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New Spain’s Century of Depression

Author(s):Borah, Woodrow Wilson
Reviewer(s):Salvucci, Richard

Project 2001: Significant Works in Economic History
Woodrow Wilson Borah, New Spain’s Century of Depression. Berkeley: University of California Press, 1951. 58 pp.
Review Essay by Richard Salvucci, Department of Economics, Trinity University.

An Obscure Century in a Backward Country: Woodrow Borah and New Spain’s Century of Depression

In 1938, the English novelist Graham Greene traveled to Mexico to investigate the condition of the Catholic Church under the regime of President Plutarco El?as Calles. While there, Greene interviewed the strongman of San Luis Potos?, General Saturnino Cedillo. In the most memorable terms, Greene called Cedillo “an Indian general in an obscure state of a backward country.” So my title, I fear, is a plagiarism, but an appropriate one. For certainly some who read this essay will wonder why a brief (58 pages) book about seventeenth?century New Spain (as Mexico was then known) counts as influential at all, let alone very influential? After all, Lesley Simpson, an authority on Mexico, famously labeled the seventeenth as Mexico’s “forgotten” century, and everyone from Adam Smith to Thomas Jefferson thought the Spanish empire both backward and obscure.

Influence, of course, is a matter of audience. There must be few economic historians of Latin America and fewer still of Mexico who are unfamiliar with the work of Woodrow Borah and the so-called “Berkeley School” of historical demography. Even with prevailing intellectual fashions, it is hard to believe that most English?speaking historians of Latin America have not heard of Borah, although whether or not they read his work in graduate school or after is much less certain. So I might best define my task as to explain why New Spain’s Century of Depression, published in 1951 as number 35 of the University of California Press’s celebrated Ibero?Americana series, should be counted one of the truly important works of twentieth?century economic history, especially for those who have yet to make its acquaintance. I take it for granted that colleagues in my field would agree. But it is a small field, and I am under no illusion that even its best work is widely known, much less regarded as a crucial contribution to economic historiography.

Woodrow Borah, who died in 1999, was one of the outstanding members of the postwar generation of Latin Americanists that included Howard Cline, Charles Gibson, John Lynch and Stanley Stein. At Berkeley, Borah, who was Abraham D. Shepard Professor of History, was one of a stellar cast of scholars drawn from a wide range of disciplines — Sherburne Cook, George Foster, James Parsons, John Rowe, Carl Sauer, and Lesley Simpson come immediately to mind. They exercised a profound influence on each other, sometimes as collaborators, but more often as valuable colleagues. What emerged from their work was a distinctive scholarship that brought together striking research and insights drawn from the natural and social sciences, precocious social science history, you might say. And Borah, his prodigious reading, meticulous scholarship and personal austerity notwithstanding, was one of this group’s more daring and imaginative members. Indeed, in a rueful aside, Borah once told me that his critics (there were a few) had accused him of “inventing Indians,” and this he meant quite literally, not in the now prosaic historicist sense of the term.

The burden of New Spain’s Century of Depression was to suggest the impact of the massive decline of the aboriginal population of Central Mexico (whom we can simply, if incorrectly, call Indians) on the material prospects of the Iberian conquerors (whom we can simply, and equally incorrectly, call Spaniards) and their descendants. As Borah understood it, the intent of the Spaniards was to live off the labor of the dense Indian population they had encountered in Central Mexico, a population accustomed to the rule of a privileged upper stratum by generations of Mesoamerican conquerors of whom the Aztec were simply the most recent. The Spaniards’ intention was no mystery. They announced they had come to the “Indies” (wrong again, but who’s counting?) to get rich, and that they had no intention of tilling the soil “like peasants” in order to do so. To accomplish their goal, the Spaniards, victorious in the wake of Cort?s’ historic expedition, rewarded themselves with the famous encomienda, the right to extract labor from the Indians. For some, like Cort?s himself, the encomienda was the source of great personal wealth and social prestige, although others, including some of Cort?s’ outspoken critics, were less richly rewarded.

For the encomienda to function as an avenue of accumulation, evidently, there had to be Indians to be distributed. At the time of the arrival of the Spaniards, Central Mexico perhaps supported an Indian population as large as 25 million. Within a century, shockingly, the same Indian population had fallen to less than a million, the victims of European disease, massive economic disruption, and the destruction of a coherent civilization that the Spaniards willingly exploited but never really understood. It was one thing for the encomienda to yield a comfortable existence for the Spaniards when Indian labor was abundant. But, obviously, such a system could hardly be expected to function when the people who supported it had disappeared. And here, then, is the gist of the argument of New Spain’s Century of Depression. What happens to a system of colonial expropriation when the society on to which it is fixed essentially disappears?

A bald summary can hardly begin to capture the twists and turns of the research agenda that New Spain’s Century of Depression ultimately entailed. When Borah published it in 1951, Sherburne Cook and Lesley Simpson had produced the population figures for New Spain on which he relied. It would require fully another quarter century, down to 1976, for what are now the standard estimates of early colonial population to emerge. There was considerable controversy along the way, and to an extent, there still is. Yet it is important to keep several things in mind. Much of the controversy regarding the population of New Spain involves the pre?contact population. About the course of events after the Spanish invasion there is far less doubt. The Indian population fell, and it fell sharply within a century, on the order of 90 percent. From an economic standpoint, only one thing really matters: factor endowments. Before the Conquest, labor was the abundant factor in Mexico. By 1620, land had become the abundant factor. No amount of scholastic contention about how many Indians there “really” were can alter that.

The other point is that even if Borah used imperfect population figures or made arbitrary assumptions, his scholarship was sound. He knew the sources and was particularly well versed in the documents associated with the relaciones geogr?ficas, the reports prepared to give Philip II of Spain an idea of what his Mexican dominions contained. While these documents are widely available today due to the efforts of the Instituto de Investigaciones Antropol?gicas in Mexico, it must have required considerably greater difficulty to master them fifty years ago. The impression from reading Borah’s notes is of a reasonably extensive investigation of the archival and printed materials available in the 1940s. In other words, you need to know something about the history of colonial scholarship to appreciate what Borah and his colleagues at Berkeley accomplished and some of the critics simply did not.

The conclusion to which Borah came was straightforward. Beginning sometime in the 1570s, an “economic depression besetting the Spanish cities because of the shrinkage of the Indian base [would last] more than a century,” and a “large number of white families must have found themselves reduced from comparative wealth to straitened circumstances as the drag in the Indian population forced a downward spiral in the economy of the European stratum”(p. 27). Although Borah presented his findings as a “hypothesis of a century?long depression” or “a hypothesis which needs much additional investigation,” the hypothesis is generally accepted as settled fact. It was not until the early 1970s that the work of the English historian Peter Bakewell raised questions about the impact of population decline on the fortunes of silver mining, but Borah’s view of the economic circumstances of the settlers went largely unchallenged. Even John Lynch, whose brilliant synthesis, Spain under the Hapsburgs (1981), called into question the entire notion of a Mexican depression in the seventeenth century, did not address the crucial issue that Borah raised. How did the elite of Mexican society — in effect the advocates, bearers, beneficiaries and putative defenders of colonialism — adjust when deprived of the Indian population on which it depended? My suspicion is that New Spain’s Century of Depression seemed logically unassailable. Borah’s citation (p. 23) of Viceroy Velasco the Younger’s report to Philip II in 1595 was especially acute: “those who consume are many and the Indians who produce are few.” What more could be said?

If you have persisted this far, you may, perhaps, think otherwise or wonder at the peculiar way in which Borah shaped his investigation. Borah did not discuss the fate of the Indians, other than to note that they “seemed doomed to relentless extinction” (p. 28). And even so, life did not come to an end in Mexico in 1576, or 1626, or 1676. Emigration from Spain continued, a fact of which Borah was quite aware. Moreover, if Cook and Borah’s later research indicated that the Indian population reached its nadir around 1620 — Borah puts its size at 750,000 — it began to recover thereafter and probably continued to do so until the 1730s, when severe epidemic disease made is reappearance. A century of population growth in a preindustrial society, however slow, does not square easily with falling living standards. And other developments, particularly the growth of colonial textile production in the middle decades of the seventeenth century, give pause as well. If a “depression” had taken hold, and more people were producing more goods, what sort of a depression was it?

To the extent that there was much data available to answer the question — and by and large, there was not — Borah made some attempt to address the objections, postulating, for instance, the existence of not one, but two economies, one Spanish, the other Indian. But there was not much he could make of the distinction, although there was a hint as to where research might lead. A dramatic change in the land-labor ratio, with the Indian population falling by 90 percent, surely affected the marginal productivity of Indian labor.

However, as Borah pointed out (p. 21), it was inconceivable that rising productivity could have offset the sheer decline in the Indians’ numbers, but the upward drift in real wages of Indian workers in cloth manufactories toward the end of the sixteenth century suggests the horrible irony of a decimated Indian population now better able to sustain itself in the face of Spanish demands. Here was one reason for the subsequent recovery in the Indians’ numbers, along with greater resistance to European disease, more aggressive defense of the Indians’ interests by the Spanish Crown, and even changes in diet — the Spaniards brought chickens with them, which came to be a ubiquitous presence in rural villages. While Borah never said as much in New Spain’s Century of Depression, Borah and Sherburne Cook would go on to argue years later that the material conditions of a reconstituted Indian society may well have been higher than they were before the Conquest. So, in a sense, Borah’s argument about “depression” was potentially revolutionary even if, in some sense, it proved a trap to the unwary who did not think its implications through. The historical intuition was of a very high order, but it was exercised by a scholar who turned twenty in 1932; who hailed from Utica, Mississippi; and for whom the term “depression” was less a technical one than a shorthand for widespread impoverishment.

Another feature of New Spain’s Century of Depression should be attractive to economic historians. It concerns the nature of institutional change that occurred under the pressure of population decline in the sixteenth century. One is sometimes struck by the fact that much (but by no means, all) of the economic historiography that relies on institutions for explanation often does a poor job of explaining why a country has a given set of institutions to begin with. In Latin America, some mix of Divine Providence, Indians, bizarre political culture, difficult geography and dumb luck often seem to be the reasons for the existence of Mexican institutions. This, for all practical purposes, means that institutions are treated as exogenously given. Well, they aren’t, or at least, not always. While Borah, of course, never wrote in these terms, he carefully links the emergence of a Mexican regime of labor and land institutions to the shifting factor endowments with which the colonists had to work. For Borah, the ultimate significance of the dramatic decline of the Indian population was the emergence of the hacienda (which reflected increasingly abundant land) and debt peonage (which reflected increasingly scarce labor). Indeed, this was another central message of New Spain’s Century of Depression. The institutions that had given rise to the Mexican Revolution of 1910 — the hacienda and debt peonage — were a product of the seventeenth century and of the demographic disaster that had destroyed the Indians. This was a remarkably clear statement of what had long been the liberal view of the causes of the Mexican Revolution. Anyone who doubts its durability need do little more than read Alan Knight’s monumental history of the Revolution (The Mexican Revolution, 1986), which largely restates the old verities.

For an historian from Mississippi, an account of “debt peonage” as the defining characteristic of rural labor may not have been untoward. But what exactly one means by “debt peonage” is another matter. Borah’s position was a moderate one. This was not slavery, open or disguised (the enslavement of Indians was forbidden under most circumstances), but an Indian peon who owed a landlord, or, indeed, any employer money was legally required to work for that employer (and for him or her alone) until the debt was discharged. The notion that debt created a form of chattel slavery in rural Mexico does not seem to have entered the vocabulary until well into the regime of President Porfirio D?az (1876-1880, 1884-1910) and provided one explanation for the Revolution in a place like Yucat?n. For a time, colonial historians went to another extreme, intent on showing the agency of free peasants as makers of their own world. They forgot that seventeenth-century Mexico was an unlikely venue for the emergence of a smoothly functioning labor market in which buyers and sellers of labor had no recourse to force or fraud. Indeed, conquest is precisely about force and fraud, depriving the conquered of their possessions, and making them do things they otherwise would never do.

A more fruitful way of viewing the phenomenon of debt peonage — or simply workers’ indebtedness, for debt did not invariably impede their mobility — is to understand how it allowed employers to determine the rate of discount at which workers in a shifting, unstable, and terribly uncertain world valued future income. There is no point in beating around the bush. Life expectancy at birth for a Mexican in the colonial period was about twenty years, and in view of the catastrophic changes that had visited the Indian world since 1519, we can only conclude that Hobbes was right, and that Mexicans knew it. Their lives were short enough, and nasty and brutish as well. In a world in which only God (and whose God was up for grabs too) knew what the future would bring, it made sense for ordinary people to get as much as they could up front, which, after all, is all the “debt” part of debt peonage meant. This was just an extreme form of live for today, for tomorrow, literally, who knew? Workers bargained for better advances and often sought to enlarge them and employers understood this. The wide variance of debts reported by farms and factories for which we have records shows that their owners struck quite different bargains with different workers, a form of price discrimination that allowed them to “pay” no more than they had to, certainly less than raising wages to market-clearing levels. In fact, in the disorganized and fluid circumstances of the late sixteenth and early seventeenth centuries, when Indian villages were forming and reforming under the pressure of Castillian administration, it would have been impossible to gauge the overall willingness of Indians to leave their communities to work for wages, or even the willingness of their communities to allow individuals to leave, a point to which Borah was quite sensitive (pp. 41-42).

Besides, the point of indebtedness was not necessarily to reduce mobility. The Spaniards had other ways of doing so, which is another aspect of the system of land tenure they devised. As Evsey Domar once wrote, it is impossible to have free labor, free land and a nonworking landlord class simultaneously. One of the three must disappear. In Mexico, the Church prevailed in the 1540s in the struggle against the frank coercion of Indian labor. For most purposes, the labor of enslaved Africans was simply too expensive, even though there was a sizeable black population in seventeenth?century Mexico. No, the Spaniards made another choice, to deprive the Indians of access to free land, for free land they very well may have had. The dramatic decline in the Indian population left vast expanses of Central Mexico essentially empty, so what was to prevent the Indians from moving on to the land as a subsistence peasantry, to the lasting dismay of the Spaniards? The answer is that the Spaniards consciously set about driving the Indians into villages over which they could exercise some level of control, as Bernardo Garc?a Mart?nez demonstrated in Los pueblos de la Sierra (1987). At the same time, they sanctioned land?grabbing by the settlers, usually in amounts far in excess of anything the settlers could reasonably cultivate. At a stroke, the Spaniards accomplished two things. First, they shifted to a system of agriculture that reflected the abundance of land, a regime vastly different from the preconquest one based on the intensive use of labor, of which the famous raised?ridged fields (chinampas) of the Valley of Mexico were but one example. Second, they regularized the settlers’ land titles at the beginning of the seventeenth century, effectively transferring much land to Spanish control, whether or not it was cultivated. The hacienda thus circumscribed the ability of the Indian communities to survive independently of the Spanish economy, and in so doing, obviated the need for a draconian regime of forced labor, at least in Mexico.

This dramatic transition, from an economy based on intensive agriculture and the exploitation of a dense indigenous population, to one that relied on extensive agriculture and scarce Indian labor could not be accomplished rapidly. Moreover, the shift from an economy with relatively high levels of personal wealth in the form of Indians held in encomienda to a poorer one with fewer Indians and no encomiendas reduced New Spain’s capacity to import. It was now necessary to produce at home many goods that were, in the early years of the colony, imported through Spain. A reduction in consumption and a reorientation of expenditure toward investment was required to accommodate such a change. Borah, for instance, noted that the construction of churches tended to slow dramatically in the 1570s (p. 31), attributing this primarily to a redeployment of scarcer labor. (The demand for churches sadly fell as well, for there were far fewer souls to fill them.) For Borah, presumably, all this was a depression. To a later generation of historians, however, notably the British school headed by John Lynch, Borah’s “depression” was more a case of deferred consumption, the redirection of productive effort toward mining, manufacturing and farming that a colony living on its own required. None of this could have come easily or cheaply — the mining and irrigation works, the granaries, fences, sugar mills, ranches and textile manufactories absorbed resources. Hence, for Lynch and his followers, the apparent stagnation of the Mexican economy in the seventeenth century was just that, an apparent stagnation that marked the reorientation underway, one that would result in the visible renewal of economic growth under the Bourbon monarchs of the eighteenth century. It was not so much that Borah was wrong about what he had seen, but that he had, instead, seen wrongly.

Viewed fifty years after its publication, New Spain’s Century of Depression reads much like the pioneering work it was, full of insight, largely intuitive, sometimes wrong in detail and premature in judgment, but, all the same, arresting and audacious. It was, above all, a great work of history, for it sought to explain the present through the past, and to explain in simple but persuasive terms how what was distinctively Mexican, the play of institutions, political economy and an emerging social structure, came together out of the shock of the Conquest in the sixteenth and seventeenth centuries. If there is anything disappointing about New Spain’s Century of Depression, it is that the response to it has been admiration or assent from most students of Latin American history, but few studies in which appropriately trained scholars have undertaken the work necessary to establish Borah’s hypothesis fully, or to revise and extend it in ways consistent with contemporary population studies. That is the problem with writing a classic about an obscure century in a backward country: it is hard to get people to notice. Those of us who spend our time studying the history of Mexico know full well how important Borah’s elegant “hypothesis” was. It is time for mainstream economic historians, and, one hopes, their students, to develop an interest in replying to Woodrow Borah’s pioneering work as well.

Richard Salvucci teaches economics at Trinity University in San Antonio, Texas. He was a colleague of Woodrow Borah’s at the University of California, Berkeley, from 1980 through 1989. He works on the economic and financial history of Mexico between 1823 and 1884.


Subject(s):Historical Demography, including Migration
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):17th Century

Apogee of Empire: Spain and New Spain in the Age of Charles III, 1759-1789

Author(s):Stein, Stanley J.
Stein, Barbara H.
Reviewer(s):Ringrose, David

Published by EH.NET (April 2004)

Stanley J. Stein and Barbara H. Stein, Apogee of Empire: Spain and New Spain in the Age of Charles III, 1759-1789. Baltimore: Johns Hopkins University Press, 2003. xiv + 464 pp. $52 (cloth), ISBN: 0-8018-7339-8.

Reviewed for EH.NET by David Ringrose, Department of History, University of California – San Diego.

The culmination of literally decades of careful scholarship, this book is both magnificent and a bit frustrating. The frustrations are not so much due to flaws in the book itself as to some thoughts about what has been left out. Since that amounts to complaining about the book that the authors did not write, such comments will be kept to a minimum. The book is also a fitting sequel to the Stein’s equally impressive Silver, Trade, and War: Spain and America in the Making of Early Modern Europe (Baltimore: Johns Hopkins University Press, 2000).

Although the title hints at a more comprehensive presentation, this book is focused on two interlocking themes. One of these, around which the vast and detailed analysis of sources is organized, is the attempt by the Spanish Crown to modernize the peninsular economy and reorganize and reform trade between Spain and its Empire, specifically with New Spain. The second theme is interpretive. The Stein’s presentation emphasizes the inability of the Spanish monarchy to carry out the kinds of structural reforms that might have allowed the Spanish colonial system, with its many pre-capitalist vested interests, to adapt to the more intensely industrial and capitalist environment of the coming nineteenth century. In this, the presentation builds upon the authors’ conclusions in Silver, Trade, and War.

This interpretation, while well founded, is the source of one bit of frustration. The book shows how and why Spanish reformers failed to achieve more than a small part of what they aspired to do, leaving the Spanish state vulnerable. At the same time, however, it ends abruptly in 1788 with the implication that these internal problems explain the subsequent debacle of the Spanish empire. Nothing is said about the external forces that contributed to that demise and the tenacity with which the monarchy held on, nor do the authors actually examine the longer-term seriousness of the debacle.

The first third of the book deals with the initial years of the reign of Charles III and the effort by Charles and his ministers to promote widespread reform inside Spain as well as in the colonial system. The book provides a detailed discussion of the reform effort, including the first reforms of trade with the empire. This first Reglamento del Comercio Libre, promulgated in 1765 offered a modest challenge to Cadiz’s official monopoly on colonial trade, facilitating trade between a small number of peninsular ports and a limited number of ports in the Caribbean. This reglamento, did not, however, challenge the protected trade with Mexico, which accounted for half of Spain’s colonial assets, nor did it infringe on the Caribbean preserves of the Royal Guip?zcoa Company in Venezuela.

Domestic reform projects and the first reglamento then set the stage for the Stein’s remarkable dissection of the political crisis of 1766. This crisis brought down the King’s reform ministry, resulted in the expulsion and then suppression of the Jesuit Order, and seriously compromised the authority of the Spanish monarchy. Drawing upon a vast collection of information about interpersonal, familial, and professional interconnections, the book identifies a range of political factions and the special interests they represented. The result is a complex account of the lines of reasoning for and against reform, of the shadowy processes that precipitated the riots of 1766, the missteps that turned this into a serious challenge to royal authority, and the links between the subsequent expulsion of the Jesuits and the restoration of the prestige of the crown. In contrast to many accounts of this episode, the Steins’ version investigates the role of colonial interests as well as peninsular ones.

In the Steins’ interpretation, this episode marks the failure of serious structural reform under Charles III. Subsequently, the Crown pursued less sweeping, incremental changes. While these changes were more substantive than under the first two Bourbon kings, in the Stein’s view Charles III and his ministers gave up on serious structural change in the peninsula and focused their attention on Spain’s colonial empire.

Most of the rest of the book then examines the step-by-step discussions and actions that led to the so-called Comercio Libre of 1778, a reform that opened most important peninsular ports to most colonial ports outside of New Spain. The book then goes on to detail the subsequent extension of the Comercio Libre to New Spain in 1789. The Steins untangle the long sequence of commissions, secret deliberations, reports by vested interest groups, and unofficial publications that set out the various rationales for and against aspects of the proposed reforms. While the authors do not evaluate the evidence about the results of these reforms in a systematic way, they do something even more interesting. They attempt to give us an understanding of the quality of the information that the key personalities actually had at their disposal as they combined preconceived notions with various versions of reality. The overall impression is of the limited effectiveness of the reform agenda, of tension between fiscal priorities and developmental ones, and of the intransigence of established commercial structures.

At the end of Part Two on the “Colonial Option,” the authors insert a fascinating chapter on Spanish trade policy and France. It is a first-rate synthesis of the topic but stands somewhat to one side of the larger analysis. It starts with a flashback to the seventeenth century and traces the complexities of trade between France, Spain, and Spanish America throughout the eighteenth century. The chapter draws together data on the stagnation of key French textile industries in the 1780s, connecting this with stagnating demand for French textiles in Spanish-America. The explanation emphasizes the penetration of Spanish trade by English and Silesian textiles, but the discussion does not address the role of Catalan textiles in the story.

The book ends with two short chapters, both of which are conclusions of a sort. Chapter 11 juxtaposes optimistic and pessimistic views of reform as articulated in the 1780s by Spaniards themselves. Predictably, the optimists, led by Prime Minister Floridablanca, lined up data that showed both the expansion of trade and expansion of the share of exports produced within Spain as well as increases in state revenue.

The pessimists pointed to continued rampant smuggling, the power of vested interests in Cadiz, and massive fraud in the labeling of supposedly Spanish goods and equally massive smuggling of specie into France. Then, as well as now, critics suggested that the reforms were better designed to increase royal revenue than to stimulate economic development.

The authors’ own conclusion, Chapter 12, summarizes the situation as they see it. The role of silver in the Spanish system kept the commercial bourgeoisie in Mexico and Cadiz small and backward looking. This part of Spain’s economic system resisted any reform that implied more flexible commercial capitalism. Their resistance prevented major change and resulted in incremental reform that did not address structural problems. Similar domestic resistance also led the crown to abandon its promotion of an industrial establishment in peninsular Spain. The whole Spanish system thus ended up more, rather than less, dependent on silver and America. As a result, Spain was fatally vulnerable to wartime interruption of Atlantic communications and to illegal, peacetime penetration by English trade, which diverted colonial silver and profits away from the home country.

This reviewer would have liked to see a bit more of the larger context, in particular the role of imperial reform outside of New Spain. Little is said about the administrative (as opposed to commercial) reform of the empire (and of the peninsula). There is little sense of the long-term trends in Spanish trade, including domestic exports, both of which grew dramatically and much of which went to Europe. As indicated at the start, these are mostly comments about the book the authors chose not to write and do not detract from the achievement.

Few books in recent decades have been so successful in mining a vast amount of primary material in order to evoke the arguments and counter arguments that shaped policy in an Ancien R?gime monarchy. The authors’ account of the crisis of 1766 is stunning in its detail and mastery of political infighting. Their ability to present the interactions between colonial and peninsular factions is unique. We have long known that the failure of serious reform was a key factor in the collapse of the old regime Spanish monarchy. No other account, however, provides such a vivid picture of how and why that failure came about.

David Ringrose has published several books on Spain from the sixteenth to the nineteenth century, including Spain, Europe and the “Spanish Miracle,” 1700-1900 (Cambridge Univrsity Press, 1996). His current book project is tentatively entitled Europeans Abroad, 1400-1700: Support Networks, Middle Ground, Collaboration and Cohabitation. He is Professor of History at the University of California, San Diego and, for 2003-2004, a Fellow at the National Humanities Center in North Carolina.

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):18th Century

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

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

Published by EH.NET (May 2003)


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Project 2000/2001

Project 2000

Each month during 2000, EH.NET published a review essay on a significant work in twentieth-century economic history. The purpose of these essays was to survey the works that have had the most influence on the field of economic history and to highlight the intellectual accomplishments of twentieth-century economic historians. Each review essay outlines the work’s argument and findings, discusses the author’s methods and sources, and examines the impact that the work has had since its publication.

Nominations were received from dozens of EH.Net’s users. P2K
selection committee members were: Stanley Engerman (University of
Rochester), Alan Heston (University of Pennsylvania), Paul
Hohenberg, chair (Rensselaer Polytechnic Institute), and Mary
Yeager (University of California-Los Angeles). Project Chair was
Robert Whaples (Wake Forest University).

The review essays are:

Braudel, Fernand
Civilization and Capitalism, 15th-18th Century Time
Reviewed by Alan Heston (University of Pennsylvania).

Chandler, Alfred D. Jr.
The Visible Hand: The Managerial Revolution in American Business
Reviewed by David S. Landes (Department of Economics and History, Harvard University).

Chaudhuri, K. N.
The Trading World of Asia and the English East India Company, 1660-1760
Reviewed by Santhi Hejeebu.

Davis, Lance E. and North, Douglass C. (with the assistance of Calla Smorodin)
Institutional Change and American Economic Growth.
Reviewed by Cynthia Taft Morris (Department of Economics, Smith College and American University).

Fogel, Robert W.
Railroads and American Economic Growth: Essays in Econometric History
Reviewed by Lance Davis (California Institute of Technology).

Friedman, Milton and Schwartz, Anna Jacobson
A Monetary History of the United States, 1867-1960
Reviewed by Hugh Rockoff (Rutgers University).

Heckscher, Eli F.
Reviewed by John J. McCusker (Departments of History and Economics, Trinity University).

Landes, David S.
The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present
Reviewed by Paul M. Hohenberg (Rensselaer Polytechnic Institute).

Pinchbeck, Ivy
Women Workers and the Industrial Revolution, 1750-1850 
Reviewed by Joyce Burnette (Wabash College).

Polanyi, Karl
The Great Transformation: The Political and Economic Origins of Our Time
Reviewed by Anne Mayhew (University of Tennessee).

Schumpeter, Joseph A.
Capitalism, Socialism and Democracy 
Reviewed by Thomas K. McCraw (Harvard Business School).

Weber, Max
The Protestant Ethic and the Spirit of Capitalism
Reviewed by Stanley Engerman.

Project 2001

Throughout 2001 and 2002, EH.Net published a second series
of review essays on important and influential works in economic
history. As with Project 2000, nominations for Project 2001 were
received from many EH.Net users and reviewed by the Selection
Committee: Lee Craig (North Carolina State University); Giovanni
Federico (University of Pisa); Anne McCants (MIT); Marvin McInnis
(Queen’s University); Albrecht Ritschl (University of Zurich);
Winifred Rothenberg (Tufts University); and Richard Salvucci
(Trinity College).

Project 2001 selections were:

Borah, Woodrow Wilson
New Spain’s Century of Depression
Reviewed by Richard Salvucci (Department of Economics, Trinity University).

Boserup, Ester
Conditions of Agricultural Growth: The Economics of Agrarian Change under Population Pressure
Reviewed by Giovanni Federico (Department of Modern History, University of Pisa).

Deane, Phyllis and W. A. Cole
British Economic Growth, 1688-1959: Trends and Structure
Reviewed by Knick Harley (Department of Economics, University of Western Ontario).

Fogel, Robert and Stanley Engerman
Time on the Cross: The Economics of American Negro Slavery
Reviewed by Thomas Weiss (Department of Economics, University of Kansas).

Gerschenkron, Alexander
Economic Backwardness in Historical Perspective
Review Essay by Albert Fishlow (International Affairs, Columbia University).

Horwitz, Morton
The Transformation of American Law, 1780-1860
Reviewed by Winifred B. Rothenberg (Department of Economics, Tufts University).

Kuznets, Simon
Modern Economic Growth: Rate, Structure and Spread
Reviewed by Richard A. Easterlin (Department of Economics, University of Southern California).

Le Roy Ladurie, Emmanuel
The Peasants of Languedoc
Reviewed by Anne E.C. McCants (Department of History, Massachusetts Institute of Technology).

North, Douglass and Robert Paul Thomas
The Rise of the Western World: A New Economic History
Reviewed by Philip R. P. Coelho (Department of Economics, Ball State University).

de Vries, Jan
The Economy of Europe in an Age of Crisis, 1600-1750
Review Essay by George Grantham (Department of Economics, McGill University).

Temin, Peter
The Jacksonian Economy
Reviewed by Richard Sylla (Department of Economics, Stern School of Business, New York University).

Wrigley, E. A. and R. S. Schofield
The Population History of England, 1541-1871: A Reconstruction

Project Coordinator and Editor: Robert Whaples (Wake Forest

Why Democracy Failed. The Agrarian Origins of the Spanish Civil War

Author(s):Simpson, James
Carmona, Juan
Reviewer(s):Riesco, Sergio

Published by EH.Net (October 2022).

James Simpson and Juan Carmona. Why Democracy Failed. The Agrarian Origins of the Spanish Civil War. Cambridge: Cambridge University Press, 2020. xviii + 299 pp. $30 (paperback), ISBN 978-1-108-72038-0.

Reviewed for EH.Net by Sergio Riesco, Department of Contemporary History, Universidad Autónoma de Madrid (UAM, Spain).


Throughout the 20th century, most Western European countries underwent a process of agricultural modernisation that enabled them to achieve the longed-for food sovereignty. In the case of Spain, this sovereignty was not achieved until barely 60 years ago, leaving the country dependent on wheat imports for most of its history. Just a few decades later, at the end of the 20th century, Spain was one of the largest suppliers of products from the primary sector both worldwide and, especially, to the European Union. Today, as in other neighbouring countries, agriculture and livestock farming account for approximately 10% of GDP and employ barely 4 percent of the labour force.

These data show that Spain, in less than 50 years, has reached the same destination as other countries. However, the delay in this modernisation process has been the subject of a rich and extensive scientific literature. It seems logical that the debate has focused on the first attempt at democratisation in its history: the Second Republic, built in the middle of the crisis of the 1930s. Perhaps we can speak of an Iberian peculiarity: long dictatorships that repelled the attempts at democratisation until the 1970s.

Why Democracy Failed. The Agrarian Origins of the Spanish Civil War aims to provide a new approach to several of these questions. The authors are leading specialists in economic history. James Simpson is the author of one of the most prestigious books on the long-term agrarian history of Spain, La Agricultura Española: La Larga Siesta (1997). Juan Carmona is a leading expert on the functioning of agrarian institutions in contemporary history. In this work, the authors attempt to articulate an overall interpretation of the failure of the Spanish democratic experiment, focusing on the state’s inability to give a voice and political weight to family farming.

One of the book’s great merits is that it situates the Spanish problem in its European context. The analysis of agriculture during the “age of economic instability” is essential to understanding the sustained growth of the family farm throughout the period 1870-1939. The authors delve into the structural limits of Spanish agriculture, in particular the enormous variety of farming and land tenure systems. In the face of all this, the growth thresholds of Spanish agriculture were limited by an environmental issue that has been highlighted in numerous studies (Pujol, et al. 2001).

Traditionally, Spanish agriculture has been polarised between two main models: the North of the country, where family farming followed a path dependence similar to that of the rest of Europe; and the South, where large farms predominated and were not always cultivated in an optimal way. The authors point to a greater fragmentation of land ownership in the South that would weaken this model, since they present numerous examples of dynamism, adjusted to the market, on the part of Southern landowners.

Another issue of great interest raised by the book is the scarce information available to the state on agrarian problems. Spain, although an agrarian country, lacked a ministry of agriculture until the arrival of the Second Republic. Then again, this fact is somewhat misleading. After the creation of the Instituto de Reformas Sociales in 1905, Spain promoted various research projects to identify the problems of the Spanish economy, especially in the agrarian sector. This situation is related in the book to a weakness of the state that related to Spain’s neutrality during the First World War. According to this hypothesis, the lack of incentives to organise a wartime economy limited the country’s capacity to face the enormous problems of the inter-war period.

Faced with a new political opportunity structure along the Second Republic, agrarian actors defended their interests according to a coherent logic. Along the lines already proposed by Malefakis (1970), but with some nuances, Simpson and Carmona propose that the clash between the different opposing blocs (great landowners and unionised landless peasants) was resolved in a violent manner, among other reasons, because a third way (that of the family farmers) had no options in the face of the radicalisation of positions.

Beyond the political interpretation, the authors’ purely economic interpretation seems more appropriate, because it raises the question of whether the problem was one of “too much land or too many workers.” This points to a rather convincing misallocation of resources (capital, land, labour).

Every book that leads in one way or another to the Spanish civil war presents a huge difficulty: the distribution of responsibilities. As is well known, this is one of the most widely discussed topics on a global level by specialists of all kinds and from all parts of the world. The greatest difficulty is, in my view, that of taking the part for the whole. The democratic era of the Second Republic had both conservative and relatively progressive governments. The latter were in power for only 30 months and tried to build the State that should have taken the lead in a balanced and productive reform. They did all this in the middle of the global impact of the crisis of 1929 and, therefore, without the resources to enable irrigation policies to provide a medium-term solution to the serious yield problems facing Spanish agriculture.

However, the other bloc, the conservative one, did nothing to contribute to the construction of this modern state. Rather, it chose to dismantle any reformist attempt made by its political enemies. The third way suggested by the authors could have worked, but in the day-to-day life of the 30 months mentioned above, the problems of inequality were such that it was hardly possible to propose profound changes.

All the economic interpretations put forward in this book have a strong foundation based on existing literature and reliable sources. The radicalisation of the landless peasants did exist, and their political and trade union representatives were conditioned by it. But on the other side, “the families that shuddered at the mere name of agrarian reform” (Tuñón 2000, 341) were very powerful and would not give up their bargaining power. Rather, they put it at the service of a coup d’état that would delay the necessary economic modernisation of Spain for decades.

Why Democracy Failed offers a compelling contrast to Ricardo Robledo’s new book La Tierra Es Vuestra: La Reforma Agraria. Un Problema No Resuelto. Spain, 1900-1950.  Both books are essential reading for anyone looking to understand how Spain’s problems of inequality led to such a brutal and violent reaction.


Malefakis, Edward. 1970. Agrarian Reform and Peasant Revolution in Spain. Origins of the Civil War. Yale: University Press.

Pujol, Andreu, et al. 2001. El Pozo de Todos Los Males: Sobre El Atraso en la Agricultura Española Contemporánea. Barcelona: Crítica.

Robledo, Ricardo. 2022. La Tierra Es Vuestra: La Reforma Agraria. Un Problema No Resuelto. España: 1900-1950. Barcelona: Pasado & Presente.

Simpson, James. 1997. La Agricultura Española: La Larga Siesta (1765-1965). Madrid: Alianza.

Tuñón de Lara, Manuel. 2000. La España del Siglo XX. Madrid: Akal.


Sergio Riesco is Associate Lecturer at Universidad Autónoma de Madrid (UAM, Spain). His publications include “La Reforma Agraria y los Orígenes de la Guerra Civil: Cuestión Yuntera y Radicalización Patronal en la Provincia de Cáceres (1931-1940)” (Biblioteca Nueva, 2006) and “La Reforma Agraria Italiana Vista Desde España (1918-1953): Un Comentario Crítico” (Segle XX, 2020).

Copyright (c) 2022 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 (October 2022). All EH.Net reviews are archived at


Subject(s):Agriculture, Natural Resources, and Extractive Industries
Economywide Country Studies and Comparative History
Military and War
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

Path Dependence

Douglas Puffert, University of Warwick

Path dependence is the dependence of economic outcomes on the path of previous outcomes, rather than simply on current conditions. In a path dependent process, “history matters” — it has an enduring influence. Choices made on the basis of transitory conditions can persist long after those conditions change. Thus, explanations of the outcomes of path-dependent processes require looking at history, rather than simply at current conditions of technology, preferences, and other factors that determine outcomes.

Path-dependent features of the economy range from small-scale technical standards to large-scale institutions and patterns of economic development. Several of the most prominent path-dependent features of the economy are technical standards, such as the “QWERTY” standard typewriter (and computer) keyboard and the “standard gauge” of railway track — i.e., the width between the rails. The case of QWERTY has been particularly controversial, and it is discussed at some length below. The case of track gauge is useful for introducing several typical features of path-dependent processes and their outcomes.

Standard Railway Gauges and the Questions They Suggest

Four feet 8-1/2 inches (1.435 meters) is the standard gauge for railways throughout North America, in much of Europe, and altogether on over half of the world’s railway routes. Indeed, it has been the most common gauge throughout the history of modern railways, since the late 1820s. Should we conclude, as economists often do for popular products or practices, that this standard gauge has proven itself technically and economically optimal? Has it been chosen because of its superior performance or lower costs? If so, has it proven superior for every new generation of railway technology and for all changes in traffic conditions? What of the other gauges, broader or narrower, that are used as local standards in some parts of the world — are these gauges generally used because different technology or different traffic conditions in those regions favor these gauges?

The answer to all these questions is no. The consensus of engineering opinion has usually favored gauges broader than 4’8.5″, and in the late nineteenth century an important minority of engineers favored narrower gauges. Nevertheless, the gauge of 4’8.5″ has always had greater use in practice because of the history of its use. Indeed, even the earliest modern railways adopted the gauge as a result of history. The “father of railways,” British engineer George Stephenson, had experience using the gauge on an older system of primitive coal tramways serving a small group of mines near Newcastle, England. Rather than determining optimal gauge anew for a new generation of railways, he simply continued his prior practice. Thus the gauge first adopted more than two hundred years ago for horse-drawn coal carts is the gauge now used for powerful locomotives, massive tonnages of freight shipments, and passenger trains traveling at speeds as great as 300 kilometers per hour (186 mph).

We will examine the case of railway track gauge in more detail below, along with other instances of path dependence. We first take an analytical look at what conditions may give rise to path dependence — or prevent it from arising, as some critics of the importance of path dependence have argued.

What Conditions Give Rise to Path Dependence?

Durability of Capital Equipment

The most trivial — and uninteresting — form of path dependence is based simply on the durability of capital equipment. Obsolete, inferior equipment may remain in use because its fixed cost is already “sunk” or paid for, while its variable costs are lower than the total costs of replacing it with a new generation of equipment. The duration of this sort of path dependence is limited by the service life of the obsolete equipment.

Technical Interrelatedness

In railways, none of the original gauge-specific capital equipment from the early nineteenth century remains in use today. Why, then, has Stephenson’s standard gauge persisted? Part of the reason is the technical interrelatedness of railway track and the wheel sets of rolling stock. When either track or rolling stock wears out, it must be replaced with equipment of the same gauge, so that the wheels will still fit the track and the track will still fit the wheels. Railways almost never replace all their track and rolling stock at the same time. Thus a gauge readily persists beyond the life of any piece of equipment that uses it.

Increasing Returns

A further reason for the persistence, and indeed spread, of the Stephenson gauge is increasing returns to the extent of use. Different railway companies or administrations benefit from using a common gauge, because this saves costs and improves both service quality and profits on through-shipments or passenger trips that pass over each other’s track. New railways have therefore nearly always adopted the gauge of established connecting lines, even when engineers have favored different gauges. Once built, railway lines are reluctant to change their gauge unless neighboring lines do so as well. This adds coordination costs to the physical costs of any conversion.

In early articles on path dependence, Paul David (1985, 1987) listed these same three conditions for path dependence: first, the technical interrelatedness of system components; second, increasing returns to scale in the use of a common technique; and, third, “quasi-irreversibility of investment,” for example in the durability of capital equipment (or of human capital). The third condition gives rise to switching costs, while the first two conditions make gradual change impractical and rapid change costly, due to the transactions costs required to coordinate the actions of different agents. Thus together, these three conditions may lend persistence or stability to a particular path of outcomes, “locking in” a particular feature of the economy, such as a standard railway track gauge.

David’s early work on path dependence represents, in part, the culmination of an earlier economic literature on technical interrelatedness (Veblen 1915; Frankel 1955; Kindleberger 1964; David 1975). By contrast, the other co-developer of the concept of path dependence, W. Brian Arthur, based his ideas on an analogy between increasing returns in the economy, particularly when expressed in the form of positive externalities, and conditions that give rise to positive feedbacks in the natural sciences.

Dynamic Increasing Returns to Adoption

In a series of theoretical papers starting in the early 1980s, Arthur (1989, 1990, 1994) emphasized the role of “increasing returns to adoption,” especially dynamic increasing returns that develop over time. These increasing returns might arise on the supply side of a market, as a result of learning effects that lower the cost or improve the quality of a product as its cumulative production increases. Alternatively, increasing returns might arise on the demand side of a market, as a result of positive “network” externalities, which raise the value of a product or technique for each user as the total number of users increases (Katz and Shapiro 1985, 1994). In the context of railways, for example, a railway finds a particular track gauge more valuable if a greater number of connecting railways use that gauge. (Note that a track gauge is not a “product” but rather a “technology,” as Arthur puts it, or a “technique,” as I prefer to call it.)

In Arthur’s (1989) basic analytical framework, “small events,” which he treated as random, lead to early fluctuations in the market shares of competing techniques. These fluctuations are magnified by positive feedbacks, because techniques with larger market shares tend to be more valuable to new adopters. As a result, one technique grows in market share until it is “locked in” as a de facto standard. In a simple version of Arthur’s model (Table 1), different consumers or firms initially favor different products or techniques. At first, market share for each technique fluctuates randomly, depending on how many early adopters happen to prefer each technique. Eventually, however, one of the techniques will gain enough of a lead in market share that it will offer higher payoffs to everyone — including to the consumers or firms that have a preference for the minority technique. For example, if the total number of adoptions for technique A reaches 80, while the number of adoptions of B is less than 60, then technique A offers higher payoffs for everyone, and it is locked in as the de facto standard.

Table 1. Adoption Payoffs in Arthur’s Basic Model

Number of previous adoptions 0 10 20 30 40 50 60 70 80 90
“R-type agents” (who prefer technique A):
Technique A 10 11 12 13 14 15 16 17 18 19
Technique B 8 9 10 11 12 13 14 15 16 17
“S-type agents” (who prefer technique B):
Technique A 8 9 10 11 12 13 14 15 16 17
Technique B 10 11 12 13 14 15 16 17 18 19

Source: Adapted from Arthur (1989).

Which of the competing techniques becomes the de facto standard is unpredictable on the basis of systematic conditions. Rather, later outcomes depend on the specific early history of the process. If early “small” events and choices are governed in part by non-systematic factors — even “historical accidents” — then these factors may have large effects on later outcomes. This is in contrast to the predictions of standard economic models, where decreasing returns and negative feedbacks diminish the impact of non-systematic factors. To cite another illustration from the history of railways, George Stephenson’s personal background was a non-systematic or “accidental” factor that, due to positive feedbacks, had a large influence on the entire subsequent history of track gauge.

Efficiency, Foresight, Remedies, and the Controversy over Path Dependence

Arthur’s (1989) basic model of a path-dependent process considered a case in which the selection of one outcome (or one path of outcomes) rather than another has no consequences for general economic efficiency — different economic agents favor different techniques, but no technique is best for all. Arthur also, however, used a variation of his modeling approach to argue that an inefficient outcome is possible. He considered a case where one technique offers higher payoffs than another for larger numbers of cumulative adoptions (technique B in Table 2), while for smaller numbers the other technique offers higher payoffs (technique A). Arthur argued that, given his model’s assumptions, each new adopter, arriving in turn, will prefer technique A and adopt only it, resulting later in lower total payoffs than would have resulted if each adopter had chosen technique B. Arthur’s assumptions were, first, that each agent’s payoff depends only on the number of previous adoptions and, second, that the competing techniques are “unsponsored,” that is, not owned and promoted by suppliers.

Table 2. Adoption Payoffs in Arthur’s Alternative Model

Number of previous adoptions 0 10 20 30 40 50 60 70 80 90
All agents:
Technique A 10 11 12 13 14 15 16 17 18 19
Technique B 4 7 10 13 16 19 22 25 28 31

Source: Arthur (1989), table 2.

Liebowitz and Margolis’s Critique of Arthur’s Model

Arthur’s discussion of efficiency provided the starting point for a theoretical critique of path dependence offered by Stan Liebowitz and Stephen E. Margolis (1995). Liebowitz and Margolis argued that two conditions, when present, prevent path-dependent processes from resulting in inefficient outcomes: first, foresight into the effects of choices and, second, opportunities to coordinate people’s choices, using direct communication, market interactions, and active product promotion. Using Arthur’s payoff table (Table 2), Liebowitz and Margolis argued that the purposeful, rational behavior of forward-looking, profit-seeking economic agents can override the effects of events in the past. In particular, if agents can foresee that some potential outcomes will be more efficient than others, then they have incentives to avoid the suboptimal ones. Agents who already own — or else find ways to appropriate — products or techniques that offer superior outcomes can often earn substantial profits by steering the process to favor those products or techniques. For the situation in Table 2, for example, the supplier of product or technique B could draw early adopters to that technique by temporarily setting a price below cost, making a profit by raising price above cost later.

Thus, in Liebowitz and Margolis’s analysis, the sort of inefficient or inferior outcomes that can arise in Arthur’s model are often not true equilibrium outcomes that market processes would lead to in the real world. Rather, they argued, purposeful behavior is likely to remedy any inferior outcome — except where the costs of a remedy, including transactions costs, are greater than the potential benefits. In that case, they argued, an apparently “inferior” outcome is actually the most efficient one available, once all costs are taken into account. “Remediable” inefficiency, they argued in contrast, is highly unlikely to persist.

Liebowitz and Margolis’s analysis gave rise to a substantial controversy over the meaning and implications of path dependence. In the view of Liebowitz and Margolis, the major claims of the economists who promote the concept of path dependence have amounted to assertions of remediable inefficiency. Liebowitz and Margolis coined the term “third-degree” path dependence to refer to such cases. They contrasted this category both to “first-degree” path dependence, which has no implications for efficiency, and to “second-degree” path dependence, where transactions costs and/or the impossibility of foresight lead to outcomes that offer lower payoffs than some hypothetical — but unattainable — alternative. In Liebowitz and Margolis’s view, only “third-degree” path dependence offers scope for optimizing behavior, and thus only this type stands in conflict with what they call “the neoclassical model of relentlessly rational behavior leading to efficient, and therefore predictable, outcomes” (1995). Only this category of path dependence, they argue, would constitute market failure. They cast strong doubt on the likelihood of its occurrence, and they asserted that no empirical examples have been demonstrated.

Responses to Liebowitz and Margolis’s Critique

Proponents of the importance of path dependence have responded, in large part, by asserting that the interesting features of path dependence have little to do with the question of remediability. David (1997, 2000) argued that the concept of third-degree path dependence proves incoherent upon close examination and that Liebowitz and Margolis had misconstrued the issues at stake. The present author asserted that one can usefully incorporate several of Liebowitz and Margolis’s ideas on foresight and forward-looking behavior into the theory of path dependence while still affirming the claims made by proponents (Puffert 2000, 2002, 2003).

Imperfect Foresight and Inefficiency

One point that I have emphasized is that the cases of path dependence cited by proponents typically involve imperfect foresight, and sometimes other features, that make remediation impossible. Indeed, proponents of the importance of path dependence partly recognized this point prior to the work of Liebowitz and Margolis. Nobel Prize-winner Kenneth Arrow argued in his foreword to Arthur’s collected articles that Arthur’s modeling approach applies specifically to cases where foresight is imperfect, or “expectations are based on limited information” (Arthur 1994). Thus, economic agents cannot foresee future payoffs, and they cannot know how best to direct the process to the outcomes they would prefer. In terms of the payoffs in Table 2, technique A might become locked-in because adopters as well as suppliers initially think, mistakenly, that technique A will continue to offer the higher payoffs. Similarly, David (1987) had argued still earlier that path dependence is sometimes of interest precisely because lock-in might happen too quickly, before the payoffs of different paths are known. Lock-in, as David and Arthur use the term, applies to a stable equilibrium — i.e., to an outcome that, if inefficient, is not remediable. (Liebowitz and Margolis introduce a different definition of lock-in.)

Imperfect foresight is, of course, a common condition — and especially common for new, unproven products (or techniques) in untested markets. Part of the difference between path-dependent and “path-independent” processes is that foresight doesn’t matter for path-independent processes. No matter what the path of events, path-independent processes still end up at unique outcomes that are predictable on the basis of fundamental conditions. Generally, these predictable outcomes are those that are most efficient and that offer the highest payoffs. By contrast, path-dependent processes have multiple potential outcomes, and the outcome selected is not necessarily the one offering the highest payoffs. This contrast to the results of standard economic analysis is part of what makes path dependence interesting.

Winners, Losers and Path Dependence

Path dependence is also interesting, however, when the issue at stake is not the overall efficiency (i.e., Pareto efficiency) of the outcome, but rather the distribution of rewards between “winners” and “losers” — for example, between firms competing to establish their products or techniques as a de facto standard, resulting in profits or economic rents to the winner only. This is something that finds no place in Liebowitz and Margolis’s taxonomy of “degrees.” In keeping with Liebowitz and Margolis’s analysis, competing firms certainly exercise forward-looking behavior in efforts to determine the outcome, but imperfect information and imperfect control over circumstances still make the outcome path dependent, as some of the case studies below illustrate.

Lack of Agreement on What the Debate Is About

Finally, market failure per se has never been the primary concern of proponents of the importance of path dependence. Even when proponents have highlighted inefficiency as one possible consequence of path dependence, this inefficiency is often the result of imperfect foresight rather than of market failure. Market failure is, however, the primary concern of Liebowitz and Margolis. This difference in perspective is one reason that the arguments of proponents and opponents have often failed to meet head on, as we shall consider in several case studies.

These contrasting analytical arguments can best be assessed through empirical cases. The case of the QWERTY keyboard is considered first, because it has generated the most controversy and it illustrates opposing arguments. Three further cases are particularly useful for the lessons they offer. Britain’s “coal wagon problem” offers a strong example of inefficiency. The worldwide history of railway track gauge, now considered at greater length, illustrates the roles of foresight (or lack thereof) and transitory circumstances, as well as the role of purposeful behavior to remedy outcomes. The case of competition in videocassette recorders illustrates how path dependence is compatible with purposeful behavior, and it shows how proponents and critics of the importance of path dependence can offer different interpretations of the same events.

The Debate over QWERTY

The most influential empirical case has been that of the “QWERTY” standard typewriter and computer keyboard, named for the first letters appearing on the top row of keys. The concept of path dependence first gained widespread attention through David’s (1985, 1986) interpretation of the emergence and persistence of the QWERTY standard. The critique of path dependence began with the alternative interpretation offered by Liebowitz and Margolis (1990).

David (1986) noted that the QWERTY keyboard was designed, in part, to reduce mechanical jamming on an early typewriter design that quickly went out of use, while other early keyboards were designed more with the intention of facilitating fast, efficient typing. In David’s account, QWERTY’s triumph over its initial revivals resulted largely from the happenstance that typing schools and manuals offered instruction in eight-finger “touch” typing first for QWERTY. The availability of trained typists encouraged office managers to buy QWERTY machines, which in turn gave further encouragement to budding typists to learn QWERTY. These positive feedbacks increased QWERTY’s market share until it was established as the de facto standard keyboard.

Furthermore, according to David, similar positive feedbacks have kept typewriter users “locked in” to QWERTY, so that new, superior keyboards could gain no more than a small foothold in the market. In particular the Dvorak Simplified Keyboard, introduced during the 1930s, has been locked out of the market despite experiments showing its superior ergonomic efficiency. David concluded that our choice of a keyboard even today is governed by history, not by what would be ergonomically and economically optimal apart from history.

Liebowitz and Margolis (1990) directed much of their counterargument to the alleged superiority of the Dvorak keyboard. They showed, indeed, that claims David cited for the dramatic superiority of the Dvorak keyboard were based on dubious experiments. The experiments that Liebowitz and Margolis prefer support the conclusion that it could never be profitable to retrain typists from QWERTY to the Dvorak keyboard. Moreover, Liebowitz and Margolis cited ergonomic studies that conclude that the Dvorak keyboard offers at most only a two to six percent efficiency advantage over QWERTY.

Liebowitz and Margolis did not address David’s proposed mechanism for the original triumph of QWERTY. Instead, they argued against the claims of some popular accounts that QWERTY owes its success largely to the demonstration effect of winning a single early typing contest. Liebowitz and Margolis showed that other, well-known typing contests were won by non-QWERTY typists, and so they cast doubt on the impact of a single historical accident. This, however, did not address the argument that David made about that one typing contest. David’s argument was that the contest’s modest impact consisted largely in vindicating the effectiveness of eight-finger touch-typing, which was being taught at the time only for QWERTY.

Although Liebowitz and Margolis never addressed David’s claims about the role of third-party typing instruction, they did argue that suppliers had opportunities to offer training in conjunction with selling typewriters to new offices, so that non-QWERTY keyboards would not have been disadvantaged. They did not, however, present evidence that suppliers actually offered such training during the early years of touch-typing, the time when QWERTY became dominant. Whether the early history of QWERTY was path dependent thus seems to depend largely on the unaddressed question of how much typing instruction was offered directly by suppliers, as Liebowitz and Margolis suggest could have happened, and how much was offered by third parties using QWERTY, as David showed did happen.

Liebowitz and Margolis showed that early typewriter manufacturers competed vigorously in the features of their machines. They inferred, therefore, that the reason that typewriter suppliers increasingly supported and promoted QWERTY must have been that it offered a competitive advantage as the most effective system available. This reasoning is plausible, but it was not supported by direct evidence. The alternative, path-dependent explanation would be that QWERTY’s competitive advantage in winning new customers consisted largely in its lead in trained typists and market share. That is, positive feedbacks would have affected the decisions of customers and, thus, also suppliers. David presented some evidence for this, although, in light of the issues raised by Liebowitz and Margolis, this evidence might now appear less than conclusive.

Liebowitz and Margolis highlighted the following lines from David’s article: “… competition in the absence of perfect futures markets drove the industry prematurely into de facto standardization on the wrong system — and that is where decentralized decision-making subsequently has sufficed to hold it” (emphasis original in David’s article). In Liebowitz and Margolis’s view, the focus here on decentralized decision-making constitutes a claim for market failure and third-degree path dependence, and they treat this as the central claim of David’s article. In the view of the present author, this interpretation is mistaken. David’s claim here plays only a minor role in his argument — indeed it is less than one sentence. Moreover, it is not clear that David’s comment about decentralized decision-making amounts to anything more than a reference to the high transactions costs that would be entailed in organizing a coordinated movement to an alternative outcome — a point that Liebowitz and Margolis themselves have argued in other (non-QWERTY) contexts. (A coordinated change would be necessary because few typists would wish to learn a non-QWERTY system unless they could be sure of conveniently finding a compatible keyboard wherever they go.) David may have wished to suggest that centralized decision-making (by government?) would have greatly reduced these transactions costs, but David made no explicit claim that such a remedy would be feasible. If David had wished to make market failure or remediable inefficiency the central focus of his claims for path dependence, then he surely could and would have done so in a more explicit and forceful manner.

Part of what remains of the case of QWERTY is modest support for David’s central claim that history has mattered, leaving us with a standard keyboard that is less efficient than alternatives available today — not as inefficient as the claims David cited, but still somewhat so. Donald Norman, one of the world’s leading authorities on ergonomics, estimates on the basis of several recent studies that QWERTY is about 10 percent less efficient than the Dvorak keyboard and other alternatives (Norman, 1990, and recent personal correspondence).

For Liebowitz and Margolis, it was most important to show that the costs of switching to an alternative keyboard would outweigh any benefits, so that there is no market failure in remaining with the QWERTY standard. This claim appears to stand. David had made no explicit claim for market failure, but Liebowitz and Margolis — as well, indeed, as some supporters of David’s account — took that as the main issue at stake in David’s argument.

Britain’s “Silly Little Bobtailed” Coal Wagons

A strong example of inefficiency in path dependence is offered by the small coal wagons that persisted in British railway traffic until the mid-twentieth century. Already in 1915, economist Thorstein Veblen cited these “silly little bobtailed carriages” as an example of how industrial modernization may be inhibited by “the restraining dead hand of … past achievement,” that is, the historical legacy of interrelated physical infrastructure: “the terminal facilities, tracks, shunting facilities, and all the ways and means of handling freight on this oldest and most complete of railway systems” (Veblen, 1915, pp. 125-8). Veblen’s analysis was the starting point for the literature on technical and institutional interrelatedness that formed the background to David’s early views on path dependence.

In recent years Van Vleck (1997, 1999) has defended the efficiency of Britain’s small coal wagons, arguing that they offered “a crude just-in-time approach to inventory” for coal users while economizing on the substantial costs of road haulage that would have been necessary for small deliveries if railway coal wagons were larger. More recently, however, Scott (1999, 2001) presented evidence that few coal users benefited from small deliveries. Rather, he showed, the wagons’ small size, widely dispersed ownership and control, antiquated braking and lubrication systems, and generally poor physical condition made them quite inefficient indeed. Replacing these cars and associated infrastructure with modern, larger wagons owned and controlled by the railways would have offered savings in railway operating costs of about 56 percent and a social rate of return of about 24 percent. Nevertheless, the small wagons were not replaced until both railways and collieries were nationalized after World War II. The reason, according to Scott, lay partly in the regulatory system that allocated certain rights to collieries and other car owners at the expense of the railways, and partly in the massive coordination problem that arose because railways would not have realized much savings in costs until a large proportion of antiquated cars were replaced. Together, these factors lowered the railways’ realizable private rate of return below profitable levels. (Van Vleck’s smaller estimates for potential efficiency gains from scrapping the small wagons were largely the result of assuming that there would be no change in the regulatory system or in the ownership and control of wagons. Scott argued that such changes added greatly to the potential cost savings.)

Scott noted that the persistence of small wagons was path dependent, because both the technology embodied in the small wagons and the institutions that supported fragmented ownership long outlasted the earlier, transitory conditions to which they were a rational response. Ownership of wagons by the collieries had been advantageous to railways as well as collieries in the mid-nineteenth century, and government regulation had assigned rights in a way designed to protect the interests of wagon owners from opportunistic behavior by the railways. By the early twentieth century, these regulatory institutions imposed a heavy burden on the railways, because they required either conveyance even of antiquated wagons for set rates or else payment of high levels of compensation to the wagon owners. The requirement for compensation helped to raise the railways’ private costs of scrapping the small wagons above the social costs of doing so.

The case shows the relevance of Paul David’s approach to path dependence, with its discussion of technical (and institutional) interrelatedness and quasi-irreversible investment, above and beyond Brian Arthur’s more narrow focus on increasing returns.

The case also supports Liebowitz and Margolis’s insight that an inferior path-dependent outcome can only persist where transactions costs (and other costs) prevent remediation, but it undercuts those authors’ skepticism toward the possibility of market failure. The high transactions costs that would have been entailed in scrapping Britain’s small wagons indeed outweighed the potential gains, but these costs were high only due to the institutions of property rights that supported fragmented ownership. When these institutions were later changed, a remedy to Britain’s coal-wagon problem followed quickly. Thus, the failure to scrap the small wagons earlier can be ascribed to institutional and market failure.

The case thus appears to satisfy Liebowitz and Margolis’s criterion for “third-degree” path dependence. This is not completely clear, however. Whether Britain’s coal-wagon problem qualifies for that status depends on whether the benefits of solving the problem would have been worth the cost of implementing the necessary institutional changes, a question that Scott did not address. Liebowitz and Margolis argue that an inferior outcome cannot be considered a result of market failure, or even meaningfully inefficient, unless this criterion of remediability is satisfied.

In this present author’s view, Liebowitz and Margolis’s criterion has some usefulness in the context of considering government policy toward inferior outcomes, which is Liebowitz and Margolis’s chief concern, but the criterion is much less useful for a more general analysis of these outcomes. If Britain’s coal-wagon problem does not qualify for “third-degree” status, then it suggests that Liebowitz and Margolis’s dismissive approach toward cases that they relegate to “second-degree” status is misplaced. The case seems to show that path dependence can have substantial effects on the economy, that the outcomes of path-dependent processes can vary substantially from the predictions of standard economic models, that these outcomes can exhibit substantial inefficiency of a sort discussed by proponents of path dependence, and that all this can happen despite the exercise of foresight and forward-looking behavior.

Railway Track Gauges

The case of railway track gauge illustrates how “accidental” or “contingent” events and transitory circumstances can affect choice of technique and economic efficiency over a period now approaching two centuries (Puffert 2000, 2002). The gauge now used on over half the world’s railways, 4 feet 8.5 inches (4’8.5″, 1435 mm), comes from the primitive mining tramway where George Stephenson gained his early experience. Stephenson transferred this gauge to the Liverpool and Manchester Railway, opened in 1830, which served as the model of best practice for many of the earliest modern railways in Britain, continental Europe, and North America. Many railway engineers today view this gauge as narrower than optimal. Yet, although they would choose a broader gauge today if the choice were open, they do not view potential gains in operating efficiency as worth the costs of conversion.

A much greater source of inefficiency has been the emergence of diversity in gauge. Six gauges came into widespread use in North America by the 1870s, and Britain’s extensive Great Western Railway system maintained a variant gauge for over half a century until 1892. Even today, Australia and Argentina each have three different regional-standard gauges, while India, Chile, and several other countries each make extensive use of two gauges. Breaks of gauge also persist at the border of France and Spain and most external borders of the former Russian and Soviet empires. This diversity adds costs and impairs service in interregional and international traffic. Where diversity has been resolved, conversion costs have sometimes been substantial.

This diversity arose as a result of several contributing factors: limited foresight, the search for an improved railway technology, transitory circumstances, and contingent events or “historical accidents.” Many early railway builders sought simply to serve local or regional transportation needs, and they did not foresee the later importance of railways in interregional traffic. Beginning in the late 1830s, locomotive builders found their ability to construct more powerful, easily maintained engines constrained by the Stephenson gauge, while some civil engineers thought that a broader gauge would offer improved capacity, speed, and passenger comfort. This led to a wave of adoption of broad gauges for new regions in Europe, the Americas, South Asia, and Australia. Changes in locomotive design soon eliminated much of the advantage of broad gauges, and by the 1860s it became possible to take advantage of the ability of narrow gauges to make sharper curves, following the contours of rugged landscape and reducing the need for costly bridges, embankments, cuttings, and tunnels. This, together with the beliefs of some engineers and promoters that narrow gauges would offer savings in operating costs, led to a wave of introductions of narrow gauges to new regions.

At every point of time there was some variation in engineering opinion and practice, so that which gauge was introduced to each new region often depended on the contingent circumstances of who decided the gauge. To cite only the most fateful example, Stephenson’s rivals for the contract to build the Liverpool and Manchester Railway proposed to adopt the gauge of 5’6″ (1676 mm). If that team had been employed, or if Stephenson had gained his earlier experience on almost any other mining tramway, then the ensuing worldwide history of railway gauge would have been different — perhaps far different.

After the introduction of particular gauges to new regions, later railways nearly always adopted the gauge of established connecting lines, reinforcing early contingent choices with positive feedbacks. As different local common-gauge regions expanded, regions that happened to have the same gauge merged into one another, but breaks of gauge emerged between regions of differing gauge. The extent of diversity that emerged at the national and continental levels, and thus the relative efficiency of the outcome, thus depended on earlier contingent events.

Once these patterns of diversity had been established by a path-dependent process, they were partly rationalized by the sort of forward-looking, profit-seeking behavior proposed by Liebowitz and Margolis. In North America, for example, a continental standard emerged quickly after demand for interregional transport grew, and standardization was facilitated both by the formation of interregional railway systems and by cooperation among independent railways. Elsewhere as well, much of the most inefficient diversity was resolved relatively quickly. Nonetheless, a costly diversity has persisted in places where variant-gauge regions had grown large and costly to convert before the value of conversion became apparent. Spain’s variant gauge has become more costly in recent years as the country’s economy has been integrated into that of the European Union, but estimated costs of (U.S.) $5 billion have precluded conversion. India and Australia have only recently made substantial progress toward the resolution of their century-old diversity.

Wherever gauge diversity has been resolved, it is one of the earliest gauges that has emerged as the standard. In no significant part of the world has current practice in gauge broken free of its early history. The inefficiency that has resulted, relative to what other sequences of events might have produced, was not the result of market failure. Rather, it resulted primarily from the natural inability of railway builders to foresee how railway networks and traffic patterns would develop and how technology would evolve.

The case also illustrates the usefulness of Arthur’s (1989) modeling approach for cases of unsponsored techniques and limited foresight (Puffert 2000, 2002). These were essentially the conditions Arthur assumed in proposing his model.

Videocassette Recording Systems

Markets for technical systems exhibiting network externalities (where users benefit from using the same system as other users) often tend to give rise to de facto standards — one system used by all. Foreseeing this, suppliers sometimes join to offer a common system standard from the outset, precluding any possibility for path-dependent competition. Examples include first-generation compact discs (CDs and CD-ROMs) and second-generation DVDs.

In the case of consumer videocassette recorders (VCRs), however, Sony with its Betamax system and JVC with its VHS system were unable to agree on a common set of technical specifications. This gave rise to a celebrated battle between the systems lasting from the mid-1970s to the mid-1980s. Arthur (1990) used this competition as the basis for a thought experiment to illustrate path dependence. He explained the triumph of VHS as the result of positive feedbacks in the video film rental market, as video rental stores stocked more film titles for the system with the larger user base, while new adopters chose the system for which they could rent more videos. He also suggested tentatively that, if the common perception that Betamax offered a superior picture quality is true, then the “the market’s choice” was not the best possible outcome.

In a closer look at the case, Cusumano et al. (1992) showed that Arthur’s suggested positive-feedback mechanism was real, and that this mechanism explains why Sony eventually withdrew Betamax from the market rather than continuing to offer it as an alternative system. However, they also showed that the video rental market emerged only at a late stage in the competition, after VHS already had a strong lead in market share. Thus, Arthur’s mechanism does not explain how the initial symmetry in competitors’ positions was broken.

Cusumano et al. argued, nonetheless, that the earlier competition already had a path-dependent market-share dynamic. They presented evidence that suppliers and distributors of VCRs increasingly chose to support VHS rather than Betamax because they saw other market participants doing so, leading them to believe that VHS would win the competition and emerge as a de facto standard. The authors did not make clear, however, why market participants believed that a single system would become so dominant. (In a private communication, coauthor Richard Rosenbloom said that this was largely because they foresaw the later emergence of a market for prerecorded videos.)

The authors argue that three early differences in promoters’ strategies gave VHS its initial lead. First, Sony proceeded without major co-sponsors for its Betamax system, while JVC shared VHS with several major competitors. Second, the VHS consortium quickly installed a large manufacturing capacity. Third, Sony opted for a more compact videocassette, while JVC chose instead a longer playing time for VHS. In the event, a longer playing time proved more important to many consumers and distributors, at least during early years of the competition when Sony cassettes could not accommodate a full (U.S.) football game.

This interpretation shows how purposeful, forward-looking behavior interacted with positive feedbacks in producing the final outcome. The different strategies, made under conditions of limited foresight, were contingent decisions that set competition among the firms on one path rather than another (Puffert 2003). Furthermore, the early inability of Sony cassettes to accommodate a football game was a transitory circumstance that may have affected outcomes long afterward.

Liebowitz and Margolis’s (1995) initial interpretation of the case responded only to Arthur’s brief discussion. They argued that the playing-time advantage for VHS was the crucial factor in the competition, so that VHS won because its features most closely matched consumer demand — and not due to path dependence. Although their discussion covers part of the same ground as that of Cusumano et al., Liebowitz and Margolis did not respond to the earlier article’s argument that the purposeful behavior of suppliers interacted with positive feedbacks. Rather, they treated this purposeful behavior as the antithesis of the mechanistic, non-purposeful evolution of market share that they see as the ultimate basis of path dependence.

Liebowitz and Margolis also presented substantial evidence that Betamax was not, in fact, a superior system for the consumer market. The primary concern of their argument was to refute a suggested case of path-dependent lock-in to an inferior technique, and in this they succeeded. It is arguable that they overstated their case, however, in asserting that what they refuted amounted to a claim for “third-degree” path dependence. Arthur had not argued that the selection of VHS, if inferior to Betamax, would have been remediable.

Recently, Liebowitz (2002) did respond to Cusumano et al. He argued, in part, that the larger VHS tape size offered a permanent rather than transitory advantage, as this size facilitated higher tape speeds and thus better picture quality for any given total playing time.

A Brief Discussion of Further Cases

Pest Control

Cowan and Gunby (1996) showed that there is path dependence in farmers’ choices between systems of chemical pest control and integrated pest management (IPM). IPM relies in part on predatory insects to devour harmful ones, and the drift of chemical pesticides from neighboring fields often makes the use of IPM impossible. Predatory insects also drift among fields, further raising farmers’ incentives to use the same techniques as neighbors. To be practical, IPM must be used on the whole set of farms that are in proximity to each other. Where this set is large, the transactions costs of persuading all farmers to forego chemical methods often prevent adoption. In addition to these localized positive feedbacks, local learning effects also make the choice between systems path dependent. The path-dependent local lock-in of each technique has sometimes been upset by such developments as invasions by new pests and the emergence of resistance to pesticides.

Nuclear Power Reactors

Cowan (1990) argued that transitory circumstances led to the establishment of the dominant “light-water” design for civilian nuclear power reactors. This design, adapted from power plants for nuclear submarines, was rushed into use during the Cold War because the political value of demonstrating peaceful uses for nuclear technology overrode the value of finding the most efficient technique. Thereafter, according to Cowan, learning effects arising from engineering experience for the light-water design continued to make it the rational choice for new reactors. He argued that there are fundamental scientific and engineering reasons for believing, however, that an equivalent degree of development of alternative designs may have made them superior.

Information Technology

Although Shapiro and Varian (1998) did not emphasize the term path dependence, they pointed to a broad range of research documenting positive feedbacks that affect competition in contemporary information technology. Like Morris and Ferguson (1993), they showed how competing firms recognize and seek to take advantage of these positive feedbacks. Strictly speaking, not all of these cases are path dependent, because in some cases firms have been able to control the direction and outcome of the allocation processes. In other cases, however, the allocation process has had its own path-dependent dynamic, affected both by the attempts of rival firms to promote their products and by factors that are unforeseen or out of their control.

Among the cases that Shapiro and Varian discuss are some involving Microsoft. In addition, some proponents of the importance of path dependence have argued that positive feedbacks favor Microsoft’s competitive position in ways that hinder competitors from developing and introducing innovative products (see, for example, Reback et al., 1995). Liebowitz and Margolis (2000), by contrast, offered evidence of cases where superior computer software products have had no trouble winning markets. Liebowitz and Margolis also argued that the lack of demonstrated empirical examples of “third-degree” path dependence creates a strong presumption against the existence of an inferior outcome that government antitrust measures could remedy.

Path Dependence at Larger Levels

Geography and Trade

The examples thus far all treat path dependence in the selection of alternative products or techniques. Krugman (1991, 1994) and Arthur (1994) have also pointed to a role for contingent events and positive feedbacks in economic geography, including in the establishment of Silicon Valley and other concentrations of economic activity. Some of these locations, they showed, are the result not of systematic advantages but rather of accidental origins reinforced by “agglomeration” economies that lead new firms to locate in the vicinity of similar established firms. Krugman (1994) also discussed how these same effects produce path dependence in patterns of international trade. Geographic patterns of economic activity, some of which arise as a result of contingent historical events, determine the patterns of comparative advantage that in turn determine patterns of trade.

Institutional Development

Path dependence also arises in the development of institutions — a term that economists use to refer to the “rules of the game” for an economy. Eichengreen (1996) showed, for example, that the emergence of international monetary systems, such as the classical gold standard of the late nineteenth century, was path dependent. This path dependence has been based on the benefits to different countries of adopting a common monetary system. Eichengreen noted that these benefits take the form of network externalities. Puffert (2003) has argued that path dependence in institutions is likely to be similar to path dependence in technology, as both are based on the value of adopting a common practice — some technique or rule — that becomes costly to change.

Thus path dependence can affect not only individual features of the economy but also larger patterns of economic activity and development. Indeed, some teachers of economic history interpret major regional and national patterns of industrialization and growth as partly the result of contingent events reinforced by positive feedbacks — that is, as path dependent. Some suggest, as well, that the institutions responsible for economic development in some parts of the world and those responsible for backwardness in others are, at least in part, path dependent. In the coming years we may expect these ideas to be included in a growing literature on path dependence.


Path dependence arises, ultimately, because there are increasing returns to the adoption of some technique or other practice and because there are costs in changing from an established practice to a different one. As a result, many current features of the economy are based on what appeared optimal or profit-maximizing at some point in the past, rather than on what might be preferred on the basis of current general conditions.

The theory of path dependence is not an alternative to neoclassical economics but rather a supplement to it. The theory of path dependence assumes, generally, that people optimize on the basis of their own interests and the information at their disposal, but it highlights ways that earlier choices put constraints on later ones, channeling the sequence of economic outcomes along one possible path rather than another. This theory offers reason to believe that some — or perhaps many — economic processes have multiple possible paths of outcomes, rather than a unique equilibrium (or unique path of equilibria). Thus the selection among outcomes may depend on nonsystematic or “contingent” choices or events. Empirical case studies offer examples of how such choices or events have led to the establishment, and “lock in,” of particular techniques, institutions, and other features of the economy that we observe today — although other outcomes would have been possible. Thus, the analysis of path dependence adds to what economists know on the basis of more established forms of neoclassical analysis.

It is not possible at this time to assess the overall importance of path dependence, either in determining individual features of the economy or in determining larger patterns of economic activity. Research has only partly sorted out the concrete conditions of technology, interactions among agents, foresight, and markets and other institutions that make allocation path dependent in some cases but not in others (Puffert 2003; see also David 1997, 1999, 2000 for recent refinements on theoretical conditions for path dependence).

Addendum: Technical Notes on Definitions

Path dependence, as economists use the term, corresponds closely to what mathematicians call non-ergodicity (David 2000). A non-ergodic stochastic process is one that, as it develops, undergoes a change in the limiting distribution of future states, that is, in the probabilities of different outcomes in the distant future. This is somewhat different from what mathematicians call path dependence. In mathematics, a stochastic process is called path dependent, as opposed to state dependent, if the probabilities of transition to alternative states depend not simply on the current state of the system but, additionally, on previous states.

Furthermore, the term path dependence is applied to economic processes in which small variations in early events can lead to large or discrete variations in later outcomes, but generally not to processes in which small variations in events lead only to small and continuous variations in outcomes. That is, the term is used for cases where positive feedbacks magnify the impact of early events, not for cases where negative feedbacks diminish this impact over time.

The term path dependence can also be used for cases in which the impact of early events persists without appreciably increasing or decreasing over time. The most important examples would be instances where transitory conditions have large, persistent impacts.


Arthur, W. Brian. 1989. “Competing Technologies, Increasing Returns, and Lock-in by Historical Events.” Economic Journal 99: 116‑31.

Arthur, W. Brian. 1990. “Positive Feedbacks in the Economy.” Scientific American 262 (February): 92-99.

Arthur, W. Brian. 1994. Increasing Returns and Path Dependence in the Economy. Ann Arbor: University of Michigan Press.

Cowan, Robin. 1990. “Nuclear Power Reactors: A Study in Technological Lock-in.” Journal of Economic History 50: 541-67.

Cowan, Robin, and Philip Gunby. 1996. “Sprayed to Death: Path Dependence, Lock-in and Pest Control Strategies.” Economic Journal 106: 521-42.

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David, Paul A. 2000. “Path Dependence, Its Critics and the Quest for ‘Historical Economics’.” Working paper, All Souls College, Oxford University.

Eichengreen, Barry. 1996 Globalizing Capital: A History of the International Monetary System. Princeton: Princeton University Press.

Frankel, M. 1955. “Obsolescence and Technological Change in a Maturing Economy.” American Economic Review 45: 296-319.

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Liebowitz, S.J. 2002. Rethinking the Network Economy. New York: AMACOM

Liebowitz, S.J., and Stephen E. Margolis. 1990. “The Fable of the Keys.” Journal of Law and Economics 33: 1-25.

Liebowitz, S.J., and Stephen E. Margolis. 1995. “Path Dependence, Lock-In, and History.” Journal of Law, Economics, and Organization 11: 204-26.

Liebowitz, S.J., and Stephen E. Margolis. 2000. Winners, Losers, and Microsoft. Oakland: The Independent Institute.

Morris, Charles R., and Charles H. Ferguson. 1993. “How Architecture Wins Technology Wars.” Harvard Business Review (March-April): 86-96.

Norman, Donald A. 1990. The Design of Everyday Things. New York: Doubleday. (Originally published in 1988 as The Psychology of Everyday Things.)

Puffert, Douglas J. 2000. “The Standardization of Track Gauge on North American Railways, 1830-1890.” Journal of Economic History 60: 933-60.

Puffert, Douglas J. 2002. “Path Dependence in Spatial Networks: The Standardization of Railway Track Gauge.” Explorations in Economic History 39: 282-314.

Puffert, Douglas J. 2003 forthcoming. “Path Dependence, Network Form, and Technological Change.” In W. Sundstrom, T. Guinnane, and W. Whatley, eds., History Matters: Essays on Economic Growth, Technology, and Demographic Change. Stanford: Stanford University Press.

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Citation: Puffert, Douglas. “Path Dependence”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL

Encumbered Cuba: Capital Markets and Revolt, 1878-1895

Author(s):Fernández, Susan J. F
Reviewer(s):Salvucci, Linda K.

Published by EH.NET (June 2003)

Susan J. Fern?ndez, Encumbered Cuba: Capital Markets and Revolt, 1878-1895. Gainesville: University Press of Florida, 2002. xii + 203 pp. $59.95 (hardcover), ISBN: 0-8130-2564-8.

Reviewed for EH.NET by Linda K. Salvucci, Department of History, Trinity University.

Encumbered Cuba is a timely addition to the recent spate of historical works commemorating the centennial of the War of 1898 on the one hand and the latest print and broadcast analyses of “Anglobalization” by Niall Ferguson and his critics on the other. Inspired by such ongoing debates on the relationship between empire and economy, this monograph is grounded in sources from Cuba, Spain and the United States, especially the Braga Brothers Collection at the University of Florida. At issue are the very nature of late nineteenth-century Spanish colonialism and its relationship to subsequent economic growth and development in Cuba. Of course, the imperial bond between Spain and Cuba was rendered infinitely more complicated and complex, if not distorted entirely, by the pervasive influence of the United States. Indeed, for much of the nineteenth century, Cuba was a commercial and financial dependency of the United States, while remaining a political dependency of Spain (p. 47). The peculiarities of this situation make it more difficult than is often the case for historians to assess cause and effect, but Fern?ndez makes a credible effort to do so. She makes a compelling case for the significance of the period between the end of the Ten Years War (1868-1878) and the outbreak of rebellion again in 1895. During these years, she argues, Cuba should have been able to diversify its economy but did not, because Spanish colonialism had failed to foster the necessary institutions for credit and investment.

Cubanists will find this monograph an interesting prologue to Allan Dye’s Cuban Sugar in the Age of Mass Production (Stanford, 1998). Fern?ndez begins her intricate tale with an evocative description of the Columbian Exposition of 1893 and its “homage to European colonialism” (p. 1). Drawing upon the work of Spanish economic historians such as Gabriel Tortella Casares and the still useful insights of Stanley J. and Barbara H. Stein in The Colonial Heritage of Latin America (New York, 1970), she reviews the problems inherent in Spanish colonialism. Overall economic decline in the nineteenth century and the low level of technological development in the metropolis itself made for a “takeoff into sustained dependency” on the island (p. 7). Spain resisted the gold standard and free trade; the proportion of its government budget devoted to servicing debt far exceeded expenditures on infrastructure. In Cuba, railroads failed to handle all the sugar produced, let alone to stimulate industrialization or even diversification. A class of bourgeois bankers never developed to meet the significant credit needs of the sugar, tobacco, coffee and mining sectors because “personal favoritism” guided the appointment of “loyal Spaniards” to bank directorships and the subsequent granting of loans to borrowers (pp. 80, 91). In short, the Banco de Espa?ol de la Isla de Cuba (BEIC) and the Banco Hispano-Colonial (BHC) accommodated their functions to government interests and goals. For example, the BEIC alienated the elites outside Havana through its role as a designated tax collector; eventually, it found itself in the position of refusing its own notes for collection of fees to the government (p. 102). The Cuban planter class increasingly turned to the United States as the source of finance capital, paid for by ubiquitous sugar exports. All this was in evidence as early as 1866, when a crisis in Cuban money markets occurred.

Not surprisingly, the Ten Years War only exacerbated these interrelated trends and shortcomings. The impending demise of slavery in Cuba changed cash flow requirements for large producers, while freed slaves would have different credit needs as well. Added to this difficult mix were persistent currency shortages; by the early 1880s, there was not even enough currency available to pay winners of the Cuban colonial lottery. Spanish authorities and Catalan businessmen wanted the banks to stabilize the currency and to act as agencies for mobilizing private capital, but they were simply not able to do so.

During the last two decades of the nineteenth century, Spain’s need for Cuba increased while Cuba’s need for Spain decreased. Fern?ndez points out that the owners of large estates needed U.S. sugar sales and credit to survive Spanish colonialism. In short, Spain failed to provide its once “ever faithful isle” with the benefits of colonialism. The situation worsened dramatically in 1893, as economic crises occurred at other points in the Atlantic basin, most notably the United States. “Between 1893 and 1895, rebellion against Spanish colonialism in Cuba emerged from cross-class opposition to failed Spanish fiscal and monetary policies” (p. 143). Moreover, she asserts, the key element in the Cuban revolt was the perception that Spain could not lead Cuba to economic recuperation after 1894 (p. 150). Apparently, the United States, whose government knew how to recuperate from fiscal crises, could.

Or could it? The arguments of the last chapter of this book are a bit confusing, as Fern?ndez reverts back to her central premise, that the crucial moment for Cuba was not 1898, but the years between 1870 and 1895, when failure to develop adequate credit and investment institutions determined the persistence of sugar monoculture. Comparisons and contrasts with the rest of Latin America are attempted, but not fully pursued. While it is certainly true that, unlike elsewhere, domestic problems in Cuba could be blamed on colonialism (p. 164), the cause-effect relationship needs to be defined more systematically, perhaps by tracking the economic interests and political behavior of key planters and their creditors. Another way to approach this would be to propose a counterfactual: what if Cuba had become independent along with the rest of the Spanish colonies in the New World? In other words, it seems to me that the timing of Cuban independence might be as critical a variable as Spanish colonialism. Had Cuba achieved political independence in the 1810-20s, would the prospects for diversification have been significantly better? Would Cubans have put borrowed capital to better use? Or was U.S. influence already strong enough to have locked Cuba into a system of trade and borrowing that still depended upon sugar monoculture? Perhaps it is developments in the decades before the Ten Years War that proved just as decisive in the long run.

Susan Fern?ndez has tackled a complex and vital subject. While her work may be of greatest interest to specialists in nineteenth century Cuban history, she raises important questions for all who remain intrigued by the relationship between colonialism and economic development.

Linda K. Salvucci, Associate Professor of History at Trinity University in San Antonio, is working on a book project, “Ironies of Empire: The United States-Cuba Trade under Spanish Rule, 1760-1898.” With Richard J. Salvucci, she is coauthor of “Cuba and the Latin American Terms of Trade: Old Theories, New Evidence,” Journal of Interdisciplinary History, XXXI: 2 (Autumn, 2000), 197-222, which won the Conference on Latin American History Prize in 2001.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):19th Century

The Origins of Commercial Banking in America, 1750-1800

Author(s):Wright, Robert E.
Reviewer(s):Perkins, Edwin J.

Published by EH.NET (November 2001)

Robert E. Wright, The Origins of Commercial Banking in America,

1750-1800. London and New York: Rowman & Littlefield Publishers, 2001. xii

+ 219 pp. $65 (cloth), ISBN: 0-7425-2086-2; $24.95 (paperback), ISBN:


Reviewed for EH.NET by Edwin J. Perkins, Professor of History, emeritus,

University of Southern California.

Robert Wright has written a highly original book that merits our attention.

First, he overlaps the late colonial period and the first decade of the early

national era — an uncommon periodization for financial historians. Previous

authors typically have covered either the colonial period or the national

period, not both. Second, Wright approaches the subject mainly from an

economic perspective rather than from a political angle. Earlier writers have

been mostly concerned with the public policy ramifications of legislative

debates over financial matters, and they have been less concerned with the

impact of financial legislation on the economy. Trained as a historian but

employed for several years in the economics department of the University of

Virginia, Wright has a unique academic profile. That interdisciplinary

background has enabled him to generate an analysis of critical financial

issues during this era that is unmatched by any of his predecessors. For

economists, in particular, this volume stands as the new starting point for

gaining an understanding of the evolution of U.S. commercial banking.

Wright focuses throughout on the perpetual demand for improved liquidity. The

colonial economy had no active private banks. Likewise, there was no uniform

currency since the British had forbidden the establishment of a colonial mint.

As a result, most of the coinage in circulation originated in Spain’s colonial

empire in the Western Hemisphere. The paper currency issues of the various

colonial legislatures supplemented these hard monies. Capital markets in the

colonies were non-existent or thin. Only Massachusetts had a public debt that

was privately held and occasionally traded. The whole financial system was

institutionally immature. A huge percentage of the outstanding colonial

mercantile debt could be traced back to the London money market. Colonial

merchants did make use of domestic and foreign bills of exchange, but it was

nearly impossible to convert these financial instruments into cash during

periods of stringency. While the financial system was sufficiently functional

to support steady increases in the size of the colonial economy (primarily due

to population growth), its overall performance was less than optimal.

Liquidity was sorely lacking. Merchants, family farmers, great planters, and

artisans all sought some form of institutional relief.

Parliamentary regulations and the negative attitudes of distant British

administrators who were responsible for colonial affairs discouraged private

initiatives. Colonial leaders from South Carolina to New England periodically

sought legislative permission to create banks of one variety or another, but

none of these attempts produced anything sustainable. Wright covers these

early efforts in a fair amount of detail. He views these abortive efforts as

legitimate antecedents of the private commercial banks that emerged after


After the achievement of independence, the new nation began to experiment with

modern commercial banking. Luckily, these experiments, which aroused much

public debate and legislative controversy at the state and federal levels,

almost immediately led to the creation of viable institutions. I say “luckily”

because the effort to create similar institutions in many other emerging

nations over the last two centuries has produced numerous tragic missteps.

The Bank of North America, the brainchild of Robert Morris, the famous

treasurer of the confederation government, became the prime model for all

subsequent commercial banks. It issued currency supported by adequate specie

reserves, accepted deposits, discounted mercantile notes, and turned a

respectable profit for investors. Other commercial banks operating under state

charters began to multiply. The problem of illiquidity in the U.S. economy was

steadily alleviated thereafter. The national government created the Bank of

the United States, which was the largest economic unit in the economy

throughout its twenty-year life span. Commercial banks were the pillars and

catalysts for the expansion of the U.S. economy from 1790 forward. We are

finally coming to the realization, thanks largely to the contributions of

Richard Sylla and his collaborators, that improvements in financial services

preceded advancements in agriculture, transportation, and industry.

For his discussion of events after 1780, Wright draws most of his information

from a careful analysis of banking in Pennsylvania and New York. His

conclusions contrast at many points with Naomi Lamoreaux’s study of New

England banking during the same period. In her research, Lamoreaux found that

commercial banks were typically closely held; the major investors dominated

the board of directors and made numerous insider loans to themselves. Wright

has found a different pattern in the middle Atlantic region. These banks had a

larger capitalization and a broader ownership. They made loans mainly to

depositors, not owners, and the occupations of borrowers varied — from

merchants to farmers to artisans. As much as I admire Wright’s detailed

discussion of the development of the commercial banking system, I would have

gone about this project in a different manner — not necessarily better, but

different and complementary. Since I have been working in this subfield for

decades, I offer my own admittedly biased opinions without apology.

Whereas Wright concentrates on the demand for liquidity, I would have

celebrated the supply side of the equation. I am not convinced that the

colonial demand for liquidity was any different than the persistent demands of

thousands of urban merchants in past civilizations. I take the demand for

superior financial services as a given — a truism. What was astonishingly

different in the eighteenth century was the institutional response in the new

United States. Borrowing piecemeal from the example of a handful of British

private bankers and the singular Bank of England, the first generation of

independent Americans were imaginative and prudent institutional innovators.

Despite their strategic differences, Hamiltonians and Jeffersonians both

wanted a successful financial system — if only to prove to a skeptical world

that a republican form of government could survive and indeed thrive

financially as well as politically.

I also wish Wright had cited the public loan offices created by the colonial

legislatures as the prime forerunners of the modern commercial bank. Across

the Atlantic Ocean, advocates of land banks had tried for centuries to gain

the attention and approval of the ruling classes. Their proposed land banks

were designed to offer loans to citizens with real estate as collateral. None

of these European schemes proved viable. But in English North America, land

banks in the middle colonies (but not in New England) operated successfully

for decades. They made loans to a wide swath of landholders; they experienced

few losses; and they generated substantial interest revenue for their

provincial legislatures. Their issues of paper currency were retired at their

original purchasing-power values; depreciation was not a serious problem. The

Pennsylvania legislature imposed no new taxes for decades because interest

income from the loan office covered its modest annual expenses. True, the loan

offices did not accept deposits and did not discount mercantile paper, but

they succeeded over a long period of time, whereas similar efforts in all

other contemporary societies had failed. The colonial land offices were

remarkable enterprises for their era and deserve more recognition as emulative

institutional models.

My third friendly amendment relates to the coverage of the Bank of the United

States. Wright just does not devote sufficient space to this novel

institution. It too was highly innovative. Unlike the Bank of England, its

main customers after 1795 were private citizens, not governments. It possessed

branch offices in major port cities. As David Cowen has recently argued, the

BUS in tandem with the U.S. Treasury Department acted very much like a modern

central bank. Fourthly, Wright might have cited the recent work of Glenn

Crothers on commercial banking in northern Virginia in the 1790s. I had better

stop here with my recommended additions or I might be roundly accused of

criticizing the author for not writing the book I had envisioned rather than

the book he chose to write. By revising the analytical model for all subsequent

historians who embark on an examination of the origins of U.S. commercial

banking, Robert Wright has made a major scholarly contribution. The supply

side innovations did not occur in a vacuum, Wright reminds us; they came about

because thousands of participants in the eighteenth-century economy desired

increased levels of liquidity. If the author has gone slightly overboard to

prove a valid point, he has done so in a noble cause.

Edwin J. Perkins has written extensively about financial history. His books

include American Public Finance and Financial Services, 1700-1815 (Ohio

State University Press, 1994). His most recent publication is Wall Street

to Main Street: Charles Merrill and Middle Class Investors (Cambridge

University Press, 1999).

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):18th Century

Monetary Standards in the Periphery: Paper, Silver and Gold, 1854-1933

Author(s):Acena, Pablo Martin
Reis, Jaime
Reviewer(s):Redish, Angela

Published by EH.NET (September 2000)

Pablo Martin Acena and Jaime Reis, editors, Monetary Standards in the

Periphery: Paper, Silver and Gold, 1854-1933. New York: St. Martin’s Press,

2000. x + 264 pp. $75 (cloth), ISBN: 0-312-22677-2.

Reviewed for EH.NET by Angela Redish, Department of Economics, University of

British Columbia and Bank of Canada.

The classical gold standard of the late nineteenth and early twentieth

centuries remains a touchstone for evaluating alternative international

monetary regimes. Therefore the operation of that standard has both

contemporary and historical implications. With some notable exceptions,

analyses have focused on the operation and costs and benefits of that regime in

a few “core” economies — predominantly the United Kingdom, the United States

and France. Thus, this book, in which leading monetary historians in six

“peripheral” economies present case-studies of the operation of the gold

standard, is particularly welcome.

The book begins with a brief chapter by Pablo Martin Acena, Jaime Reis and

Agustin Llona Rodriguez that summarizes the literature on two related themes

pursued (to varying degrees) in the case studies: the possibility that

adherence to the gold standard was more difficult in peripheral economies and

the possibility that the benefits of gold standard adherence were different for

the periphery. The article then suggests what can be learned from these six

economies. In a nutshell, the authors believe that adherence to the gold

standard was more difficult for peripheral countries (especially in Latin

America) because they faced volatile export prices, were sensitive to the

international capital market and had an underdeveloped financial system,

particularly no lender of last resort.

The six economies discussed in the book are Italy, Portugal and Spain (within

Europe) and Brazil, Chile and Columbia (within Latin America). The overall

picture presented is a diverse one, which is a little disheartening for those

wishing to take away general lessons. Was the gold standard an appropriate

monetary regime for peripheral countries? Jose Antonio Ocampo, writing on

Columbia, argues that it “worked” (perhaps not the strongest endorsement!) even

in the face of sharp external cycles. Rodriguez, writing on Chile, carefully

shows how the appropriate exchange rate regime might depend on the level of

development of the banking system. He argues that, in Chile, the paper standard

in the late nineteenth century had been a good fit. Did countries benefit from

a “Good Housekeeping seal of approval” if they joined the gold standard? Reis,

writing on Portugal, argues that this did not happen. Portugal did not enjoy

low interest rates as a member of the gold standard club, but, on the other

hand, it did not behave according to the rules either. In Italy and Spain, for

much of the period, exchange rates were stable even without formal adherence to

the gold standard. But if being on the gold standard assured easier/cheaper

access to international capital markets, why pay the price of acting like a

convertible currency without getting the benefit of the “seal”? (This is an

issue that has similarities with the current debate about the advantages of

explicit targets for the implementation of monetary policy.)

This book may find its principal use as a source for those studying the

monetary systems of individual countries, but let me turn to what I took away

from the whole. Firstly, economies on paper money standards experienced a wide

range of macro-economic outcomes. As Tolstoy might have put it, “All metallic

standards resemble one another; every paper standard is a standard in its own

way.” Fiat money standards provide the scope for everything from high inflation

to stable prices. Given that today most economies are searching for the optimal

paper standard it is this diverse experience off the gold standard that may

have the most useful lessons for understanding the international monetary


Secondly, while the introductory chapter emphasizes that these six economies

spent more time off than on a metallic standard, there is an interesting common

chronology underlying that statistic. For virtually all of the first thirty

years of the period covered, Chile, Columbia, Portugal, and Spain were on

metallic standards; from 1880 to the mid-1920s most regimes were paper based;

and, in the mid-1920s, there was a return to metallism in Latin American and

Italy. Were there common factors in the suspension and return to

convertibility? Again there is more diversity than uniformity. Chile suspended

convertibility after enduring balance of payments problems from 1875-78 as the

price of wheat and copper fell, and these problems were then exacerbated by the

War of the Pacific (1879-83). Columbia’s civil war began in 1885 leading to the

issue of inconvertible paper. Portugal suspended the gold standard as a result

of fallout from the dramatic depreciation in Brazil after the 1889 Republican

revolution there, and also from the cessation of lending by the Barings.

Finally, Spain’s suspension appears to have been caused by the dramatic fall in

the price of silver in the early 1880s. (The discussion of the return to

metallism in the 1920s is told only for Columbia where the influence of the

renowned Dr. Kemmerer was (pro)found.)

Finally, the summary chapter stresses the need for greater emphasis on

political economy analyses of the monetary standard issue, and I strongly

concur. While economic factors, such as the dependence on a few exports whose

prices are volatile, were important vulnerabilities for the peripheral

countries, perhaps the most significant threats to metallism were war and

unstable political processes. This of course was equally true in the core: the

Franco-Prussian War, the US Civil War and the First World War all led to

suspensions of convertibility, and Barry Eichengreen and others have argued for

the importance of changing political systems in the collapse of the gold

standard in the core countries during the interwar period. A monetary system is

a social contract, and its strength will reflect the degree of social cohesion.

Before wholeheartedly recommending this book, let me just add a brief wish

list. The book would have profited from a concluding chapter that pulled the

material together even more than in the introductory chapter, focusing on

whether or not mistakes were made and whether or not there are lessons that can

be learned. The book might have also benefited had the authors of the case

studies presented comparable material and coverage. For example, the time

periods differed quite starkly, with the chapter on Brazil focusing only on the

ten gold standard years, while other chapters covered only subsets of the

period–to 1891 (Portugal) and to 1914 (Spain and Italy). My last request would

be for a common set of data tables, which would have enhanced the usefulness of

the book as a source for comparative financial history. That said, however,

there are a vast number of data tables and plenty of references for those who

want to go further.

Let me then end as I began: there is not sufficient knowledge about the

experience of peripheral economies during the heyday of the international gold

standard, and this book goes a long way toward filling gaps in our information.

Angela Redish is the author of Bimetallism: An Economic and Historical

Analysis recently published by Cambridge University Press. She is currently

Special Advisor at the Bank of Canada, on leave from the Economics Department

at the University of British Columbia.

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