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Alexander Hamilton and the Origin of the Fed

Author(s):Rasmus, Jack
Reviewer(s):Cowen, David

Published by EH.Net (June 2020)

Jack Rasmus, Alexander Hamilton and the Origin of the Fed. Lanham, MD: Lexington Books, 2019. v + 139 pp. $85 (hardcover), ISBN: 978-1-4985-8284-1.

Reviewed for EH.Net by David Cowen, Museum of American Finance.


In Alexander Hamilton and the Origins of the Fed, Jack Rasmus of St. Mary’s College traces and analyzes the roots of American central banking. The book consists of eleven detailed chapters that outline the story of U.S. banking development. He starts with Hamilton’s creation of the First Bank of the United States (BUS1), the subsequent chartering of Second Bank of the United States (BUS2), an in-depth survey of the period 1836-1913 without a national bank, followed by the creation of the Federal Reserve System. He concludes by looking at the current Federal Reserve and comparing it to the BUS1 in order to answer the question of whether the Federal Reserve is the “Third Bank of the United States.” This is a phrase that is not in the book, but is one I first heard as a student of Richard Sylla.

The setup to that question can be found in the first several chapters, which describe how Hamilton’s central banking vision was crucial for early U.S. economic growth. The author retraces Hamilton’s youth and early ideas on banking, as well as his military service, the Constitutional Convention, his appointment as the nation’s first Secretary of the Treasury, the creation of the BUS1, and the subsequent battle to get the legislation passed. One of Rasmus’s analogies that resonates is his comparison of the U.S. Constitution to the Bible: “One can find a particular passage or reference to justify one’s interpretation, and other passages to justify the opposite” (p. 31).

Many others — including Bray Hammond, Fritz Redlich, Edwin Perkins, James Wettereau, Benjamin Klebaner, Robert Wright, Richard Sylla, and this author — have looked at the BUS1 and concluded that the national bank performed many tasks associated with a modern central bank. All, including Rasmus, give the BUS1 high marks as the government’s fiscal agent. Rasmus looks at Hamilton’s unique hybrid 80%/20% private-public partnership and, on the one hand, concludes that there was independence for the bankers. However, he states that the Treasury Department made “considerable interference” in its operations (p. 36). Reconciling this “considerable interference” with his notion that there was independence is not an easy tightrope to walk. This theme continues throughout the book and is nicely framed as a two-sided question, “Independence from whom? … Interference in carrying out central banking functions by private banker interests? Or interference from government politicians” (p. 66).

After reading and analyzing hundreds of letters about the bank, it seems to me that during this period the Treasury was the central banker and the BUS1 the central bank. It is best described as a principal-agent relationship; however, it is clear the principal held the upper hand. For instance, when Treasury Secretary Albert Gallatin was in office, he allayed Thomas Jefferson’s fears about the BUS1: “Whenever they shall appear to be really dangerous, [the Bank is] completely in our power and may be crushed.”

While aptly describing the bigger themes surrounding the BUS1 creation, Rasmus makes several errors. He correctly states that Hamilton’s first act was to raise money for the newborn country through bank loans from the Bank of New York. However, he mistakenly labels the other bank, the Bank of North America, as the “National Bank of Philadelphia” and says that the total loan amount was $100 million when the borrowings were a tenth of one percent of that amount (p. 19). Also needing correction is that the “bonds issued” by the BUS1 to its investors would be paid at 4% (p. 21). It was the equity stock of the bank that paid the dividends, as the BUS1 did not issue bonds. To state that the “federal government put up $2 million in gold” is correct in terms of amount, but the reality is that the government did not have $2 million in gold to invest (p. 25). Rather, the federal government infused the funds to the national bank through a complex transaction via loans from Amsterdam, but immediately borrowed that amount and more. Rasmus does note that within a few years BUS1 loans to the government had tripled, peaking at $6 million or about 60% of its capital, before the BUS1 directors became nervous and asked for repayment. The government commenced selling its shares to repay the loans.

Because banks proliferated and the money supply grew, Rasmus states that as far as control of that supply is concerned, the “BUS1 clearly receives an ‘F’ in terms of performance during its twenty-year charter period” (p. 34). This failing grade contradicts Thomas Willing, the bank’s long-standing president, who wrote that BUS1 was the “great regulating wheel of all the Commercial Banks [and] … never overtraded, neither was it possible for any other institution to do so and preserve its credit for a day.” Bolstering the Willing case was William Gouge, certainly no friend of bank note issuance, who wrote in 1842 that the BUS1 “was perhaps as well managed as a paper money Bank could be.”

The book is detailed in describing nineteenth century banking in the intervening years between the BUS2 and the creation of the Federal Reserve. Major financial crises are on display — 1837, 1857, 1873, 1884, 1890, 1893 — culminating with the 1907 panic that led to the creation of the Fed. These episodes include explanations of a “full-blown financial crisis versus a banking panic” (p. 81). Themes recur, for instance how fractional reserve banking is a “great boon,” but at the same time a “fundamental weakness,” and the constant pushback and resistance to centralized banking powers in U.S. history (p. 5).

Rasmus brings the book together in a nice concluding chapter analyzing where the Fed and Hamilton’s BUS1 have similarities, differences, or an incomplete scorecard. The verdict: “In many respects the 1913 Fed was an implementation of Hamilton’s vision. It was very much a Hamiltonian central bank” (p. 121). However, Rasmus sees two great failures in the lack of effective bank supervision and a weak lender of last resort, the latter evidenced by many bank failures, particularly in the 1930s. Nonetheless, Rasmus’s book suggests that the Federal Reserve is indeed the Third Bank of the United States.

In a postscript, Rasmus criticizes central banks and the Fed for the massive stimulation in the wake of the 2008-09 financial crisis, believing it has “not been very effective” (p. 125). Earlier in the book, he posed the question of whether the Fed would be able to “evolve further” to handle a future crisis (p. 10). That answer is currently upon us, as the U.S. grapples with the coronavirus, quarantine, economic shut down and reopening, and social unrest. With the Fed balance sheet growing from $4.5 trillion to $7 trillion in a matter of months in 2020, and likely more financial stimulus on the way, we may expect that Jack Rasmus will have some forthcoming opinions on evolving central banking.


David Cowen is President/CEO of the Museum of American Finance. He is the co-author (with Richard Sylla) of Alexander Hamilton on Finance, Credit, and Debt (Columbia University Press, 2018) and (with Robert Wright) of Financial Founding Fathers: The Men Who Made America Rich (University of Chicago Press, 2006). He is author of The Origins and Economic Impact of the First Bank of the United States, 1791-1797 (Garland Publishing, 2000).

Copyright (c) 2020 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (June 2020). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Reconstructing the National Bank Controversy: Politics and Law in the Early American Republic

Author(s):Lomazoff, Eric
Reviewer(s):Cowen, David

Published by EH.Net (July 2019)

Eric Lomazoff, Reconstructing the National Bank Controversy: Politics and Law in the Early American Republic. Chicago: University of Chicago Press, 2018. x + 253 pp. $90 (cloth), ISBN: 978-0-226-57945-0.

Reviewed for EH.Net by David Cowen, Museum of American Finance.

“… [Of] all acts of government none perhaps was more delicate, none required greater discretion and caution to guard it against improper speculations than the granting of a bank charter,” wrote Secretary of the Treasury Albert Gallatin to Thomas Jefferson in 1804. He continued that “… It is an act of the highest legislative nature.”[1] Eric Lomazoff understands this as well, and his book, Reconstructing the National Bank Controversy: Politics and Law in the Early American Republic, brings back to the fore the constitutional banking debate that raged throughout much of the early history of our country. This playing field constitutes well-tread ground with established paradigms by previous generations of scholars. Given that there are well-established narratives, it is not easy to shed new light. Lomazoff does so by taking an incredibly deep dive into the bank debates, starting with the 1791 creation of the First Bank of the United States, and continuing with the 1811 death of the institution, the 1816 subsequent re-charter, the 1819 McCulloch v. Maryland challenge in front of the John Marshall-led Supreme Court, and Andrew Jackson’s attack leading to the death of the Second Bank of the United States in 1836. For good measure, in the concluding chapter Lomazoff brings the discussion forward to look at the implications for the founding of the Federal Reserve and other monetary debates.

Lomazoff — to his credit — has pored over the debates and legislative records with a fine-tooth comb. The extensive research extends to his secondary sources as well. The work is carefully footnoted throughout, and the footnotes themselves provide a wealth of knowledge and demonstrate the depth of scholarship. For instance, he took care to self-catalogue the 3,150 letters of Nicholas Biddle on microfilm held at the Library of Congress (p. 216, note 21). The structure of the book includes vignettes at the beginning of several chapters that recount the traditional viewpoints on the subject. Given that the title of the book is Reconstructing the National Bank Controversy and “reconstruct” means to rebuild after something has been destroyed or damaged, the author needed to set the stage by first constructing the accepted dogma via the vignettes.

Lomazoff has gone back and read the primary source materials in depth and has effectively placed them side-by-side for the debates of 1791, 1811, 1816, 1819 and 1836. What makes this thought provoking is that so many others have done so as well, and they have drawn different conclusions. A first step is to understand the standard and accepted line of logic that is central to the original narrative: Article I Section 8 of the U.S. Constitution. This section empowers the government to perform many duties, including raising an Army and Navy and declaring war, and its final paragraph constitutes the famous Sweeping Clause, “to make all Laws which shall be necessary and proper.” The Sweeping Clause allows for a broad interpretation of the Constitution. It has been the linchpin to the bank debates for years, as it authorized the government to create two national banks and own part of them. In Lomazoff’s journey through the research, he found that another part of Article 1 Section 8 has received scant attention, but it may hold the key to much of the debate. That portion is the Coinage Clause, which authorizes Congress to coin and regulate money. While that argument is known to scholars, it has taken a backseat to the Sweeping Clause. Lomazoff is out to correct the historical record and give the Coinage Clause equal due. Interestingly, buried in a footnote the author admits that, “in an early pass I too adopted a version of the strict/broad dichotomy” (p. 176). A second recurring theme is that the constitutional debates were often shaped by self-interest or messy party politics.

As part of his case, Lomazoff introduces the three F’s that anti-bank advocates rally their objections around: federal, functional and frequency standards. In short, federal questions whether there are other institutions, i.e. state banks, which can provide a similar service. Functional gets to the core of the Necessary and Proper Clause, i.e. as it relates to Article I and the Sweeping Clause, and asks whether a national bank would fill that role directly or indirectly. Frequency is exogenous to Article I and debates what power a government should have as it relates to coinage, borrowing money, and banking. The three F’s are used throughout the book to assist in defining the debates.

The book begins with the 1791 creation of the First Bank of the United States, when the opponents threw, “everything but the kitchen sink at it” (p. 15). But the anti-bankers needed a legal issue, and in 1791 that was a strict interpretation of the Constitution. Therefore, Lomazoff agrees that, “the traditional 1791 narrative certainly does not err,” but he wants to ensure that constitutional scholars realize it was not one size fits all with other factors at play (p. 30).

A pivotal chapter titled “The Compromise of 1816” takes a very deep dive into the charter debate of the Second Bank of the United States. Here the book highlights how a Republican-controlled Congress and the White House cloned a national bank that many of them had killed just a few years prior. Given the stress of financing the War of 1812, these politicians realized the need for a national bank, and they needed to “swallow their long-standing objections” (p. 105). But how? Their answer was the Coinage Clause of Article 1 Section 8.

A few years hence was the landmark McCulloch v. Maryland case, where the Supreme Court reaffirmed the national bank. Using the Compromise of 1816 as a lens on this case is interesting, although the author admits, “it may be too much, however, to claim that the Compromise of 1816 ultimately helps make better sense of what occurred in McCulloch” (p.139). When we fast forward to the 1830s and Andrew Jackson’s attack on the Second Bank, Lomazoff explains that traditional historical fare has excluded that his veto message also included the Coinage Clause. That portion has been lost to scholars over time.

Revisionist history is not an easy hill to climb, especially when the traditional paradigms are so well entrenched. This book is geared toward constitutional scholars and members of the academic community who can handle the in-depth analysis. This is not light summertime reading. In one section, Lomazoff points out that, “American economic historians are familiar with these facts” (p. 98). However, economic historians who grew up on traditional narratives will find this a detailed refresher course with a Coinage Clause twist. Lomazoff has opened our eyes that the Coinage Clause needs some due. Some months after the difficult fight over chartering the First Bank, Alexander Hamilton stated that, “a mighty stand was made on the affair of the Bank. There was much commitment in that case. I prevailed.”[2] Eric Lomazoff also prevails, as he brings much commitment to the role of the Coinage Clause in shaping early national bank debates.


1. Albert Gallatin to Thomas Jefferson. April 12, 1804. The Writings of Albert Gallatin. Vol II, pp. 184-85. The italics are Gallatin’s.


David Cowen is President/CEO of the Museum of American Finance. He is the co-author (with Richard Sylla) of Alexander Hamilton on Finance, Credit, and Debt (Columbia University Press, 2018) and (with Robert Wright) of Financial Founding Fathers: The Men Who Made America Rich (University of Chicago Press, 2006).

Copyright (c) 2019 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (July 2019). All EH.Net reviews are archived at

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):North America
Time Period(s):18th Century
19th Century

Alexander Hamilton on Finance, Credit, and Debt

Author(s):Sylla, Richard
Cowen, David J.
Reviewer(s):McNamara, Peter

Published by EH.Net (November 2018)

Richard Sylla and David J. Cowen, Alexander Hamilton on Finance, Credit, and Debt. New York: Columbia University Press, 2018. xii + 346 pp. $30 (hardcover), ISBN: 978-0-231-18456-4.

Reviewed for EH.Net by Peter McNamara, School of Civic and Economic Thought and Leadership, Arizona State University.

“The effect of energy and system is to vulgar and feeble minds a kind of magic which they do not comprehend and thus they make false interpretation of the most obvious facts. The people of several parts of the state relieved and happy by the effects of the assumption execrate the measure with its authors to which they owe the blessing” (p. 289). So wrote Alexander Hamilton in his “Defense of the Funding System,” soon after resigning his post as the nation’s first Secretary of the Treasury. “The Defense” is one of a number of Hamilton’s economic writings that have not received the scholarly attention they deserve. The piece contains not only polemics and technical discussions of Hamilton’s financial program, it also contains a number of important philosophical reflections, rare in Hamilton’s writings, on the nature, especially the moral costs and benefits, of commercial societies. Richard Sylla, professor emeritus at the Stern School of Business at New York University and David J. Cowen, president and CEO of the Museum of American Finance have included the “Defense” in their new collection of Hamilton’s writings, Alexander Hamilton on Finance, Credit, and Debt.

In addition to drawing attention to neglected documents, Sylla and Cowen’s broader goal with this volume is to create a kind of Hamiltonian primer on public finance, to explain its magic to “citizens, financiers, and policy makers” (p. 322). To this end, they have brought together writings from across Hamilton’s career beginning with the young soldier thinking through the political and financial woes of the would-be new republic. In an effort to make Hamilton’s ideas more accessible, Sylla and Cowen have engaged in a drastic pruning of Hamilton’s voluminous, sometimes prolix output and have modernized spelling and punctuation. By my rough count, they have trimmed over 100,000 words, almost 60 percent of the original documents. The result is a unique, highly readable, and very useful collection of Hamilton’s writings on political economy, broadly understood. By including documents that are usually overlooked, they also give us a fuller picture of Hamilton.

Hamilton displayed a remarkable consistency in his economic thinking over the years. As noted, he began to think through the American situation while on Washington’s staff and quickly identified the most important problems. For solutions, he looked to the Dutch and British examples for guidance and to writers such as David Hume, James Steuart, Malachy Postlethwayt, and later Jacques Necker and Adam Smith. The lessons he learned were many but the key lesson, according to Sylla and Cowen, was that what the United States needed was a “financial revolution” of the kind the Dutch and British had experienced. Sylla and Cowen acknowledge the contributions of their sometime collaborator Robert E. Wright of Augustana College in developing this particular interpretation of Hamilton and of America’s economic take-off. What specifically was needed? Based on his inquiries: a national bank, a sound currency, assumption of the states’ Revolutionary War debt, an efficient and equitable tax system, and most immediately a plan to restore the public credit of the United States, then a bankrupt nation. Hamilton and the United States benefited from being late arrivers because they were able to innovate on Dutch and British precedents. This is, for example, evident in Hamilton’s plan for a national bank. As the editors point out, the Bank of the United States differed from the Bank of England as regards its voting procedures, its partial government ownership, its species reserve requirements, and branch banking. Hamilton’s vision and recommendations went beyond matters of pure public finance. If it was to realize its potential, the American private sector economy needed modernization as well. Hamilton recommended the encouragement of manufactures through modest tariffs and a variety of other government incentives. According to Sylla and Cowen, however, the critical thing was to make capital readily available to entrepreneurs. The Bank of the United States was one way to do this. It could lend to entrepreneurs and it provided the states with an incentive to encourage the creation of banks and a model to emulate. The editors include documents relative to Hamilton’s drafting of charters for the Bank of New York and the Merchants Bank (also of New York).

Hamilton’s neglected final report on public credit of January 15, 1795 is included in the volume. A clearly irritated Madison characterized it as Hamilton’s “arrogant valedictory Report” (p. 231). Hamilton did remark that the nation’s finances were “prosperous beyond expectation” (p. 239), a judgement with which Madison took issue. This piece is most important because it clarifies Hamilton’s views on public debt which were misunderstood at the time and have often been since. In a 1781 letter to Robert Morris, Hamilton had written that “A national debt if it is not excessive will be to us a national blessing; it will be powerful cement of our union” (p. 45). Hamilton enemies believed that he saw maintaining a high level of public debt as a weapon for subverting republican government. They feared a class of permanent government pensioners living off the debt would support the government and in turn the government would be beholden to them. Hamilton’s final report made clear his views. He warned against high levels of public debt and given the inevitability of future government borrowing he advised that new debt should be incurred only if the means of extinguishing it were also created. With respect to the current debt he proposed a plan that would extinguish it in thirty years. As matters turned out, it was forty years until Andrew Jackson (much as he loathed the Hamiltonian system) could announce in 1835 that the debt had been paid off. This period, of course, included the War of 1812, which by itself more than doubled the national debt at the time.

Hamilton does not fit neatly into contemporary categories. Free market economists will have difficulties with some of Hamilton’s argument about trade and with his belief that funding the debt would add to the nation’s stock of “active capital.” Notwithstanding the success of Hamilton: An American Musical, contemporary progressives will find Hamilton’s enthusiastic embrace of business and modern finance off-putting to say the least. Nor, it must be emphasized, does Hamilton provide us with ready answers for today’s problems. During the 2008 financial crisis, would Hamilton have bailed out the banks or would he have provided relief to embattled home-owners? Or would he, given his remarkable inventiveness, have come up with some third option? We cannot know. That said, there is much to learn from this collection of writings by the man who more than any other of the time thought through the complex problems of securing American power and prosperity.

Peter McNamara is the author of Political Economy and Statesmanship: Smith, Hamilton and the Foundation of the Commercial Republic.

Copyright (c) 2018 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (November 2018). All EH.Net reviews are archived at

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):North America
Time Period(s):18th Century

Jefferson’s Treasure: How Albert Gallatin Saved the New Nation from Debt

Author(s):May, Gregory
Reviewer(s):Wright, Robert E.

Published by EH.Net (November 2018)

Gregory May, Jefferson’s Treasure: How Albert Gallatin Saved the New Nation from Debt. Washington, DC: Regnery History, 2018. xxxii + 512 pp. $35 (hardcover), ISBN: 978-1-62157-645-7.

Reviewed for EH.Net by Robert E. Wright, Thomas Willing Institute, Augustana University.

International tax expert Gregory May’s entertainingly written birth-to-death biographical treatment of U.S. Treasury Secretary Albert Gallatin (1761-1849) covers Gallatin’s public career and private life in ten chapters and 300 pages of chronological narrative. Despite make passing reference to concepts like regulatory capture, May did not try to write a biography that would pass muster with economic historians. While generalists will find much merit in the book, economic historians, at least those who do not place a heavy premium on newness, have no clear reason to favor this Gallatin biography over those of Henry Adams (J. B. Lippincott, 1879) or Raymond Walters (Macmillan, 1957). Specialists interested in the history of the American System, higher education, Indian affairs, diplomacy, and so forth, also will find little new here.

Like most biographies, this one covers far more ground than can be summarized in even a long review. Much of it provides general context of only passing interest to economic historians. The most important background discussions justify the author’s views of Gallatin’s motivations when Gallatin himself remained silent on important issues, like why he never took a strong stand against slavery or why he emigrated from Geneva to the United States, in 1780 of all years. The political and social contextualization of the latter conundrum runs a half dozen pages, but the economic depression and monetary chaos gripping America in 1780 merits only four general sentences. Personal details of Gallatin’s life, like the tragic death of his first wife after just a few months of marriage, consume many more pages. Such scenes render the book compelling reading for general consumption but seem of minimal value to economic historians.

The conceit of the book’s subtitle, that Gallatin saved America from its debt, is untenable, as the author himself seems to concede. As Bill White showed in America’s Fiscal Constitution: Its Triumph and Collapse (PublicAffairs, 2014), Alexander Hamilton, not Gallatin, established the fiscal constitution that provided the basic policy frame by which the United States managed its national debt from the Washington administration until at least the Nixon years. When David Cowen (mistakenly cited as Cohen) and I published a prosopography of early U.S. financiers (Financial Founding Fathers, Chicago, 2006), we styled Gallatin “the savior,” not because he saved the early nation from its debt but because he protected Hamilton’s fiscal constitution from Thomas Jefferson’s palpably suboptimal financial policy preferences.

May sometimes ignores or distorts evidence that runs counter to his case. For example, he pushes the Jeffersonian view that ownership of U.S. debt securities in the 1790s was highly concentrated among a few hundred wealthy men in the big Northern seaports. In support of that tired canard, he cites several old studies based more on innuendo than data, and also my own One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe (McGraw-Hill, 2008), which most emphatically shows the opposite (The dataset undergirding the book is stored here on EH.NET: Federal bond registers reveal that considerable numbers of women, rural folks, and Southerners owned federal bonds, which traded prodigiously in secondary securities markets that were remarkably liquid and integrated given the technology of the era (on which point see and my book based on it, The Wealth of Nations Rediscovered [Cambridge, 2002]). May even disappoints on tax policy because he fails to explain that the infamous whiskey tax, resistance to which helped to launch Gallatin’s political career, was not primarily designed to increase federal revenue but rather was meant to offset the protection granted domestic distillers by the relatively high tax on imported spirits, which of course leveraged liquor’s notorious inelasticity.

This biography, like many, sometimes gives too much credit to the protagonist, for example presenting Gallatin as a major force in the formation of the Philadelphia-Lancaster Turnpike Company when his actual role was limited to some committee work in the Pennsylvania legislature. Similarly, the author almost invariably simply summarizes Gallatin’s policy pamphlets, insinuating that they were brilliant without subjecting them to informed critique. He does make clear, however, that Gallatin’s Eurocentric worldview rendered his work on Indian language and culture antiquarian, in the racist sense of the term.

Errors of omission and commission, too numerous and tedious to recount here, stand as solemn testament to the fact that penning the biographies of major political and policy figures is difficult business, especially for authors with no formal academic research training. The errors, though, signal only the writing of a non-specialist. To make up for his lack of formal credentials, May read extremely widely but, alas, with insufficient expert guidance. Two hundred pages of citations seem impressive at first glance but May often misses the most important citations and contextualizations, and not just in economic history. He misses, for example, Joanne Freeman’s work when discussing “affairs of honor” and provides readers with no context for the “rough music” or charivari that Federalists in Reading, Pennsylvania subjected Gallatin to one night after he became the opposition leader in the U.S. House of Representatives. Authors must be selective but not mentioning or explaining the ubiquity of that transplanted European social practice could be construed as authorial ignorance, another example of overplaying Gallatin’s importance, or a snide insinuation that the midnight revelers were Federalist extremists.

On that last point, it is unsurprising that Regnery History, which recently published a book that claims that Hamilton “screwed up America,” published this book, which gels with a certain strain in ahistorical libertarian scholarship that vilifies Hamilton, largely unfairly, on three important points. First, May regurgitates the claim that Hamilton advocated protective tariffs, an ancient but mistaken assertion demolished, yet again, by Richard Sylla and David Cowen in their Alexander Hamilton on Finance, Credit and Debt (Columbia University Press, 2018), and Sylla in his illustrated biography of Hamilton (Sterling, 2016). Hamilton understood Harberger triangles more than a century before Arnold was born!

Second, Hamilton wanted a vigorous federal government, not a large one, and he was a debt realist, not an advocate of a forever growing national debt. May, like others motivated to exaggerate Hamilton’s views on government size, conveniently leaves off the “if it is not excessive” (page 66) qualifying clause from Hamilton’s claim that the national debt could be “a national blessing.” Hamilton believed that population and economic growth would ease the nation’s real debt burden over time without unduly restraining government or taxing the private sector. Gallatin, by contrast, believed that all government debt was bad and should be paid off as quickly as possible, even at the expense of economic growth and national defense. Both policies are better than those of policymakers who think the debt can balloon to any size because we “owe it to ourselves” and can “always print money to service it,” but selectively quoting Hamilton to associate him with that group needlessly perverts the historical record. All this has been exhaustively explained by Richard Salsman in The Political Economy of Debt: Three Centuries of Theory and Evidence (Edward Elgar, 2017) and the books by Richard Sylla and David Cowen referenced above.

Third, although typographically the difference between adopting and adapting the British financial system is only one letter, interpretively it is huge. To play up his protagonist, May claims that Hamilton only did the former, on the basis of a comment made by Gideon Granger, Jefferson’s postmaster general and otherwise an insignificant politician and thinker. Several scholars, including myself and Sylla, have explained in detail that adaptation is a more apt characterization of Hamilton’s fiscal and financial policies.

In sum, read this well-crafted biography for general interest but not for new insights into the early U.S. financial system.

Robert E. Wright is the Nef Family Chair of Political Economy at Augustana University and the coauthor, with Bucknell’s Jan Traflet, of a forthcoming biography of NBC radio financial reporter and corporate governance “gadfly” Wilma Soss.

Copyright (c) 2018 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (November 2018). All EH.Net reviews are archived at

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):18th Century
19th Century

Origins of Commercial Banking in the United States, 1781-1830

Robert E. Wright, University of Virginia

Early U.S. commercial banks were for-profit business firms, usually structured as joint-stock companies. Many, but by no means all, obtained corporate charters from their respective state legislatures. Although politically controversial, commercial banks, the number and assets of which grew quickly after 1800, played a key role in early U.S. economic growth.1 Commercial banks, savings banks, insurance companies and other financial intermediaries helped to fuel growth by channeling wealth from savers to entrepreneurs. Those entrepreneurs used the loans to increase the profitability of their businesses and hence the efficiency of the overall economy.

Description of the Early Commercial Banking Business

As financial intermediaries, commercial banks pooled the wealth of a large number of savers and lent fractions of that pool to a diverse group of enterprising business firms. The best way to understand how early commercial banks functioned is to examine a typical bank balance sheet.2 Banks essentially borrowed wealth from their liability holders and re-lent that wealth to the issuers of their assets. Banks profited from the difference between the cost of their liabilities and the net return from their assets.

Assets of a Typical Commercial Bank

A typical U.S. commercial bank in the late eighteenth and early nineteenth centuries owned assets such as specie, the notes and deposits of other banks, commercial paper, public securities, mortgages, and real estate. Investment in real estate was minimal, usually simply to provide the bank with an office in which to conduct business. Commercial banks used specie, i.e. gold and silver (usually minted into coins but sometimes in the form of bars or bullion), and their claims on other banks (notes and/or deposits) to pay their creditors (liability holders). They also owned public securities like government bonds and corporate equities. Sometimes they owned a small sum of mortgages, long-term loans collateralized by real property. Most bank assets, however, were discount loans collateralized by commercial paper, i.e. bills of exchange and promissory notes “discounted” at the bank by borrowers.

Discount Loans Described

Most bank loans were “discount” loans, not “simple” loans. Unlike a simple loan, where the interest and principal fall due when the loan matures, a discount requires only the repayment of the principal on the due date. That is because the borrower receives only the discounted present value of the principal at the time of the loan, not the full principal sum.

For example, with a simple loan of $100 at 6 percent interest, of exactly one year’s duration, the borrower receives $100 today and must repay the lender $106 in one year. With a discount loan, the borrower repays $100 at the end of the year but receives only $94.34 today.3

Commercial Bank Liabilities

Commercial banks acquired wealth to purchase assets by issuing several types of liabilities. Most early banks were joint-stock companies, so they issued equities (“stock”) in an initial public offering (IPO). Those common shares were not redeemable. In other words, stockholders could not demand that the bank exchange their shares for cash. Stockholders who wished to recoup their investments could do so only by selling their shares to other investors in the secondary “stock” market. Because its common shares were irredeemable, a bank’s “capital stock” was its most certain source of funds.

Holders of other types of bank liabilities, including banknotes and checking deposits, could redeem their claims during the issuing bank’s open hours of operation, which were typically four to six hours a day, Monday through Saturday. A holder of a deposit liability could “cash out” by physically withdrawing funds (in banknotes or specie) or by writing a check to a third party against his or her deposit balance. A holder of a banknote, an engraved promissory note payable to the bearer very similar to today’s Federal Reserve notes,4 could physically visit the issuing bank to redeem the sum printed on the note in specie or other current funds, at the holder’s option. Or, a banknote holder could simply use the notes as currency, to make retail purchases, repay debts, make loans, etc.

After selling its shares to investors, and perhaps attracting some deposits, early banks would begin to accept discount loan applications. Successful applicants would receive the loan as a credit in their checking accounts, in banknotes, in specie, or in some combination thereof. Those banknotes, deposits, and specie traveled from person to person to make purchases and remittances. Eventually, the notes and deposits returned to the bank of issue for payment.

Balance Sheet Management

Early banks had to manage their balance sheets carefully. They “failed” or “broke,” i.e. became legally insolvent, if they could not meet the demands of liability holders with prompt specie payment. Bankers, therefore, had to keep ample amounts of gold and silver in their banks’ vaults in order to remain in business. Because specie paid no interest, however, bankers had to be careful not to accumulate too much of the precious metals lest they sacrifice the bank’s profitability to its safety. Interest-bearing public securities, like U.S. Six Percent bonds, often served as “secondary reserves” that generated income but that bankers could quickly sell to raise cash, if necessary.

When bankers found that their reserves were declining too precipitously they slowed or stopped discounting until reserve levels returned to safe levels. Discount loans were not callable.5 Bankers therefore made discounts for short terms only, usually from a few days to six months. If the bank’s condition allowed, borrowers could negotiate a new discount to repay one coming due, effectively extending the term of the loan. If the bank’s condition precluded further extension of the loan, however, borrowers had to pay up or face a lawsuit. Bankers quickly learned to stagger loan due dates so that a steady stream of discounts was constantly coming up for renewal. In that way, bankers could, if necessary, quickly reduce the outstanding volume of discounts by denying renewals.

Reduction of Information Asymmetry

Early bankers maintained profitability by keeping losses from defaults less than the gains from interest revenues.6 They kept defaults at an acceptably low level by reducing what financial theorists call “information asymmetry.” The two major types of information asymmetry are adverse selection, which occurs before a contract is made, and moral hazard, which occurs after contract completion. The information is asymmetrical or unequal because loan applicants and borrowers naturally know more about their creditworthiness than lenders do. (More generally, sellers know more about their goods and services than buyers do.) Bankers, in other words, must create information about loan applicants and borrowers so that they can assess the risk of default and make a rational decision about whether to make or to continue a loan.

Adverse Selection

Adverse selection arises from the fact that risky borrowers are more eager for loans, especially at high interest rates, than safe borrowers. As Adam Smith put it, interest rates “so high as eight or ten per cent” attract only “prodigals and projectors, who alone would be willing to give this high interest.” “Sober people,” he continued, “who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition.”

Adverse selection is also known as the “lemons problem” because a classic example of it occurs in the unintermediated market for used cars. Potential buyers have difficulty discerning good cars, the “peaches,” from breakdown-prone cars, the “lemons.” Sellers naturally know whether their cars are peaches or lemons. So information about the car is asymmetrical — the seller knows the true value but the buyer does not. Potential buyers quite rationally offer the average market price for cars of a particular make, model, and mileage. An owner of a peach naturally scoffs at the average offer. A lemon owner, on the other hand, will jump at the opportunity to unload his heap for more than its real value. If we recall that borrowers are essentially sellers of securities called loans, the adverse selection problem in financial markets should be clear. Lenders that do not reduce information asymmetry will purchase only lemon-like loans because their offer of a loan at average interest will appear too dear to good borrowers but will look quite appealing to risky “prodigals and projectors.”

Moral Hazard

Moral hazard arises from the fact that people are basically self-interested. If given the opportunity, they will renege on contracts by engaging in risky activities with, or even outright stealing, lenders’ wealth. For instance, a borrower might decide to use a loan to try his luck at the blackjack table in Atlantic City rather than to purchase a computer or other efficiency-increasing tool for his business. Another borrower might have the means to repay the loan but default on it anyway so that she can use the resources to take a vacation to Aruba.

In order to reduce the risk of default due to information asymmetry, lenders must create information about borrowers. Early banks created information by screening discount applicants to reduce adverse selection and by monitoring loan recipients and requiring collateral to reduce moral hazard. Screening procedures included probing the applicant’s credit history and current financial condition. Monitoring procedures included the evaluation of the flow of funds through the borrower’s checking account and the negotiation of restrictive covenants specifying the uses to which a particular loan would be put. Banks could also require borrowers to post collateral, i.e. property they could seize in case of default. Real estate, slaves, co-signers, and financial securities were common forms of collateral.

A Short History of Early American Commercial Banks

Colonial Experiments

Colonial America witnessed the formation of several dozen “banks,” only a few of which were commercial banks. Most of the colonial banks were “land banks” that made mortgage loans. Additionally, many of them were government agencies and not businesses. All of the handful of colonial banks that could rightly be called commercial banks, i.e. that discounted short-term commercial paper, were small and short-lived. Some, like that of Alexander Cummings, were fraudulent. Others, like that of Philadelphia merchants Robert Morris and Thomas Willing, ran afoul of English laws and had to be abandoned.

The First U.S. Commercial Banks

The development of America’s commercial banking sector, therefore, had to await the Revolution. No longer blocked by English law, Morris, Willing, and other prominent Philadelphia merchants moved to establish a joint-stock commercial bank. The young republic’s shaky war finances added urgency to the bankers’ request to charter a bank, a request that Congress and several state legislatures soon accepted. By 1782, that new bank, the Bank of North America, had granted a significant volume of loans to both the public and private sectors. New Yorkers, led by Alexander Hamilton, and Bostonians, led by William Phillips, were not to be outdone and by early 1784 had created their own commercial banks. By the end of the eighteenth century, mercantile leaders in over a dozen other cities had also formed commercial banks. (See Table 1.)

Table 1:
Names, Locations, Charter or Establishment Dates, and Authorized Capitals of the First U.S. Commercial Banks, 1781-1799

Name Location Year of Charter (Year of Establishment) Authorized Capital (in U.S. dollars)
Bank of North America Philadelphia, Pennsylvania 1781*/1782/1786** $400,000 (increased to $2,000,000 in 1787)
The Bank of New York Manhattan, New York (1784) 1791 $1,000,000
The Massachusetts Bank Boston, Massachusetts 1784 $300,000
The Bank of Maryland Baltimore, Maryland 1790 $300,000
The Bank of the United States Philadelphia, Pennsylvania 1791* $10,000,000
The Bank of Providence Providence, Rhode Island 1791 $500,000
New Hampshire Bank Portsmouth, New Hampshire 1792 $200,000
The Bank of Albany Albany, New York 1792 $260,000
Hartford Bank Hartford, Connecticut 1792 $100,000
Union Bank New London, Connecticut 1792 $50,000-100,000
Union Bank Boston, Massachusetts 1792 $400,000-800,000
New Haven Bank New Haven, Connecticut 1792 $100,000 (increased to $400,000 in 1795)
Bank of Alexandria Alexandria, Virginia 1792 $150,000 (increased to $500,000 in 1795)
Essex Bank Salem, Massachusetts (1792) 1799 $100,000-400,000
Bank of Richmond Richmond, Virginia (1792) n/a
Bank of South Carolina Charleston, South Carolina (1792) 1801 $200,000
Bank of Columbia Hudson, New York 1793 $160,000
Bank of Pennsylvania Philadelphia, Pennsylvania 1793 $3,000,000
Bank of Columbia Washington, D.C. 1793 $1,000,000
Nantucket Bank Nantucket, Massachusetts 1795 $40,000-100,000
Merrimack Bank Newburyport, Massachusetts 1795 $70,000-150,000
Middletown Bank Middletown, Connecticut 1795 $100,000-400,000
Bank of Baltimore Baltimore, Maryland 1795 $1,200,000
Bank of Rhode Island Newport, Rhode Island 1795 $500,000
Bank of Delaware Wilmington, Delaware 1796 $500,000
Norwich Bank Norwich, Connecticut 1796 $75,000-200,000
Portland Bank Portland, Maine 1799 $300,000
Manhattan Company New York, New York 1799# $2,000,000

Source: Fenstermaker (1964); Davis (1917)

* = National charter.
** = The Bank of North America gained a second charter in 1786 after its original Pennsylvania state charter was revoked. Pennsylvania, Massachusetts, and New York chartered the bank in 1782.
# = This firm was chartered as a water utility company but began banking operations almost immediately.

Banking and Politics

The first U.S. commercial banks helped early national businessmen to overcome a “crisis of liquidity,” a classic postwar liquidity crisis caused by a shortage of cash, and an increased emphasis on the notion that “time is money.” Many colonists had been content to allow debts to remain unsettled for years and even decades. After experiencing the devastating inflation of the Revolution, however, many Americans came to see prompt payment of debts and strict performance of contracts as virtues. Banks helped to condition individuals and firms to the new, stricter business procedures.

Early U.S. commercial banks had political roots as well. Many Revolutionary elites saw banks, and other modern financial institutions, as a means of social control. The power vacuum left after the withdrawal of British troops and leading Loyalist families had to be filled, and many members of the commercial elite wished to fill it and to justify their control with an ideology of meritocracy. By providing loans to entrepreneurs based on the merits of their businesses, and not their genealogies, banks and other financial intermediaries helped to spread the notion that wealth and power should be allocated to the most able members of post-Revolutionary society, not to the oldest or best groomed families.

Growth of the Commercial Banking Sector

After 1800, the number, authorized capital, and assets of commercial banks grew rapidly. (See Table 2.) As early as 1820, the assets of U.S. commercial banks equaled about 50 percent of U.S. aggregate output, a figure that the commercial banking sectors of most of the world’s nations had not achieved by 1990.

Table 2:
Numbers, Authorized Capitals, and Estimated Assets of Incorporated U.S. Commercial Banks, 1800-1830

Year No. Banks Authorized Capital (in millions $U.S.) Estimated Assets (in millions $U.S.)
1800 29 27.42 49.74
1801 33 29.17 52.66
1802 36 30.03 50.00
1803 54 34.90 58.69
1804 65 41.17 67.07
1805 72 48.87 82.39
1806 79 51.34 94.11
1807 84 53.43 90.47
1808 87 51.49 92.04
1809 93 55.19 100.23
1810 103 66.19 108.87
1811 118 76.29 142.65
1812 143 84.49 161.89
1813 147 87.00 187.23
1814 202 110.02 233.53
1815 212 115.23 197.16
1816 233 158.98 270.30
1817 263 172.84 316.47
1818 339 195.31 331.41
1819 342 195.98 349.66
1820 328 194.60 341.42
1821 274 181.23 345.93
1822 268 177.53 307.86
1823 275 173.67 283.10
1824 301 185.75 328.16
1825 331 191.08 347.65
1826 332 190.98 349.60
1827 334 192.51 379.03
1828 356 197.41 344.56
1829 370 201.06 349.72
1830 382 205.40 403.45

Sources: For total banks and authorized bank capital, see Fenstermaker (1965). I added the Bank of the United States and the Second Bank of the United States to his figures. I estimated assets by multiplying the total authorized capital by the average ratio of actual capital to assets from a large sample of balance sheet data.

Commercial banks caused considerable political controversy in the U.S. As the first large, usually corporate, for-profit business firms, banks took the brunt of reactionary “agrarian” rhetoric designed to thwart, or at least slow down, the post-Revolution modernization of the U.S. economy. Early bank critics, however, failed to see that their own reactionary policies caused or exacerbated the supposed evils of the banking system.

For instance, critics argued that the lending decisions of early banks were politically-motivated and skewed in favor of rich merchants. Such was indeed the case. Overly stringent laws, usually championed by the agrarian critics themselves, forced bankers into that lending pattern. Many early bank charters forbade banks to raise additional equity capital or to increase interest rates above a low ceiling or usury cap, usually 6 percent per year. When market interest rates were above the usury cap, as they almost always were, banks were naturally swamped with discount applications. Forbidden by law to increase interest rates or to raise additional equity capital, banks were forced to ration credit. They naturally lent to the safest borrowers, those most known to the bank and those with the highest wealth levels.

Early banks were extremely profitable and therefore aroused considerable envy. Critics claimed that bank dividends greater than six percent were prima facie evidence that banks routinely made discounts at illegally high rates. In fact, banks earned more than they charged on discounts because they lent out more, often substantially more, than their capital base. It was not unusual, for example, for a bank with $1,000,000 equity capital to have an average of $2,000,000 on loan. The six percent interest on that sum would generate $120,000 of gross revenue, minus say $20,000 for operating expenses, leaving $100,000 to be divided among stockholders, a dividend of ten percent. More highly leveraged banks, i.e. banks with higher asset to capital ratios, could earn even more.

Early banks also caused considerable political controversy when they attempted to gain a charter, a special act of legislation that granted corporate privileges such as limited stockholder liability, the ability to sue in courts of law in the name of the bank, etc. Because early banks were lucrative, politicians and opposing interest groups fought each other bitterly over charters. Rival commercial factions sought to establish the first bank in emerging commercial centers while rival political parties struggled to gain credit for establishing new banking facilities. Politicians soon discovered that they could extract overt bonuses, taxes, and even illegal bribes from bank charter applicants. Again, critics unfairly blamed banks for problems over which bankers had little control.

The Economic Importance of Early U.S. Commercial Banks

Despite the efforts of a few critics, most Americans rejected anti-bank rhetoric and supported the controlled growth of the commercial banking sector. They did so because they understood what some modern economists do not, namely, that commercial banks helped to increase per capita aggregate output. Unfortunately, the discussion of banks’ role in economic growth has been much muddied by monetary issues. Banknotes circulated as cash, just as today’s Federal Reserve notes do. Most scholars, therefore, have concentrated on early banks’ role in the monetary system. In general, early banks caused the money supply to be procyclical. In other words, they made the money supply expand rapidly during business cycle “booms,” thereby causing inflation, and they made the money supply contract sharply during recessions, thereby causing ruinous price deflation.

The economic importance of early banks, therefore, lies not in their monetary role but in their capacity as financial intermediaries. At first glance, intermediation may seem a rather innocuous process — lenders are matched to borrowers. Upon further inspection, however, it is clear that intermediation is a crucial economic process. Economies devoid of financial intermediation, like those of colonial America, grow slowly because firms with profitable ideas find it difficult to locate financial backers. Without intermediaries, search costs, i.e. the costs of finding a counterparty, and information creation costs, i.e. the costs of reducing information asymmetry (adverse selection and moral hazard), are so high that few loans are made. Profitable ideas cannot be implemented and the economy stagnates.

Intermediaries reduce both search and information costs. Rather than hunt blindly for counterparties, for instance, both savers and entrepreneurs needed only to find the local bank, a major reduction in search costs. Additionally, banks, as large, specialized lenders, were able to reduce information asymmetry more efficiently than smaller, less-specialized lenders, like private individuals.

By lowering the total cost of borrowing, commercial banks increased the volume of loans made and hence the number of profitable ideas that entrepreneurs brought to fruition. Commercial banks, for instance, allowed firms to implement new technologies, to increase labor specialization, and to take advantage of economies of scale and scope. As those firms grew more profitable, they created new wealth, driving economic growth.

Additional Reading

Important recent books about early U.S. commercial banking include:

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

Cowen, David J. The Origins and Economic Impact of the First Bank of the United States, 1791-1797. New York: Garland Publishing, 2000.

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

Wright, Robert E. Origins of Commercial Banking in America, 1750-1800. Lanham, MD: Rowman & Littlefield. 2001.

Important recent overviews of the wider early U.S. financial sector are:

Perkins, Edwin J. American Public Finance and Financial Services, 1700-1815. Columbus: Ohio State University Press, 1994.

Sylla, Richard. “U.S. Securities Markets and the Banking System, 1790-1840.” Federal Reserve Bank of St. Louis Review 80 (1998): 83-104.

Wright, Robert. The Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets, 1780-1850. New York: Cambridge University Press. 2002.

Classic histories of early U.S. banks and banking include:

Cleveland, Harold van B., Thomas Huertas, et al. Citibank, 1812-1970. Cambridge: Harvard University Press, 1985.

Davis, Joseph S. Essays in the Earlier History of American Corporations. New York: Russell & Russell, 1917.

Eliason, Adolph O. “The Rise of Commercial Banking Institutions in the United States.” Ph.D., diss. University of Minnesota, 1901.

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

Fenstermaker, J. Van and John E. Filer. “Impact of the First and Second Banks of the United States and the Suffolk System on New England Bank Money: 1791-1837.” Journal of Money, Credit and Banking 18 (1986): 28-40.

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

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

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

Hedges, Joseph Edward. Commercial Banking and the Stock Market Before 1863. Baltimore: Johns Hopkins Press, 1938.

Hunter, Gregory. The Manhattan Company: Managing a Multi-Unit Corporation in New York, 1799-1842. New York: Garland Publishing, 1989.

Redlich, Fritz. The Molding of American Banking: Men and Ideas. New York. Johnson Reprint Corporation, 1968.

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

Smith, Walter Buckingham. Economic Aspects of the Second Bank of the United States. Cambridge: Harvard University Press, 1953.

Wainwright, Nicholas B. History of the Philadelphia National Bank: A Century and a Half of Philadelphia Banking, 1803-1953. Philadelphia: Philadelphia National Bank, 1953.

1 Which is to say that they increased real per capita aggregate output. Aggregate output is the total dollar value of goods and services produced in a year. It can be measured in different ways, the two most widely used of which are Gross National Product (GNP) and Gross Domestic Product (GDP). The term per capita refers to the total population. Aggregate output may increase simply because of additional people, so economists must take population growth into consideration. Similarly, nominal aggregate output might increase simply because of price inflation. Real aggregate output means output adjusted to account for price changes (inflation or deflation). Real per capita aggregate output, therefore, measures the economy’s “size,” adjusting for changes in population and prices.

2 A balance sheet is simply a summary financial statement that lists what a firm owns (its assets) as well as what it owes (its liabilities).

3 Early bankers used the formula for present value familiar to us today: PV = FV/(1+i)n where PV = present value (sum received today), FV = future value (principal sum), i = annual interest rate, and n = the number of compounding periods, which in this example is one. So, PV = 100/1.06 = 94.3396 or $94.34.


5 In other words, banks could not demand early repayment from borrowers.

6In order to maintain bank revenues, bankers are willing, under competitive conditions, to take some risks and therefore to suffer some defaults. For example, making a simple year-long loan for $100 at 10 percent per annum, if the banker determines that the borrower represents, say, only a 5 percent chance of default, is clearly superior to not lending at all and foregoing the $10 interest revenue. Early U.S. banks, however, rarely faced such risk-return tradeoffs. Because the supply of bank loans was inadequate to meet the huge demand for bank loans, and because banks were constrained by usury law from raising their interest rates higher than certain low levels, usually around 6 to 7 percent, bankers could afford to lend to only the safest risks. Early bankers, in other words, usually faced the problem of too many good borrowers, not too few.

Citation: Wright, Robert. “Origins of Commercial Banking in the United States, 1781-1830”. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL

The First Bank of the United States

David Cowen

Birth of the Bank

In February 1791, the First Bank of the United States (1791-1811) received a unique national charter for twenty years. Alexander Hamilton’s brainchild, a semi-public national bank, was a crucial component in the building of the early U.S. economy. The Bank prospered for twenty years and performed traditional banking functions in exemplary fashion. With a main office in Philadelphia and eight branches nationwide to serve its customers, the Bank’s influence stretched along the entire Atlantic seaboard from Boston to Charleston and Savannah and westward along the Gulf Coast to New Orleans.

Hamilton’s Broad Economic Plan

When the Treasury Department was created by an Act of Congress in September 1789, President George Washington rewarded Hamilton with the post of Secretary. Hamilton quickly became the nation’s leading economic figure. When Congress asked Hamilton to submit an economic plan for the country, he was well prepared. The Secretary delivered several monumental state papers that forged the financial system for the nation: The Report on Public Credit (January 9, 1790), The Report on the Bank (December 13, 1790), The Establishment of a Mint (January, 1791), and The Report on Manufactures (December 5, 1791). Hamilton’s reports outlined the strategies that were part of a comprehensive Federalist economic and financial program. They included a sinking fund to extinguish the national debt and an excise tax to be collected on all distilled liquors.

A key component of Hamilton’s economic plan for the country was the national Bank, an institution that would safeguard all pecuniary transactions. The Bank would not only stimulate the economy but also enhance the shaky credit of the government. The English financial system, particularly the Bank of England, provided an important model for Hamilton.

The Bank’s Funding and Privileges

The Report on the Bank explained that the national Bank would be chartered for twenty years, during which time the Congress would agree not to establish another national bank. The seed capital would be $10 million: $8 million from private sources, and $2 million from the government. The Bank would have the right to issue notes or currency up to $10 million. The government would also pledge that the notes of the Bank would be unique in that they were valid for payments to the United States. In short, the notes would be suitable for payment of taxes, a feature that would provide the Bank with a strong advantage over its competitors.

The national Bank would confer many benefits on the government including a ready source of loans, a principal depository for federal monies that were transferable from city to city without charge, and a clearing agent for payments on the national debt. The government, as the largest stockholder, would share in the profits, but have no direct participation in the management.

Debate over Establishment of the Bank

The Bank bill was introduced into Congress on December 13, 1790, passed the Senate on January 20, 1791, the House on February 8, 1791, and therefore was forwarded to President Washington for his signature. It was unclear whether Washington would sign the bill into law. Powerful forces led by James Madison, Thomas Jefferson and the Attorney General, Edmund Randolph, argued to Washington that the Constitution had not granted the government the power to incorporate a Bank and therefore he should not sign the bill.

Washington Accepts Hamilton’s View on Implied Powers

Washington showed Hamilton the opposition’s argument and asked him to prepare a document explaining why he should sign the bill. The pressure was therefore on Hamilton to produce a flawless retort. His reply to Washington has been christened as the benchmark of a broad interpretation of the Constitution. Hamilton turned the tables on his opposition. If Thomas Jefferson, James Madison and Edmund Randolph argued that the power to incorporate was not available unless explicitly prescribed by the Constitution, then Alexander Hamilton retorted that a power was not unavailable unless so stated in the Constitution. Washington accepted Hamilton’s logic and signed the bill on February 25, 1791 to create the national Bank.

Most important, however, was not the political infighting, but rather that Hamilton’s view holding that implied governmental powers were a viable part of the Constitution had carried the day. Hamilton had accomplished his aim: his detractors defeated; his economic approach adopted. In the ensuing years the Bank of the United States occupied center stage of the American financial system.

Life of the Bank

Initial Stock Offering

On July 4, 1791, in the largest initial stock offering the country had ever witnessed, investors displayed confidence in the new funding system by scooping up $8 million in Bank of United States stock with unprecedented alacrity. Many notable members of the Congress were purchasers. Prices of receipts for the right to buy stock (i.e. not the stock itself), know as scripts, were driven from an initial offering price of $25 to the unsustainable height of over $300, and then tumbled to $150 within days, causing alarm in the markets. Secretary Hamilton calmed the storm much as a modern central banker would have by using public money to directly purchase government securities. However, the script bubble led many to blame the Bank for such rabid speculations.

Bank Branches

In the fall of 1791 the new stockholders met in Philadelphia to choose board members and decide on rules and regulations. While the Bank would be headquartered in Philadelphia, the stockholders clamored for and received branches, with four opening in Baltimore, Boston, Charleston, and New York in 1792, and eventually four more in Norfolk (1800), Washington (1802), Savannah (1802) and New Orleans (1805). The branches were of great concern to the existing state banks, which viewed the national Bank as a competitive threat.

The Bank’s First President and Cashiers

Thomas Willing accepted the title of president of the Bank and remained in that position until 1807. Willing possessed strong credentials as he had been president of the Bank of North America, Mayor of Philadelphia, the Secretary to the Congress of delegates at Albany, and a Judge of the Supreme court of Pennsylvania. As the day-to- day manager, the role of bank cashier was also important. At the head office in Philadelphia, John Kean was appointed the cashier; however, the most noteworthy was George Simpson, who held the post from 1795-1811.

The Bank’s Roles in the Economy

On December 12, 1791, the Bank opened for business in Philadelphia. The customers were merchants, politicians, manufacturers, landowners, and most importantly, the government of the United States. The Banks notes circulated countrywide and therefore infused a safe medium of paper money into the economy for business transactions. The sheer volume of deposits, loans, transfers and payments conducted by the Bank throughout the country made it far and away the single largest enterprise in the fledgling nation. Profits, however, were moderate during the operation of the Bank because its directors opted for stability over risk taking.

The Bank and the “Panic of 1792”

The Bank had an enormous impact on the economy within two months of opening its doors for business by flooding the market with its discounts (loans) and banknotes and then sharply reversing course and calling in many of the loans. Although the added liquidity initially helped push a rising securities market higher, the subsequent drain caused the very first U.S. securities market crash by forcing speculators to sell their stocks. The largest speculator caught in the financial crisis was William Duer. When he went insolvent in March 1792, the markets were temporarily paralyzed. This so-called “Panic of 1792” was short lived as again Secretary Hamilton (as in the previous year during the script bubble) injected funds by buying securities directly and on behalf of the sinking fund. Yet incidents like the Panic of 1792 and the script bubble would be remembered for many years by opponents of the Bank who were still in steadfast opposition to the Hamilton inspired institution.

The Bank’s Business with the National Government

The rest of Bank years were never as tumultuous as the events surrounding the Panic of 1792. Rather during its twenty-year lifespan the Bank performed many mundane pecuniary functions for its customers. The largest customer, the government, had many notable interactions with the Bank. One of the highlights of the relationship was the Bank’s efficient managing of the government’s fiscal affairs with respect to the Louisiana Purchase in 1803. In its earlier days, the Bank had lent heavily to its largest customer. By the end of 1795 the Bank had lent the government over $6 million, or 60% of its capital. At this point Willing and the other directors became alarmed and demanded the Government repay part of its loan. Since Government credit was still weak, the Treasury resorted to selling shares of its Bank stock. The sales began in 1796 and ended in 1802. With the proceeds from the sales of stock, the government repaid the Bank.

Central Banking Functions of the Bank

The Bank performed certain functions that today are associated with central banking. First, the Bank attempted to regulate state banks by curtailing those that had overissued their bank notes. Second, the Bank, in coordination with the Treasury department, discussed economic conditions and attempted to promote the safety of the entire credit system. Third, while the Philadelphia board gave each branch autonomy respecting lending to individuals, the Bank tried to coordinate aggregate policy changes, whether a loosening or tightening of lending credit, across the entire network of branches.

Death of the Bank

The anti-Bank forces had remained steadfast in their opposition to the Bank since its inception in 1791. By the time of the renewal debate in Congress, the Federalists were no longer in control. The Democrats now held the majority and were ready to act against the Federalist conceived institution. The opponents of the Bank included Henry Clay, William Branch Giles and Vice-President George Clinton. The Federalists supported renewal and were joined by two notable Democrats who crossed party lines, Treasury Secretary Albert Gallatin, who believed in the usefulness of the institution, and then President Madison, who had switched camps with respect to the Bank issue because he believed the matter had been settled by precedent.

Complaints about the Bank

The opponents charged that because three-fourths of the ownership of the stock was held by foreigners, that the Bank was under their direct influence. The charge was false, as foreigners were prohibited from electing directors. The opposition also charged that the Bank was concealing profits, operating in a mysterious fashion, unconstitutional, and simply a tool for loaning money to the Government.

Rechartering Suffers a Narrow Defeat in Congress

Although the charter did not expire until March 4, 1811, the renewal process commenced in the House on March 28, 1808 and in the Senate on April 20, 1808. The matter developed slowly and was referred to Secretary Gallatin for an opinion. On March 3, 1809 Gallatin communicated his beliefs to the House that the Bank charter should be renewed. The matter returned to the House on January 29, 1810 for Committee debate. On February 19th, the committee recommended in favor of renewing the charter and sent the bill to the floor of the House. Floor debate opened on April 13th, and the bill was stopped dead in its tracks. Stockholders resubmitted the bill on December 10th, and despite an intense three-month debate, the bill was killed. The vote in each section of the Congress was incredibly close. The bill was defeated in the House by a 65 to 64 margin on January 24, 1811, and in the Senate was deadlocked at 17 on February 20th before Vice-President Clinton, an enemy of both Madison and Gallatin, broke the tie with a negative vote. The Bank of the United States closed its doors on March 3, 1811.

The Bank and the Debate over Central Government Power

The reason the Bank lost its charter had precious little to do with banking. When charter renewal debate transpired in 1811 banking on the whole was flourishing. The Bank was born, lived, and eventually died a victim of politics. The Bank has been remembered not for what occurred during its operation — stimulating business, infusing safe paper money into the economy, supporting the credit of the country and national government, and with the Treasury department regulating the financial arena — but rather for what occurred during the stormy debates at its birth and death. The death of the Bank was another chapter in an ongoing debate between the early leaders of the country who were split between those who preferred a weak central government on the one hand and those who desired a strong central government on the other.

The chartering of a national economic institution, a Bank of the United States, marks the take-off of the Federalist financial revolution that began several years earlier with the signing of the Constitution. The political die of the United States was cast with that document, and by 1792 the economic base of Federalism was in place, first with the Federal funding of national and state war debts, and second, with a sound national Bank in place to give coherence to the developing U.S. financial system.

Further Reading:

Bowling, Kenneth R. “The Bank Bill, the Capital City and President Washington.” Capital Studies 1, no. 1 (1972).

Cowen, David J. “The First Bank of the United States and the Securities Market Crash of 1792.” Journal of Economic History 60, no. 4 (2000).

Cowen, David J. _The Origins and Economic Impact of the First Bank of the United States, 1791-1797_. New York: Garland Publishing, 2000.

Dewey, Davis Rich and John Thom Holdsworth. The First and Second Banks of the United States. Washington, D.C.: Government Printing Office, 1910.

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

Klubes, Benjamin. “The First Federal Congress and the First National Bank: A Case Study in Constitutional History.” Journal of the Early American Republic10 (1990).

McDonald, Forrest. “The Constitution and Hamiltonian Capitalism.” In How Capitalistic is the Constitution? Edited by Robert A. Goldwin and William A. Schambra. New York: American Enterprise Institute for Public Policy Research, 1982.

Perkins, Edwin. American Public Finance and Financial Services 1700-1815 Columbus: Ohio State University Press, 1994.

Redlich, Fritz. The Molding of American Banking. New York: Johnson Reprint Corporation, 1968.

St. Clair Clarke, M. and D. A. Hall. Legislative and Documentary History of the Bank of United States. Washington, D.C.: Gales and Seaton, 1832. Reprint. New York: Augustus M. Kelley Publishers, 1967.

Sylla, Richard. “U.S. Securities Markets and the Banking System, 1790-1840.” Federal Reserve Bank of St. Louis Review 80, no. 3 (1998).

Syrett, Harold, editor. The Papers of Alexander Hamilton. New York: Columbia University Press, 1961-87.

Wettereau, James O. “Branches of the First Bank of the United States.” Journal of Economic History 2 (1942).

Wettereau, James O. “New Light on the First Bank of the United States.” Pennsylvania Magazine of History and Biography 61 (1937).

Wettereau, James O. Statistical Records of the First Bank of the United States. New York: Garland Publishing, 1985.

Wettereau, James O. “The Oldest Bank Building in the United States.” Transactions of the American Philosophical Society 43, part 1, 1953.

Wright, Robert. Origins of Commercial Banking in America, 1750-1800. Lanham, MD: Rowman & Littlefield, 2001.

Wright, Robert. The Wealth of Nations Rediscovered: Integration and Expansion of the U.S. Financial Sector, 1780-1850. New York: Cambridge University Press, 2002.

Wright, Robert. “Thomas Willing (1731-1821): Philadelphia Financier and Forgotten Founding Father.” Pennsylvania History, Fall, 1996.

Citation: Cowen, David. “First Bank of the United States”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL


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Vries, Peer
Wahl, Jenny
Wahl, Jenny B.
Wale, Judith
Wallis, John J.
Wallis, John Joseph
Wallis, Patrick
Walsh, Lorena S.
Walsh, Margaret
Walvin, James
Wanamaker, Marianne
Ward, Marianne
Wardley, Peter
Waterman, A. M. C.
Weber, Cameron M.
Wegge, Simone A.
Weidenmier, Marc D.
Weiher, Kenneth
Weir, Robert E.
Weir, Ron
Weiss, Thomas
Wells, Wyatt
Wendt, Ian C.
West, Martin
Westerman, Thomas D.
Whaples, Robert
Whatley, Christopher A
Whatley, Warren C.
Wheatcroft, Stephen
Wheeler, Hoyt N.
Wheelock, David C.
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White, Michael V.
White, Nicholas J.
Whitehead, John C.
Whitman, T. Stephen
Wicker, Elmus
Wilkins, Mira
Will, Pierre-Étienne
Williamson, Samuel H.
Wilson, John
Wilson, John F.
Winpenny, Thomas
Winpenny, Thomas R.
Wishart, David M.
Woeste, Saker
Wolcott, Susan
Wolf, Nikolaus
Wolff, Robert
Wood, Geoffrey
Wood, John
Wood, John H.
Woodward, Ralph Lee
Worden, Nigel
Wright, Gavin
Wright, Robert E.
Wright, Tim
Wuthrich, Bryan
Wynne, Ben
Yeager, Mary A.
Young, Garry
Young, Jeffrey T.
Zalewski, David A.
Zamagni, Vera
Zeiler, Thomas W.
Zevin, Robert
Zieger, Robert H.
Ziliak, Stephen
Ziliak, Stephen T.
de Fátima Brandão, Maria
del Mar Rubio, M.
van der Beek, Karine
van der Eng, Pierre
Álvarez-Nogal, Carlos
Ó Gráda, Cormac

The American Technological Challenge: Stagnation and Decline in the 21st Century

Author(s):Vijg, Jan
Reviewer(s):Mokyr, Joel

Published by EH.Net (April 2013)

Jan Vijg, The American Technological Challenge: Stagnation and Decline in the 21st Century.? New York: Algora Publishing, 2011.? 248 pp.? $33 (hardcover), ISBN: 978-0-87586-886-8.

Reviewed for EH.Net by Joel Mokyr, Departments of Economics and History, Northwestern University.

Jan Vijg is a Dutch-born leading molecular geneticist at one of the most prestigious scientific institutions in the nation.? He displays an insatiable appetite for history and technology and an intellectual curiosity that would do credit to the most interdisciplinary of economic historians.? He is also well-read, thoughtful, and articulate, and asks excellent questions.? The result is a thought-provoking and lively ?big picture? book, ideal for undergraduate teachers who want to introduce young students without a strong background in economics and history to global history.?

This book, like a pearl, was born out of irritation.? As a young man, Vijg read a lot of science fiction, which made him think that the world of the future would be full of technological wonders, such as manned space flight, time travel, flying cars, immortality, and one hundred percent dependence on non-hydrocarbon energy.? None of these things have materialized to date, and Vijg at times sounds disappointed that his modern car is not much different from the cars he learned to drive in the 1960s, that airplane flights today are not much faster than the Boeing 707’s of his youth, and that even in medicine, his field of expertise, the rate of technological progress has slowed down.? The exciting technological hustle and bustle of earlier times, he feels, has disappeared.? We are simply coasting along, driven by momentum, but truly revolutionary macroinventions have disappeared and in his view are unlikely to re-appear.? Technological stagnation, or at best technological creep, awaits us.

Vijg is far too sophisticated a thinker to turn this book into a Jeremiad in the style of Daniel Cohen?s recent The Prosperity of Vice: A Worried View of Economics (2012).? He notes that with the technology of the twenty-first century the industrialized West has already secured an unimaginable standard of living, and that prosperity is slowly but inexorably spreading to the rest of the world.? Despite pockets of violence, the world is largely at peace, and most existentialist threats to our golden age such as nuclear terrorism are dismissed as unlikely.? Climate change and an asteroid strike, to be sure, are threats, but on the whole he realizes that the slow-down is the result of our success.? Many of humanity?s most pressing needs ? high-quality food in abundant supply, comfortable shelter, entertainment, information and so on ? are increasingly met with our existing technology.? Yet the boyish and adventurous streak in him wants more: space-travel (or at least hypersonic flights), instant-made textiles, radically different sources of energy, and household robots that obey our whims.? None of this, he claims, is forthcoming.? The IT revolution, he submits, offers scant compensation for those disappointed dreams.? As Peter Thiel, the founder of PayPal once put it, ?we wanted flying cars, instead we got 140 characters.?

To understand his disappointment, he looks at the history of technology summarized in a bare one hundred pages.? Usually these summaries have a certain ?potted? quality to them, but Vijg?s point is to understand an important issue: why successful societies seem to have sunk into stagnation after periods of technological flourishing.? His examples are, not surprisingly, the Roman Empire, Song China, Medieval Islam, and our own industrialized world, the offspring of the Industrial Revolution of the eighteenth century.? In all of them, he observes, a successful period of technological progress was followed by a slowing-down and eventually a collapse.? He observes quite astutely that such a collapse was not inevitable but brought about by foreign invasions of barbarian invaders specializing in violence and mayhem.[1] Given that such an invasion in our own time is unlikely, Vijg feels we will basically coast along, gradually improving on the margins but without setting foot on Mars or doubling life expectancy again.

The culprit of this stagnation, in his view, is decidedly not that human minds are running out of ideas, or that everything important that could be invented already has been invented, or that the ?low-hanging fruits in technology have all been picked? as my Northwestern colleague Robert J. Gordon puts it.[2]? Indeed, the technology we are developing is much like ever-taller ladders that allow us to get to ever higher-hanging fruits.[3]? Instead, Vijg points to what we would call today institutional failure.? We are the victims of our success: wealthy and sated (Vijg does not use words like ?lazy? or ?complacent,? but clearly they are in the back of his mind), we become more risk-averse, more concerned about possible losses, and we feel increasingly reluctant to venture into the unknown and the possibly risky.[4]? Medical advances are severely slowed-down and even blocked if the most minute percentage of users are negatively affected, and Vijg is eloquent and convincing in his just indignation at ?irrational? resistance to many potential sources of macroinventions such as genetically modified organisms, human cloning, and third-generation nuclear energy such as pebble-bed reactors, which are essentially disaster-proof.? Regulation and political control, he feels, are the result of such sentiments and they are getting in the way of more progress.?

What is the economic historian to make of this analysis? The idea that ?conservative? institutions may get in the way of innovation can be traced down to Schumpeter?s Capitalism, Socialism, and Democracy and has been the subject of a small but important literature in an area we may call the political economy of technological change (for a summary, see my Gifts of Athena, chapter 6). While we use the term ?technological progress? in our historical analysis, implying a clear-cut non-stationarity in the evolution of useful knowledge, we do not admit ?progress? in our institutional stories.? There may have been improvement, but it is less secure and less obvious.? Vijg is quite right in that he sees institutions as a threat to continued technological advance.? It is quite possible that a mixture of vested interests in incumbent techniques, and ?irrational? fears of what unknowable disasters innovations may inflict upon our comfortable and secure existence could throttle progress.

Yet two caveats are in order.? First, it is far from clear that in fact technology is slowing down.? Vijg relies heavily on a database of his own creation, 337 macroinventions made between 10,000 BC and 2006.? Such attempts to count the uncountable are common, but in the end run into the irrefutable complaint that inventions simply do not obey the laws of arithmetic because of complex complementarities and substitution effects.? More immediately, his diagnosis that we find ourselves in the midst of a technological slow-down is far from a consensus (as he knows all too well).[5]? Take for instance his argument that transportation has barely improved in the past half century.? Cars are not markedly different in outward appearance, and not moving noticeably faster; airplanes do not fly any faster either and are more cramped than ever.? On the surface, this argument is correct, but at closer examination some doubts creep in: cars today are far better-made, more durable, comfortable and safe than in 1965; drivers have access to hands-free costless communication with almost anywhere on the planet, can listen to a bewildering choice of high-definition music and information, and will never need to shuffle annoying paper maps or worry about getting lost.? Traffic jams are still annoying and costly, but modern technology can resolve it through pricing that will charge peak-hour driving a higher marginal cost (if the political problems of doing so can be resolved).? Airplanes are a different matter.[6]? But even here the effect of technology has been enormous, by reducing the real price of travel and thus making it available to almost everyone in the developed world ? leading of course to the congestion and queues Vijg dislikes.[7]? It is also no more than fair to point out that, before he dismisses the impact of innovation on transportation, Vijg might have benefited from reading Vaclav Smil?s Prime Movers of Globalization: The History and Impact of Diesel Engines and Gas Turbines (2010), which describes in magisterial detail the impact of technology on transport costs and the world we live in.?

What Vijg must also realize is that if he is right that further innovation may not make transportation all that much more efficient (or even cheap), it may make much of it redundant, through increasingly more effective and inexpensive person-to-person communication, in professional meetings and conferences as well as family gatherings can be conducted electronically and much work can be carried out from one?s living room.? If telecommuting and teleconferencing have not taken off quite as rapidly as many were hoping a decade ago, it is because for some reason most of us prefer it this way.? But the technology is basically here and still getting better by the day.? If the full price of transportation were to rise steeply all of a sudden due to a 9-11 type of event, this substitute for transportation would surely witness a rapid expansion.? Similar developments are evolving as these lines are being written, especially three-dimensional printing, which has the potential to alter manufacturing more than any invention since the Industrial Revolution, by providing mass-customization in ways and at prices that are totally unprecedented.? In services, the effects of pattern- and speech-recognizing software are only beginning to be felt.?

The second point is that technology, much like evolution in living species, often moves in leaps and bounds, punctuating extended periods of seeming stagnation.? Part of the reason is that at times technology comes up with a new idea that affects many other techniques and thus causes a widespread innovative wave.? Such techniques have been called General Practice Techniques and account to some extent for the intensity of first Industrial Revolution, but even more so for that of the second Industrial Revolution between 1870 and 1914.[8]? Historically such interactions can explain a great deal of the irregular and discrete behavior of technology.? At times, however, a dominant design is so effective that little change should be expected.? Who would complain that the forks we eat with or the buttons and zippers we use for our clothing have not changed in many years? Moreover, when a new technique is still in development, it is hard to fully see its full impact.? Would someone in 1760 England not have felt that for all their noise and bombast, steam engines had to date done little more than pump a bit of water out of coal mines?
Finally, we should keep in mind that innovation is often needed to fix the unexpected side-effects of earlier technological progress, such as catalytic converters and asbestos removal.? Whether such a technique can emerge to cope with the ?mother of all side-effects? ? climate change ? remains to be seen.? But Vijg is right: the problem is not technological, it is institutional.? Solving the ?global commons? threats, and much of our technological future, depend on politics, not knowledge.


1. A more detailed and elaborate statement in the direction can be found in Ian Morris, Why the West Rules ? For Now, 2010.?

2.? Robert J. Gordon, ?Is U.S.? Economic Growth over? Faltering Innovation Confronts the Six Headwinds?.?? NBER Working Paper 18315 (Aug. 2012).? The term does not appear in that essay, but can be found for instance in ?The Innovation Equation,? World Finance, March 2013, An earlier use of the term was proposed by Tyler Cowen.
3. I made this argument in some detail in my The Gifts of Athena (2002), in which I argue that what counts for technological development is socially useful knowledge which can be defined as the union of all sets of knowledge possessed by members of society.? Since the division of knowledge can be made finer and finer, what really matters is the access that agents have to the knowledge that is in the possession of specialists.? This access is what has become increasingly easy and cheap due to the IT revolution, and hence ? on this account ? we might well expect technological progress to keep growing at a rate that is at least as fast as in the past and possibly a lot faster.?

4. Vijg himself is anything but risk-averse, and boldly (if controversially) postulates (p. 108) that part of the higher risk aversion of modern society could be due to the larger influence of women and older voters on political outcomes, since he feels that these groups are more risk averse than young males.

5. See for example ?Has the Ideas Machine Broken Down,? The Economist, Jan. 12, 2013.

6. GPS technology ? astoundingly ? has not yet been introduced into commercial aircrafts, and a bill to fund the FAA?s plan to introduce it has a target date of 2020, by which time the technology may well be outdated.?

7. Vijg should recognize that goods and services come in two variants, following Fred Hirsch?s classic distinction between ?material? and ?positional? goods.? The former are amenable to technological progress because they are what we think of as goods subject to standard production function relations.? Positional goods are by definition zero-
sum: access to uncrowded museums, front-row tickets to opera performances, fast-track driving on highways, and VIP treatment at airports.? As income goes up, the gap between progress in material goods and the lack thereof in positional goods becomes more noticeable and perhaps more irritating.?

8. For an introduction to GPT?s see Elhanan Helpman, ed., General Purpose Technologies and Economic Growth (1998) and Richard G. Lipsey, Kenneth I. Carlaw, and Clifford T. Bekar, Economic Transformations: General Purpose Technologies and Long-term Economic Growth (2005).

Joel Mokyr is the author of The Enlightened Economy: An Economic History of Britain, 1700-1850 (Yale University Press, 2009).

Copyright (c) 2013 by EH.Net.? All rights reserved.? This work may be copied for non-profit educational uses if proper credit is given to the author and the list.? For other permission, please contact the EH.Net Administrator ( Published by EH.Net (April 2013).? All EH.Net reviews are archived at

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

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

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

Published by EH.NET (January 2009)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Matthew Arnold (1869), Culture and Anarchy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Published by EH.NET (October 2007)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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