, include Benny Lai’s Finanze e finanzieri vaticani tra l’Ottocento e il Novecento, da Pio IX a Benedetto XV, 2 vols. (Milan: A. Mondadori, 1979) and Carlo Crocella, “Augusta miseria.” Aspetti della finanza vaticana nell’et? del capitalismo (Milan: Nuovo istituto editoriale italiano, 1982).

4. Cf. Ann Carnahan, The Vatican: Behind the Scenes in the Holy City (New York: Farrar, Straus, and Co., 1949), 127.

Patrick Hayes teaches theology at Marymount College of Fordham University in Tarrrytown, NY and is a co-director of Passing on the Faith/Passing on the Church, a three-year project sponsored by the Curran Center for American Catholic Studies at Fordham. He has written numerous articles for the New Catholic Encyclopedia on the Roman Curia and for Catholic News Service on the papacy. He is also the Review Editor for H-Catholic.

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