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State Banking in Early America: A New Economic History

Author(s):Bodenhorn, Howard
Reviewer(s):Rousseau, Peter L.

Published by EH.NET (November 2003)

Howard Bodenhorn, State Banking in Early America: A New Economic History. New York: Oxford University Press, 2003. ix + 355 pp. $45 (cloth), ISBN: 0-19-514776-6.

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

The antebellum period in U.S. history is fertile ground for economists and economic historians seeking to understand the linkages between financial factors and macroeconomic performance. This is especially so because the topic has not, until recently, attracted much attention among scholars of the period. I suspect that this is for two reasons. First, developments in agriculture, commercial trade, and internal improvements in the first sixty years of the nation’s history appear, to many, to have had a more direct link with the nation’s early growth, diverting attention from the capital markets that made these advances possible. Second, the preoccupation of financial history with banks rather than with financial systems more generally leads inevitably to an over-emphasis on the rather checkered record of antebellum banking. Nowhere is this more apparent than in the traditional view that problems in the nation’s early banks usually began with deviations from the real bills doctrine, in which self-liquidating commercial paper was to be a bank’s primary asset, and backed by as much specie and as little real estate as possible. More recent scholarship recognizes the potential for missed investment opportunities and for a perverse elasticity of money that can follow from conservative practices such as these, and has contributed to the view that state banks — even those managed under real-bills principles — could not have added much punch to early U.S. growth.

Howard Bodenhorn’s second book, titled State Banking in Early America: A New Economic History, takes on the challenge of explaining how banks did contribute to the growth of the antebellum economy. The task is formidable because an enormous body of research on early U.S. banking has, if anything, shown that successful banks did not conform to simple principles that worked universally. This means that idiosyncratic practices in various states and at various times must be placed in the context of regional growth, piece by piece. The case might have been more convincing had federal banks, state banks, and markets been considered together, as Robert Wright does in The Wealth of Nations Rediscovered (Cambridge University Press, 2002), but Bodenhorn still does a respectable job of synthesizing the literature on early U.S. banking and placing it in a broader context.

The early chapters (2 and 3) consider difficulties faced by banks in navigating the often-politicized process of obtaining charters, compensating states for them, and serving the varied lending needs of the communities in which they operated. Emphasis is on just how well banks were able to develop governance structures under difficult circumstances that reduced informational asymmetries along the corporate chain of command. Bodenhorn then asserts that it was deviations from the real-bills doctrine that, when not leading to non-performing loans and bank failure, were most effective in promoting entrepreneurship and growth. In terms of impact, however, this may be an instance of seeing the glass as 1/4 full rather than 3/4 empty. This is not to say that banks never made loans to entrepreneurs, and that these loans did not improve economic conditions, but it is likely that the effects of state banks on economic growth in the early United States were more a result of growth in their numbers and in the resources that became available to them, than the quality of their allocation decisions.

Bodenhorn then considers banking systems region-by-region, starting with New England (chapters 4 and 5). In revisiting how kinship ties affected the allocation of credit (i.e., the so-called “insider-lending” hypothesis), he raises the important question of why uninformed outsiders would choose to hold minority shares or lodge deposits with banks that might divert returns from them while advancing the interests of a core group of insiders. Bodenhorn contributes the insight that minority insiders, related by kinship to the majority shareholders, held similar interests to outsiders, and could thus monitor the bank’s practices for them. This augments the simpler view that capital scarcity was at the heart of insider lending with a plausible story of its advantages in reducing the severity of problems in firm governance.

Attention then turns to the Suffolk System, which allowed for the clearance of New England bank notes at par. The system should have been an improvement over gross clearings, but had one serious flaw, namely that costs fell primarily on country banks that saw their notes redeemed more rapidly under the Suffolk system than would have otherwise occurred. By inverting the logical cost structure to favor those Boston bankers who had the most to gain from the system, the Suffolk Bank created a structure which, though working for years, collapsed when the Bank of Mutual Redemption emerged as a viable alternative to its coercive practices. Bodenhorn submits the Suffolk Bank as an example of how an innovation, however flawed, worked in a particular place and time to improve the flow of credit and make a rapidly monetizing economy more efficient.

The next three chapters (6, 7, and 8) focus on the Mid-Atlantic States. After describing how the state interfered with the free allocation of bank credit in New York, Pennsylvania, and Maryland early on, Bodenhorn considers the relative success of New York’s Safety Fund in establishing confidence among holders of bank notes, and the system’s fatal inability to maintain this confidence by winding up troubled banks in a timely manner when faced with the depression of the 1840s. The experience showed that liability insurance could be used effectively, but that some form of central banking would be needed to administer the system and to serve as a lender of last resort. This was not to be, of course, for nearly another century. Instead, New York turned to free banking. The ability to issue notes based on holdings of government bonds was an attractive feature of the free banking legislation, and allowed the number of banks to expand rapidly. And while it is easy to focus on the problems associated with free banking, Bodenhorn takes a more balanced stance, reiterating Richard Sylla’s point that the real contribution of free banking was to introduce the notion of free incorporation, which encouraged entrepreneurship.

When considering the South and West in chapter 9, Bodenhorn describes a set of banking systems that drew eclectically upon the experiences of other regions to serve the credit needs of agriculture. As the South and West have received relatively less scholarly attention than banking in other regions, the account here is particularly useful.

Overall, I would recommend the book to scholars interested in a fresh discussion of antebellum banking. It is, however, largely a synthesis of older research in the area, and Bodenhorn’s ready adoption of the “accepted views” of various historical events gives the impression that little has been done recently to sharpen our views of them. Nonetheless, the book does provide answers to several questions about finance and growth in early America that had interested this reader for some time. How much did state-level banking practices contribute to growth? Perhaps not all that much in general, but the interaction of these practices with other institutional characteristics of the regions in which they were implemented had important local effects. Were particular institutional structures clearly superior to others? Probably not, since states both succeeded and failed with a myriad of approaches that cannot be reduced to a simple set of rules.

These questions and answers relate closely to the modern debate on banks vs. markets, or Anglo-American vs. German-style financial systems. The conclusion of this literature seems to be that financial development matters for the agglomeration of capital, and that the methods by which this finance is administered are of secondary importance. The early United States saw rapid expansion of banks and bond, stock, and insurance markets, starting almost immediately from the adoption of the Federal Constitution. By 1825 it had a financial system that was world-class. It is difficult to make the case that state banks, or any one component of the system, was the prime mover — all were crucial. Bodenhorn’s book aptly fills in the details of the emergence and meteoric growth of one of these components, and describes how lessons learned in the period of early state banking have gone on to shape the institutional forms that remain with us today.

Peter L. Rousseau is an Associate Professor of Economics at Vanderbilt University and a Research Associate of the NBER. He is the author of “The Permanent Effects of Innovation on Financial Depth: Theory and U.S. Historical Evidence from Unobservable Components Models,” Journal of Monetary Economics (October 1998), “Jacksonian Monetary Policy, Specie Flows, and the Panic of 1837,” Journal of Economic History (June 2002), and “Historical Perspectives on Financial Development and Economic Growth,” Review, Federal Reserve Bank of St. Louis (July/August 2003).

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

JSTOR: A History

Author(s):Schonfield, Roger C.
Reviewer(s):Kurtz, Royce

Published by EH.Net (October 2003)

Roger C. Schonfield, JSTOR: A History. Princeton, N.J.: Princeton University Press, 2003. xxxiv + 412 pp. $29.95 (hardback), ISBN: 0-691-11531-1.

Reviewed for EH.Net by Royce Kurtz, Head of Reference, J.D. Williams Library, University of Mississippi.

JSTOR: A History is not a modest book. Few nonprofit enterprises warrant a history when they are less than ten years old. Even fewer infant organizations dare to declare themselves successful when their mission is to store knowledge in perpetuity. JSTOR is the story of an excellent idea with even better unintended consequences that succeeded because its sponsor was a powerful man with monetary resources and well-placed friends. While the very antithesis of the Cinderella tale, JSTOR is still a fascinating read as one is given an inside look in how the educational elite can bring money and skill together to create a successful electronic business in the midst of the .com crash.

William G. Bowen, the book’s hero, is a man of distinction. When the story of JSTOR begins in 1993, Bowen was president of the prestigious Andrew W. Mellon Foundation, a nonprofit that had already given millions in grant money to higher education. He was a nationally recognized economist specializing in nonprofits, an emeritus president of Princeton University, and a member of the Board of Trustees of Denison College, a selective, small liberal arts college in Ohio. Denison needed to build a new library, the old one having reached capacity. Upon surveying the library, Bowen realized that by digitizing the long runs of old journals much space could be freed up and the need to build a new library postponed. As college and university libraries all held virtually the same set of core journals, the aggregate space savings, and hence financial savings, of delaying library construction by means of digital collections would ripple across higher education. Bowen took his idea back to the board of trustees at Mellon, and they immediately funded a pilot project.

Roger C. Schonfeld, the author, is a research associate at the Mellon foundation. He has access to the Foundation’s files and interviewed high level participants in order to give readers the feel of being in the know as events unfolded. While Schonfeld occasionally points out the naivete of Bowen and his colleagues when approaching technological and legal hurdles, the Mellon Foundation and its leaders never come in for harsh criticism. Theirs is a story of sound judgement, wise use of resources, and impeccable timing with a dash of good luck. In order to succeed, adept administrators were needed as well as large and timely cash flows. Bowen supplied both. While maintaining close ties with his project, Bowen also lined up Kevin Guthrie to officially head up the operation and pilot JSTOR (the name of Bowen’s computer file for the project) to the status of an independent nonprofit. Guthrie had worked on Mellon Foundation projects before and was well known to Bowen. In the end it was Guthrie’s managerial skills and Bowen’s strategic appeals to the Mellon Board for money that kept the young project moving forward.

Two huge problems had to be overcome for the project to begin. First were the technological problems of scanning millions of pages, providing hardware and software sufficient to store, search, and quickly deliver the product to thousands of locations worldwide. Second were the legal problems of gaining copyright permission from dozens of journal publishers in order to digitize their back files. While few journal publishers make money from their back files, all were cautious about signing away the rights. Technology issues were resolved as Bowen contacted his good friend, the president of the University of Michigan, who found a home for the fledgling program in the university’s major and innovative digitization efforts. Michigan engineers and computer scientists worked on perfecting software for JSTOR, and Michigan staff organized the journals for scanning by a private company. Many of the journals that JSTOR wished to scan were published by either university presses or scholarly associations. Bowen’s friendships among university presidents got JSTOR’s lawyers a favorable hearing from these publishers.

When it came time to market JSTOR to university libraries, Bowen again called on University presidents, not library directors, in order to sell the product. It is not surprising that virtually all of JSTOR’s first customers were large university research libraries. The journal titles that JSTOR had digitized would make virtually no impact on these libraries’ storage problems. Indeed JSTOR’s success came, not primarily from solving storage concerns, but by providing easy access to the long back files of a bundle of essential scholarly journals.

Schonfeld provides lengthy descriptions of the ins and outs of setting up a nonprofit enterprise. Librarians and academic administrators, who are struggling with how to pay for electronic products, will find the details of how JSTOR arrived at its value pricing model fascinating. As a nonprofit associated with the Mellon Foundation, JSTOR developed different marketing and pricing models for unique customers, such as the Appalachian Colleges Association. Libraries outside the United States and library buying consortia also proved to be challenging markets. Schonfeld also provides details on production operations, establishing business models for nonprofits, and the politics of the nonprofit world of higher education. Schonfeld is a great story teller; his book skillfully intertwines the specifics of setting up a scholarly nonprofit enterprise with the larger intellectual issues of scholarly communications and the economics of the nonprofit sector. JSTOR: A History is a must read for economists interested in nonprofits and for librarians (or anyone else) interested in where college and university library collections are headed.

Royce Kurtz received a Ph.D. from the University of Iowa in anthropology, specializing in frontier interactions between Euro-Americans and native Americans. He is currently the bibliographer for history and the social sciences at the University of Mississippi libraries. He has published in both the fields of history and library science.

Subject(s):History of Technology, including Technological Change
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

The Market, the State, and the Export-Import Bank of the United States, 1934-2000

Author(s):Becker, William H.
McClenahan Jr., William M.
Reviewer(s):Bean, Jonathan J.

Published by EH.NET (July 2003)

William H. Becker and William M. McClenahan, Jr., The Market, the State, and the Export-Import Bank of the United States, 1934-2000. New York: Cambridge University Press, 2003. xii + 340 pp. $80 (cloth), ISBN: 0-521-81143-0.

Reviewed for EH.NET by Jonathan J. Bean, Department of History, Southern Illinois University – Carbondale.

In recent years, “globalization” has become a hot topic in U.S., European and world politics, as young (and not-so-young) demonstrators have taken to the streets protesting free trade and the policies of the World Bank and the International Monetary Fund. The resulting media attention has raised the name recognition of those institutions. Yet very few Americans could properly identify the Export-Import Bank as “the United States’ export credit agency” (p. ix) and one of the country’s chief instruments of free trade. In this superbly researched monograph, Becker and McClenahan highlight the important role “Ex-Im” has played, not only in promoting international trade but also in serving U.S. foreign policy interests. In so doing, they have made an important contribution to the scholarly literature on international trade. The hefty price tag and thick narrative, however, will prevent this book from reaching a broader audience.

This is a commissioned history; Becker and McClenahan were successful bidders for a sixty-fifth anniversary commemoration of Ex-Im’s founding. Despite its commemorative status, this is a serious scholarly study enriched by “full access to the Bank’s records and to its personnel,” including many oral interviews with agency history makers (p. x). In addition to on-site records, the authors delved into documents at the National Archives and at other government agencies. The Export-Import Bank agreed to ongoing peer review by the eminent professor of economic history Richard Sylla (New York University) and the authors retained copyright. The end result is an exhaustively researched manuscript that stands among the best-documented histories of any federal agency.

The Export-Import Bank began as the offspring of President Franklin D. Roosevelt’s diplomatic recognition of the Soviet Union in December 1933. Two months later, prodded by U.S. exporters hoping to pry open a new market, FDR established, by Executive Order, an Export-Import Bank to finance trade with the U.S.S.R., a venture that foundered on the issue of unpaid pre-revolutionary loans. Simultaneously, Roosevelt created a second Export-Import Bank to do business with a new, friendly regime in Cuba. The Banks’ trustees merged the two banks into one — originally financed by the Reconstruction Finance Corporation — and expanded Ex-Im’s mission to include markets around the world, except the U.S.S.R. The Bank received Congressional backing in 1935 and became an independent agency ten years later. By statute, Ex-Im was to avoid competing with commercial banks; assume risk on longer-term loans that they would not accept; yet still assure a reasonable chance of repayment. At the same time, President Roosevelt and his successors repeatedly called on the Bank to serve foreign policy ends that went against the grain of these statutory requirements. Thus, from the beginning, Ex-Im served the conflicting interests of exporters and the foreign policy establishment of the U.S. government. In short, the Bank navigated uneasily “between the state and the market” (p. 8) throughout its history.

One major theme is that “businesslike values” (p. 2) permeated the Bank but U.S. diplomats “tested many times” this “core market orientation” (p. 3). Tested indeed! The authors spend so much time on the fascinating, ever-changing role Ex-Im played in foreign policy that the reader gets the impression that the bankers at Ex-Im were helpless pawns in the hands of diplomats and governments friendly to the United States. This is undoubtedly a false impression gained by the weight of presentation, yet one that could have been countered by more frequent mention of “businesslike” statistics such as loan loss rates, profitability, and so on.

As it stands, the foreign policy story is one that should interest diplomatic historians: During the late 1930s, Ex-Im made risky loans to Latin American countries to forestall German Nazi intervention; after World War II, the Bank was the first U.S. agency to help reconstruct Western Europe before the Marshall Plan went into effect; during the 1950s and 1960s, it financed development projects in the Third World to counter communist movements. Later, in the 1970s, Ex-Im negotiated with the Organization for Economic Cooperation and Development (OECD) to “level the playing field” among export credit agencies in Europe and North America after that era’s brutal trade wars.

The past two decades have proven particularly challenging for the Export-Import Bank. The Reagan Revolution of the 1980s brought to power laissez-faire conservatives who were skeptical of subsidies for bankers. Meanwhile, a Third World debt crisis and a strong dollar led to plummeting U.S. exports, a weak Ex-Im portfolio, and a severe institutional crisis. During the early 1990s, however, the Bank “reinvented” itself by abandoning the direct credit market and relying almost exclusively on loan guarantees through private banks. The authors note that this strong market orientation is unique among Western export credit agencies, which are much more state-oriented. In the epilogue, the authors reflect on recent international financial crises that have reintroduced the potential of Ex-Im as a “lender of last resort” when private capital flees foreign markets.

There is no evidence of institutional bias in this organizational history. Becker and McClenahan give plenty of airtime to critics who have accused Ex-Im of serving as “corporate welfare” and as an agent of the U.S. military-diplomatic-industrial complex. If anything, their judgments on these controversies are too even-handed: After presenting both sides, the authors frequently hedge their judgments, leaving the readers to judge for themselves the merits of the case. A bit more controversy might have spiced up an otherwise dry and neutral presentation of the facts. For readers short on time, the authors provide a splendid summary in their introduction. Specialists will gain much more, however, from the detailed narrative that follows. Overall, this book earns “two thumbs up.”

Jonathan J. Bean is Professor of History at Southern Illinois University – Carbondale. He is the author of Big Government and Affirmative Action: The Scandalous History of the Small Business Administration (University Press of Kentucky, 2001).

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

A History of the Federal Reserve, Vol. I: 1913-51

Author(s):Meltzer, Allan H.
Reviewer(s):Wood, John H.

Published by EH.NET (June 2003)

Allan H. Meltzer, A History of the Federal Reserve, Vol. I: 1913-51. Chicago: University of Chicago Press, 2003. xiii + 800 pp. $75 (hardcover), ISBN: 0-226-51999-6.

Reviewed for EH.NET by John H. Wood, Department of Economics, Wake Forest University.

Allan Meltzer has given us a thorough history of the Federal Reserve’s monetary policy from its founding in December 1913 to the Treasury-Federal Reserve Accord in the spring of 1951. Several excellent descriptive and critical studies of various parts of this period of the Fed are available, led by a considerable portion of Friedman and Schwartz’s Monetary History. But Meltzer advances our understanding of the Fed in two respects that that I explore in this review: First, he considers all the significant episodes of monetary policy, usually in more detail than can be found elsewhere. This book must be the starting point for future studies of Federal Reserve monetary policy, not only for the period covered by the book, but also for the succeeding fifty years because the Fed’s organization and most of its beliefs and procedures were developed in the earlier period. The second main contribution is an extension of the first. Meltzer makes unequalled use of the unpublished minutes, correspondence, and other internal papers of the Federal Reserve Board and the Federal Reserve Bank of New York. He takes us further behind the scenes of policymaking.

This review seeks to locate the book in the literature on the Fed, a task made easier by Meltzer’s recognition of previous work and the absence of radically new interpretations. He supports the positions that have been associated with monetarist criticisms by Friedman and Schwartz and his work with Karl Brunner since the 1960s, especially the Fed’s lack of understanding of its role in the economy and its obsession with financial markets, commercial bank free reserves in particular. His support is in the form of information about the ideas, institutions, and personalities behind actions and inactions that are well known. We are told that the inflation and deflation of 1919-21, the Great Depression of 1929-33, the recession of 1937-38, and the post-World War II inflation would have been avoided or greatly moderated if the Fed had make money grow at a constant rate, as Friedman proposed (1959, 92) or as adjusted for velocity and inflation as Meltzer proposed (1984). Whether or not we accept these conclusions, Meltzer enables us to increase our understanding of the Fed’s intentions, or rather the intentions of different parts of an institution that was at war with itself.

The new material may be the book’s most important contribution to research because it adds to the information available for the study of the policy preferences of different interests in the Federal Reserve and their effects on decisions. Internal conflicts often involved battles for control between the Board in Washington and the regional Reserve Banks. The Federal Reserve Act of 1913 was vague about control. The powers of the Fed — particularly discounting and open-market operations — were vested in the Banks under the Board’s supervision. The extent of this supervision — broad or, as the Banks complained, amounting to the micro-management of a central bank from Washington — was the main source of these conflicts, which spilled over into policy decisions. It is also possible that policy differences between the Board and the Banks, especially New York, were partly due to the knowledge and interests arising from their political and economic environments. Given the importance attached to these differences, I would like to have seen more attention paid to their possible reasons beyond institutional grasps for power. It is no surprise to find the Board more sympathetic to (or under the thumb of) the Treasury during the latter’s pressures for continued bond supports after the two world wars. Less expected, perhaps, was the Board’s greater skepticism of market forces. Its preference for controls over interest rates helped to rationalize its support for Treasury low-interest programs. But the Board also differed from New York in believing that controls could control stock speculation in 1928-29 without impinging on “legitimate” credit. Havrilesky (288-331) found that the Banks’ greater reliance on interest rates continued in the second half of the century. Might those, like the New York Fed, who are immersed in the financial markets repose more trust in their operation, specifically in the efficacy of interest rates as rationing devices, compared with credit controls? On the other hand, this tack may not be appealing to monetarists who already find the Fed too sensitive to markets and interest rates. Meltzer finds that a good deal of the Board’s criticism of the New York Bank after the Crash was motivated more by concern for control than different perceptions of economic relations (289).

Meltzer confirms the charge that the Fed neglected to develop a model, or guide, to policy. This neglect can be interpreted with more sympathy than Meltzer and other critics have shown, although they recognize the Fed’s difficulties, because important conditions assumed by the Fed’s creators quickly disintegrated with war and its aftermath. They were adrift without a destination, compass, or anchor. The great inflow of gold caused by European inflations and other disorders divorced the Fed’s actions from the historic central bank concern for its reserve. The Fed’s timid support of credit during the Great Depression may have been partly due to a desire to preserve the gold standard (Eichengreen; Meltzer is doubtful, 405), but its interest in price stability between 1921 and 1929 prevented it from taking full advantage of its more-than-ample reserves.

We must also realize that prevalent economic models did not imply the countercyclical policy to which economists were converted a decade later. An influential theory that implied “liquidation” in depression stemmed from the belief that deflations are reactions to inflations that had been driven by speculations in inventories and fixed assets. These should be allowed to return to normal levels. Deflations must be allowed to run their course (Hayek; Treasury Secretary Mellon, discussed by Meltzer, 400). Attempts to force money into paths “where it was not wanted” merely sow the seeds of future inflation. We can see where this policy was conducive to long-run price stability under the gold standard — price indexes in 1933 still exceeded those of 1914. Even if Meltzer, like Friedman and Schwartz, is right that the Fed should have tried for constant money growth or at least a stable price level, the application of such a policy would have required remarkably prescient theoretical sophistication by a group of committees of mainly conventional businessmen unused to abstractions.

Irving Fisher was a notable exception in his resistance to conventional sound money. But his “compensated dollar” plan for stabilizing the price level by adjusting the price of gold (182) was ridiculed as “a rubber dollar” (Hoover, 119) and dismissed by the New York Fed’s Benjamin Strong as the work of “extreme quantity theorists” (Chandler, 203).

Meltzer’s criticisms of the Fed, like Friedman and Schwartz’s, are meant to be lessons for policy. In its theoretical and policy implications, the book is mainstream monetarism, deserving of the usual plaudits and criticisms: money and output are correlated, so that money must be important, but no convincing evidence of the direction of causation is offered.

Prospective buyers should note that the book is not about Federal Reserve activities that are not directly part of monetary policy. Check clearing and other parts of the payments system, on which most Fed employees work, are ignored, and the structure and regulation of banking receive little attention. The last omission is more the Fed’s than Meltzer’s. The Fed recognized the weakness of the banking system as evidenced by the high failure rate of banks during the 1920s, but it did not work towards an improvement — unlike President Hoover (121-25), who tried unsuccessfully for a system of larger and stronger banks. When Board Chairman Marriner Eccles (266-69) sought measures similar to Hoover’s in 1936, he was rebuffed by President Roosevelt. The Fed’s lack of attention to the banking structure is striking in light of England’s experience, where the encouragement of amalgamations after the Panic of 1825, which was attributed to the fragility of small banks, contributed to the decline in the frequency and severity of panics as the nineteenth century progressed (none after 1866). On the other hand, the Fed might have followed Congress in taking the banking structure as given because the protection of local banks had been a political condition of the Federal Reserve Act.

Returning to the Fed’s model, or lack thereof, Meltzer agrees with his predecessors that monetary policy was an irregular mix of the gold standard rules of the game, the real bills doctrine, and a concern for price stability that seemed important only when inflation threatened. The place of the real bills doctrine in Fed thinking is unclear. The Federal Reserve Act has been interpreted as a legal implementation of the doctrine by its limitation of private discounting to real bills of exchange, that is, short-term lending secured by inventories. This had always been regarded as sound practice for commercial banks, and the Fed favored it in aggregate because lending for productive purposes was more conducive to economic activity and price stability than “speculative” lending on securities. But favoring real bills is not the real bills “doctrine,” as Meltzer would have it. The doctrine’s fallacies had often been shown, particularly the indeterminacy of the price level when credit is linked to expected prices (Thornton, 244-59), and monetary policy (as opposed to rhetoric, for example, Senator Glass; Meltzer, 400) did not suggest that the Fed believed it. If it had, there would have been no role for interest rates. In the closest it came to expressions of policy guides, in the Board’s 1923 Annual Review and statements by Benjamin Strong (Chandler, 188-246), the Fed indicated less fear of inflation from real bills than other lending. But it depended on interest rates to rein in excessive borrowing, whatever the purposes. Whether credit was “excessive” tended to depend on what was happening to the price level, although this connection was cloudy in Fed statements at least partly because it did not wish to be held responsible for price stability. The reasons for the Fed’s opposition to an official goal of price stability probably included its constraints on the pursuit of other goals, such as the alleviation of financial stress, and the fact that its proponents in Congress (especially James Strong of Kansas) were most interested in restoring agricultural prices to previous heights.

Touching on Meltzer’s relations to other controversies: He continues to differ from Friedman and Schwartz (692) in his argument (with Brunner, 1968, and agreed by Wicker, 1969, and Wheelock, 1991) that the Fed’s actions during the Great Depression would have been approximately the same if Benjamin Strong (who died in 1928) had continued at the helm of the New York Bank. Meltzer believes that Strong’s “attachment” to commercial bank borrowing from the Fed and free reserves as policy guides continued after 1928, and were responsible for its failure to increase credit between 1929 and 1933 and its doubling of reserve-requirements ratios in 1936-37. This position dates at least from the 1960s, when he and Brunner assisted Congressman Patman’s investigation of the Fed that initiated the work leading to the book under review.

It was a common belief in government and Congress that “international cooperation,” specifically the creation of inflation in the interests of European currencies (Hoover, 1952, 6-14), interfered with domestic goals. Meltzer agrees with Hardy (228-32) and Friedman and Schwartz that the accusation is unsupported. Quoting the latter: “foreign considerations were seldom important in determining the policies followed but were cited as additional justification for policies adopted primarily on domestic grounds when foreign and domestic considerations happened to coincide” (279).

I do not think that Meltzer’s treatment of bank failures during the Great Depression adequately reflects Wicker’s (1996) investigations that seriously undermine Friedman and Schwartz’s interpretations and suggest that the name “runs” is inappropriate. The three banking crises of 1930-31 identified by Friedman and Schwartz (and accepted by Meltzer, 323, 731) involved mostly small banks that were insolvent. Farm and real estate prices had fallen drastically, and banks failed because their customers failed. The frequency of failures in the “crisis periods” was only slightly greater than in the period as a whole, and were geographically concentrated. None became national in scope or exerted pressure on, not to say panic in, the New York money market. The first consisted largely of the collapse of the Caldwell investment banking firm of Nashville, Tennessee, which controlled the largest chain of banks in the South and was heavily invested in real estate. There is no evidence of contagion. The “crisis” of mid-1931 was concentrated in northern Ohio and the Chicago suburbs, where small banks had multiplied with the real estate boom. The crisis of September-October 1931was wider, but concentrated in Chicago, Pittsburgh, and Philadelphia.

This brings us to Meltzer’s (and Friedman and Schwartz’s) criticism of the Fed’s failure to apply Bagehot’s proposal that the central bank act as lender of last resort. That is, as holder of the nation’s reserve it should stand ready to supply the cash demanded in times of panic. Meltzer contends that “Most of the bank failures of 1929 to 1932, and the final collapse in the winter of 1933, could have been avoided” (729) if the Fed had applied Bagehot’s rule. However, as he (283-91) and Friedman and Schwartz (335-39) recognize elsewhere, the New York Fed actively assisted the financial markets during and after the Crash, and withdrew when there was no evidence of panic in New York, that is, “once borrowing and upward pressure on interest rates” declined (Meltzer, 288). I find Meltzer convincing when he suggests that this “was consistent with the Riefler-Burgess [free reserves] framework,” as opposed to Friedman and Schwartz’s argument that New York eventually yielded to the Board’s opposition to its open-market purchases. “The dispute was mainly about procedure, not about substance,” Meltzer (289) argues. “They [the Board] disliked New York’s decision to act alone.” It appears to this reviewer that the Fed’s actions as described by Meltzer and Friedman and Schwartz, generally conformed with Bagehot’s advice to relieve illiquidity in the money market in times of panic. He had not recommended the rescue of insolvent banks in the hinterlands that did not threaten the money market. This includes at least the beginnings of the nationwide closures of 1933 that were precipitated by the Michigan governor’s decision to close the banks in his state to protect them from the possibility of a run when the failure of Ford’s bank in Detroit (which was also heavily invested in real estate) was announced.

I end with comments that are more differences of emphasis than of substance: The Fed’s irrelevance in planning postwar financial arrangements is interesting, although Meltzer may exaggerate its significance. He wrote: “In the 1930s, the Treasury replaced the Federal Reserve as the principal negotiator on international financial arrangements” (737). In fact, governments have always, directly and firmly, controlled monetary arrangements. Their seizures of the details of monetary policy in the U.S. and U.K. in the early 1930s were remarkable, but the U.S. government’s control of changes in the monetary system as exemplified by the devaluation of 1933, Bretton Woods in 1944, and the Nixon suspension of 1971 had also been the practice of Parliament, which decided (with more or less advice from the Bank of England) suspensions, resumptions, legal tender, and other trade and financial arrangements. The irrelevance of the Fed in the negotiation of post-World War II financial agreements was shared by the Bank of England. Their places in the row behind finance ministers during negotiations continued an age-old practice. It is interesting in light of the high visibility of central banks in the operation of monetary systems that the structures of those systems belong to governments. Without defending the Fed, which ought to have behaved better within the framework that it was given, the real failure to respond to the catastrophe should be laid at the feet of the government. Herbert Hoover was more active than he is often given credit for, but he departed from tradition in leaning on the “weak reed” that was the Federal Reserve (1952, 212; Meltzer, 413).

Meltzer suggests that the Great Depression was not considered a failure of monetary policy at the time (727). He refers to the Federal Reserve and economists, and I agree. But this was not true of the public or of substantial parts of Congress (which he acknowledges on p. 427). Carter Glass was a powerful defender of the Fed in the Senate, but the House passed the Goldsborough Bill directing the Federal Reserve “to take all available steps to raise the present deflated wholesale commodity level of prices as speedily as possible to the level existing before the present deflation” by a vote of 289-60 in 1932, before it was watered down into a meaningless resolution in the Senate. The 72nd Congress (1931-33) introduced more than fifty bills to increase the money supply, which came closer to passage as the depression worsened (Krooss, 2662). It would be difficult to imagine a more damaging commentary on Woodrow Wilson’s idealistic expert (read “remote”) institution than Chicago Congressman A.J. Sabath’s question to Chairman Eugene Meyer in 1931: “Does the board maintain that there is no emergency existing at this time” (letter entered into the Congressional Record, Jan. 19) — or a similar lack of sensitivity of legislators in a democracy. The monetary authority supplanted by the Fed — the Treasury with an attentive Congress — might have done no better. But the sharp actions in 1865 (when Congress reversed its decision to retire the greenbacks after voters complained) and 1890 and 1893 (when it increased and then reduced the monetization of silver during recession and then gold flight) suggest that it would not have stayed on the sidelines if it had not been inhibited by (and waiting for) its expert creation. This is not (necessarily) a plea for free banking, but at least for monetary authorities that are closer to the effects of their actions.

I would have liked to see Meltzer subject the Fed’s existence to a little scrutiny, and to consider what kinds of institutions might have better responded to events or (this is surely an oversight) been more likely to adopt his preferred policy model. My guess is that he, Friedman and Schwartz, and most of the rest of the economics profession share Woodrow Wilson’s desire for experts: The Fed should be independent but use the right model.


Karl Brunner and Allan H. Meltzer. The Federal Reserve’s Attachment to the Free Reserve Concept. For Subcommittee on Domestic Finance, The Federal Reserve after Fifty Years. House Committee on Banking and Currency. Washington, 1965.

Karl Brunner and Allan H. Meltzer. “What Did We Learn from the Monetary Experience of the United States in the Great Depression?” Canadian Journal of Economics, May 1968.

W. Randolph Burgess. The Reserve Banks and the Money Market. New York, 1927.

Lester V. Chandler. Benjamin Strong, Central Banker. Washington, 1958.

Marriner Eccles. Beckoning Frontiers. New York, 1951.

Barry Eichengreen. Golden Fetters: The Gold Standard and the Great Depression, 1919-39. New York, 1992.

Milton Friedman. A Program for Monetary Stability. New York, 1959.

Milton Friedman and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton, 1963.

Charles O. Hardy. Credit Policies of the Federal Reserve System. Washington, 1932.

Thomas Havrilesky. The Pressures on American Monetary Policy. Boston, 1993.

Freidrich A. Hayek. Prices and Production. London, 1931.

Herbert Hoover. Memoirs: The Great Contraction, 1929-41. New York, 1952.

Herman E. Krooss, editor. Documentary History of Banking and Currency in the United States. New York, 1969.

Allan H. Meltzer. “Overview,” in Federal Reserve Bank of Kansas City, Price Stability and Public Policy, 1984.

Winfield W. Riefler. Money Rates and Money Markets in the United States. New York, 1930.

Henry Thornton. An Inquiry into the Nature and Effects of the Paper Credit of Great Britain. London, 1802.

David C. Wheelock. The Strategy and Consistency of Federal Reserve Monetary Policy, 1924-33. Cambridge, 1991.

Elmus Wicker. “Brunner and Meltzer on Federal Reserve Monetary Policy during the Great Depression,” Canadian Journal of Economics, May 1969.

Elmus Wicker. Banking Panics of the Great Depression. Cambridge, 1996.

John Wood’s main research interest is a history of the ideas and behavior of British and American central bankers since 1694. Recent articles include “Bagehot’s Lender of Last Resort: A Hollow Hallowed Tradition,” Independent Review (Winter 2003), and “The Determination of Commercial Bank Reserve Requirements” (with Cara Lown), Review of Financial Economics (December 2002).

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

Transferring Wealth and Power from the Old to the New World: Monetary and Fiscal Institutions in the 17th through the 19th Centuries

Author(s):Bordo, Michael D.
Cortes-Conde, Roberto
Reviewer(s):Chabot, Benjamin

Published by EH.NET (May 2003)


Michael D. Bordo and Roberto Cortes-Conde, editors, Transferring Wealth and Power from the Old to the New World: Monetary and Fiscal Institutions in the 17th through the 19th Centuries. New York: Cambridge University Press, 2001. x + 482 pp. $80 (cloth), ISBN: 0-521-77305-9.

Reviewed for EH.NET by Benjamin Chabot, Department of Economics, University of Michigan.

Why were some nations able to develop efficient fiscal and monetary institutions while others were not? Why were some governments able to live within their means while for others expenditure often exceeded revenue? These are the questions Michael Bordo (Rutgers University) and Roberto Cortes-Conde (Universidad de San Andres) pose in their introduction to Transferring Wealth and Power from the Old to the New World. The editors proceed to provide us with a collection of eleven essays detailing the history of the fiscal and monetary institutions of five European and six New World nations.

The book is divided into three parts. Part I reviews the history of fiscal and monetary regimes of the Old World nations England, France, the Netherlands, Spain and Portugal. Part II compares the fiscal and monetary institutions of the Old World nations to the institutions adopted in the United States, Canada, Mexico, Brazil, Argentina, and New Granada. Special attention is paid to the process by which some institutions were successfully transferred from the Old World nations to their New World colonies while other institutions proved unsuccessful and had to be replaced. The book concludes with commentaries by Herschel Grossman and Albert Fishlow.

Part I begins with Forrest Capie’s (City University Business School) “The Origins and Development of Stable Fiscal and Monetary Institutions in England.” Capie traces the origins of the remarkably successful British tax and monetary institutions back to the establishment of a liquid securities market made possible by efficient tax collection and a long tradition of well-established and secure property rights.

Unlike England, where the Crown’s power to tax was legitimized at an early date, France lacked a national institution that could represent all taxpayers and legitimize tax increases. As a result, the French were left with a patchwork of local tax regimes and judicial restraints on optimal tax policy. In chapter 3, Eugene White (Rutgers University) documents France’s relative inability to collect taxes efficiently. White convincing argues that flawed fiscal institutions constrained France’s ability to raise the revenue necessary to maintain an overseas empire.

Perhaps no nation has created and transferred more financial technology abroad than the Netherlands. The excellent essay by Jan de Vries (UC Berkeley) begins with the Dutch Republic’s tradition of well-established property rights and its non-centralized system of taxation and provision of public goods. De Vries takes the reader on a tour of Dutch financial history beginning with the introduction of the public debt and the emergence of the Amsterdam stock exchange. His essay concludes with a look at the Netherlands’ largely fruitless efforts to establish a New World empire. Particular attention is paid to Dutch attempts to finance their interests in New World plantations and the early United States.

In chapter five, Gabriel Tortella (University of Acala de Henares) and Francisco Comin (Fundacion Empresa Publica) survey the history of Spanish public finances from Alfonso X’s introduction of a sales tax (the alcabala) in 1269 to the crushing debts of the Armada and the introduction of a public debt. The authors explain the deficiencies of Hapsburg Spain’s public finances and conclude with the attempts at reform adopted during the eighteenth and nineteenth centuries.

Jorge Braga de Macedo (Nova University), Alvaro Ferreira de Silva (Nova University) and Rita Martins se Sousa (Technical University of Lisbon) conclude part I with an overview of Portuguese fiscal and monetary institutions from the seventeenth to nineteenth centuries. The authors focus on the increasing cost of war as an explanation of the Portuguese shift from domain revenues to direct and indirect taxation. This is one of the more empirical essays. The authors collect a series of price, money, and expenditure data from a number of published sources and use this data to illustrate the changing state of Portuguese state finance.

Part II of the book surveys the financial histories of six New World nations. As the title implies, these surveys focus on the fiscal and monetary institutions that were transferred from Old World nations to their New World colonies. In many cases, New World resources, populations and distances differed to such an extent that the European colonies were forced to significantly alter or abandon the fiscal and monetary institutions of their home nations.

The study of New World financial institutions begins with Richard Sylla’s (NYU) history of the United States. Sylla’s survey begins with British colonial-era public finance with its reliance on local taxes during peacetime and currency finance during war. Considerable attention is paid to the introduction of fiat money and bills of credit during the last decade of the seventeenth and early eighteenth centuries. Those familiar with Sylla’s work will not be surprised to learn that he delivers an excellent review of Alexander Hamilton’s financial plan for the Bank of the United States and the creation of long-term federal bonds which proved so important to the first American stock exchanges. The chapter concludes with a history of U.S. monetary regimes from the pre-constitutional patchwork of local currencies to the Federal Reserve System.

In chapter eight, Michael Bordo and Angela Redish (University of British Columbia) survey the fiscal and monetary legacy to Canada from its imperial home nations, France and England. The modern nation of Canada began as New France, a French colony that fell under British control after the treaty of Paris in 1763. With fiscal and monetary roots in both Britain and France, Canada provides a unique look at the transfer of fiscal institutions from Old World to New.

Few French institutions survived Canada’s transformation from French to English colony. Canada did successfully adopt many British institutions such as the reliance on indirect taxes, a strict adherence to the gold standard and a stable banking system based on the real bills doctrine.

Bordo and Redish also retell the story of one of the most unique instruments in monetary history. Plagued by an inability to collect colonial taxes efficiently, the French crown was forced to pay for its Canadian expenditures by borrowing or taxing in France and shipping specie to the New World. The periodic scarcity of coin led to the introduction in New France of a unique form of fiat currency, playing cards. Between 1685 and 1763, the French colonial government issued playing cards that were redeemable for specie at a future date. These cards circulated as money and provide us with one of the earliest examples of a successful use of fiat currency.

Carlos Marichal (College of Mexico) and Marcello Carmagnani’s (University of Torino) review of the fiscal history of Mexico provides a good example of a New World nation that quickly adapted the fiscal institutions of its home country to reflect the realities of a new environment. Spain exported its complex tax system to its colony of New Spain (Mexico). The traditional tax system of Castile, with its reliance upon sales taxes and a direct tax on the tithe proved ill suited for the natural resource based economy of New Spain. The authors explain how the Bourbon reforms of the late eighteenth century transformed the viceroyalty of New Spain into one of the most efficient tax regimes in colonial history. The chapter concludes with a look at the revolutionary wars of the early nineteenth century and their devastating effect on Mexico’s fiscal institutions. These wars led to a series of debt crises that plagued Mexico throughout the century.

The links between well established property rights and economic activity is, in the opinion of this reviewer, one of the most interesting topics in economics. I therefore found the discussion by Maecelo de Paiva Abreu and Luiz A. Correa do Lago (both Pontificia University) of the history of property rights and Brazilian fiscal and financial development one of the most interesting chapters of this book. Professors Abreu and Lago provide a very detailed (51 pages) financial history of Brazil. The authors focus on episodes during which the government undermined the property rights of creditors by undermining the value of financial assets through currency devaluation, inflation, or outright confiscation. Colonial Brazil raised most of its revenue by taxing exports such as wood, gold, sugar and coffee. The ease of collecting export taxes allowed Colonial Brazil to largely avoid confiscation and peacetime inflationary finance. Fiscal policies were lax during wartime but no more so then other nations. Taken as a whole, Brazil’s fiscal record during its imperial era was as good as any New World nation. Under Pedro II (1831-89) direct foreign investors and bondholders enjoyed a stable currency and strong returns on their investments. The Republican period witnessed an erosion of property rights, which severely hampered Brazil’s ability to attract foreign capital. It was during the republic that Brazil witnessed government intervention in foreign exchange cover, a reliance on inflationary financing, mandatory purchases of government “loans” and of course the outright repudiation of foreign debt.

In chapter eleven, Roberto Cortes-Conde and George T. McCandless (University of San Andres) survey Argentina’s fiscal history and introduce a formal model of government tax collection and service as a function of distance and costs. The authors begin their survey with an overview of Argentinean colonial taxes and tax administrations. Given the great distances and poor communications between the New and Old World, the Spanish crown relied on a form of tax farming in Argentina. Local officials raised funds and remitted tax revenues to the Crown after first subtracting local expenses. This arrangement led to frictions between the provinces and the central government in Buenos Aires, which was subsidized by the provinces but was often unable to provide public goods (such as defense) over great distances.

Cortes-Conde and McCandless attempt to explain the rise of local alternatives to centralized public defense by modeling the rise of local caudillos as a function of the distance and transportation costs between the central government and its provinces. The authors use a dynamic version of Alesina and Tabellini’s (1996) model in which citizens are located on a circle and can form governments with their neighbors. A government’s ability to deliver public goods increases with tax paying citizens and decreases with distance. Individuals choose to enter or leave a government based on the utility that government provides compared to the utility provided by other governments. The authors use this model to illustrate the rise of local caudillos and, after the railroad lowered transportation costs, the eventual consolidation of power in Buenos Aires.

This model strikes me as a rather formal way of saying that governments, which are unable to provide public goods (especially national defense) to the periphery of their empire, will soon discover that the citizens of the peripheral lands are paying taxes to a new more local government.

Part II of the book concludes with a chapter by Jaime Jaramillo, Adolfo Meisel, and Miguel Urrutia (all Banco de la Republica, Columbia) on the fiscal and monetary institutions of New Granada. New Granada, modern day Columbia, Panama and Venezuela (over which it had very little control) inherited Spain’s tax system. Unlike colonial Argentina or Mexico, which were endowed with easy-to-tax mining industries, colonial New Granada’s economy was relatively small and diversified. As a result, the Spanish tax system, with its reliance on head taxes and the alcabala was especially regressive and inefficient in New Granada. The authors argue that the inequity of the Spanish tax regime and the desire to replace it with a more efficient system was one of the driving forces behind New Granada’s independence movement.

The book concludes with Herschel Grossman’s (Brown University) chapter “The State in Economic History” and Albert Fishlow’s (Council for Foreign Relations) “Reflections on the Collection.” Grossman discusses the conditions that can lead to a ruling elite behaving as if they were agents of their citizens. In his model, rulers who have a low survival probability cannot credibly act as an agent of their citizens. Such a government will have a hard time establishing a nonconfiscatory tax regime with secure property rights. States with high potential survivability (due to geography, weak neighbors, etc.) were in a better position to credibly guarantee property rights and establish a broad tax base. Fishlow’s review focuses on the central role of fiscal and monetary capability and the avoidance of inflation in the most successful nations. He concludes his review with a number of questions about external versus internal forces and North-South differences in the evolution of fiscal and monetary institutions.

As a whole, I found this book to be useful as a broad guide to the fiscal and monetary institutions of a large number of nations over a considerable time period. As with any edited collection, page constraints necessitate that the essays are more broad than deep. A reader with intimate knowledge of the fiscal and monetary history of each of the nations contained in this study will no doubt find much of the material familiar. Such a reader is a rare specialist indeed. The breadth of tax regimes, debt contracts, and monetary institutions adopted by these eleven nations over the course of three centuries assures that most readers (the reviewer included) will be unfamiliar with at least one of them and would benefit from owning a collected work.

Ben Chabot is an assistant professor of economics at the University of Michigan. Professor Chabot’s main research focus is in economic history and finance with an emphasis on financial market integration and its effects upon economic growth, historical exchange-rate risk, long run changes in risk premiums, historical asset pricing anomalies, and the link between financial development and economic output. Professor Chabot has spent much of the past three years collecting a sample of stocks traded in the United States and London between 1865 and 1925. These data consist of close to 2 million prices and dividends sampled every 28 days between 1865 and 1925. The sample contains virtually every stock listed or traded over-the-counter in New York, London, Boston, Philadelphia, Baltimore, Chicago, San Francisco, Louisville, Cincinnati, St. Louis and Charleston.

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):19th Century

Studies in Economic and Social History: Essays in Honour of Derek H. Aldcroft

Author(s):Oliver, Michael J.
Reviewer(s):Ranieri, Ruggero

Published by EH.NET (January 2003)


Michael J. Oliver, editor, Studies in Economic and Social History. Essays in Honour of Derek H. Aldcroft. Aldershot, UK: Ashgate, 2002. xxvi + 275 pp. $84.95/?47.50 (hardcover), ISBN: 0-7546-0371-7.

Reviewed for EH.NET by Ruggero Ranieri, Department of History, University of Manchester.

As many other practitioners, I have made — and still make — excellent use of Derek Aldcroft’s textbooks in my economic history teaching. What is it that makes them so attractive? They have clarity, pace and breadth, while occasionally providing the reader with unexpected angles. They are written with enough intellectual tension and curiosity to produce two complementary results: for the teacher they offer a rewarding mine for lecture notes, and for the student they generate real interest for the subject.

This festschrift produced to commemorate professor Aldcroft’s retirement discusses his work and personality, and honors his highly prolific and respected academic career with chapters by some of his former students, associates and estimators, covering topics close to his interest. The book begins with a very frank and entertaining biographical sketch of Aldcroft’s life and career by Michael Oliver, the editor of the volume, currently professor of Economics at Bates College, Maine. Aldcroft’s academic life has been a pendulum between four universities: Manchester, where he graduated, wrote his doctoral thesis and then ended up as a Research Professor at the end of his career, Glasgow, Leicester and Sidney. In all these places he left a mark, his longest spell being in Leicester. Again as a more recent practitioner I was intrigued to look back at the youthful, hopeful days of Economic History of the 1950s and 1960s. Oliver’s piece is refreshingly frank in assessing professor Aldcroft’s contribution, addressing head on the question of the depth and originality of his work against the charge that it has been largely derivative, and it is also presents a humane and well-rounded portrait of Aldcroft, the man. On the whole he comes out as a hard-working professional with a broad, clever and inquisitive mind, a restless and at the same time withdrawn personality.

The chapters in this book are on very diverse topics, reflecting the range of Aldcroft’s interests. They are also different in their scope and range. Simon Ville offers a review of research in transport history and so does Peter Payne on the question of entrepreneurship in Britain during 1870-1914. Steve Morewood, on the other hand, writes a synthesis, in the Aldcroft mode, of twentieth century developments in the economies of Eastern Europe. James Foreman-Peck and Michael Oliver advance new views on British economic policy and performance respectively in the 1920s and in the 1980s and 1990s, while Derek Leslie attempts an econometric test of the feasibility of policies to discourage immigration — illegal and otherwise — in advanced western economies. Forrest Capie and Geoffrey Wood offer a critical reassessment of the post-1945 international monetary system, with a sharp indictment of the past and current role of the IMF. Finally Anthony Sutcliffe offers a piece of comparative cultural history, focusing on the social contents of movies in Britain and the United States between 1930 and 1950. Some authors engage in meticulous literature surveys (Ville and Payne) and attempt to draw firm conclusions (Payne); others open up new fields of enquiry (Oliver) or new interpretations (Foreman-Peck, Leslie, Capie and Wood).

I think it would be fair to characterize Aldcroft’s views as conservative over a wide range of economic and social issues. In some cases his conservatism reflected dissatisfaction with current orthodoxy and embodied a radical streak. Already in the 1960s he anticipated a strong interest on the economy’s supply side and a critique of current macro-economic neo-Keynesian orthodoxy. He challenged the negative perceptions of the 1920s as a period of stagnation and failure. He was also, however, critical of the performance of British entrepreneurs. Payne takes a new look at the debate on their alleged failure up to 1914, surveying a large body of recent literature. He resolutely concludes that no evidence of failure can be reasonably claimed: British entrepreneurs were knowledgeable, flexible and innovative and earned good profits. He dismisses claims by Chandler and others that they lagged behind in technological innovation or in vertical integration, and they would have been misguided to make the Chandlerian transition to managerial capitalism. Is this spirited defense the last word in this longstanding debate? The present reviewer remains a moderate ‘declinist.’ Comparative research in the steel industry, for example, such as the excellent one by Wengenroth, has revealed that while British steel firms retained technological excellence up to 1914 and beyond, they did not pursue the improvements in productivity that were common with German or US producers, and ultimately gave them an edge in cheaper, mass-produced goods. Explanations for German and US catch-up over a number of industrial sectors are therefore complex and multi-faceted, embracing diverse factors as choice of technology and industrial practice, attention to marketing, industrial relations. It was not simply that they profited from monopoly and protection.

Foreman-Peck places his skillful, econometrically based reassessment of UK economic policy in the 1920s in the same skeptical tradition with which Aldcroft approached the Keynesian interpretation of the shortcomings of the Gold Standard and its negative impact on economic growth and employment. Foreman-Peck looks at the causes of high unemployment and concludes that the problem was a supply-side failure to adjust to shifting patterns of demand on world markets. The overriding cause of this was not, however, the commitment to currency stability at the overvalued pre-war par level with gold. It was the need to maintain high interest rates to maintain a credible premium with US rates and fund the huge stock of national debt. The contraction would have happened therefore, irrespective of the adherence to the Gold Standard. It was essentially brought about by the huge financial effort sustained during World War I. Public debt and high interest rates had crowding out effects and discouraged investment. Foreman-Peck’s piece is ingenious and written with a touch of the magician’s zest — he now works for the Treasury. If followed through it would invite a radical reassessment of our understanding of the interwar years. However, it begs more questions than it answers and it would seem to require a large supplement of empirical work, both on the narrower issues (on UK debt and reserve management) and on the broader issues of comparative debt management under different monetary regimes. Would a closer look at debt/GDP ratios and macro-economic policies in post-1970 Italy help?

It would take a considerable amount of expertise, much beyond the present reviewer’s ability, to comment meaningfully on all the pieces in this volume. The unifying theme being their connection to Derek Aldcroft’s work, it is perhaps worth restating that his breadth of interests and methodological location at the borders between macroeconomics and economic history are well represented here, so is his intellectual restlessness. I am sure he will have also liked Anthony Sutcliffe’s richly detailed and entertaining revisitation of so many films and film stars of his youth, not devoid of a note of serious social endeavor. The working class and the masses made a brief appearance in popular movies, especially during the war and in Britain more than the United States (although don’t forget the Chicago gangsters!). They have since struggled to make a reappearance, as movies have become more and more enmeshed in the Hollywood discourse. For moviegoers and academics the latter part of the twentieth century has been about the rising middle class.

Professor Ranieri is co-editing The Development of the Wide Strip Mill in Europe to be published by Merton Priory Press.

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

Monetary Regimes of the Twentieth Century

Author(s):Britton, Andrew
Reviewer(s):Macesich, George

Published by EH.NET (August 2002)

Andrew Britton, Monetary Regimes of the Twentieth Century. New York:

Cambridge University Press, 2001. xi + 244 pp. $70 (hardcover), ISBN:


Reviewed for EH.NET by George Macesich, Department of Economics, Florida State


Myth, fact, and fancy tend to dominate monetary affairs. Some themes in the

literature of monetary controversy may be interpreted as involving puzzles

fundamentally vexing to the human mind, since they have provoked discussion

over the centuries with no evident improvement in the general level of

comprehension. Monetary problems are thus as fascinating as they are

perplexing, combining as they do a rich mixture of technical economics,

political repercussions, and even the psychology of symbols and beliefs.

Andrew Britton in his study provides insight into monetary and political

problems as they appear in the twentieth century. He concentrates on

developments in the United States, Europe, and Japan from the period of the

gold standard regime to the end-of-the-century regimes he calls “neo-liberal.”

It is a journey he describes as “to Utopia and back.” In his view “no school of

macroeconomics is right for all time; different theoretical models may be

appropriate.” Macroeconomics must be seen in its historical context if it is to

add to our understanding of economic, and indeed, political processes.

Britton’s narrative pulls together in eight chapters various episodes in the

twentieth century in a clear manner. It is, he writes, a book about history and

economics. Each chapter begins with a section describing the behavior of the

world’s major economies with respect to inflation, output growth, unemployment,

and interest rates. A second section describes the evolution of economic policy

and specifically monetary policy for most of the economies under review. A

third section takes under discussion international monetary systems. In a

fourth section Britton illustrates the interrelationship between economic

behavior and the monetary regime in place.

This is a useful book. Monetary regimes in the world do indeed have a colorful

history. They certainly merit serious study. These regimes have ranged from

stone money to the current fiat monetary regimes. The better known are the

specie (gold and/or silver) regime, under which domestic currency was

convertible into specie, and the fiat (paper) regime. The specie regime, more

or less, dominated until 1971. The fiat paper regime has come to be the world’s

principal regime since 1971.

Other regimes included: bimetallic standard (gold and silver); unimetallic

(gold or silver); gold exchange standard; and post-World War II Bretton Woods.

Over the years government priorities changed from the earlier focus on domestic

currency convertibility to that of general (macro) domestic economic stability.

These changes were prompted by economic (and indeed political) problems during

the interwar years particularly during the Great Depression of the 1930s.

Although the post-World War II Bretton Woods regime with its adjustable peg

exchange rate arrangement maintained an indirect link with gold, the

convertibility into gold was abandoned. Henceforth, the goals would be internal

domestic economic stability and especially “full” employment. The net effect

was to set off the Great Inflation of the 1960s and 1970s. The experience

promoted many monetary authorities worldwide to again emphasize the goal of low

inflation and some sort of rules-based monetary regime. Indeed, by the 1990s a

rules-oriented monetary regime became increasingly popular as a means for

restoring and preserving the credibility of monetary authorities and central


What are we to make of the performance of the several monetary regimes? We have

it from such studies as Milton Friedman and Anna J. Schwartz, A Monetary

History of the United States, 1867-1960 (Princeton: Princeton University

Press, 1963); Michael D. Bordo, “The Classical Gold Standard: Some Lessons for

Today,” Monthly Review, Federal Reserve Bank of St. Louis (May 1981);

Colin D. Campbell and William Dougan editors, Alternative Monetary

Regimes (Baltimore: Johns Hopkins University Press, 1986); Gary M. Walton

and Hugh Rockoff, History of the American Economy, eighth edition

(Orlando: Harcourt, Brace, Jovanovich, 1998); and George Macesich, Money and

Monetary Regimes: Struggle for Monetary Supremacy (Westport, CT: Praeger

Publishers, 2002) that real output was considerably less stable in both the

United States and the United Kingdom during the interwar years than during the

post-World War II years when both higher rates of inflation and lower

variability in output and unemployment were registered. This demonstrates the

apparent policy preference away from long-term price stability toward full

employment and suggests the reason behind the strong inflationary pressures in

the postwar years. It is on the basis of such evidence that the public

recognized that a specie-like monetary regime no longer existed and began to

arrange its affairs accordingly.

The evidence also suggests that a fiat monetary regime based on some type of

monetary rule, including one calling for a steady monetary growth, could

provide the benefits of the gold standard without its costs. A prerequisite for

success, however, is a firm commitment from the government to maintain a

monetary rule and to incorporate long-run stability as one of its goals.

In any case, the international gold regime cannot now be restored. It requires

a return to the set of economic, political, and philosophical beliefs upon

which that regime was based, which is unlikely. It is probably easier to

deprive the government altogether of its monopoly over money, although the

magnitude of such a task should not be minimized. Because the sensitive issue

of national sovereignty is involved, as well as for other reasons, governments

will not voluntarily abdicate their power over money (currency boards and

similar arrangements may in fact do just that).

Constraints imposed on national monetary sovereignty by the rules of the

international gold standard regime have been eroding since the collapse of the

international monetary system. Fumbling attempts to reimpose monetary

constraints through international monetary reform since World War I have only

served the cause of discretionary intervention and imposed tasks on the

monetary system, which it has been unable to attain.

Few monetary problems have ever been so ingeniously contrived to maximize

difficulty as that of granting discretionary authority to central banks. Such

authority, when granted central banks over domestic monetary policies —

undertaken for various and often illusive goals — constitutes a formidable

reinforcement of nationalism in the economic sphere and creates an important

source of instability. At the same time, the discretionary authority serves the

central bank well whose preference function may indeed differ significantly

from that of the general public. Central banks are an economic arm of the

political interventionist position, while admirably serving their own

bureaucratic goals and interests.

Central banks are subject to potential pressures, and their typical response,

in the absence of explicit constraints, is to manipulate money and monetary

policy as a matter of bureaucratic survival. They are, after all, creatures of

the national state. Little wonder that the Federal Reserve System stubbornly

refuses to disclose the criteria it uses to decide when to pump more money into

the economy to drive (nominal) interest rates down or when to draw money out of

the economy to drive (nominal) rates up. It is this lack of clarity that is an

important criticism of the Federal Reserve.

One suspects (and Andrew Britton observes) that the Federal Reserve System,

along with many other central bank staffs and some economists, do not use

growth in the money supply in monetary policy deliberations. They appear to

prefer to rely on the Phillips Curve and/or atheoretical relations. What

evidence we do have suggests that minimizing the role of money and its growth

is ill-advised indeed.

In fact, such evidence underscores that there is a positive and close relation

between the price levels and money relative to real income. This relation holds

for long as well as short periods of time for many countries (see Milton

Friedman, Money Mischief: Episodes in Monetary History, New York:

Harcourt Brace Jovanovich, 1992). The average rise in this relationship during

the early 1990s appears to be transitory and not at all unusual when viewed in

a larger context. Indeed, the argument advanced by some economists that there

is no information in monetary aggregates is simply incorrect. This is in marked

contrast to the conclusion drawn by Milton Friedman “that substantial changes

in prices or nominal revenue are almost always the result of changes in the

nominal supply of money, rarely the result of changes in demand for money”

(Money Mischief, p. 46).

Friedman also observes that a change in the “monetary regime can set the world

sailing on unchartered monetary seas . . . without any agreed on and

trustworthy map to the future course of the monetary voyage” (Money

Mischief, p. 142). That in fact is now the problem. The world since the

1970s is on an irredeemable fiat monetary regime unprecedented in history. We

are sailing into turbulent seas without reliable charts or an anchor to the

general level of prices that earlier monetary regimes provided. Andrew Britton,

to his credit, does point out some of the rocks and shoals. Certainly, I

recommend the book to those who prefer reading economics without the usual


George Macesich is the author of several books, including Political Economy

of Money: Emerging Fiat Monetary Regime (Praeger, 1999); Issues in Money

and Banking (Praeger, 2000) and Money and Monetary Regimes: Struggle for

Monetary Supremacy (Praeger, 2002).

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

A Financial History of the United States

Author(s):Markham, Jerry W.
Reviewer(s):Wright, Robert E.

Published by EH.NET (June 2002)


Jerry W. Markham, A Financial History of the United States. Armonk, NY: M.E. Sharpe, 2002. Volume 1: xxii + 437 pp.; Volume 2: xx + 412 pp.; Volume 3: xx + 449 pp. $349.00 (cloth), ISBN: 0-7656-0730-1.

Reviewed for EH.NET by Robert E. Wright.

Former SEC attorney Jerry W. Markham currently teaches corporate and international law at the University of North Carolina at Chapel Hill. Heretofore, he has written extensively on the history of the regulation of commodity futures trading. The work under review is his first significant foray into the broad study of financial history and, quite frankly, it shows. Given the high costs of purchasing and reading these three volumes, the reviewer feels an obligation to the academic community not to mince words: the thesis of this review is that Markham’s opus is seriously flawed.

Markham clearly wanted his book to be a Narrative in the Grand Olde Style, not an academic monograph seeking to prove a point, so not a single table or equation graces the volume. Moreover, the book does not present a thesis so much as an attitude. Like many Americans, Markham views the financial sector with suspicion. He fails, therefore, to give full credit to the crucial role of finance in U.S. economic development. For instance, he claims that banks issued notes “without limits” (1:132; 1:133), that “speculators” made “vast fortunes” (1:109), and that investors fell easy prey to any old “speculative frenzy” (1:98) that happened to form. “Every advance in finance,” Markham opines, “was accompanied by fraud and over-reaching by the unscrupulous” (1:380). Busy with such hyperbole, he fails to explicate how intermediaries, speculators, and investors interacted to finance the mightiest economy on Earth.

Markham ignores too many important secondary works to be taken seriously as an authority in financial history. For instance in Volume 1, which covers the colonial period to 1900, he fails to cite any of the following economic historians: Howard Bodenhorn, Stuart Bruchey, David Cowen, Thomas Doerflinger, E. James Ferguson, Gary Gorton, Gregory Hunter, Naomi Lamoreaux, Diane Lindstrom, John Majewski, Cathy Matson, John J. McCusker, Ranald Michie, George Rappaport, Winifred Rothenberg, Mary Schweitzer, or Richard Sylla. Moreover, he pays scant attention to the important contributions of Stuart Banner, Edwin Perkins, and Hugh Rockoff, among others. In short, the book is not based on anything approaching a comprehensive review of the extant literature.

Markham also fails to survey significant primary source material. He cites a few court cases, an occasional old legal treatise, some congressional reports, a handful of newspaper articles, and Joseph Martin’s descriptions of the Boston stock market. More maddening still, Markham cites recent articles from the Wall Street Journal, the Washington Post, the New York Times, and the Raleigh News & Observer as authorities on historical subjects! Journalists often rely on the same outdated, often nineteenth-century, secondary sources that Markham also leans upon, including William Gouge’s infamous book on antebellum banks and an array of late nineteenth-century hard money polemicists. Worst of all, many of Markham’s assertions are completely undocumented, allowing him to breathe life into a series of apocryphal stories of questionable origins and unlikely authenticity (see, for example, 1:50, 68).

Historians do not have to uncover new archival sources or re-examine known sources in a fresh manner in order to make a contribution. A good story well told will always be appreciated. Due to the inadequacies of Markham’s prose, however, few readers will come to appreciate financial history’s many good stories. The book reads like a rough draft, not a polished book. Numerous simple declarative sentences, at times virtually unconnected conceptually, and rampant use of the passive voice make the book difficult to read. Consider, for example, the following excerpt, which is all-too-typical of the author’s style: “Wheat farm bonds on Canadian lands were sold in Chicago. Those bonds paid 7 per cent per annum. Spitzer, Rorick & Co. offered municipal bonds that netted from 4.25 to 5.75 percent. Seney, Rogers & Co. sold real estate gold bonds and mortgages on Chicago property. Investments from $100 to $50,000 were sought” (2:62).

Markham regularly incorporates quotations of secondary authors into his own sentence structure, as if the words emanated from an historical figure instead of an historian. Only when the reader turns to the endnote, at the end of the volume and difficult to find because of the book’s odd numbering scheme does it become clear that the ‘great quotation’ is that of Bray Hammond, Paul Studenski, or Margaret Myers, not that of Robert Morris, Alexander Hamilton, or Jay Gould.

Indeed, Markham displays precious little historical sense. He notes that “colonial governments eventually found themselves issuing the paper currency advocated by Franklin and others,” then goes on to describe paper money emissions made decades before Franklin’s birth (1:50). He describes a retail purchase that George Washington made in Maryland in 1770 and bolsters it with Madame Knight’s famous discussion of prices in New England in 1704 (1:53-54). I wonder what a judge would say to the following reasoning: “The worldwide depression in 1765 added to the economic problems encountered by the American colonies. A creditor of Paul Revere sought to attach his property for a debt of ten pounds. Nevertheless, some consumer protection was appearing. A law against usurious loans was adopted in New York in 1661″ (1:56)? Similar examples abound (1:63, 70, 83, 126).

Outright errors also abound. Some of the more technical errors, like confusing “bottomry” loans (on ships) with “respondentia” loans (on cargo), would perhaps be partially understandable were not the author a legal scholar (1:6). Other errors, like calling a tontine “a form of lottery scheme” (1:81), referring to bills of exchange as “currency” (1:48), and confusing banknotes and bills of credit (1:72) suggest that Markham is not conversant with the financial terminology of the era. Other errors probably stem from the volume’s impoverished editing. Consider, for example, his “definition” of a put option: “A put option entitled the option holder to sell stock to the writer of the stock [sic] at a specified price.”

Markham makes little use of financial theory. In numerous places, for instance, he could have explained his anecdotes using basic financial concepts like adverse selection and moral hazard (1:38-39, 55). In other places, Markham makes wild comparisons between past and present practices. For instance, he somehow concludes that the “exchange of flour in one state for flour in another in order to save transportation expenses” is “an early form of a swap transaction” (1:70). He describes U.S. Deferred bonds as “when issued” securities instead of discount (zero coupon) bonds (1:119). Similarly, he fails to see that the market correctly priced convertible bank notes as discount bonds (1:132).

The very subtitle of Volume 2, From J.P. Morgan to the Institutional Investor (1900-1970), is misleading because it implies that Morgan predated institutional investors. In fact, institutional investors, particularly life insurance companies and mutual savings banks, were important players in the nation’s financial markets by the 1860s, not the 1960s. True, institutional investors largely eschewed common stocks until the 1960s, but it is well known that equity investment represents a small percentage of external finance flows. Markham’s assertion that “the first seven decades of the twentieth century witnessed more challenges to American finance than all the years before” seems at best a matter of opinion and, at worst, another example of the author’s lack of historical perspective (2:369).

Outright errors and misleading statements again abound in Volume 2. For instance, Markham claims that the Blue Sky Laws were passed “to stop the sale of worthless securities” (2:370). Law professor Paul Mahoney, however, has shown that commercial banks fought for the passage of those securities regulations in order to disembowel their major competitor, the commercial paper market. Markham also asserts that “the Federal Reserve legislation [of 1913] adopted the concept of ‘open market’ operations in which the Federal Reserve banks bought and sold government securities and eligible private debt issues in order to influence the money supply” (2:46). In fact, the Fed discovered the monetary policy uses of open market operations some years after its establishment ( and at first favored private paper and municipal warrants over Treasuries (David Marshall, “Origins of the Use of Treasury Debt in Open Market Operations: Lessons for the Present,” Federal Reserve Bank of Chicago Economic Perspectives, 2002 1Q: 45-54).

Time and space limitations prevent a fuller discussion of the shortcomings of Markham’s mammoth book. Volume 3, From the Age of Derivatives into the New Millennium, appears to contain fewer outright errors than the first two volumes, but it too suffers from a lack of focus, editing, evidence, and documentation. Indeed, only six pages of notes support 357 pages of text. The conclusion to the third volume confidently predicts the demise of paper money, paper correspondence, brick-and-mortar stores, and specialized financial services firms. “Undoubtedly, Wal-Mart and its like,” Markham claims, will supply consumers with mortgages, mutual funds, insurance policies, and “a host of other financial services” (3:365). Markham does not make clear, however, why Wal-Mart will fare any better than Sears did.

To conclude, I do not suggest that you use this opus, but if you do, use it with great care. The historical development of U.S. financial markets and institutions is an enormously important and complex topic. A quality, scholarly synthetic overview is still desperately needed.

Robert E. Wright is the author of The Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets, 1780-1850 (Cambridge, 2002), Hamilton Unbound: Finance and the Creation of the American Republic (Greenwood, 2002), History of Corporate Finance: Development of Anglo-American Securities Markets, Laws, and Financial Practices and Theories (Pickering & Chatto, 2002), Origins of Commercial Banking in America, 1750-1800 (Rowman & Littlefield, 2001), and three forthcoming works tentatively titled Corporate Governance in Historical Perspective: The Importance of Stakeholder Activism (Pickering & Chatto), Mutually Beneficial: The Guardian and Life Insurance in America (New York University Press), and Financing American Economic Growth: The Philadelphia Story (New York University Press).

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

How Much Is That in Real Money? A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States

Author(s):McCusker, John J.
Reviewer(s):Margo, Robert A.

Published by EH.NET (February 2002)

John J. McCusker, How Much Is That in Real Money? A Historical Commodity

Price Index for Use as a Deflator of Money Values in the Economy of the United

States. Second Edition, Revised and Enlarged. Worcester, MA: American

Antiquarian Society, 2001. ix + 142 pp. $15 (paperback), ISBN 1-929545-01-0.

(Available from Oak Knoll Press, 310 Delaware Street, New Castle DE 19720.


Reviewed by Robert. A. Margo, Department of Economics, Vanderbilt University.

The construction of price indices qualifies as one of the central activities

of economic history. Such indices are essential inputs into the measurement of

changes in the standard of living over time. When hard data on outputs are

absent, price data can provide important clues about the ups and downs of the

business cycle. When price series are available for different locations they

inform about the degree, or lack thereof, of economic integration.

How Much is the revised version of an earlier “small” (the author’s

term) book of the same title. As before, the goal is to provide a single,

comprehensive price index for the entire sweep of “American” history — in this

revision, 1665-2001. The revisions are of three sorts: extensions back and

forward in time, more examples, and additional information on colonial exchange

rates. Although economic historians in economics departments will find much

that is useful, I suspect the real audience consists of students, and

historians other than economic, who, for various reasons, need a specific

answer to the question posed in the title.

Most books, even small ones, have several chapters. How Much has a

single chapter — really, an interpretive essay — five appendices with tables,

a bibliography, and a brief Introduction. The essay touches on the history and

uses of price indices, and problems therein. Appendix A presents the overall

index. As previously, the bulk of the index is derived from the work of David

and Solar, whose index itself is mostly derivative of Brady, Bezanson, Cole,

and others. McCusker updates his previous updating of David and Solar to 2001

(estimated) using the Bureau of Labor Statistics’ CPI-U (urban) cost of living

index, available at the click of a button from the BLS website. He also

backdates to 1665 using recent work by P.M.G. Harris and Stephen G. Hardy, who

have constructed indices from probate records for colonial Maryland and

Virginia. These are all spliced together, and the base period set to 1860,

allowing easy comparisons over time.

Appendices B and C draw on McCusker’s bailiwick, colonial monetary history. The

colonies all had their own currency. To convert prices in, say, Maryland and

New York into common units requires exchange rates, which are provided in

Appendix B. Appendix C does the same for paper money during and just after the

Revolutionary War. The tables in these appendices are based on a lot of hard

work in archives over many years. Colonial monetary history is an arcane field

with more than its fair share of arcane debates. Not being a member of this

crowd, I can’t really evaluate the issues but, for the rest of us, Appendices B

and C certainly seem worth the $15.00 the publishers are asking for the book.

Appendix D provides commodity price indices for Great Britain from 1600 to

2001. Table D-1, like Table A-1, has blank rows extending to 2009, suggesting

that another revision may be forthcoming in a few years. Appendix E uses the

price index in Appendix A to provide some conjectural dating of business cycles

in the United States back to the mid-seventeenth century.

How Much is easy to criticize. The interpretive essay is far from

comprehensive. There is barely a mention (except, obliquely, in a footnote) of

quality bias and none that I could find of substitution bias. Readers seeking

“nuts-and-bolts” advice in constructing a price index will not find much of

immediate use in the essay. Although McCusker is correct that some of the

criticism directed at historical price indices is off the mark he is too

dismissive, in my opinion, of the criticism that many historical indices derive

from too limited a range of locations. The essay would have benefited from more

(there are some) of McCusker’s reasoned judgments on what should be done in

future research. The footnotes and bibliography are extensive, but still rather

selective — no mention, for example, is made of this reviewer’s rental price

index for ante-bellum New York City. Then, there is footnote 22 on pp. 26-27

which claims that “[e]conomic historians are in fact guilty of some of the most

simplistic, even misleading use of price indexes” but provides no specific


One can also question the prototypical use — figuring out what specific items

are “worth” in different years — for which the index is intended. Consider

McCusker’s example of George Washington’s false teeth (p. 37), purchased in

1795 for $60.00. According to McCusker’s index, this was “the equivalent of

roughly $820 in year 2000 terms.” “Roughly” is the operative word in this

sentence. In 1984 I purchased my first personal computer, a Kaypro, for $1,500,

worth “roughly” $2,485 in year 2000 terms, according to McCusker’s index. No

one in their right mind would pay $2,485 for such a computer in today’s dollars

($51, I note, is the current price on Ebay). However, if such a machine had

been available, in say, 1964, I am quite sure someone would have paid many

times its alleged 1964 value ($448). Were we able to transport one back in time

to 1864, I am also quite sure its value would have been close to zero, since

there would have been no way to turn it on.

The point is that, given a suitable estimate of aggregate quality bias, indices

like McCusker’s can give us a reasonable sense of the average rate of change of

the price level — inflation — over long periods of time. They do even better

over shorter periods of time. And quality bias matters less when we use such a

price index to deflate indices of nominal wages, since wage indices are also

afflicted by quality bias — today’s workers are healthier, better educated,

and so on, than in the distant past. But, to use such an index to predict

changes in individual prices is more than a little perilous, because the

variance around the average rate of price change — particularly over long

periods of time — is enormous. Unfortunately, naive users are likely to forget

this caveat — embedded as it is in the word “rough” — if they are aware of it

at all. This caveat notwithstanding, I certainly value having a copy of

McCusker at hand, and expect to turn to it often.

(McCusker is Ewing Halsell Distinguished Professor of History, and professor of

economics at Trinity University in San Antonio, Texas.)

(Editors Note: The two series: RPI from Great Britian, 1600 to present, and the

CPI from the United States, 1650 to present; from this book are available

online on the EH.Net server at )

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

Nashville TN. He is the author of Wages and Labor Markets in the United

States, 1820-1860 (University of Chicago Press, 2000); and, with Joel

Perlmann, Women’s Work? American School Teachers, 1650-1920 (University

of Chicago Press, 2001).

Subject(s):Living Standards, Anthropometric History, Economic Anthropology
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

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

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

Published by EH.NET (March 2001)


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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