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Records of American Business

Author(s):O'Toole, James M.
Reviewer(s):Jimerson, Randall C.

EH.NET BOOK REVIEW

Published by H-Business@eh.net and EH.Net (May 1998)

James M. O’Toole, ed. The Records of American Business. Chicago: Society of American Archivists, 1997. xvii + 396 pp. Bibliographical references and index. $39.95 (cloth), ISBN 0-931828-45-7.

Reviewed for H-Business and EH.Net by Randall C. Jimerson , Western Washington University

The Challenges of Documenting Modern American Business

The challenges of documenting American business have led archivists to develop techniques for selection, appraisal, and use of a wide variety of records that provide essential information for depicting aspects of business history and corporate operations. Often working closely with business historians and corporate leaders, archivists have attempted to mine the rich resources worthy of preservation from vast mountains of modern business records. In order to understand past and present approaches taken by archivists to preserve documentation important both to company officials and to outside researchers, this book is essential reading. The Records of American Business provides a variety of perspectives on the current state of archival practice, both for in-house corporate archives and for repositories that collect records relating to American business and enterprise.

This volume is a tangible result of the Records of American Business Project (RAB), sponsored by the Minnesota Historical Society and the Hagley Museum and Library and funded in part by the National Endowment for the Humanities. This project brought together the two collecting repositories with the largest holdings of business records in North America in a joint effort “to refine and redefine the appraisal and use of corporate records” (p. vi). Many of the essays in this volume were first presented at the RAB symposium in April, 1996. By that time, the project had broadened its scope to include many of the most significant institutions and individuals actively engaged with American business records, including corporate archivists, archivists from universities and historical societies, and independent consultants. The variety of perspectives offered in this volume is impressive. The diversity of views indicates that there is no consensus concerning a particular approach to solving archival conundrums, but rather a healthy discourse representing different viewpoints.

The Records of American Business begins with a foreword by the editor, James M. O’Toole, who outlines some of the major themes that emerge from this collection of fourteen essays. One of the most basic issues is placement: should business firms establish in-house archival programs, or place their records at an external research institution? Other issues include the complex process of appraisal, by which archivists determine the long-term value of records. Changing technology has had a significant impact on archival operations, particularly in business firms, which often have confronted new technologies, such as the computer, before other institutions. Finally, O’Toole makes a strong case for the necessity of business archives to redefine their clientele and to build alliances of all kinds with other groups. “Only if alliance building comes to be seen as part of the core of archival services–equal in importance to appraisal, arrangement, description, preservation activities, and all the other familiar archival tasks–will archivists be able to meet the multifarious challenges of modern records,” he concludes (p. xvi). O’Toole insists that these essays have a wider applicability than American business records, since all archivists face similar challenges and problems. This is true, but in straining to make the point he overreaches, advising the reader to substitute the word “academic” or “religious” or whatever term applies to your own setting whenever the word “business” appears (p. vii). I tried this; it simply doesn’t work all the time. Many of the issues presented here apply only, or principally, to a business context. After all, that is the presumed rationale for a volume devoted to business records. That said, it is true that many of these techniques can be adapted to fit other types of institutional settings, and the volume will be useful for all archivists, and it should find a wide audience.

In his introduction, “Business and American Culture: The Archival Challenge,” Francis X. Blouin, Jr., director of the Bentley Historical Library at the University of Michigan, provides the context for the essays that follow. Quoting Calvin Coolidge’s famous dictum, “The chief business of the American people is business,” Blouin writes that, despite the enormous impact of business institutions on American life, relatively little is known about them. Blouin blames this in part on trends in academic history, which has not focused much attention on business institutions, and in part on the fact that, compared to political, religious and educational institutions, “there is very little documentation with which to work” (p. 1). Blouin discusses the narrow definition of business, as “a set of organizations that have structure and purpose focused on the delivery of goods and services,” and the broader sense of the term, as “an institution that defines culture and values” (p. 3). Both senses should be considered in reading the diverse articles in this volume, he says. Blouin then provides a succinct overview and interpretation of the essays to follow, showing how they relate to three major challenges facing archivists dealing with business records: appraisal, use, and technical issues. This volume presents a variety of perspectives, Blouin states, and this pluralistic approach appears necessary to meet the needs of a diverse group of users.

The fundamental divergence represented here is between corporations that establish their own internal archives and “external” repositories, such as universities, historical societies, and research libraries, which collect records from many different business firms. Although archivists generally encourage businesses to maintain their own archives, over the past decade there has been “a downward trend in the creation of business archives programs in corporations” (p. 351), and several major corporations have closed well-established and apparently successful archives programs, according to Winthrop Group consultant Karen Benedict. Benedict, formerly corporate archivist for Nationwide Insurance, provides an analysis of the choices facing company officials in deciding between maintaining an in-house archives program or placing company records in an outside repository. Although arguing strongly for the first option, Benedict acknowledges that many companies will prefer contracting out for archival services. This, at least, is preferable to destroying caches of significant historical documentation, which is all too common among corporations worried about disclosure of sensitive information.

Many of the reasons for this concern for corporate privacy are implicit in the essay by Philip F. Mooney of Coca-Cola, who is curiously the only contributor actively employed as an in-house business archivist. Mooney contrasts archival myths about business archives with the corporate reality he sees daily. He contends that corporations are “a historic by their very nature” (p. 60), and that in-house “archival professionals need to develop more precise tools to measure bottom-line contributions” (p. 61) and must “constantly seek new opportunities to market [the archives] resources and service to its constituents” (p. 63). Although a few business leaders might appreciate the value of history for institutional memory, decision-making or maintaining corporate culture, Mooney counters that they are rare exceptions. Corporate archivists will have a difficult time justifying their contributions to the financial well-being of the company.

Despite these difficulties, Marcy Golstein depicts in-house business archives moving from a narrow traditional focus to a more flexible approach emphasizing a variety of business uses for archival records. A former archivist for AT&T, now working as a consultant, Goldstein emphasizes corporate archives as “the repository of the corporate memory” (p. 41) and as “knowledge management centers and not historical warehouses” (p. 54). Such arguments sound persuasive, but the declining numbers of corporate archives suggest that fewer business executives are convinced that the costs and potential liabilities of in-house archives justify their continuation.

To demonstrate that some corporate executives have championed the establishment and development of in-house archives, the volume presents brief excerpts from oral history interviews with three such business leaders. These statements repeat some of the traditional arguments in support of in-house archives, but there is not much context or background with which to form a clear perspective on their comments. It would have been more interesting to hear comments from different viewpoints, such as an executive who opposes funding for archives or one who was converted from a skeptic to a true believer. This would help us understand the challenges faced by corporate archivists.

The other side of the debate, comprising most of the essays in this volume, is framed by archivists who do not have direct ties to in-house archives. While corporate archivists seem to be waging a battle for survival and attempting to adapt to ever-changing corporate climates, several major archival institutions have been developing significant research collections of business records. Many of these collections result from business closings or corporate takeovers, with surviving records often being spotty or coming to a repository without opportunity for the archivist to determine in advance which records should be saved. The challenges faced in such circumstances involve selection and acquisition, appraisal, and filling documentary gaps. These are the themes explored in the remaining essays.

The “complex relationship between historical scholarship and the keeping of archival records” is the theme of the lead essay, by Michael Nash of the Hagley Museum and Library. Writing more for archivists than for business historians, Nash provides an historiographic survey from the founding of the Business Historical Society in 1925 to recent studies that focus on trends in American economic, political, and social life, and the impact of gender, race, and workers on business. From a citation study of more than 67,000 footnotes in fifty major business history monographs and five leading journals, Nash concludes that “over time, there appears to be a declining reliance on archival sources” from business firms (p. 35). Nash offers only a few observations based on this finding, principally that archivists should make a more systematic effort to collect records from industry trade associations, lobbying groups, political action committees, and other entities that “can potentially provide the sources that scholars are seeking in order to document the relationship between business, culture, politics, and society” (p. 35). Unfortunately, this recommendation is the final sentence of his essay, so there are no specific suggestions for how this can be accomplished.

The most ambitious effort to answer the questions raised by Nash comes from Mark A. Greene and Todd J. Daniels-Howell, both archivists at Minnesota Historical Society (MHS), who first proposed the RAB Project. Their essay presents a lengthy case study of the MHS effort to develop a pragmatic approach to selecting modern business records for archival preservation. The “Minnesota Method” they developed is based on the assumption that “all archival appraisal is local and subjective” (p. 162), but that, through careful analysis of both records creators and the records themselves, archivists can establish appraisal and selection criteria that are “rational and efficient relative to a specific repository’s goals and resources” (p. 162). The strategy they propose includes: defining a collecting area; analyzing existing collections; determining the documentary universe, including relevant government records, printed and other sources; prioritizing industrial sectors, individual businesses, geographic regions, and time periods from which records will be sought; defining functions performed by businesses and the collecting levels needed to document major functions; connecting documentary levels to priority tiers; and updating this process every three to seven years. They outline priority factors used in making these decisions, documentation levels, and decision points to refine the priority levels. This Minnesota Method combines features of archival approaches to collection analysis, documentation strategy, appraisal, and functional analysis. Complete with eight flow charts, as well as other outlines and charts listing various procedural steps and criteria, the essay presents a detailed explanation of this strategy. Despite the authors’ statement that this “pragmatic method of selection … may seem a modest goal on paper” (p. 206), many archivists would find it a daunting task to adapt the Minnesota Method to their own repositories. The essay’s greatest value, however, is in outlining the complex issues that must be addressed in making appropriate and effective decisions regarding archival selection and acquisition. This is one essay that clearly suggests applicability to other types of historical records beyond the sphere of business.

Whereas Greene and Daniels-Howell focus on documentation for entire industries, Christopher T. Baer examines appraisal of records within a single firm. Baer draws on his extensive experience at the Hagley Museum and Library to explain four parameters that shape his approach to appraisal of business records. Baer’s approach reflects a number of influences, including Alfred D. Chandler’s seminal work and Michael E. Porter’s “Five Forces” of competitive strategy. The four parameters he posits for evaluating business records are function (actions required to achieve elemental purposes), structure (i.e., external structure), strategy (referring to both strategy and tactics), and detail (level of specificity and completeness for a particular record). In explaining the application of such criteria, Baer reviews much of the business management literature of recent decades and provides detailed analysis of factors affecting appraisal of business records. Ultimately, however, he concludes that the parameters he describes are “at best a kind of mental road map” and that the efficacy of appraisal decisions rests “in the archivist’s ability to use them in practice” (p. 120). The archivist is not a scientist searching for abstract truths but “a technologist who must occasionally work in the absence of or in advance of theory and who must use a variety of tools to produce a useful product in response to conflicting and often irreconcilable demands” (p. 121). Baer’s model, not quite as complex as the Minnesota Method, provides a useful starting point for any archivist facing the daunting task of analyzing and appraising voluminous records of a modern business firm. Following a detailed model may not make the work easier, but it should improve the quality and reliability of appraisal decisions.

Compared to the lengthy essays just considered, Bruce Bruemmer’s essay on functional analysis in the appraisal of business records will seem either a welcome relief for harried archivists or a simplistic solution to a complex problem. Bruemmer, archivist of the Charles Babbage Institute at the University of Minnesota, focuses on the documentation needs of individual companies. Borrowing from earlier work by Helen Samuels, Joan Krizack, and others, he applies the concept of functional analysis to business records. This appraisal method concentrates on documenting the most important functions of an organization, rather than its structural hierarchy. Instead of selecting records based on their relationship to the offices that generated them, functional analysis examines the underlying functions performed by the organization as a basis for records appraisal. Particularly as electronic records replace traditional means of communication, archivists must define the documentary needs of the organization at the middle or even the beginning of the records cycle. As Bruemmer argues, “Functional analysis is one of the few tools at the command of archivists to help guide archival practice in the electronic environment because it dictates documentary requirements before records are analyzed” (p. 155). In addition to the proximate goal of ensuring adequate documentation of business, he posits the further goal of strengthening the role of business archivists: “If we rise to the challenge, we may discover that the archive itself has become an essential business function” (p. 158). Although less sweeping in its purview and less complex in its design, functional analysis provides another useful model for documenting modern American business.

As historians well know, the history of business is not told entirely through the records generated by business firms. The forms of “external documentation” that supplement corporate records, according to Timothy L. Ericson, include a broad array of sources created by an individual or agency outside the company. Ericson, archivist at the University of Wisconsin-Milwaukee, examines the types of records that document businesses, including printed materials, newspapers, government records, personal papers of business founders or former employees, photographic and cartographic records, oral history, electronic data bases, and the World Wide Web. In some cases, these external sources may be the only records available for studying certain companies, either because official company records have been lost or destroyed or because of access restrictions placed on such records. In some situations, Ericson contends, such limited documentation might be all that is needed for companies that have limited national or even local impact. In other cases, external documentation may provide “a more appropriate level of information” (p. 319) than detailed records of every action taken within a corporation. This approach will be especially useful for small or defunct businesses, for businesses subject to extensive government regulation, to fill documentary gaps, or when only general or summary information is required.

Several essays in The Records of American Business examine specific types of records that are important for business archives. Richard J. Cox examines the impact of electronic records on corporate archives, emphasizing the internal value of business records as evidence and the role of archivists in protecting intellectual property, transaction security, integrity of data, and privacy. James E. Fogerty makes a strong case for the value of oral history in filling gaps in the documentation of business and in explicating corporate culture. Oral history “allows the creation of documents that cut through the formal record of organization to the internal and dynamic record of everyday operation” (p. 264). Ernest J. Dick, another former corporate archivist now working as a consultant, likewise argues for the importance of sound and visual records in providing a more complete documentation of corporate memory and a clearer understanding of corporate culture.

Most of the essays in this volume address the concerns and needs of archivists, scholars, and corporate officials. An important counterpoint is provided by John A. Fleckner, chief archivist at the National Museum of American History, Smithsonian Institution. Starting from the paradox of the public’s dislike of history as an academic subject despite its fascination with history outside the classroom, Fleckner discusses the popular presentation of business history. Drawing examples from history museums, historical sites, corporate depictions of history, and a variety of popular history publications, Fleckner distinguishes three distinct purposes served by popular history of business–to educate an audience; to contribute to business objectives; and to entertain. He urges archivists to look beyond their traditional audiences for business records–scholars and business executives–and to recognize the broader potential for some business records to become “the grist for journalists, public affairs staff, and other popular writers who unlock the history of business to much wider audiences” (p. 345). Given the public’s fascination with old products and advertisements, for example, and the boundless allure of nostalgia, this may well be a valuable approach for archivists to take. Many business advertisers have already discovered this.

The final essay in the volume, “Business Records: The Prospect from the Global Village,” by Michael S. Moss and Lesley M. Richmond, seeks to broaden the perspective beyond the United States. The title is a bit misleading, since the essay deals mainly with the United Kingdom and only tangentially with other European countries, and, after 368 pages of detailed discussion of American business records, this brief essay seems more an afterthought than an integral part of the discussion. Still, the essay does afford a few comparative insights. Reporting that throughout Europe use of business records for research “remains disappointingly low” (p. 381), the authors conclude, “Although a few family historians occasionally consult certain categories of business records … the majority of users seem to be enthusiasts seeking information about a product or service that has captured their imagination” (p. 382). The latter type of use is barely hinted at in other essays in the volume, though for many types of business records it holds true equally in the United States. For example, the majority of researchers in certain collections of railroad records consist of model railroaders and other hobbyists. Moss and Richmond also point out that public sector archives can earn revenue by providing research services for distant researchers, and by selling copies of items in their collections. Particularly significant are their comments about the relationship between historians and archivists. “Throughout Europe there is a complaint, echoing North America, that the archival community has lost contact with historians” (p. 386), they conclude, citing criticism of appraisal methods and demands that more records be preserved for research use. “The historians, for their part, need to understand the issues that confront the archivist and to be aware that they no longer (if they ever did) represent more than a mere fraction of the user community; the records they need for their research are very vulnerable to deaccessioning programmes,” they write (p. 387). Finally, due to the growth of a global economy, they argue that archivists from all countries need to exchange ideas about documentation, appraisal, and use of business records. This call for international collaboration and joint projects is, perhaps after all, a fitting conclusion to a volume of essays about American business records.

The Records of American Business will not be the last word on the subject. But it is a significant step forward in providing broad coverage of a wide range of issues, concerns, and perspectives regarding the selection, appraisal, and use of modern business records. It is essential reading for anyone interested in the process and outcome of archival efforts to ensure adequate documentation of American business in the coming decades.

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Subject(s):Business History
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

The Price of Permanence: Nature and Business in the New South

Author(s):Bryan, William D.
Reviewer(s):Irwin, James R.

Published by EH.Net (February 2020)

William D. Bryan, The Price of Permanence: Nature and Business in the New South. Athens: University of Georgia Press, 2018. xxiii + 226 pp. $55 (hardcover), ISBN: 978-0-8203-5339-5.

Reviewed for EH.Net by James R. Irwin, Department of Economics, Central Michigan University.

 
The Price of Permanence is a nicely-written and well-documented exploration of boosterism in the New South. Highlighting issues of conservation and natural resource management, the book is part of the University of Georgia Press’s series, “Environmental History and the American South.” An environmental historian in Atlanta, Bryan uses the notion of “permanence” to organize his discussion, arguing that New South “boosters supported national conservation measures and embraced a philosophy of conservation … hoping that a permanent economy would make the region independently prosperous” (p. xvii). Bryan offers to correct the history of the New South and move “beyond persistent caricatures of business leaders and public officials as so desperate for economic growth that they had little concern for the environment” — a “simplistic take on southern boosters” which Bryan attributes to C. Van Woodward (p. xvi).

Chapter 1, “Nature’s Bounty,” presents Bryan’s interpretation of New South boosterism for natural-resource-based business development. He explains (p. 3) that “conservation was never antithetical to the New South mantra of economic development. It was a key part of this creed.” Bryan locates the New South within the “mainstream conservation movement,” by taking seriously the boosterism which promoted “permanent development” based on “maintaining stocks of profitable natural resources that could be used indefinitely” (p. 32). The chapter points to the challenges of rebuilding the South’s society and economy on a free-labor basis, using quotations from a range of boosters and drawing on historians of the New South — but without attention to economic history research and evidence. Bryan focuses on two interrelated themes in the advocacy of public officials and business leaders: first, that the region’s abundant natural resources could be the basis for prosperity in the New South; second, that natural resource exploitation should be guided by conservation principles (Bryan’s notion of “permanence”). While emphasizing speeches and writings of boosters, Chapter 1 also addresses issues of racial hierarchy and economic inequalities more generally (pp. 7-10, 29-32), suggesting that “conservation was intertwined with designs for racial mastery” (p. 31).

Chapter 2, “Cultivating Permanence,” focuses on agriculture, exploring how notions of permanence figured in debates over agricultural reform and land use. Bryan describes and discusses advocacy for diversification away from cotton, as well as debates over competing approaches to maintaining or restoring soil fertility. Many reformers pushed for a shift away from “staple crop monoculture,” advocating various forms of diversification. Others defended staple crop production, but both sides of the debate addressed the implications for soil fertility, and accepted the goal of permanent (long-term) cultivation. Bryan highlights advocacy for diversification as a basis for permanent agriculture, but he finds that southern farmers settled on commercial fertilizers as a “purchased form of permanence” (p. 66). Fertilizer use enabled farmers to “continuously cultivate the soils” without diversifying away from “staple crop monoculture.”

Chapter 3, “Utilizing Southern Wastes,” looks at some largely unsuccessful efforts to find permanent development opportunities, focusing on the South’s forests, with some attention to mineral resources (phosphate mining, carbon black). Bryan explores the growing recognition that extractive industries were inherently impermanent. “As the problems of resource depletion became clear in the early twentieth century, southern businessman, public officials, and boosters all looked for more ‘constructive’ paths of development that would allow for continued economic expansion while easing pressure on the most-used resources” (pp. 77-78). Bryan highlights the short-term extractive nature of the naval stores industry and hardwood lumbering. The chapter describes a variety of attempts to promote more permanent forms of resource exploitation, with a focus on possibilities for finding uses for “waste” resources — such as sawmill waste and small low-quality pines, which became the basis for the southern pulp and paper industry. However, the chapter concludes on a pessimistic note: “waste industries only brought a veneer of permanence to the southern environment” (p. 110).

Chapter 4, “The Costs of Permanence,” shifts focus toward debates and discussion of the environmental costs associated with exploiting the South’s natural resources. Bryan pays considerable attention to debates over competing uses of water. Some debate centered on the health consequences of damming rivers and streams to provide water power for manufacturing and (later) hydroelectric power. Other debates arose over water pollution from industrial wastes and urban sewage. Bryan notes that some wealthier southern whites used the legal system “to get compensation from, or sometime to halt, polluting industries” (p. 126). In contrast, disenfranchisement and segregation left African-Americans particularly vulnerable to the environmental costs of industrial and urban development (pp. 132-33). A more sanguine outcome came from “efforts of public health officials and businessmen to protect drinking water” (p. 135). Bryan explores “how urban development complicated choices about economic development and water resources.” He contrasts the city of Durham’s successful legal campaign to limit industrial and sewage pollution from upstream textile mills to the city of Richmond’s largely unsuccessful efforts to limit pollution of the James River from “upstream pulp mills, iron furnaces and other industries” (p. 139).

Chapter 5, “Tourism’s New Path,” offers a decidedly upbeat appraisal of tourism as a “permanent industry” with “the potential to bring permanent economic growth without environmental cost.” Referring to UNC sociologist Rupert Vance, Bryan points out that “natural beauty and a mild climate could be valuable and renewable resources” (p. 143). The chapter offers an historical sketch of the emergence of tourism as a “stand-alone industry in the twentieth century,” starting with the rise of “health tourism” in the 1870s and 1880s (pp. 145-49). He discusses the importance of the automobile for middle-class tourism, which was also enjoyed by “middle- and upper-class African Americans” — even if “the vast majority of black southerners … could little afford to purchase an automobile or to travel” (p. 156). Bryan covers debates that arose in the context of competing approaches to developing tourist resources, with preservation of natural scenery for tourists emerging as a new value. For example, Bryan offers an interesting account (pp. 159-62) of unsuccessful efforts to prevent the Georgia Power Company from constructing a hydroelectric dam at Georgia’s scenic Tallulah gorge. Opposition was led by Helen Dortch Longstreet, widow of the famous Confederate general. Bryan explains that “the controversy pitted two competing visions of permanence against each other,” with Georgia Power touting both recreational and hydroelectric benefits from damming the gorge. Longstreet’s failed campaign represented a defeat for advocates of natural scenery, but in Bryan’s view, the values of permanence and conservation were affirmed.

The Price of Permanence closes with a brief “Conclusion” (pp. 175-82), which starts with a reminder of various successful examples of “permanent enterprises” that were explored in the previous chapters. These successes saw businesses prosper by exploiting the South’s natural resources without depleting them. Bryan is careful to note that the successes of permanent development were very much “in the eyes of white boosters and businesspeople” (p. 175), especially because permanence served to prop up white supremacy and to perpetuate low-skill labor-intensive production (pp. 177-78). After pointing out that “permanence” failed to solve the problem of Southern poverty, Bryan turns his attention to “the environmental costs” of permanence — “the gullies, the exhausted fields, the dammed rivers, and the air and water pollution that have pockmarked the southern landscape for much of the twentieth century” (p. 178). Here, Bryan points out that boosters and business leaders embraced notions of conservation that focused on long-term exploitation of natural resources, but failed to recognize the effects of extractive industries on environmental quality and ecosystems. In Bryan’s view, environmental degradation “did not occur because New South leaders embraced growth without any thought about the environmental costs,” but because their “version of environmental quality” was too narrow, focused on maintaining “stocks of natural resources” for continuing production (p. 180). Looking beyond the New South, Bryan notes similarities and contrasts between New South notions of permanence and the broader conceptions of environmental quality central to environmentalism since the 1960s. Bryan concludes by relating permanence to current notions of sustainable development, offering both optimistic and pessimistic takes on “the lessons” from his exploration of “the South’s struggle for permanence.”

Aficionados of southern history might enjoy the wide range of personalities and episodes that Bryan covers. But the book is neither intended for, nor suited to, someone looking for historical insights from economic reasoning and evidence (economic historians, for example). Specialists in the economic history of the New South may want to take a look for Bryan’s perspectives on New South boosters. But otherwise I don’t see much of an audience among economic historians for the The Price of Permanence. As an economic historian, I want works informed by economic history research, and by theories and evidence of economic growth, and by concepts from environmental economics (externalities, for example). The Price of Permanence is informed by, and contributes to, historical scholarship whose methods and evidence offer quite a contrast to economic history.

 
James R. Irwin is Professor of Economics, Central Michigan University. An economic historian, his current research, joint with C. L. McDevitt, uses deed records to document under-reporting of illiteracy in the decennial censuses of the U.S. from 1850 to 1880.

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

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

From Wall Street to Bay Street: The Origins and Evolution of American and Canadian Finance

Author(s):Kobrak, Christopher
Martin, Joe
Reviewer(s):Rockoff, Hugh

Published by EH.Net (February 2019)

Christopher Kobrak and Joe Martin, From Wall Street to Bay Street: The Origins and Evolution of American and Canadian Finance. Toronto: University of Toronto Press, 2018. xii + 401 pp. $35 (paperback), ISBN: 978-1-4426-1625-7.

Reviewed for EH.Net by Hugh Rockoff, Department of Economics, Rutgers University.

 
Why did the Canadian financial system escape the devastation that the American system experienced in the Great Depression (although Canada did not escape the decline in economic activity) and in 2008? Indeed, why has the financial system of Canada been so much more stable throughout its history than the American system? It’s a question that many economic historians have thought about. Calomiris and Haber (2014) is a recent attempt to come to grips with this and other comparisons which highlight the instability of the American financial system. And I have done some work on this with Michael Bordo and Angela Redish (1994, 2015).

From Wall Street to Bay Street sheds light on these questions. The book, I should note, is written for the layperson and not for the typical reader of EH.Net. One imagines (hopes?) that the intended audience might include a journalist, a politician, or a business executive looking for an explanation of a puzzling fact that might in turn affect what they write or do. Although Kobrak and Martin include some comparative charts at the end of the book, the text itself includes no charts, tables, or equations. As an explanation for lay readers, it works well. But, as I will explain below, I think it is also a book that professional economic historians will profit from reading.

Joe Martin is the Director of Canadian Business History at the Rotman School of Management of the University of Toronto. Christopher Kobrak (an undergraduate philosophy major at Rutgers, a clear marker of excellence, and a Columbia Ph.D.) was at the Rotman School at his untimely death in 2017. They chose to tell the whole story of American and Canadian finance — insurance, investment banks, and so on, as well as commercial banking — chronologically. There are introductory and concluding chapters, and five chapters in which they take their story from the colonial period to today.

Although the American systems were and very likely are still more crisis-prone than the Canadian system, there have been some bad moments in Canada that they duly note. There was a “near panic” in Western Canada in 1907 that the government addressed by allowing banks to issue notes in excess of those permitted under existing reserve requirements (p. 146). The Home Bank failed in 1923 and the government provided compensation for 35 percent of small deposits. And an emergency loan was made to the Dominion Bank. The Office of the Inspector of Banks was then created in the wake of the Home Bank failure. During the 1930s the Sun Life Insurance Company received special treatment from regulators probably because it was considered “too big to fail” (p. 184). The less-developed countries debt crisis of the early 1980s hit the Canadian financial system hard. And there were other difficulties including failures of trust companies and banks. The Office of Superintendent of Financial Institutions was created in the wake of these difficulties. But all of this pales in comparison with the American record of financial crises – 1819, 1837, 1857, 1873, 1893, 1907, 1930, and 2008, just to name some of the big ones.

What explains the relative stability of the Canadian system? Kobrak and Martin rely on two explanatory factors. One, that will be familiar to most American and Canadian financial historians, is Canada’s system of nationwide branch banking; a stark contrast with the United States which for much of its history had a fragmented banking system in which banks were always prevented from branching across state lines and in some cases were prevented from establishing any branches at all by unit banking laws. Most financial historians, I believe, agree that the absence of branching made American banks far more vulnerable to economic shocks than their Canadian cousins. The problem of state-centric regulation, however, was not confined, Kobrak and Martin show, to banking, but also troubled the American Insurance industry. This comparison illustrates one of the strengths of From Wall Street to Bay Street: its broad sectoral coverage creates opportunities for comparisons that test their conclusions about the origins of the difference in stability between the systems.

The other explanation that Kobrak and Martin rely on is culture. There is a tradeoff, they argue, between innovation and stability. “American finance,” in their estimation, “has been associated with an abundance of the former and not enough of the latter, with Canada assuming the opposite approach” (p. 14). In their concluding chapter they say that “Americans have always exhibited a tolerance for recklessness in commercial innovation, which appears curious to much of the rest of the world, including Canadians.” A reference to Tocqueville, who said much the same, helps to establish the venerable lineage of their observation about different attitudes toward stability (p. 262). Their reliance on cultural differences inevitably raises the question of whether it is “Kosher to Talk about Culture” to quote the title of one of Peter Temin’s (1997) well-known papers. A reliance on cultural explanations is always problematic. It is far easier to suggest cultural explanations for economic phenomena than to test them rigorously. For that reason, many economic historians shy away from them. Kobrak and Martin, however, are not afraid. I was skeptical at first, but I found myself coming away persuaded that part of the difference in institutional arrangements (including regulatory structures) and records of stability in the two financial systems ultimately derives from different attitudes toward innovation and stability.

Some parts of the book will be familiar to professional economic historians, such as summaries of work by economic historians on slavery and the Great Depression, and can be skipped by someone already familiar with these literatures. But professional economic historians are likely to encounter ideas that are worth pondering. The repeated emphasis on cultural differences is one example. Their conviction that to understand financial systems one has to look at the systems in their entirety and not focus solely on banking is another.

My bottom line is that this is a fine book. It delivers the explanation that they promised to the lay reader, but professional economic historians, such as those of us that read the posts on EH.Net, will also find that the book is worth their time.

References:

Bordo, Michael D., Angela Redish, and Hugh Rockoff. “The U.S. Banking System from a Northern Exposure: Stability versus Efficiency.” Journal of Economic History 54, no. 2 (1994): 325-41.

Bordo, Michael D., Angela Redish, and Hugh Rockoff. “Why Didn’t Canada Have a Banking Crisis in 2008 (or in 1930, or 1907, or …)?” Economic History Review 68, no.1, (2015): 218-43.

Calomiris, Charles and Stephen Haber. Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton: Princeton University Press, 2014.

Temin, Peter. “Is It Kosher to Talk about Culture?” Journal of Economic History 57, no. 2 (1997): 267-87.

 

Hugh Rockoff is a distinguished professor of economics at Rutgers University and a Research Associate of the National Bureau of Economic Research. His current research focuses on the origins of America’s national income accounts and in joint work with Michael Leeds at Temple University on the coming of Jim Crow to American horse racing.

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

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

The Political History of American Food Aid: An Uneasy Benevolence

Author(s):Riley, Barry
Reviewer(s):Barrett, Christopher B.

Published by EH.Net (June 2018)

Barry Riley, The Political History of American Food Aid: An Uneasy Benevolence. New York: Oxford University Press, 2017. xxvii + 562 pp. $50 (hardcover), ISBN: 978-019-02-2887-3.

Reviewed for EH.Net by Christopher B. Barrett, School of Applied Economics and Management, Cornell University.

 
International food aid has long attracted attention from policymakers and scholars far out of proportion to its scale in the global economy. Concessional food shipments have always comprised a small share of international flows of food and a negligible increment of global food production and consumption. Yet a Google Scholar search on “food aid” and “economics” returns more than one million results. Since at least T.W. Schultz more than half a century ago, economists have written about food aid’s direct effects on the economic and nutritional well-being of recipients and, even more, on its indirect effects on outcomes as diverse as food markets and prices, agricultural producer incentives in donor and recipient countries, international trade flows, and conflict in recipient countries. In recent years, special attention has been paid to the political economy of food aid and to the distributional and efficiency effects of statutory restrictions placed on food aid donations by legislatures, especially by the United States Congress since the U.S. has long been, by far, the world’s largest food aid donor. The complex political processes behind those restrictions, however, indeed the motivations and machinations behind the very existence and scale of international food aid donations, has remained a bit of a black box.

Barry Riley has done a remarkable job filling that void. This new volume offers the definitive political history of U.S. food aid. Riley brings impeccable credentials to the task. Now retired after a long and distinguished career with various food aid agencies of the U.S. government and the World Bank, he wrote the volume while a Visiting Scholar at Stanford University. At a time when economists too commonly grab a secondary data set and quickly write about a complex topic without taking time to master essential policy details, Riley’s work stands out as firmly rooted in an immersive understanding of the topic’s finest details. And this comprehensive historical account is meticulously sourced with primary documents from government records, media accounts of the day, and even personal letters.

Riley lucidly explains how and why the U.S. became the world’s primary food aid donor. He tells the story of the constant tension between the humanitarian impulse to assist those imperiled by natural disasters or war and the conservative instinct to resist foreign entanglements and fiscal commitments beyond the nation’s borders. He skillfully explains the time-varying electoral pressures faced by elected officials confronted by agricultural and maritime interests seeking assistance in lean times and reaching for profits opportunistically. He documents both the cynical and the idealistic geopolitical aims various nineteenth and twentieth century U.S. politicians had in deploying American farm surpluses around the world. The central role of key leaders — especially Herbert Hoover, Lyndon Johnson, and Henry Kissinger — in bending others to their will comes through clearly. The case-specific drivers and outcomes of food aid donations are especially nicely illustrated in two chapters that go into particular depth on a single country: Chapter 13’s explanation of the Johnson administration’s management of food aid to India in the 1960s and Chapter 19’s analysis of the Reagan administration’s handling of the mid-1980s famine in Ethiopia.

Riley begins with late eighteenth-century Congressional debates when the framers of the Constitution and their colleagues were struggling to interpret what limits, if any, the new nation’s founding charter imposed on the federal government using scarce tax revenues to shower largesse on foreign populations. Those debates resumed periodically in response to a variety of foreign disasters of various sorts. Into the early years of the twentieth century, American food aid was episodic and modest in volume and impacts.

Riley then focuses attention on the first half of the twentieth century, when the ravages of two World Wars and the Great Depression, combined with rapid technological change in American agriculture, created a perfect storm of U.S. commodity surpluses, extended periods of depressed global demand, and acute humanitarian need. This period put the existential questions surrounding U.S. food aid to rest. Programs became permanent and expansive. That period begat the Agricultural Adjustment Acts of 1933 and 1938, which launched large-scale farm support programs that insinuated the federal government into commodity markets. This laid the foundation for 1954’s passage of the Agricultural Trade Development and Assistance Act, Public Law 480, which created the main U.S. food aid programs ever since. The program’s renaming in the Food for Peace Act of 1966 signaled the growing use of food aid as a foreign policy tool under the Kennedy, Johnson, Nixon, Ford, Carter, and Reagan administrations. The aims varied with the political leanings of the U.S. government of the day: to foster economic development and relieve world hunger, to reward foreign allies and punish those regimes that strayed too near the Soviet orbit, to advance human rights, or to promote American exports. Both Democratic and Republican administrations, however, proved overconfident in food aid’s ability to bend the world to American will.

As food aid’s ineffectiveness as a foreign policy tool and as the fiscal imperative of extracting the U.S. government from the business of propping up grain prices as a buyer of last resort both became clear, the scale of U.S. food aid relative to commercial exports and the domestic food economy has steadily declined since the 1970s. The dominant voices in recent food aid debates have thus been the international development and humanitarian organizations, as well as the agribusinesses — mainly processors, not farmers — and maritime interests that profit from Congressionally-imposed statutory restrictions on commodity and ocean freight procurement. In the twenty-first century, both Democratic and Republican administrations have consistently advocated for reforms to enhance the efficiency and timeliness of increasingly scarce humanitarian food aid. But the complex political economy that begat a permanent and briefly-generous U.S. food aid program now complicates the Congressional politics of reform. Without understanding the political history of U.S. food aid, it’s hard to make sense of the current policy debate.

In twenty-five years of studying food aid, I have probably read the vast majority of published studies on the topic. Rarely have I learned so much as from Riley’s impressive and beautifully written history. This volume is an indispensable reference for anyone studying or writing about U.S. food aid programs. U.S. food aid policy has always reflected a shifting balance among a range of objectives. Thus it has always been deeply political. The complexities of U.S. Congressional authorization and appropriations processes often make it difficult to identify the drivers of policy decisions. Thanks to Barry Riley’s lucid historical account, it is far easier for contemporary policy analysts to appreciate the history dependence of current economic policy.

 
Christopher B. Barrett is the Stephen B. and Janice G. Ashley Professor of Applied Economics at Cornell University. He has written extensively on the economics of food aid and food assistance programs and is co-author (with Daniel G. Maxwell) of Food Aid after Fifty Years: Recasting Its Role and co-editor (with Julia Steets and Andrea Binder) of Uniting on Food Assistance: The Case for Transatlantic Cooperation.

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

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

Money in the American Colonies

Ron Michener, University of Virginia

“There certainly can’t be a greater Grievance to a Traveller, from one Colony to another, than the different values their Paper Money bears.” An English visitor, circa 1742 (Kimber, 1998, p. 52).

The monetary arrangements in use in America before the Revolution were extremely varied. Each colony had its own conventions, tender laws, and coin ratings, and each issued its own paper money. The monetary system within each colony evolved over time, sometimes dramatically, as when Massachusetts abolished the use of paper money within her borders in 1750 and returned to a specie standard. Any encyclopedia-length overview of the subject will, unavoidably, need to generalize, and few generalizations about the colonial monetary system are immune to criticism because counterexamples can usually be found somewhere in the historical record. Those readers who find their interest piqued by this article would be well advised to continue their study of the subject by consulting the more detailed discussions available in Brock (1956, 1975, 1992), Ernst (1973), and McCusker (1978).

Units of Account

In the colonial era the unit of account and the medium of exchange were distinct in ways that now seem strange. An example from modern times suggests how the ancient system worked. Nowadays race horses are auctioned in England using guineas as the unit of account, although the guinea coin has long since disappeared. It is understood by all who participate in these auctions that payment is made according to the rule that one guinea equals 21s. Guineas are the unit of account, but the medium of exchange accepted in payment is something else entirely. The unit of account and medium of exchange were similarly disconnected in colonial times (Adler, 1900).

The units of account in colonial times were pounds, shillings, and pence (1£ = 20s., 1s. = 12d.).1 These pounds, shillings, and pence, however, were local units, such as New York money, Pennsylvania money, Massachusetts money, or South Carolina money and should not be confused with sterling. To do so is comparable to treating modern Canadian dollars and American dollars as interchangeable simply because they are both called “dollars.” All the local currencies were less valuable than sterling.2 A Spanish piece of eight, for instance, was worth 4 s. 6 d. sterling at the British mint. The same piece of eight, on the eve of the Revolution, would have been treated as 6 s. in New England, as 8 s. in New York, as 7 s. 6 d. in Philadelphia, and as 32 s. 6 d. in Charleston (McCusker, 1978).

Colonists assigned local currency values to foreign specie coins circulating there in these pounds, shillings and pence. The same foreign specie coins (most notably the Spanish dollar) continued to be legal tender in the United States in the first half of the nineteenth century as well as a considerable portion of the circulating specie (Andrews, 1904, pp. 327-28; Michener and Wright, 2005, p. 695). Because the decimal divisions of the dollar so familiar to us today were a newfangled innovation in the early Republic and because the same coins continued to circulate the traditional units of account were only gradually abandoned. Lucius Elmer, in his account of the early settlement of Cumberland County, New Jersey, describes how “Accounts were generally kept in this State in pounds, shillings, and pence, of the 7 s. 6 d. standard, until after 1799, in which year a law was passed requiring all accounts to be kept in dollars or units, dimes or tenths, cents or hundredths, and mills or thousandths. For several years, however, aged persons inquiring the price of an article in West Jersey or Philadelphia, required to told the value in shillings and pence, they not being able to keep in mind the newly-created cents or their relative value . . . So lately as 1820 some traders and tavern keepers in East Jersey kept their accounts in [New] York currency.”3 About 1820, John Quincy Adams (1822) surveyed the progress that had been made in familiarizing the public with the new units:

“It is now nearly thirty years since our new monies of account, our coins, and our mint, have been established. The dollar, under its new stamp, has preserved its name and circulation. The cent has become tolerably familiarized to the tongue, wherever it has been made by circulation familiar to the hand. But the dime having been seldom, and the mille never presented in their material images to the people, have remained . . . utterly unknown. . . . Even now, at the end of thirty years, ask a tradesman, or shopkeeper, in any of our cities, what is a dime or mille, and the chances are four in five that he will not understand your question. But go to New York and offer in payment the Spanish coin, the unit of the Spanish piece of eight [one reale], and the shop or market-man will take it for a shilling. Carry it to Boston or Richmond, and you shall be told it is not a shilling, but nine pence. Bring it to Philadelphia, Baltimore, or the City of Washington, and you shall find it recognized for an eleven-penny bit; and if you ask how that can be, you shall learn that, the dollar being of ninety-pence, the eight part of it is nearer to eleven than to any other number . . .4 And thus we have English denominations most absurdly and diversely applied to Spanish coins; while our own lawfully established dime and mille remain, to the great mass of the people, among the hidden mysteries of political economy – state secrets.”5

It took many more decades for the colonial unit of account to disappear completely. Elmer’s account (Elmer, 1869, p. 137) reported that “Even now, in New York, and in East Jersey, where the eighth of a dollar, so long the common coin in use, corresponded with the shilling of account, it is common to state the price of articles, not above two or three dollars, in shillings, as for instance, ten shillings rather than a dollar and a quarter.”

Not only were the unit of account and medium of exchange disconnected in an unfamiliar manner, but terms such as money and currency did not mean precisely the same thing in colonial times that they do today. In colonial times, “money” and “currency” were practically synonymous and signified whatever was conventionally used as a medium of exchange. The word “currency” today refers narrowly to paper money, but that wasn’t so in colonial times. “The Word, Currency,” Hugh Vance wrote in 1740, “is in common Use in the Plantations . . . and signifies Silver passing current either by Weight or Tale. The same Name is also applicable as well to Tobacco in Virginia, Sugars in the West Indies &c. Every thing at the Market-Rate may be called a Currency; more especially that most general Commodity, for which Contracts are usually made. And according to that Rule, Paper-Currency must signify certain Pieces of Paper, passing current in the Market as Money” (Vance, 1740, CCR III, pp. 396, 431).

Failure to appreciate that the unit of account and medium of exchange were quite distinct in colonial times, and that a familiar term like “currency” had a subtly different meaning, can lead unsuspecting historians astray. They often assume that a phrase such as “£100 New York money” or “£100 New York currency” necessarily refers to £100 of the bills of credit issued by New York. In fact, it simply means £100 of whatever was accepted as money in New York, according to the valuations prevailing in New York.6 Such subtle misunderstandings have led some historians to overestimate the ubiquity of paper money in colonial America.

Means of Payment – Book Credit

While simple “cash-and-carry” transactions sometimes occurred most purchases involved at least short-term book credit; Henry Laurens wrote that before the Revolution it had been “the practice to give credit for one and more years for 7/8th of the whole traffic” (Burnet, 1923, vol. 2, pp. 490-1). The buyer would receive goods and be debited on the seller’s books for an agreed amount in the local money of account. The debt would be extinguished when the buyer paid the seller either in the local medium of exchange or in equally valued goods or services acceptable to the seller. When it was mutually agreeable the debt could be and often was paid in ways that nowadays seem very unorthodox – with the delivery of chickens, or a week’s work fixing fences on land owned by the seller. The debt might be paid at one remove, by the buyer fixing fences on land owned by someone to whom the seller was himself indebted. Accounts would then be settled among the individuals involved. Account books testify to the pervasiveness of this system, termed “bookkeeping barter” by Baxter. Baxter examined the accounts of John Hancock and his father Thomas Hancock, both prominent Boston merchants, whose business dealings naturally involved an atypically large amount of cash. Even these gentlemen managed most of their transactions in such a way that no cash ever changed hands (Baxter, 1965; Plummer, 1942; Soltow, 1965, pp. 124-55; Forman, 1969).

An astonishing array of goods and services therefore served by mutual consent at some time or other to extinguish debt. Whether these goods ought all to be classified as “money” is doubtful; they certainly lacked the liquidity and universal acceptability in exchange that ordinarily defines money. At certain times and in certain colonies, however, specific commodities came to be so widely used in transactions that they might appropriately be termed money. Specie, of course, was such a commodity, but its worldwide acceptance as money made it special, so it is convenient to set it aside for a moment and focus on the others.

Means of Payment – Commodity Money

At various times and places in the colonies such items as tobacco, rice, sugar, beaver skins, wampum, and country pay all served as money. These items were generally accorded a special monetary status by various acts of colonial legislatures. Whether the legislative fiat was essential in monetizing these commodities or whether it simply acknowledged the existing state of affairs is open to question. Sugar was used in the British Caribbean, tobacco was used in the Chesapeake, and rice in South Carolina, each being the central product of their respective plantation economies. Wampum signifies the stringed shells used by the Indians as money before the arrival of European settlers. Wampum and beaver skins were commonly used as money in the northern colonies in the early stages of settlement when the fur trade and Indian trade were still mainstays of the local economy (Nettels, 1928, 1934; Fernow, 1893; Massey, 1976; Brock, 1975, pp. 9-18).

Country pay is more complicated. Where it was used, country pay consisted of a hodgepodge of locally produced agricultural commodities that had been monetized by the colonial legislature. A list of commodities, such as Indian corn, beef, pork, etc. were assigned specific monetary values (so many s. per bushel or barrel), and debtors were permitted by statute to pay certain debts with their choice of these commodities at nominal values set by the colonial legislature.7 In some instances country pay was declared a legal tender for all private debts although contracts explicitly requiring another form of payment might be exempted (Gottfried, 1936; Judd, 1905, pp. 94-96). Sometimes country pay was only a legal tender in payment of obligations to the colonial or town governments. Even where country pay was a legal tender only in payment of taxes it was often used in private transactions and even served as a unit of account. Probate inventories from colonial Connecticut, where country pay was widely used, are generally denominated in country pay (Main and Main, 1988).8

There were predictable difficulties where commodity money was used. A pound in “country pay” was simply not worth a pound in cash even as that cash was valued locally. The legislature sometimes overvalued agricultural commodities in setting their nominal prices. Even when the legislature’s prices were not biased in favor of debtors the debtor still had the power to select the particular commodity tendered and had some discretion over the quality of that commodity. In late 17th century Massachusetts the rule of thumb used to convert country pay to cash was that three pounds in country pay were worth two pounds cash (Republicæ, 1731, pp. 376, 390).9 Even this formula seems to have overvalued country pay. When a group of men seeking to rent a farm in Connecticut offered Boston merchant Thomas Bannister £22 of country pay in 1700, Bannister hesitated. It appears Bannister wanted to be paid £15 per annum in cash. Country pay was “a very uncertain thing,” he wrote. Some years £22 in country pay might be worth £10, some years £12, but he did not expect to see a day when it would fetch fifteen.10 Savvy merchants such as Bannister paid careful attention to the terms of payment. An unwary trader could easily be cheated. Just such an incident occurs in the comic satirical poem “The Sotweed Factor.” Sotweed is slang for tobacco, and a factor was a person in America representing a British merchant. Set in late seventeenth-century Maryland, the poem is a first-person account of the tribulations and humiliations a newly-arrived Briton suffers while seeking to enter the tobacco trade. The Briton agrees with a Quaker merchant to exchange his trade goods for ten thousand weight of oronoco tobacco in cask and ready to ship. When the Quaker fails to deliver any tobacco, the aggrieved factor sues him at the Annapolis court, only to discover that his attorney is a quack who divides his time between pretending to be a lawyer and pretending to be a doctor and that the judges have to be called away from their Punch and Rum at the tavern to hear his case. The verdict?

The Byast Court without delay,
Adjudg’d my Debt in Country Pay:
In Pipe staves, Corn, or Flesh of Boar,
Rare Cargo for the English Shoar.

Thus ruined the poor factor sails away never to return. A footnote to the reader explains “There is a Law in this Country, the Plaintiff may pay his Debt in Country pay, which consists in the produce of the Plantation” (Cooke, 1708).

By the middle of the eighteenth century commodity money had essentially disappeared in northern port cities, but still lingered in the hinterlands and plantation colonies. A pamphlet written in Boston in 1740 observed “Look into our British Plantations, and you’ll see [commodity] Money still in Use, As, Tobacco in Virginia, Rice in South Carolina, and Sugars in the Islands; they are the chief Commodities, used as the general Money, Contracts are made for them, Salaries and Fees of Office are paid in them, and sometimes they are made a lawful Tender at a yearly assigned Rate by publick Authority, even when Silver was promised” (Vance, 1740, CCR III, p. 396). North Carolina was an extreme case. Country pay there continued as a legal tender even in private debts. The system was amended in 1754 and 1764 to require rated commodities to be delivered to government warehouses and be judged of acceptable quality at which point warehouse certificates were issued to the value of the goods (at mandated, not market prices): these certificates were a legal tender (Bullock, 1969, pp. 126-7, 157).

Means of Payment – Bills of Credit

Cash came in two forms: full-bodied specie coins (usually Spanish or Portuguese) and paper money known as “bills of credit.” Bills of credit were notes issued by provincial governments that were similar in many ways to modern paper money: they were issued in convenient denominations, were often a legal tender in the payment of debts, and routinely passed from man to man in transactions.11 Bills of credit were ordinarily put into circulation in one of two ways. The most common method was for the colony to issue bills to pay its debts. Bills of credit were originally designed as a kind of tax-anticipation scrip, similar to that used by many localities in the United States during the Great Depression (Harper, 1948). Therefore when bills of credit were issued to pay for current expenditures a colony would ordinarily levy taxes over the next several years sufficient to call the bills in so they might be destroyed.12 A second method was for the colony to lend newly printed bills on land security at attractive interest rates. The agency established to make these loans was known as a “land bank” (Thayer, 1953).13 Bills of credit were denominated in the £., s., and d. of the colony of issue, and therefore were usually the only form of money in circulation that was actually denominated in the local unit of account.14

Sometimes even the bills of credit issued in a colony were not denominated in the local unit of account. In 1764 Maryland redeemed its Maryland-pound-denominated bills of credit and in 1767 issued new dollar-denominated bills of credit. Nonetheless Maryland pounds, not dollars, remained the predominant unit of account in Maryland up to the Revolution (Michener and Wright, 2006a, p. 34; Grubb; 2006a, pp. 66-67; Michener and Wright, 2006c, p. 264). The most striking example occurred in New England. Massachusetts, Connecticut, New Hampshire, and Rhode Island all had, long before the 1730s, emitted paper money in bills of credit known as “old tenor” bills of credit, and “old tenor” had become the most commonly-used unit of account in New England. The old tenor bills of all four colonies passed interchangeably and at par with one another throughout New England.

Beginning in 1737, Massachusetts introduced a new kind of paper money known as “new tenor.” New tenor can be thought of as a monetary reform that ultimately failed to address underlying issues. It also served as a way of evading a restriction the Board of Trade had placed on the Governor of Massachusetts that limited him to emissions of not more than £30,000. The Massachusetts assembly declared each pound of the new tenor bills to be worth £3 in old tenor bills. What actually happened is that old tenor (abbreviated in records of the time as “O.T.”) continued to be the unit of account in New England, and so long as the old bills continued to circulate, a decreasing portion of the medium of exchange. Each new tenor bill was reckoned at three times its face value in old tenor terms. This was just the beginning of the confusion, for yet newer Massachusetts “new tenor” emissions were created, and the original “new tenor” emission became known as the “middle tenor.”15 The new “new tenor” bills emitted by Massachusetts were accounted in old tenor terms at four times their face value. These bills, like the old ones, circulated across colony borders throughout New England. As if this were not complicated enough, New Hampshire, Rhode Island, and Connecticut all created new tenor emission of their own, and the factors used to convert these new tenor bills into old tenor terms varied across colonies (Davis, 1970; Brock, 1975; McCusker, pp. 131-137). Connecticut, for instance, had a new tenor emission such that each new tenor bill was worth 3½ times its face value in old tenor (Connecticut, vol. 8, pp. 359-60; Brock, 1975, pp. 45-6). “They have a variety of paper currencies in the [New England] provinces; viz., that of New Hampshire, the Massachusetts, Rhode Island, and Connecticut,” bemoaned an English visitor, “all of different value, divided and subdivided into old and new tenors, so that it is a science to know the nature and value of their moneys, and what will cost a stranger some study and application” (Hamilton, 1907, p. 179). Throughout New England, however, Old Tenor remained the unit of account. “The Price of [provisions sold at Market],” a contemporary pamphlet noted, “has been constantly computed in Bills of the old Tenor, ever since the Emission of the middle and new Tenor Bills, just as it was before their Emission, and with no more Regard to or Consideration of either the middle or new Tenor Bills, than if they had never been emitted” (Enquiry, 1744, CCR IV, p. 174). This occurred despite the fact that by 1750 only an inconsiderable portion of the bills of credit in circulation were denominated in old tenor.16

For the most part, bills of credit were fiat money. Although a colony’s treasurer would often consent to exchange these bills for other forms of cash in the treasury, there was rarely a provision in the law stating that holders of bills of credit had a legally binding claim on the government for a fixed sum in specie, and treasurers were sometimes unable to accommodate people who wished to exchange money (Nicholas, 1912, p. 257; The New York Mercury, January 27, 1759, November 24, 1760).17 The form of the bills themselves was sometimes misleading in this respect. It was not uncommon for the bills to be inscribed with an explicit statement that the bill was worth a certain sum in silver. This was often no more than an expression of the assembly’s hope, at the time of issuance, of how the bills would circulate.18 Colonial courts sometimes allowed inhabitants to pay less to royal officials and proprietors by valuing bills of credit used to pay fees, dues, and quit rents according to their “official” rather than actual specie values. (Michener and Wright, 2006c, p. 258, fn. 5; Hart, 2005, pp. 269-71).

Maryland’s paper money was unique. Maryland’s paper money – unlike that of other colonies – gave the possessor an explicit legal claim on a valuable asset. Maryland had levied a tax and invested the proceeds of the tax in London. It issued bills of credit promising a fixed sum in sterling bills of exchange at predetermined dates, to be drawn on the colony’s balance in London. The colony’s accrued balances in London were adequate to fund the redemption, and when redemption dates arrived in 1748 and 1764 the sums due were paid in full so the colony’s pledge was considered credible.

Maryland’s paper money was unique in other ways as well. Its first emission was put into circulation in a novel fashion. Of the £90,000 emitted in 1733, £42,000 was lent to inhabitants, while the other £48,000 was simply given away, at the rate of £1.5 per taxable (McCusker, 1978, pp. 190-196; Brock, 1975, chapter 8; Lester, 1970, chapter 5). Maryland’s paper money was so peculiar that it is unrepresentative of the colonial experience. This was recognized even by contemporaries. Hugh Vance, in the Postscript to his Inquiry into the Nature and Uses of Money, dismissed Maryland as “intirely out of the Question; their Bills being on the Foot of promissory Notes” Vance, 1740, CCR III, p. 462).

In 1690, Massachusetts was the first colony to issue bills of credit (Felt, 1839, pp. 49-52; Davis, 1970, vol. 1, chapter 1; Goldberg, 2009).19 The bills were issued to pay soldiers returning from a failed military expedition against Quebec. Over time, the rest of the colonies followed suit. The last holdout was Virginia, which issued its first bills of credit in 1755 to defray expenses associated with its entry into the French and Indian War (Brock, 1975, chapter 9). The common denominator here is wartime finance, and it is worthwhile to recognize that the vast majority of the bills of credit issued in the colonies were issued during wartime to pay for pressing military expenditures. Peacetime issues did occur and are in some respects quite interesting as they seem to have been motivated in part by a desire to stimulate the economy (Lester, 1970). However, peacetime emissions are dwarfed by those that occurred in war.20 Some historians enamored of the land bank system, whereby newly emitted bills were lent to landowners in order to promote economic development, have stressed the economic development aspect of colonial emissions – particularly those of Pennsylvania – while minimizing the military finance aspect (Schweitzer, 1989, pp. 313-4). The following graph, however, illustrates the fundamental importance of war finance; the dramatic spike marks the French and Indian War (Brock, 1992, Tables 4, 6).

//

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That bills in circulation peaked in 1760 reflects the fact that Quebec fell in 1759 and Montreal in 1760, so that the land war in North America was effectively over by 1760.

Because bills were disproportionally emitted for wartime finance it is not surprising that the colonies whose currencies depreciated due to over-issue were those who shared a border with a hostile neighbor – the New England colonies bordering French Canada and the Carolinas bordering Spanish Florida.21 The colonies from New York to Virginia were buffered by their neighbors and therefore issued no more than modest amounts of paper money until they were drawn into the French and Indian War, by which time their economies were large enough to temporarily absorb the issues.

It is important not to confuse the bills of credit issued by a colony with the bills of credit circulating in that colony. “Under the circumstances of America before the war,” a Maryland resident wrote in 1787, “there was a mutual tacit consent that the paper of each colony should be received by its neighbours” (Hanson, 1787, p. 24).22 Between 1710 and 1750, the currencies of Massachusetts, Connecticut, New Hampshire, and Rhode Island passed indiscriminately and at par with one another in everyday transactions throughout New England (Brock, 1975, pp. 35-6). Although not quite so integrated a currency area as New England the colonies of New York, Pennsylvania, New Jersey, and Delaware each had bills of credit circulating within its neighbors’ borders (McCusker, 1978, pp. 169-70, 181-182). In the early 1760s, Pennsylvania money was the primary medium of exchange in Maryland (Maryland Gazette, September 15, 1763; Hazard, 1852, Eighth Series, vol. VII, p. 5826; McCusker, 1978, p. 193). In 1764 one quarter of South Carolina’s bills of credit circulated in North Carolina and Georgia (Ernst, 1973, p. 106). Where the currencies of neighboring colonies were of equal value, as was the case in New England between 1710 and 1750, bills of credit of neighboring colonies could be credited and debited in book accounts at face value. When this was not the case, as when Pennsylvania, Connecticut, or New Jersey bills of credit were used to pay a debt in New York, an adjustment had to be made to convert these sums to New York money. The conversion was usually based on the par values assigned to Spanish dollars by each colony. Indeed, this was also how merchants generally handled intercolonial exchange transactions (McCusker, 1978, p. 123). For example, on the eve of the Revolution a Spanish dollar was rated at 7 s. 6 d. in Pennsylvania money and at 8 s. in New York money. The ratio of eight to seven and a half being equal to 1.06666, Pennsylvania bills of credit were accepted in New York at a 6 and 1/3% advance (Stevens, 1867, pp. 10-11, 18). Connecticut rated the Spanish dollar at 6 s., and because the ratio of eight to six is 1.333, Connecticut bills of credit were accepted at a one third advance in New York (New York Journal, July 13, 1775). New Jersey’s paper money was a peculiar exception to this rule. By the custom of New York’s merchants, New Jersey bills of credit were accepted for thirty years or more at an advance of one pence in the shilling, or 8 and 1/3%, even though New Jersey rated the Spanish dollar at 7 s, 6 d., just as Pennsylvania did. The practice was controversial in New York, and the advance was finally reduced to the “logical” 6 and 2/3% advance by an act of the New York assembly in 1774.23

Means of Payment – Foreign Specie Coins

Specie coins were the other kind of cash that commonly circulated in the colonies. Few specie coins were minted in the colonies. Massachusetts coined silver “pine tree shillings” between 1652 and the closing of the mint in the early 1680s. This was the only mint of any size or duration in the colonies, although minting of small copper coins and tokens did occur at a number of locations (Jordan, 2002; Mossman, 1993). Colonial coinage is interesting numismatically, but economically it was too slight to be of consequence. Most circulating specie was minted abroad. The gold and silver coins circulating in the colonies were generally of Spanish or Portuguese origin. Among the most important of these coins were the Portuguese Johannes and moidore (more formally, the moeda d’ouro) and the Spanish dollar and pistole. The Johanneses were gold coins, 8 escudos (12,800 reis) in denomination; their name derived from the obverse of the coin, which bore the bust of Johannes V. Minted in Portugal and Brazil they were commonly known in the colonies as “joes.” The fractional denominations were 4 escudo and 2 escudo coins of the same origin. The 4 escudo (6,400 reis) coin, or “half joe,” was one of the most commonly used coins in the late colonial period. The moidore was another Portuguese gold coin, 4,000 reis in denomination. That these coins were being used as a medium of exchange in the colonies is not so peculiar as it might appear. Raphael Solomon (1976, p. 37) noted that these coins “played a very active part in international commerce, flowing in and out of the major seaports in both the Eastern and Western Hemispheres.” In the late colonial period the mid-Atlantic colonies began selling wheat and flour to Spain and Portugal “for which in return, they get hard cash” (Lydon, 1965; Virginia Gazette, January 12, 1769; Brodhead, 1853, vol. 8, p. 448).

The Spanish dollar and its fractional parts were, in McCusker’s (1978, p. 7) words, “the premier coin of the Atlantic world in the seventeenth and eighteenth centuries.” Well known and widely circulated throughout the world, its preeminence in colonial North America accounts for the fact that the United States uses dollars, rather than pounds, as its unit of account. The Spanish pistole was the Spanish gold coin most often encountered in America. While these coins were the most common, many others also circulated there (Solomon, 1976; McCusker, 1978, pp. 3-12).

Alongside the well-known gold and silver coins were various copper coins, most notably the English half-pence, that served as small change in the colonies. Fractional parts of the Spanish dollar and the pistareen, a small silver coin of base alloy, were also commonly used as change.24

None of these foreign specie coins were denominated in local currency units, however. One needed a rule to determine what a particular coin, such as a Spanish dollar, was worth in the £., s., and d. of local currency. Because foreign specie coins were in circulation long before any of the colonies issued paper money setting a rating on these coins amounted to picking a numeraire for the economy; that is, it defined what one meant by a pound of local currency. The ratings attached to individual coins were not haphazard: They were designed to reflect the relative weight and purity of the bullion in each coin as well as the ratio of gold to silver prices prevailing in the wider world.

In the early years of colonization these coin values were set by the colonial assemblies (Nettels, 1934, chap. 9; Solomon, 1976, pp. 28-29; John Hemphill, 1964, chapter 3). In 1700 Pennsylvania passed an act raising the rated value of its coins, causing the Governor of Maryland to complain to the Board of Trade of the difficulties this created in Maryland. He sought the Board’s permission for Maryland to follow suit. When the Board investigated the matter it concluded that the “liberty taken in many of your Majesty’s Plantations, to alter the rates of their coins as often as they think fit, does encourage an indirect practice of drawing the money from one Plantation to another, to the undermining of each other’s trade.” In response they arranged for the disallowance of the Pennsylvania act and a royal proclamation to put an end to the practice.25

Queen Anne’s proclamation, issued in 1704, prohibited a Spanish dollar of 17½ dwt. from passing for more than 6 s. in the colonies. Other current foreign silver coins were rated proportionately and similarly prohibited from circulating at a higher value. This particular rating of coins became known as “proclamation money.”26 It might seem peculiar that the// proclamation did not dictate that the colonies adopt the same ratings as prevailed in England. The Privy Council, however, had incautiously approved a Massachusetts act passed in 1697 rating Spanish dollars at 6 s., and attorney general Edward Northey felt the act could not be nullified by proclamation. This induced the Board of Trade to adopt the rating of the Massachusetts act.27

Had the proclamation been put into operation its effects would have been extremely deflationary because in most colonies coins were already passing at higher rates. When the proclamation reached America only Barbados attempted to enforce it. In New York Governor Lord Cornbury suspended its operation and wrote the Board of Trade that he could not enforce it in New York while it was being ignored in neighboring colonies as New York would be “ruined beyond recovery” if he did so (Brodhead, 1853, vol. 4, pp. 1131-1133; Brock, 1975, chapter 4). A chorus of such responses led the Board of Trade to take the matter to Parliament in hopes of enforcing a uniform compliance throughout America (House of Lords, 1921, pp. 302-3). On April 1, 1708, Parliament passed “An Act for ascertaining the Rates of foreign Coins in her Majesty’s Plantations in America” (Ruffhead, vol. 4, pp. 324-5). The act reiterated the restrictions embodied in Queen Anne’s Proclamation, and declared that anyone “accounting, receiving, taking, or paying the same contrary to the Directions therein contained, shall suffer six Months Imprisonment . . . and shall likewise forfeit the Sum of ten Pounds for every such Offence . . .”

The “Act for ascertaining the Rates of foreign Coins” never achieved its desired aim. In the colonies it was largely ignored, and business continued to be conducted just as if the act had never been passed. Pennsylvania, it was true, went though a show of complying but even that lapsed after a while (Brock, 1975, chapter 4). What the act did do, however, was push the process of coin rating into the shadows because it was no longer possible to address it in an open way by legislative enactment. Laws that passed through colonial legislatures (certain charter and proprietary colonies excepted) were routinely reviewed by the Privy Council, and if found to be inconsistent with British law, were declared null and void.

Two avenues remained open to alter coin ratings – private agreements among merchants that would not be subject to review in London, and a legislative enactment so stealthy as to slip through review unnoticed. New York was the first to succeed using stealth. In November 1709 it emitted bills of credit “for Tenn thousand Ounces of Plate or fourteen Thousand Five hundred & fourty five Lyon Dollars” (Lincoln, 1894, vol. 1, chap. 207, pp. 695-7). The Lyon dollar was an obscure silver coin that had escaped being explicitly mentioned in the enumeration of allowable values that had accompanied Queen Anne’s proclamation. Since 15 years previously New York had rated the Lyon dollar at 5 s. 6 d., it was generally supposed that that rating was still in force (Solomon, 1976, p. 30). The value of silver implied in the law’s title is 8 s. an ounce – a value higher than allowed by Parliament. Until 1723, New York’s emission acts contained clauses designed to rate an ounce of silver at 8 s. The act in 1714, for instance, tediously enumerated the denominations of the bills to be printed, in language such as “Five Hundred Sixty-eight Bills, of Twenty-five Ounces of Plate, or Ten Pounds value each” (Lincoln, 1894, vol. 1, chap. 280, pp. 819). When the Board of Trade finally realized what New York was up to it was too late: the earlier laws had already been confirmed. When the Board wrote Governor Hunter to complain, he replied, in part, “Tis not in the power of men or angels to beat the people of this Continent out of a silly notion of their being gainers by the Augmentation of the value of Plate” (Brodhead, vol. 5, p. 476). These colony laws were still thought to be in force in the late colonial period. Gaine’s New York Pocket Almanack for 1760 states that “Spanish Silver . . . here ‘tis fixed by Law at 8 s. per Ounce, but is often sold and bought from 9 s. to 9 s. and 3 d.”

In 1753 Maryland also succeeded using stealth, including revised coin ratings inconsistent with Queen Anne’s proclamation in “An Act for Amending the Staple of Tobacco, for Preventing Fraud in His Majesty’s Customs, and for the Limitation of Officer’s Fees” (McCusker, 1978, p. 192).

The most common subterfuge was for a colony’s merchants to meet and agree on coin ratings. Once the merchants agreed on such ratings, the colonial courts appear to have deferred to them, which is not surprising in light of the fact that many judges and legislators were drawn from the merchants’ ranks (e.g. Horle, 1991). These private agreements effectively nullified not only the act of Parliament but also local statutes, such as those rating silver in New York at 8 s. an ounce. Records of many such agreements have survived.28 There is also testimony that these agreements were commonplace. Lewis Morris remarked that “It is a common practice … [for] the merchants to put what value they think fit upon Gold and Silver coynes current in the Plantations.” When the Philadelphia merchants published a notice in the Pennsylvania Gazette of September 16, 1742 enumerating the values they had agreed to put on foreign gold and silver coins, only the brazenness of the act came as a surprise to Morris. “Tho’ I believe by the merchants private Agreements amongst themselves they have allwaies done the same thing since the Existence of A paper currency, yet I do not remember so publick an instance of defying an act of parliament” (Morris, 1993, vol. 3, pp. 260-262, 273). These agreements, when backed by a strong consensus among merchants, seem to have been effective. Decades later, Benjamin Franklin (1959, vol. 14, p. 232) recollected how the agreement that had offended Morris “had a great Effect in fixing the Value and Rates of our Gold and Silver.”

After the New York Chamber of Commerce was founded in 1768, merchant deliberations on these agreements were recorded. During this period, the coin ratings in effect in New York were routinely published in almanacs, particularly Gaine’s New-York pocket almanac. When the New York Chamber of Commerce resolved to change the rating of coins and the minimum allowable weight for guineas the almanac values changed immediately to reflect those adopted by the Chamber (Stevens, 1867, pp. 56-7. 69).29

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The coin rating table above, reproduced from The New-York Pocket Almanack for the Year 1771 shows how coin-rating worked in practice in the late colonial period. (Note the reference to the deliberations of the Chamber of Commerce.) It shows, for instance, that if you tendered a half joe in payment of debt in Pennsylvania, you would be credited with having paid £3 Pennsylvania money. If the same half joe were tendered in payment of a debt in New York you would be credited with having paid £ 3 4 s. New York money. In Connecticut it would have been £2 8 s. Connecticut money.30

The colonists possessed no central bank and colonial treasurers, however willing they might have been to exchange paper for specie, sometimes found themselves without the means to do so. That these coin ratings were successfully maintained for decades on end was a testament to the public’s faith in the bills of credit, which made them willing to voluntarily exchange them for specie at the established rate. Writing in 1786 and attempting to explain why New Jersey’s colonial bills of credit had retained their value, “Eugenio” attributed their success to the fact that it possessed what he called “the means of instant realization at value.” This awkward phrase signified the bills were instantly convertible at par. “Eugenio” went on to explain why:

“It is true that government did not raise a sum of coin and deposit the same in the treasury to exchange the bills on demand; but the faith of the government, the opinion of the people, and the security of the fund formerly by a well-timed and steady policy, went so hand in hand and so concurred to support each other, that the people voluntarily and without the least compulsion threw all their gold and silver, not locking up a shilling, into circulation concurrently with the bills; whereby the whole coin of the government became forthwith upon an emission of paper, a bank of deposit at every man’s door for the instant realization or immediate exchange of his bill into gold or silver. This had a benign and equitable, a persuasive, a satisfactory, and an extensive influence. If any one doubted the validity or price of his bill, his neighbor immediately removed his doubts by exchanging it without loss into gold or silver. If any one for a particular purpose needed the precious metals, his bill procured them at the next door, without a moment’s delay or a penny’s diminution. So high was the opinion of the people raised, that often an advance was given for paper on account of the convenience of carriage. In the market as well as in the payment of debts, the paper and the coin possessed a voluntary, equal, and concurrent circulation, and no special contract was made which should be paid or whether they should be received at a difference. By this instant realization and immediate exchange, the government had all the gold and silver in the community as effectually in their hands as if those precious metals had all been locked up in their treasury. By this realization and exchange they could extend credit to any degree it was required. The people could not be induced to entertain a doubt of their paper, because the government had never failed them in a single instance, either in war or in peace (New Jersey Gazette, January 30, 1786).”

Insofar as colonial bills of credit were convertible on demand into specie at the rated specie value of coins, there is no mystery as to why those bills of credit maintained their value. How merchants maintained and enforced such accords, however, is relatively inscrutable. Some economists are incredulous that private associations of merchants could accomplish the feat. The best evidence on this question can be found in a pamphlet by a disgruntled inhabitant complaining of the actions of a merchants’ association in Antigua (Anon., 1740), which provides a tantalizing glimpse of the methods merchants used.

Means of Payment – Private debt instruments

This leaves private debt instruments, such as bank notes, bills of exchange, notes of hand, and shop notes. It is sometimes asserted that there were no banks in colonial America, but this is something of an overstatement. There were several experiments made and several embryonic private banks actually got notes into circulation. Andrew McFarland Davis devoted an entire volume to banking in colonial New England (Davis, 1970, vol. 2; Perkins 1991 ). Perhaps the most successful bank of the era was established in South Carolina in 1731. It apparently issued notes totaling £50,000 South Carolina money and operated successfully for a decade.31 However, the banks that did exist did not last long enough or succeed in putting enough notes in circulation for us to be especially concerned about them.

Bills of exchange were similar to checks. A hypothetical example will illustrate how they functioned. The process of creating a bill of exchange began when someone obtained a balance on account overseas (in the case of the colonies, that place was often London). Suppose a Virginia tobacco producer consigned his tobacco to be sold in England, with the sterling proceeds to remain temporarily in the hands of a London merchant. The Virginia planter could then draw on those funds, by writing a bill of exchange payable in London. Suppose further that the planter drew a bill of exchange on his London correspondent, and sold it to a Virginia merchant, who then transmitted it to London to pay a balance due on imported dry goods. When the bill of exchange reached London, the dry goods wholesaler who received it would call on the London merchant holding the funds in order to receive the payment specified in the bill of exchange.

Bills of exchange were widely used in foreign trade, and were the preferred and most common method for paying debts due overseas. Because of the nature of the trade they financed, bills of exchange were usually in large denominations. Also, because bills of exchange were drawn on particular people or institutions overseas, there was an element of risk involved. Perhaps the person drawing the bill was writing a bad check, or perhaps the person on whom the bill was drawn was himself a deadbeat. One needed to be confident of the reputations of the parties involved when purchasing a bill of exchange. Perhaps because of their large denominations and the asymmetric information problems involved, bills of exchange played a limited role as a medium of exchange in the inland economy (McCusker, 1978, especially pp. 20-21).

Small denomination IOUs, called “notes of hand” were widespread, and these were typically denominated in local currency units. For the most part, these were not designed to circulate as a medium of exchange. When someone purchased goods from a shopkeeper on credit, the shopkeeper would generally get a “note of hand” as a receipt. In the court records in the Connecticut archives, one can find the case files for countless colonial-era cases where an individual was sued for nonpayment of a small debt.32 The court records generally include a note of hand entered as evidence to prove the debt. Notes of hand sometimes were proffered to third parties in payment of debt, however, particularly if the issuer was a person of acknowledged creditworthiness (Mather, 1691, p. 191). Some individuals of modest means created notes of hand in small denominations and attempted to circulate them as a medium of exchange; in Pennsylvania in 1768, a newspaper account stated that 10% of the cash offered in the retail trade consisted of such notes (Pennsylvania Chronicle, October 12, 1768; Kimber, 1998, p. 53). Indeed, many private banking schemes, such as the Massachusetts merchants’ bank, the New Hampshire merchants’ bank, the New London Society, and the Land Bank of 1740 were modeled on private notes of hand, and each consisted of an association designed to circulate such notes on a large scale. For the most part, however, notes of hand lacked the universal acceptability that would have unambiguously qualified them as money.

Shop notes were “notes of hand” of a particular type and seem to have been especially widespread in colonial New England. The twentieth-century analogue to shop notes would be scrip issued by an employer that could be used for purchases at the company store.33 Shop notes were I.O.U.s of local shopkeepers, redeemable through the shopkeeper. Such an I.O.U. might promise, for example, £6 in local currency value, half in money and half in goods (Weeden, 1891, vol. 2, p. 589; Ernst, 1990). Hugh Vance described the origins of shop notes in a 1740 pamphlet:

“… by the best Information I can have from Men of Credit then living, the Fact is truly this, viz. about the Year 1700, Silver-Money became exceedingly scarce, and the Trade so embarassed, that we begun to go into the Use of Shop-Goods, as the Money. The Shopkeepers told the Tradesmen, who had Draughts upon them from the Merchants for all Money, that they could not pay all in Money (and very truly) and so by Degrees brought the Tradesmen into the Use of taking Part in Shop-Goods; and likewise the Merchants, who must always follow the natural Course of Trade, were forced into the Way of agreeing with Tradesmen, Fishermen, and others; and also with the Shopkeepers, to draw Bills for Part and sometimes for all Shop-Goods (Vance, 1740, CCR III, pp. 390-91).”

Vance’s account seems accurate in all respects save one. Merchants played an active role in introducing shop notes into circulation. By the 1740s shop notes had been much abused, and it was disingenuous of Vance (himself a merchant) to suggest that merchants had had the system thrust upon them by shopkeepers. Merchants used shop notes to expedite sales and returns. The merchant might contact a shopkeeper and a shipbuilder. The shipbuilder would build a ship for the merchant, the ship to be sent to England and sold as a way of making returns. In exchange the merchant would provide the builder with shop notes and the shopkeeper with imported goods. The builder used the shop notes to pay his workers. The shop notes, in turn, were redeemed at the shop of the shopkeeper when presented to him by workers (Boston Weekly Postboy, December 8, 1740). Thomas Fitch tried to interest an English partner in just such a scheme in 1710:

“Realy it’s extream difficult to raise money here, for goods are generally Sold to take 1/2 money & 1/2 goods again out of the buyers Shops to pay builders of Ships [etc?] which is a great advantage in the readier if not higher sale of goods, as well as that it procures the Return; Wherefore if we sell goods to be paid in money we must give long time or they will not medle (Fitch, 1711, to Edward Warner, November 22, 1710).”

Like other substitutes for cash, shop notes were seldom worth their stated values. A 1736 pamphlet, for instance, reported wages to be 6s in bills of credit, or 7s if paid in shop notes (Anonymous, 1736, p. 143). One reason shop notes failed to remain at par with cash is that shopkeepers often refused to redeem them except with merchandise of their own choosing. Another abuse was to interpret money to mean British goods; half money, half goods often meant no money at all.34

Controversies

Colonial bills of credit were controversial when they were first issued, and have remained controversial to this day. Those who have wanted to highlight the evils of inflation have focused narrowly on the colonies where the bills of credit depreciated most dramatically – those colonies being New England and the Carolinas, with New England being a special focus because of the wealth of material that exists concerning New England history. When Hillsborough drafted a report for the Board of Trade intended to support the abolition of legal tender paper money in the colonies he rested his argument on the inflationary experiences of these colonies (printed in Whitehead, 1885, vol. IX, pp. 405-414). Those who have wanted to defend the use of bills of credit in the colonies have focused on the Middle colonies, where inflation was practically nonexistent. This tradition dates back at least to Benjamin Franklin (1959, vol. 14, pp. 77-87), who drafted a reply to the Board of Trade’s report in an effort to persuade Parliament to repeal of the Currency Act of 1764. Nineteenth-century authors, such as Bullock (1969) and Davis (1970), tended to follow Hillsborough’s lead whereas twentieth-century authors, such as Ferguson (1953) and Schweitzer (1987), followed Franklin’s.

Changing popular attitudes towards inflation have helped to rehabilitate the colonists. Whereas inflation in earlier centuries was rare, and even the mild inflation suffered in England between 1797 and 1815 was sufficient to stir a political uproar, the twentieth century has become inured to inflation. Even in colonial New England between 1711 and 1749, which was thought to have done a disgraceful job in managing its bills of credit, peacetime inflation was only about 5% per annum. Inflation during King George’s War was about 35% per annum.35

Nineteenth-century economists were guilty of overgeneralizing based on the unrepresentative inflationary experiences and associated debtor-creditor conflicts that occurred in a few colonies. Some twentieth-century economists, however, have swung too far in the other direction by generalizing on the basis of the success of the system in the Middle colonies and by attributing the benign outcomes there to the fundamental soundness of the system and its sagacious management. It would be closer to the truth, I believe, to note that the virtuous restraint exhibited by the Middle colonies was imposed upon them. Emissions in these colonies were sometimes vetoed by royal authorities and frequently stymied by instructions issued to royal or proprietary governors. The success of the Middle colonies owes much to the simple fact that they did not exert themselves in war to the extent that their New England neighbors did and that they were not permitted to freely issue bills of credit in peacetime.

A recent controversy has developed over the correct answer to the question – Why did some bills of credit depreciate, while others did not? Many early writers took it for granted that the price level in a colony would vary proportionally with the number of bills of credit the colony issued. This assumption was mocked by Ernst (1973, chapter 1) and devastated by West (1978). West performed simple regressions relating the quantity of bills of credit outstanding to price indices where such data exist. For most colonies he found no correlation between these variables. This was particularly striking because in the Middle colonies there was a dramatic increase in the quantity of bills of credit outstanding during the French and Indian War, and a dramatic decrease afterwards. Yet this large fluctuation seemed to have little effect on the purchasing power of those bills of credit as measured by prices of bills of exchange and the imperfect commodity price indices we possess. Only in New England in the first half of the eighteenth century did there seem to be a strong correlation between bills of credit outstanding and prices and exchange rates. Officer (2005) examined the New England episode and concluded that the quantity theory provides an adequate explanation in this instance, making the contrast with many other colonies (most notably, the Middle colonies) even more remarkable.

Seizing on West’s results Bruce Smith suggested that they disproved the quantity theory of money and provided evidence in favor of an alternative theory of money based on theoretical models of Wallace and Sargent, which Smith characterized as the “backing theory.”36 According to Smith (1985a, p. 534), the redemption provisions enacted when bills of credit were introduced into circulation on tax and loan funds were what prevented them from depreciating. “Just as the value of privately issued liabilities depends on the issuers’ balance sheet,” he wrote, “the same is true for government liabilities. Thus issues of money which are accompanied by increases in the (expected) discounted present value of the government’s revenues need not be inflationary.” One obvious problem with this theory is that the New England bills of credit which did depreciate were issued in exactly the same way. Smith’s answer was that the New England colonies administered their tax and loan funds poorly and New England’s poor administration accounted for the inflation experienced there.

Others who did not wholly agree with Smith – especially his sweeping refutation of the quantity theory – nonetheless pointed to the redemption provisions in explaining why bills of credit often retained their value (Wicker, 1985; Bernholz, 1988; Calomiris, 1988; Sumner, 1993; Rousseau, 2007). Of those who assigned credit to the redemption provisions, however, only Smith grappled with the key question; namely, why essentially identical redemption provisions failed to prevent inflation elsewhere.

Crediting careful administration of tax and loan funds for the steady value of some colonial currencies, and haphazard administration for the depreciation of others looks superficially appealing. The experiences of Pennsylvania and Rhode Island, generally thought to be the most and least successful issuers of colonial bills of credit, fit the hypothesis nicely. However, when one examines other cases, the hypothesis breaks down. Connecticut was generally credited with administering her bills of credit very carefully, yet they depreciated in lockstep with those of her New England neighbors for forty years (Brock, 1975, pp. 43-47). Virginia’s bills of credit retained their value even though Virginia’s colonial treasurer was discovered to have embezzled a sum equal to nearly half of Virginia’s total outstanding bills of credit and returned them to circulation (Michener, 1987, p. 247). North Carolina’s bills of credit held their value well in the late colonial period despite tax administration so notoriously corrupt it led to an armed revolt (Michener, 1987, pp. 248-9, Ernst, 1973, p. 221).

A competing explanation has been offered by Michener (1987, 1988), Brock (1992), McCallum (1992), and Michener and Wright (2006b). According to this explanation, the coin rating system operating in the colonies meant they were effectively on a specie standard with a de facto fixed par of exchange. Provided emissions of paper money did not exceed the amount needed for domestic purposes (“normal real balances,” in McCallum’s terminology) some specie would remain in circulation, prices would remain stable, and the fixed par could be maintained. Where emissions exceeded this bound specie would disappear from circulation and exchange rates would float freely, no longer tethered to the fixed par. Further emissions would cause inflation.37 This was said to account for inflation in New England after 1712, where specie did, in fact, completely disappear from circulation (Hutchinson, 1936, vol. 2, p. 154; Michener, 1987, pp. 288-94). If this explanation is correct, it would suggest that emissions of bills of credit ought to be offset by specie outflows, ceteris paribus.

Critics of the “specie circulated at rated values” explanation have frequently disregarded the ceteris paribus qualification and maintained that the theory implies specie flows always ought to be highly negatively correlated with changes in the quantity of bills of credit. This amounts to assuming the quantity of money demanded per capita in colonial America was nearly constant. If this were a valid test of the theory, one would be forced to reject it, because the specie stock fell little, if at all, in the Middle colonies in 1755-1760 as bills of credit increased, and when bills of credit began to decrease after 1760, specie became scarcer.

The flaw in critics’ reasoning, in my opinion, is that it assumes three unwarranted facts. First, that the demand for money, narrowly defined to mean bills of credit plus specie, was very stable despite the widespread use of bookkeeping barter; Second, that the absence of evidence of large interest rate fluctuations is evidence of the absence of large interest rate fluctuations (Smith, 1985b, pp. 1193, 1198; Letwin, 1982, p. 466); Third, that the opportunity cost of holding money is adequately measured by the nominal interest rate.38

With respect to the first point, colonial wars significantly influenced the demand for money. During peacetime, most transactions were handled by means of book credit. During major wars, however, many men served in the militia. Men in military service were paid in cash and taken far from the community in which their creditworthiness was commonly known, reducing both their need for book credit and their ability to obtain it. Moreover, it would have to give a shopkeeper pause and discourage him from advancing book credit to consider the real possibility that even his civilian customers might find themselves in the militia in the near future and gone from the local community, possibly forever. In each of the major colonial wars there is evidence suggesting an increase in cash real balances that could be attributed to the war’s impact on the book credit system. The increase in real money balances during the French and Indian War and the subsequent decrease can be largely accounted for in this way. With respect to the second point, fluctuations in the money supply are even compatible with a stable demand for money if periods when money is scarce are also periods when interest rates are high, as is also suggested by the historical record.39 It is true that the maximum interest rates specified in colonial usury laws are stable, generally in the range of 6%-8% per annum, often a bit lower late in the colonial era than at its beginning. This has been taken as evidence that colonial interest rates were stable. However, we know that these usury laws were commonly evaded and that market rates were often much higher (Wright, 2002, pp. 19-26). Some indication of how much higher became evident in the summer of 1768 when the Privy Council unexpectedly struck down New Hampshire’s usury law.40 News of the disallowance did not reach New Hampshire until the end of the year, at which time New Hampshire, having sunk the bills of credit issued to finance the French and Indian War during the 5 year interval permitted by the Currency Act of 1751, was in the throes of a liquidity crisis.41 Governor Wentworth reported to the Lords of Trade, that “Interest arose to 30 p. Ct. within six days of the repeal of the late Act.”42 By contrast, when cash was plentiful in Pennsylvania at the height of the French and Indian War, Pennsylvania’s “wealthy people were catching at every opportunity of letting out their money on good security, on common interest [that is, seven per cent].”43 With respect to the third point, the received theory that the nominal interest rate measures the opportunity cost of holding real money balances is derived from models in which individuals are free to borrow and lend at the nominal interest rate. Insofar as lenders respected the usury ceilings, borrowers were unable to borrow freely at the nominal interest rate. Recent work on moral hazard and adverse selection suggest that even private unregulated lenders forced to make loans in an environment characterized by seriously asymmetric information would be wise to ration loans by charging less than market clearing rates and limiting allowed borrowing. The creditworthiness of individuals was more difficult to determine in colonial times than today, and asymmetric information problems were rife. Under such circumstances, even an unregulated market rate of interest (if we had such data, which we don’t) would understate the opportunity cost of holding money for constrained borrowers.

The debate over why some colonial bills of credit depreciated, while others did not has spilled over into another related question: how much cash [i.e., paper money plus specie] circulated in the American colonies, and how much was in bills of credit, and how much was in specie? Clearly, if there was hardly any specie anywhere in colonial America, the concomitant circulation of specie at fixed rates could scarcely account for the stable purchasing power of bills of credit.

Determining how much cash circulated in the colonies is no easy matter, because the amount of specie in circulation is so hard to determine. The issue is further complicated by the fact that the total amount of cash in circulation fluctuated considerably from year to year, depending on such things as the demand for colonial staples and the magnitude of British military expenditure in the colonies (Sachs, 1957; Hemphill, 1964). The mix of bills of credit and specie in circulation was also highly variable. In the Middle colonies – and much of the most contentious debate involves the Middle colonies – the quantity of bills of credit in circulation was very modest (both absolutely and in per-capita terms) before the French and Indian War. The quantity exploded to cover military expenditures during the French and Indian War, and then fell again following 1760, until by the late colonial period, the quantity outstanding was once again very modest. Pennsylvania’s experience is not atypical of the Middle colonies. In 1754, on the eve of the French and Indian War, only £81,500 in Pennsylvania bills of credit were in circulation. At the height of the conflict, in 1760, this had increased to £446,158, but by 1773 the sum had been reduced to only £135,006 (Brock, 1992, Table 6). Any conclusion about the importance of bills of credit in the colonial money supply has to be carefully qualified because it will depend on the year in question.

Traditionally, economic historians have focused their attention on the eve of the Revolution, with a special focus on 1774, because of Alice Hanson Jones’s extensive study of 1774 probate records. Even with the inquiry dramatically narrowed, estimates have varied widely. McCusker and Menard (1985, p. 338), citing Alexander Hamilton for authority, estimated that just before the Revolution the “current cash” totaled 30 million dollars. Of the 30 million dollars, Hamilton said 8 million consisted of specie (27%). On the basis of this authority, Smith (1985a, p. 538; 1988, p. 22) has maintained that specie was a comparatively minor component in the colonial money supply.

Hamilton was arguing in favor of banks when he made this oft-cited estimate, and his purpose in presenting it was to show that the circulation was capable of absorbing a great deal of paper money, which ought to make us wonder whether his estimate might have been biased by his political agenda. Whether biased, or simply misinformed, Hamilton clearly got his facts wrong.

All estimates of the quantity of colonial bills of credit in circulation – including those of Brock (1975, 1992) that have been relied on by recent authors of all sides of the debate – lead inescapably to the conclusion that in 1774 there were very few bills of credit left outstanding, nowhere near the 22 million dollars implied by Hamilton. Calculations along these lines were first performed by Ratchford. Ratchford (1941, pp. 24-25) estimated the total quantity of bills of credit outstanding in each colony on the eve of the Revolution, and then added the local £., s., and d. of all the colonies (a true case of adding apples and oranges), converted to dollars by valuing dollars at 6 s. each, and concluded that the total was equal to about $5.16 million.

Ratchford’s method of summing local pounds and then converting to dollars is incorrect because local pounds did not have a uniform value across colonies. Since dollars were commonly rated at more than 6 s., his procedure resulted in an inflated estimate. We can correct this error by using McCusker’s (1978) data on 1774 exchange rates to convert local currency to sterling for each colony, obtain a sum in pounds sterling, and then convert to dollars using the rated value of the dollar in pounds sterling, 4½ s. Four and a half s. was very near the dollar’s value in London bullion markets in 1774, so no appreciable error arises from using the rated value. Doing so reduces Ratchford’s estimate to $3.42 million. Replacing Ratchford’s estimates of currency outstanding in New York, New Jersey, Pennsylvania, Virginia, and South Carolina with apparently superior data published by Brock (1975, 1992) reduces the total to $2.93 million. Even allowing for some imprecision in the data, this simply can’t be reconciled with Hamilton’s apparently mythical $22 million in paper money!

How much current cash was there in the colonies in 1774? Alice Hanson Jones’s extensive research into probate records gives an independent estimate of the money supply. Jones (1980, table 5.2) estimated that per capita cash-holding in the Middle colonies in 1774 was £1.8 sterling, and that the entire money supply of the thirteen colonies was slightly more than 12 million dollars.44 McCallum (1992) proposed another way to estimate total money balances in the colonies. McCallum started with the few episodes where historians generally agree paper money entirely displaced specie, making the total money supply measurable. He used money balances in these episodes as a basis for estimating money balances in other colonies by deriving approximate measures of the variability of money holdings over colonies and over time. Given the starkly different methodologies, it is remarkable that McCallum’s approach yields an answer practically indistinguishable from Jones’s.45

Various contemporary estimates, including estimates by Pelatiah Webster, Noah Webster, and Lord Sheffield, also suggest the total colonial money supply in 1774 was ten to twelve million dollars, mostly in specie (Michener 1988, p. 687; Elliot, 1845, p. 938). If we tentatively accept that the total money supply in the American colonies in 1774 was about twelve million dollars, and that only three million dollars worth of bills of credit remained outstanding, then fully 75% of the prewar money supply must have been in specie.

Even this may be an underestimate. Colonial probate inventories are notoriously incomplete, and the usual presumption is that Jones’s estimates are likely to be downwardly biased. Two examples not involving money illustrate the general problem. In Jones’s collection of inventories, over 20% of the estates did not include any clothes (Lindert, 1981, p. 657). In an independent survey of Surry County, Virginia probate records, Anna Hawley (1987, pp. 27-8) noted that only 34% of the estates listed hoes despite the fact that the region’s staple crops, corn and tobacco, had to be hoed several times a year.

In Jones’s 1774 database an amazing 70% of all estates were devoid of money. While the widespread use of credit made it possible to do without money in most transactions it is likely some estates contained cash that does not appear in probate inventories. Peter Lindert (1981, p. 658) surmised “cash was simply allocated informally among survivors even before probate took place.” McCusker and Menard (1985, p. 338, fn. 14) concurred noting “cash would have been one of the things most likely to have been distributed outside the usual probate proceedings.” If Jones actually underestimated cash holdings in 1774 the implication would be that more than 75% of the prewar money supply must have been specie.

That most of the cash circulating in the colonies in 1774 must have been specie seems like an inescapable conclusion. The issue has been clouded, however, by the existence of many contradictory and internally inconsistent estimates in the literature. By using them to defend his contention that specie was relatively unimportant, Smith (1988, p. 22) drew attention to these estimates.

The first such estimate was made by Roger Weiss (1970, p. 779), who computed the ratio of paper money to total money in the Middle colonies, using Jones’s probate data to estimate total money balances as has been done here; he arrived at a considerably smaller fraction of specie in the money supply. There is a simple explanation for this puzzling result: Weiss, whose article was published in 1970, based his analysis on Jones’s 1968 dissertation rather than her 1980 book. In her dissertation, Jones (1968, Tables 3 and 4, pp. 50-51) estimated the money supply in the three Middle colonies at £2.0 local currency per free white capita. Since £1 local currency was worth about £0.6 sterling, Weiss began with an estimated total money supply of £1.2 sterling per free white capita (equal to £1.13 per capita), rather than Jones’s more recent estimate of £1.8 sterling per capita.

Another authority is Letwin (1982, p. 467), who estimated that more than 60% of the money supply of Pennsylvania in 1775 was paper. Letwin used the Historical Statistics of the United States for his money supply data, and a casual back-of-the-envelope estimate that nominal balances in Pennsylvania were £700,000 in 1775 to conclude that 63% of Pennsylvania’s money supply was paper money. However, the data in Historical Statistics of the United States are known to be incorrect: Using Letwin’s back-of-the-envelope estimate, but redoing the calculation using Brock’s estimates of paper money in circulation, gives the result that in 1775 only 45.5% of Pennsylvania’s money supply was paper money; for 1774 the figure is 31%.46

That good faith attempts to estimate the stock of specie in the colonies in 1774 have given rise to such wildly varying and inconsistent estimates gives some indication of the task that remains to be accomplished.47 Many hints about how the specie stock varied over time in colonial America can be found in newspapers, legislative records, pamphlets and correspondence. Organizing those fragments of evidence and interpreting them is going to require great skill and will probably have to be done colony by colony. In addition, if the key to the purchasing power of colonial currency lies in the ratings attached to coins as I personally believe it does, then more effort is going to have to be paid in the future to tracking how those ratings evolved over time. Our knowledge at the moment is very fragmentary, probably because the politics of paper money has so engrossed the attention of historians that few people have attached much significance to coin ratings.

Economic historian Farley Grubb has proposed (2003, 2004, 2007) that the composition of the medium of exchange in colonial America and the early Republic can be determined from the unit of account used in arm’s length transactions, such as rewards offered in runaway ads and prices recorded in indentured servant contract registrations. If, for instance, a runaway reward is offered in pounds, shillings and pence, it means (Grubb argues) that colonial or state bills of credit were the medium of exchange used, while dollar rewards in such ads would imply silver. Grubb then uses contract registrations in the early Republic (2003, 2007) and runaway ads in colonial Pennsylvania (2004) to develop time series for hitherto unmeasurable components of the money supply and draws many striking conclusions from them. I believe Grubb is proceeding on a mistaken premise. Reversing Grubb’s procedure and using runaway ads in the early Republic and contract registrations in colonial Pennsylvania yields dramatically different results, which suggests the method is not useful. I have participated in this contentious published debate (see Michener and Wright 2005, 2006a, 2006c and Grubb 2003, 2004, 2006a, 2006b, 2007) and will leave it to the reader to draw his or her own conclusions.

Notes:

1. Beginning in 1767, Maryland issued bills of credit denominated in dollars (McCusker, 1978, p. 194).

2. For a number of years, Georgia money was an exception to this rule (McCusker, 1978, pp. 227-8).

3. Elmer (1869, p. 137). Similarly, historian Robert Shalhope (Shalhope, 2003, pp. 140, 142, 147, 290) documents a Vermont farmer who continued to reckon, at least some of the time, in New York currency (i.e. 8 shillings = $1) well into the 1820s.

4. To clarify: In New York, a dollar was rated at eight shillings, hence one reale, an eighth of a dollar, was one shilling. In Richmond and Boston, the dollar was rated at six shillings, or 72 pence, one eighth of which is 9 pence. In Philadelphia and Baltimore, the dollar was rated at seven shillings six pence, or ninety pence, and an eighth of a dollar would be 11.25 pence.

5. In 1822, for example, P. T. Barnum, then a young man from Connecticut making his first visit to New York, paid too much for a brace of oranges because of confusion over the unit of account. “I was told,” he later related, “[the oranges] were four pence apiece [as Barnum failed to realise, in New York there were 96 pence to the dollar], and as four pence in Connecticut was six cents, I offered ten cents for two oranges, which was of course readily taken; and thus, instead of saving two cents, as I thought, I actually paid two cents more than the price demanded” (Barnum, 1886, p. 18).

6. One way to see the truth of this statement is to examine colonial records predating the emission of colonial bills of credit. Virginia pounds are referred to long before Virginia issued its first bills of credit in 1755. See, for example, Pennsylvania Gazette, September 20, 1736, quoting Votes of the House of Burgesses in Virginia, August 30, 1736 or the Pennsylvania Gazette, May 29, 1746, quoting a runaway ad that mentions “a bond from a certain Fielding Turner to William Williams, for 42 pounds Virginia currency.” Advertisements in the Philadelphia newspapers in 1720 promise rewards for the return of runaway servants and slaves in Pennsylvania pounds, even though Pennsylvania did not issue its first bills of credit until 1723. The contemporary meaning of “currency” sheds light on otherwise confusing statements, such as an ad in the Pennsylvania Gazette, May 12, 1763, where the advertiser offered a reward for the recovery of £460 “New York currency” that was stolen from him and then parenthetically noted “the greatest part of said Money was in Jersey Bills.”

7. For an example of a complete list, see Felt (1839, pp. 82-83).

8. Further discussion of country pay in Connecticut can be found in Bronson (1865, pp. 23-4).

9. Weiss (1974, pp. 580-85) cites a passage from an 1684 court case that appears to contradict this discount. However, inspecting the court records shows that the initial debt consisted of 34s. 5d. in money to which the court added 17s. 3d. to cover the difference between money and country pay, a ratio of pay to money of exactly 3 to 2 (Massachusetts, 1961, pp. 303-4). Other good illustrations of the divergence of cash and country pay prices can be found in Knight (1935, pp. 40-1) and Judd (1905, pp. 95-6). The multiple price system was not limited to Massachusetts and Connecticut (Coulter, 1944, p. 107).

10. Thomas Bannister to Mr. Joseph Thomson, March 8, 1699/1700 in (Bannister, 1708).

11. In New York, for instance, early issues were legal tender, but the Currency Act of 1764 put a halt to new issues of legal tender paper money; the legal tender status of practically all existing issues expired in 1768. After prolonged and contentious negotiation with imperial authorities, the Currency Act of 1770 permitted New York to issue paper money that was a legal tender in payments to the colonial government, but not in private transactions. New York made its first issue under the terms of the Currency Act of 1770 in early 1771 (Ernst, 1973).

12. Ordinarily, but not always. For instance, in 1731 South Carolina reissued £106,500 in bills of credit without creating any tax fund with which to redeem them (Nettels, 1934, pp. 261-2; Brock, 1975, p. 123). The Board of Trade repeatedly pressured the colony to create a tax fund for this purpose, but without success. That no tax funds had been earmarked to redeem these bills was common knowledge, but it did not make the bills less acceptable as a medium of exchange, or adversely affect their value. The episode contradicts the common supposition that the promise of future redemption played a key role in determining the value of colonial currencies.

13. Once the bills of credit were placed in circulation, no distinction was made between them based on how they were originally issued. It is not as if one could only pay taxes with bills of the first sort, or repay mortgages with bills of the second sort. Many colonies, to save the cost of printing, would reuse worn but serviceable notes. A bill originally issued on loan, upon returning to the colonial treasury, might be reissued on tax funds; often it would have been impossible, even in principle, for an individual to examine the bills in his possession and deduce the funds ostensibly backing them.

14. Late in the seventeenth century Massachusetts briefly operated a mint that issued silver coins denominated in the local unit of account (Jordon, 2002). On the eve of the Revolution, Virginia obtained official permission to have copper coins minted for use in Virginia (Davis, 1970, vol. 1, chapter 2; Newman, 1956).

15. The Massachusetts government, unable to honor redemption promises made when the first new tenor emission was first created, decided in 1742 to revalue these bills from three to one to four to one with old tenor as compensation. When Massachusetts returned to a specie standard, the remaining middle tenor bills were redeemed at four to one (Davis, 1970; McCusker, 1978, p. 133).

16. New and old tenors have led to much confusion. In the Boston Weekly News Letter, July 1, 1742, there is an ad pertaining to someone who mistakenly passed Rhode Island New Tenor in Boston at three to one, when it was supposed to be valued at four to one. Modern day historians have also occasionally been misled. An excellent example can be found in Patterson (1961, p. 27). Patterson believed he had unearthed evidence of outrageous fraud during the Massachusetts currency reform, whereas he had, in fact, simply failed to convert a sum in an official document stated in new tenor terms into appropriate old tenor terms. Sufro (1976, p. 247) following Patterson, made similar accusations based on a similar misunderstanding of New England’s monetary units.

17. That colonial treasurers did not unfailingly provide this service is implicit in statements found in merchant letters complaining of how difficult it sometimes became to convert paper money to specie (Beekman to Evan and Francis Malbone, March 10, 1769, White, 1956, p. 522).

18. Nathaniel Appleton (1748) preached a sermon excoriating the province of Massachusetts Bay for flagrantly failing to keep the promises inscribed on the face of its bills of credit.

19. Goldberg (2009) uses circumstantial evidence to suggest that Massachusetts was engaged in a “monetary ploy to fool the king” when it made its first emissions. In Goldberg’s telling of the tale, the king had been furious about the Massachusetts mint and officially issuing paper money that was a full legal tender would have been a “colossal mistake” because it would have endangered the colony’s effort to obtain a new charter, which was essential to confirm the land grants the colony had already made. The alleged ploy Goldberg discovered was a provision passed shortly afterwards: “Ordered that all country pay with one third abated shall pass as current money to pay all country’s debts at the same prices set by this court.” Since those with a claim on the Treasury were going to be tendered either paper money or country pay, and since Goldberg interprets this as requiring those creditors to accept either 3 pounds in paper money or 2 pounds in country pay, the provision was, in Goldberg’s estimation, a way of forcing the paper money on the populace at a one third discount. The shortchanging of the public creditors, through some mechanism not adequately explained to my understanding, was sufficient to make the new paper money a defacto legal tender.

There are several problems with Goldberg’s analysis. Jordan (2002, pp. 36-45) has recently written the definitive history of the Massachusetts mint, and he minutely reviews the evidence pertaining to the Massachusetts mint and British reaction to it. He concludes that “there was no concerted effort by the king and his ministers to crush the Massachusetts mint.” In 1692 Massachusetts obtained a new charter and passed a law making the bills of credit a legal tender. The new charter required Massachusetts to submit all its laws to London for review, yet the imperial authorities quietly ratified the legal tender law, even though they were fully empowered to veto it, which seems very peculiar if the legal tender status of the bills was as unpopular with the King and his ministers as Goldberg maintains. The smoking gun Goldberg cites appears to me to be no more than a statement of the “three pounds of country pay equals two pounds cash” rule that prevailed in Massachusetts in the late seventeenth century. In his argument, Goldberg tacitly assumes that a pound of country pay was equal in value to a pound of hard money; he observes that the new bills of credit initially circulated at a one third discount (with respect to specie) and that this might have arisen because recipients (according to his interpretation) were offered only two pounds of country pay in lieu of three pounds of bills of credit (Goldberg, p. 1102). However, because country pay itself was worth, at most, two thirds of its nominal value in specie, by Goldberg’s reasoning paper money should have been at a discount of at least five ninths with respect to specie.

The paper money era in Massachusetts brought forth approximately fifty pamphlets and hundreds of newspaper articles and public debates in the Assembly, none of which confirm Goldberg’s inference.

20. The role bills of credit played as a means of financing government expenditures is discussed in Ferguson (1953).

21. Georgia was not founded until 1733, and one reason for its founding was to create a military buffer to protect the Carolinas from the Spanish in Florida.

22. Grubb (2004, 2006a, 2006b) argues that bills of credit did not commonly circulate across colony borders. Michener and Wright (2006a, 2006c) dispute Grubb’s analysis and provide (Michener and Wright 2006a, pp. 12-13, 24-30) additional evidence of the phenomenon.

23. Poor Thomas Improved: Being More’s Country Almanack for … 1768 gives as a rule that “To reduce New-Jersey Bills into York Currency, only add one penny to every shilling, and the Sum is determined.” (McCusker, 1978, pp. 170-71; Stevens, 1867, pp. 151-3, 160-1, 168, 185-6, 296; Lincoln, 1894, vol. 5, Chapter 1654, pp. 638-9.)

24. In two articles, John R. Hanson (1979, 1980) argued that bills of credit were important to the colonial economy because they provided much-needed small denomination money. His analysis, however, completely ignores the presence of half-pence, pistareens, and fractional denominations of the Spanish dollar. The Spanish minted halves, quarters, eighths, and sixteenths of the dollar, which circulated in the colonies (Solomon, 1976, pp. 31-32). For a good introduction to small change in the colonies, see Andrews (1886), Newman (1976), Mossman (1993, pp. 105-142), and Kays (2001).

25. Council of Trade and Plantations to the Queen, November 23, 1703, in Calendar of State Papers, 1702-1703, entry #1299. Brock, 1975, chap. 4.

26. This, it should be noted, is what British authorities meant by “proclamation money.” Since salaries of royal officials, fees, quit rents, etc. were often denominated in proclamation money, colonial courts often found a rationale to attach their own interpretation to “proclamation money” so as to reduce the real value of such salaries and fees. In New York, for example, eight shillings in New York’s bills of credit were ostensibly worth one ounce of silver although by the late colonial period they were actually worth less. This valuation of bills of credit made each seven pounds of New York bills of credit in principle worth six pounds in proclamation money. The New York courts used that fact to establish the rule that seven pounds in New York currency could pay a debt of six pounds proclamation money. This rule allowed New Yorkers to pay less in real terms than was contemplated by the British (Hart, 2005, pp. 269-71).

27. Brock (1975). The text of the proclamation can be found in the Boston New-Letter, December 11, 1704. To be precise, the Proclamation rate was actually in slight contradiction to that in the Massachusetts law, which had rated a piece of eight weighing 17 dwt. at 6 s. See Brock (1975, p. 133, fn. 7).

28. This contention has engendered considerable controversy, but the evidence for it seems to me both considerable and compelling. Apart from evidence cited in the text, see for Massachusetts, Michener (1987, p. 291, fn. 54), Waite Winthrop to Samuel Reade, March 5, 1708 and Wait Winthrop to Samuel Reade, October 22, 1709 in Winthrop (1892, pp. 165, 201); For South Carolina see South Carolina Gazette, May 14, 1753; August 13, 1744; and Manigualt (1969, p. 188); For Pennsylvania see Pennsylvania Gazette, April 2, 1730, December 3, 1767, February 15, 1775, March 8, 1775; For St. Kitts see Roberdeau to Hyndman & Thomas, October 16, 1766, in Roberdeau (1771); For Antigua, see Anonymous (1740).

29. The Chamber of Commerce adopted its measure in October 1769, apparently too late in the year to appear in the “1770” almanacs, which were printed and sold in late 1769. The 1771 almanacs, printed in 1770, include the revised coin ratings.

30. Note that the relative ratings of the half joe are aligned with the ratings of the dollar. For example, the ratio of the New York value of the half joe to the Pennsylvania value is 64 s./60 s. = 1.066666, and the ratio of the New York value of the half joe to the Connecticut value is 64 s./48 s. = 1.3333.

31. This bank has been largely overlooked, but is well documented. Letter of a Merchant in South Carolina to Alexander Cumings, Charlestown, May 23, 1730, South Carolina Public Records, Vol XIV, pp. 117-20; Anonymous (1734); Easterby (1951, [March 5, 1736/37] vol. 1, pp. 309-10); Governor Johnson to the Board of Trade in Calendar of State Papers, 1731, entry 488, p. 342; Whitaker (1741, p. 25); and Vance (1740, p. 463).

32.I base this on my own experience reviewing the contents of RG3 Litchfield County Court Files, Box 1 at the Connecticut State Library.

33. Though best documented in New England, Benjamin Franklin (1729, CCR II, p. 340) mentions their use in Pennsylvania.

34. See Douglass (1740, CCR III, pp. 328-329) and Vance (1740, CCR III, pp. 328-329). Douglass and Vance disagreed on all the substantive issues, so that their agreement on this point is especially noteworthy. See also Boston Weekly Newsletter, Feb. 12-19, 1741.

35. Data on New England prices during this period are very limited, but annual data exist for wheat prices and silver prices. Regressing the log of these prices on time yields an annual growth rate of prices approximately that mentioned in the text. The price data leave much to be desired, and the inflation estimates should be understood as simply a crude characterization. However, it does show that New England’s peacetime inflation during this era was not so extreme as to shock modern sensibilities.

36. Smith (1985a, 1985b). The quantity theory holds that the price level is determined by the supply and demand for money – loosely, how much money is chasing how many goods. Smith’s version of the backing theory is summarized by the passage quoted from his article.

37. John Adams explained this very clearly in a letter written June 22, 1780 to Vergennes (Wharton, vol. 3, p. 811). Adams’s “certain sum” and McCallum’s “normal real balances” are essentially the same, although Adams is speaking in nominal and McCallum in real terms.

A certain sum of money is necessary to circulate among the society in order to carry on their business. This precise sum is discoverable by calculation and reducible to certainty. You may emit paper or any other currency for this purpose until you reach this rule, and it will not depreciate. After you exceed this rule it will depreciate, and no power or act of legislation hitherto invented will prevent it. In the case of paper, if you go on emitting forever, the whole mass will be worth no more than that was which was emitted within the rule.

38. One of the principle observations Smith (1985b, p. 1198) makes in dismissing the possible importance of interest rate fluctuations is “it is known that sterling bills of exchange did not circulate at a discount.” Sterling bills were payable at a future date, and Smith presumably means that sterling bills should have been discounted if interest made an appreciable difference in their market value. Sterling bills, however, were discounted. These bills were not payable at a particular fixed date, but rather on a certain number of days after they were first presented for payment. For example, a bill might be payable “on sixty days sight,” meaning that once the bill was presented (in London, for example, to the person upon whom it was drawn) the person would have sixty days in which to make payment. Not all bills were drawn at the same sight, and sight periods of 30, 60, and 90 days were all common. Bills payable sooner sold at higher prices, and bills could be and sometimes were discounted in London to obtain quicker payment (McCusker, 1978, p. 21, especially fn. 25; David Vanhorne to Nicholas Browne and Co., October 3, 1766. Brown Papers, P-V2, John Carter Brown Library). In the early Federal period many newspapers published extensive prices current that included prices of bills drawn on 30, 60, and 90 days’ sight.

39. Franklin (1729) wrote a tract on colonial currency, in which he maintained as one of his propositions that “A great Want of Money in any Trading Country, occasions Interest to be at a very high Rate.” An anonymous referee warned that when colonists complained of a “want of money” that they were not complaining of a lack of a circulating medium per se, but were expressing a desire for more credit at lower interest rates. I do not entirely agree with the referee. I believe many colonists, like Franklin, reasoned like modern-day Keynesians, and believed high interest rates and scarce credit were caused by an inadequate money supply. For more on this subject, see Wright (2002, chapter 1).

40. Public Record Office, CO 5/ 947, August 13, 1768, pp. 18-23.

41. New Hampshire Gazette and Historical Chronicle, January 13, 1769.

42. Public Record Office, Wentworth to Hillsborough, CO 5/ 936, July 3, 1769.

43. Pennsylvania Chronicle, and Universal Advertiser, 28 December 1767.

44. This should be understood to be paper money and specie equal in value to 12 million dollars, not 12 million Spanish dollars. The fraction of specie in the money supply can’t be directly estimated from probate records. Jones (1980, p. 132) found that “whether the cash was in coin or paper was rarely stated.”

45. McCallum deflated money balances by the free white population rather than the total population. Using population estimates to put the numbers on a comparable basis reveals how close McCallum’s estimates are to those of Jones. For example, McCallum’s estimate for the Middle colonies, converted to a per-capita basis, is approximately £1.88 sterling.

46. This incident illustrates how mistakes about colonial currency are propagated and seem never to die out. Henry Phillips 1865 book presented data on Pennsylvania bills of credit outstanding. One of his major “findings” was that Pennsylvania retired only £25,000 between 1760 and 1769. This was a mistake: Brock (1992, table 6) found £225,247 had been retired over the same period. Because of the retirements Phillips missed, he overestimated the quantity of Pennsylvania bills of credit in circulation in the late colonial period by 50 to 100%. Lester (1939, pp. 88, 108) used Phillips’s series; Ratchford (1941) obtained his data from Lester. Through Ratchford, Phillips’s series found its way into Historical Statistics of the United States.

47. Benjamin Allen Hicklin (2007) maintains that generations of historians have exaggerated the scarcity of specie in seventeenth and early eighteenth century Massachusetts. Hicklin’s analysis illustrates the unsettled state of our knowledge about colonial specie stocks.

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The Roots of American Industrialization, 1790-1860

David R. Meyer, Brown University

The Puzzle of Industrialization

In a society which is predominantly agricultural, how is it possible for industrialization to gain a foothold? One view is that the demand of farm households for manufactures spurs industrialization, but such an outcome is not guaranteed. What if farm households can meet their own food requirements, and they choose to supply some of their needs for manufactures by engaging in small-scale craft production in the home? They might supplement this production with limited purchases of goods from local craftworkers and purchases of luxuries from other countries. This local economy would be relatively self-sufficient, and there is no apparent impetus to alter it significantly through industrialization, that is, the growth of workshop and factory production for larger markets. Others would claim that limited gains might come from specialization, once demand passed some small threshold. Finally, it has been argued that if the farmers are impoverished, some of them would be available for manufacturing and this would provide an incentive to industrialize. However, this argument begs the question as to who would purchase the manufactures. One possibility is that non-farm rural dwellers, such as trade people, innkeepers, and professionals, as well as a small urban population, might provide an impetus to limited industrialization.

The problem with the “impoverished agriculture” theory

The industrialization of the eastern United States from 1790 to 1860 raises similar conundrums. For a long time, scholars thought that the agriculture was mostly poor quality. Thus, the farm labor force left agriculture for workshops, such as those which produced shoes, or for factories, such as the cotton textile mills of New England. These manufactures provided employment for women and children, who otherwise had limited productive possibilities because the farms were not economical. Yet, the market for manufactures remained mostly in the East prior to 1860. Consequently, it is unclear who would have purchased the products to support the growth of manufactures before 1820, as well as to undergird the large-scale industrialization of the East during the two decades following 1840. Even if the impoverished-agriculture explanation of the East’s industrialization is rejected, we are still left with the curiosity that as late as 1840, about eighty percent of the population lived in rural areas, though some of them were in nonfarm occupations.

In brief, the puzzle of eastern industrialization between 1790 and 1860 can be resolved – the East had a prosperous agriculture. Farmers supplied low-cost agricultural products to rural and urban dwellers, and this population demanded manufactures, which were supplied by vigorous local and subregional manufacturing sectors. Some entrepreneurs shifted into production for larger market areas, and this transformation occurred especially in sectors such as shoes, selected light manufactures produced in Connecticut (such as buttons, tinware, and wooden clocks), and cotton textiles. Transportation improvements exerted little impact on these agricultural and industrial developments, primarily because the lowly wagon served effectively as a transport medium and much of the East’s most prosperous areas were accessible to cheap waterway transportation. The metropolises of Boston, New York, Philadelphia, and, to a lesser extent, Baltimore, and the satellites of each (together, each metropolis and its satellites is called a metropolitan industrial complex), became leading manufacturing centers, and other industrial centers emerged in prosperous agricultural areas distant from these complexes. The East industrialized first, and, subsequently, the Midwest began an agricultural and industrial growth process which was underway by the 1840s. Together, the East and the Midwest constituted the American Manufacturing Belt, which was formed by the 1870s, whereas the South failed to industrialize commensurately.

Synergy between Agriculture and Manufacturing

The solution to the puzzle of how industrialization can occur in a predominantly agricultural economy recognizes the possibility of synergy between agriculture and manufacturing. During the first three decades following 1790, prosperous agricultural areas emerged in the eastern United States. Initially, these areas were concentrated near the small metropolises of Boston, New York, and Philadelphia, and in river valleys such as the Connecticut Valley in Connecticut and Massachusetts, the Hudson and Mohawk Valleys in New York, the Delaware Valley bordering Pennsylvania and New Jersey, and the Susquehanna Valley in eastern Pennsylvania. These agricultural areas had access to cheap, convenient transport which could be used to reach markets; the farms supplied the growing urban populations in the cities and some of the products were exported. Furthermore, the farmers supplied the nearby, growing non-farm populations in the villages and small towns who provided goods and services to farmers. These non-farm consumers included retailers, small mill owners, teamsters, craftspeople, and professionals (clergy, physicians, and lawyers).

Across every decade from 1800 to 1860, the number of farm laborers grew, thus testifying to the robustness of eastern agriculture (see Table 1). And, this increase occurred in the face of an expanding manufacturing sector, as increasing numbers of rural dwellers left the farms to work in the factories, especially after 1840. Even New England, the region which presumably was the epitome of declining agriculture, witnessed a rise in the number of farm laborers all the way up to 1840, and, as of 1860, the drop off from the peak was small. Massachusetts and Connecticut, which had vigorous small workshops and increasing numbers of small factories before 1840, followed by a surge in manufacturing after 1840, matched the trajectory of farm laborers in New England as a whole. The numbers in these two states peaked in 1840 and fell off only modestly over the next twenty years. The Middle Atlantic region witnessed an uninterrupted rise in the number of farm laborers over the sixty-year period. New York and Pennsylvania, the largest states, followed slightly different paths. In New York, the number of farm laborers peaked around 1840 and then stabilized near that level for the next two decades, whereas in Pennsylvania the number of farm laborers rose in an uninterrupted fashion.

Table 1
Number of Farm Laborers by Region and Selected States, 1800-1860

Year 1800 1810 1820 1830 1840 1850 1860
New England 228,100 257,700 303,400 353,800 389,100 367,400 348,100
Massachusetts 73,200 72,500 73,400 78,500 87,900 80,800 77,700
Connecticut 50,400 49,300 51,500 55,900 57,000 51,400 51,800
Middle Atlantic 375,700 471,400 571,700 715,000 852,800 910,400 966,600
New York 111,800 170,100 256,000 356,300 456,000 437,100 449,100
Pennsylvania 112,600 141,000 164,900 195,200 239,000 296,300 329,000
East 831,900 986,800 1,178,500 1,422,600 1,631,000 1,645,200 1,662,800

Source: Thomas Weiss, “U.S. Labor Force Estimates and Economic Growth, 1800-1860,”American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John Joseph Wallis (Chicago, IL: University of Chicago Press, 1992), table 1A.9, p. 51.

The farmers, retailers, professionals, and others in these prosperous agricultural areas accumulated capital which became available for other economic sectors, and manufacturing was one of the most important to receive this capital. Entrepreneurs who owned small workshops and factories obtained capital to turn out a wide range of goods such as boards, boxes, utensils, building hardware, furniture, and wagons, which were in demand in the agricultural areas. And, some of these workshops and factories enlarged their market areas to a subregion as they gained production efficiencies; but, this did not account for all industrial development. Selected manufactures such as shoes, tinware, buttons, and cotton textiles were widely demanded by urban and rural residents of prosperous agricultural areas and by residents of the large cities. These products were high value relative to their weight; thus, the cost to ship them long distances was low. Astute entrepreneurs devised production methods and marketing approaches to sell these goods in large market areas, including New England and the Middle Atlantic regions of the East.

Manufactures Which Were Produced for Large Market Areas

Shoes and Tinware

Small workshops turned out shoes. Massachusetts entrepreneurs devised an integrated shoe production complex based on a division of labor among shops, and they established a marketing arm of wholesalers, principally in Boston, who sold the shoes throughout New England, to the Middle Atlantic, and to the South (particularly, to slave plantations). Businesses in Connecticut drew on the extensive capital accumulated by the well-to-do rural and urban dwellers of that state and moved into tinware, plated ware, buttons, and wooden clocks. These products, like shoes, also were manufactured in small workshops, but a division of labor among shops was less important than the organization of production within shops. Firms producing each good tended to agglomerate in a small subregion of the state. These clusters arose because entrepreneurs shared information about production techniques and specialized skills which they developed, and this knowledge was communicated as workers moved among shops. Initially, a marketing system of peddlers emerged in the tinware sector, and they sold the goods, first throughout Connecticut, and then they extended their travels to the rest of New England and to the Middle Atlantic. Workshops which made other types of light, high-value goods soon took advantage of the peddler distribution system to enlarge their market areas. At first, these peddlers operated part-time during the year, but as the supply of goods increased and market demand grew, peddlers operated for longer periods of the year and they traveled farther.

Cotton Textiles

Cotton textile manufacturing was an industry built on low-wage, especially female, labor; presumably, this industry offered opportunities in areas where farmers were unsuccessful. Yet, similar to the other manufactures which enlarged their market areas to the entire East before 1820, cotton textile production emerged in prosperous agricultural areas. That is not surprising, because this industry required substantial capital, technical skills, and, initially, nearby markets. These requirements were met in rich farming areas, which also could draw on wealthy merchants in large cities who contributed capital and provided sale outlets beyond nearby markets as output grew. The production processes in cotton textile manufacturing, however, diverged from the approaches to making shoes and small metal and wooden products. From the start, production processes included textile machinery, which initially consisted of spinning machines to make yarn, and later (after 1815), weaving machines and other mechanical equipment were added. Highly skilled mechanics were required to build the machines and to maintain them. The greater capital requirements for cotton mills, compared to shoes and small goods’ manufactures in Connecticut, meant that merchant wholesalers and wealthy retailers, professionals, mill owners, and others, were important underwriters of the factories.

Starting in the 1790s, New England, and, especially, Rhode Island, housed the leaders in early cotton textile manufacturing. Providence merchants funded some of the first successful cotton spinning mills, and they drew on the talents of Samuel Slater, an immigrant British machinist. He trained many of the first important textile mechanics, and investors in various parts of Rhode Island, Connecticut, Massachusetts, New Hampshire, and New York hired them to build mills. Between 1815 and 1820, power-loom weaving began to be commercially feasible, and this effort was led by firms in Rhode Island and, especially, in Massachusetts. Boston merchants, starting with the Boston Manufacturing Company at Waltham, devised a business plan which targeted large-scale, integrated cotton textile manufacturing, with a marketing/sales arm housed in a separate firm. They enlarged their effort significantly after 1820, and much of the impetus to the growth of the cotton textile industry came from the success entrepreneurs had in lowering the cost of production.

The Impact of Transportation Improvements

Following 1820, government and private sources invested substantial sums in canals, and after 1835, railroad investment increased rapidly. Canals required huge volumes of low-value commodities in order to pay operating expenses, cover interest on the bonds which were issued for construction, and retire the bonds at maturity. These conditions were only met in the richest agricultural and resource (lumbering and coal mining, for example) areas traversed by the Erie and Champlain Canals in New York and the coal canals in eastern Pennsylvania and New Jersey. The vast majority of the other canals failed to yield benefits for agriculture and industry, and most were costly debacles. Early railroads mainly carried passengers, especially within fifty to one hundred miles of the largest cities – Boston, New York, Philadelphia, and Baltimore. Industrial products were not carried in large volumes until after 1850; consequently, railroads built before that time had little impact on industrialization in the East.

Canals and railroads had minor impacts on agricultural and industrial development because the lowly wagon provided withering competition. Wagons offered flexible, direct connections between origins and destinations, without the need to transship goods, as was the case with canals and railroads; these modes required wagons at their end points. Within a distance of about fifty miles, the cost of wagon transport was competitive with alternative transport modes, so long as the commodities were high value relative to their weight. And, infrequent transport of these goods could occur over distances of as much as one hundred miles. This applied to many manufactures, and agricultural commodities could be raised to high value by processing prior to shipment. Thus, wheat was turned into flour, corn and other grains were fed to cattle and pigs and these were processed into beef and pork prior to shipment, and milk was converted into butter and cheese. Most of the richest agricultural and industrial areas of the East were less than one hundred miles from the largest cities or these areas were near low-cost waterway transport along rivers, bays, and the Atlantic Coast. Therefore, canals and railroads in these areas had difficulty competing for freight, and outside these areas the limited production generated little demand for long distant transport services.

Agricultural Prosperity Continues

After 1820, eastern farmers seized the increasing market opportunities in the prosperous rural areas as nonfarm processing expanded and village and small town populations demanded greater amounts of farm products. The large number of farmers who were concentrated around the rapidly growing metropolises (Boston, New York, Philadelphia, and Baltimore) and near urban agglomerations such as Albany-Troy, New York, developed increasing specialization in urban market goods such as fluid milk, fresh vegetables, fruit, butter, and hay (for horse transport). Farmers farther away responded to competition by shifting into products which could be transported long distances to market, including wheat into flour, cattle which walked to market, or pigs which were converted into pork. During the winter these farms sent butter, and cheese was a specialty which could be lucrative for long periods of the year when temperatures were cool.

These changes swept across the East, and, after 1840, farmers increasingly adjusted their production to compete with cheap wheat, cattle, and pork arriving over the Erie Canal from the Midwest. Wheat growing became less profitable, and specialized agriculture expanded, such as potatoes, barley, and hops in central New York and cigar tobacco in the Connecticut Valley. Farmers near the largest cities intensified their specialization in urban market products, and as the railroads expanded, fluid milk was shipped longer distances to these cities. Farmers in less accessible areas and on poor agricultural land which was infertile or too hilly, became less competitive. If these farmers and their children stayed, their incomes declined relative to others in the East, but if they moved to the Midwest or to the burgeoning industrial cities of the East, they had the chance of participating in the rising prosperity.

Metropolitan Industrial Complexes

The metropolises of Boston, New York, Philadelphia, and, to a lesser extent, Baltimore, led the industrial expansion after 1820, because they were the greatest concentrated markets, they had the most capital, and their wholesalers provided access to subregional and regional markets outside the metropolises. By 1840, each of them was surrounded by industrial satellites – manufacturing centers in close proximity to, and economically integrated with, the metropolis. Together, these metropolises and their satellites formed metropolitan industrial complexes, which accounted for almost one-quarter of the nation’s manufacturing (see Table 2). For example, metropolises and satellites included Boston and Lowell, New York and Paterson (New Jersey), Philadelphia and Reading (Pennsylvania), and Baltimore and Wilmington (Delaware), which also was a satellite of Philadelphia. Among the four leading metropolises, New York and Philadelphia housed, by far, the largest share of the nation’s manufacturing workers, and their satellites had large numbers of industrial workers. Yet, Boston’s satellites contained the greatest concentration of industrial workers in the nation, with almost seven percent of the national total. The New York, Philadelphia, and Boston metropolitan industrial complexes each had approximately the same share of the nation’s manufacturing workers. These complexes housed a disproportionate share of the nation’s commerce-serving manufactures such as printing-publishing and paper and of local, regional, and national market manufactures such as glass, drugs and paints, textiles, musical instruments, furniture, hardware, and machinery.

Table 2
Manufacturing Employment in the Metropolitan Industrial Complexes
of New York, Philadelphia, Boston, and Baltimore
as a Percentage of National Manufacturing Employment in 1840

Metropolis Satellites Complex
New York 4.1% 3.4% 7.4%
Philadelphia 3.9 2.9 6.7
Boston 0.5 6.6 7.1
Baltimore 2.0 0.2 2.3
Four Complexes 10.5 13.1 23.5

Note: Metropolitan county is defined as the metropolis for each complex and “outside” comprises nearby counties; those included in each complex were the following. New York: metropolis (New York, Kings, Queens, Richmond); outside (Connecticut: Fairfield; New York: Westchester, Putnam, Rockland, Orange; New Jersey: Bergen, Essex, Hudson, Middlesex, Morris, Passaic, Somerset). Philadelphia: metropolis (Philadelphia); outside (Pennsylvania: Bucks, Chester, Delaware, Montgomery; New Jersey: Burlington, Gloucester, Mercer; Delaware: New Castle). Boston: metropolis (Suffolk); outside (Essex, Middlesex, Norfolk, Plymouth). Baltimore: metropolis (Baltimore); outside (Anne Arundel, Harford).

Source: U.S. Bureau of the Census, Compendium of the Sixth Census, 1840 (Washington, D.C.: Blair and Rives, 1841).

Also, by 1840, prosperous agricultural areas farther from these complexes, such as the Connecticut Valley in New England, the Hudson Valley, the Erie Canal Corridor across New York state, and southeastern Pennsylvania, housed significant amounts of manufacturing in urban places. At the intersection of the Hudson and Mohawk rivers, the Albany-Troy agglomeration contained one of the largest concentrations of manufacturing outside the metropolitan complexes. And, industrial towns such as Utica, Syracuse, Rochester, and Buffalo were strung along the Erie Canal Corridor. Many of the manufactures (such as furniture, wagons, and machinery) served subregional markets in the areas of prosperous agriculture, but some places also developed specialization in manufactures (textiles and hardware) for larger regional and interregional market areas (the East as a whole). The Connecticut Valley, for example, housed many firms which produced cotton textiles, hardware, and cutlery.

Manufactures for Eastern and National Markets

Shoes

In several industrial sectors whose firms had expanded before 1820 to regional, and even, multiregional markets, in the East, firms intensified their penetration of eastern markets and reached to markets in the rapidly growing Midwest between 1820 and 1860. In eastern Massachusetts, a production complex of shoe firms innovated methods of organizing output within and among firms, and they developed a wide array of specialized tools and components to increase productivity and to lower manufacturing costs. In addition, a formidable wholesaling, marketing, and distribution complex, headed by Boston wholesalers, pushed the ever-growing volume of shoes into sales channels which reached throughout the nation. Machinery did not come into use until the 1850s, and, by 1860, Massachusetts accounted for half of the value of the nation’s shoe production.

Cotton Textiles

In contrast, machinery constituted an important factor of production which drove down the price of cotton textile goods, substantially enlarging the quantity consumers demanded. Before 1820, most of the machinery innovations improved the spinning process for making yarn, and in the five years following 1815, innovations in mechanized weaving generated an initial substantial drop in the cost of production as the first integrated spinning-weaving mills emerged. During the next decade and a half the price of cotton goods collapsed by over fifty percent as large integrated spinning-weaving mills became the norm for the production of most cotton goods. Therefore, by the mid-1830s vast volumes of cotton goods were pouring out of textile mills, and a sophisticated set of specialized wholesaling firms, mostly concentrated in Boston, and secondarily, in New York and Philadelphia, channeled these items into the national market.

Prior to 1820, the cotton textile industry was organized into three cores. The Providence core dominated and the Boston core occupied second place; both of these were based mostly on mechanized spinning. A third core in the city of Philadelphia was based on hand spinning and weaving. Within about fifteen years after 1820, the Boston core soared to a commanding position in cotton textile production as a group of Boston merchants and their allies relentlessly replicated their business plan at various sites in New England, including at Lowell, Chicopee, and Taunton in Massachusetts, at Nashua, Manchester, and Dover in New Hampshire, and at Saco in Maine. The Providence core continued to grow, but its investors did not seem to fully grasp the strategic, multi-faceted business plan which the Boston merchants implemented. Similarly, investors in an emerging core within about fifty to seventy-five miles of New York City in the Hudson Valley and northern New Jersey likewise did not seem to fully understand the Boston merchants’ plan, and these New York City area firms never reached the scale of the firms of the Boston Core. The Philadelphia core enlarged to nearby areas southwest of the city and in Delaware, but these firms stayed small, and the Philadelphia firms created a small-scale, flexible production system which turned out specialized goods, not the mass-market commodity textiles of the other cores.

Capital Investment in Cotton Textiles

The distribution of capital investment in cotton textiles across the regions and states of the East between 1820 and 1860 capture the changing prominence of the cores of cotton textile production (see Table 3). The New England and the Middle Atlantic regions contained approximately similar shares (almost half each) of the nation’s capital investment. However, during the 1820s the cotton textile industry restructured to a form which was maintained for the next three decades. New England’s share of capital investment surged to about seventy percent, and it maintained that share until 1860, whereas the Middle Atlantic region’s share fell to around twenty percent by 1840 and remained near that until 1860. The rest of the nation, primarily the South, reached about ten percent of total capital investment around 1840 and continued at that level for the next two decades. Massachusetts became the leading cotton textile state by 1831 and Rhode Island, the early leader, gradually slipped to a level of about ten percent by the 1850s; New Hampshire and Pennsylvania housed approximately similar shares as Rhode Island by that time.

Table 3
Capital Invested in Cotton Textiles
by Region and State as a Percentage of the Nation
1820-1860

Region/state 1820 1831 1840 1850 1860
New England 49.6% 69.8% 68.4% 72.3% 70.3%
Maine 1.6 1.9 2.7 4.5 6.1
New Hampshire 5.6 13.1 10.8 14.7 12.8
Vermont 1.0 0.7 0.2 0.3 0.3
Massachusetts 14.3 31.7 34.1 38.2 34.2
Connecticut 11.6 7.0 6.2 5.7 6.7
Rhode Island 15.4 15.4 14.3 9.0 10.2
Middle Atlantic 46.2 29.5 22.7 17.3 19.0
New York 18.8 9.0 9.6 5.6 5.5
New Jersey 4.7 5.0 3.4 2.0 1.3
Pennsylvania 6.3 9.3 6.5 6.1 9.3
Delaware 4.0 0.9 0.6 0.6 0.6
Maryland 12.4 5.3 2.6 3.0 2.3
Rest of nation 4.3 0.7 9.0 10.4 10.7
Nation 100.0% 100.0% 100.0% 100.0% 100.0%
Total capital (thousands) $10,783 $40,613 $51,102 $74,501 $98,585

Sources: David J. Jeremy, Transatlantic Industrial Revolution: The Diffusion of Textile Technologies Between Britain and America, 1790-1830s (Cambridge, MA: MIT Press, 1981), appendix D, table D.1, p. 276; U.S. Bureau of the Census, Compendium of the Sixth Census, 1840 (Washington, D.C.: Blair and Rives, 1841); U.S. Bureau of the Census, Report on the Manufactures of the United States at the Tenth Census, 1880 (Washington, D.C.: Government Printing Office, 1883).

Connecticut’s Industries

In Connecticut, industrialists built on their successful production and sales prior to 1820 and expanded into a wider array of products which they sold in the East and South, and, after 1840, they acquired more sales in the Midwest. This success was not based on a mythical “Yankee ingenuity,” which, typically, has been framed in terms of character. Instead, this ingenuity rested on fundamental assets: a highly educated population linked through wide-ranging social networks which communicated information about technology, labor opportunities, and markets; and the abundant supplies of capital in the state supported the entrepreneurs. The peddler distribution system provided efficient sales channels into the mid-1830s, but, after that, firms took advantage of more traditional wholesaling channels. In some sectors, such as the brass industry, firms followed the example of the large Boston-core textile firms, and the brass companies founded their own wholesale distribution agencies in Boston and New York City. The achievements of Connecticut’s firms were evident by 1850. As a share of the nation’s value of production, they accounted for virtually all of the clocks, pins, and suspenders, close to half of the buttons and rubber goods, and about one-third of the brass foundry products, Britannia and plated ware, and hardware.

Difficulty of Duplicating Eastern Methods in the Midwest

The East industrialized first, based on a prosperous agricultural and industrialization process, as some of its entrepreneurs shifted into the national market manufactures of shoes, cotton textiles, and diverse goods turned out in Connecticut. These industrialists made this shift prior to 1820, and they enhanced their dominance of these products during the subsequent two decades. Manufacturers in the Midwest did not have sufficient intraregional markets to begin producing these goods before 1840; therefore, they could not compete in these national market manufactures. Eastern firms had developed technologies and organizations of production and created sales channels which could not be readily duplicated, and these light, high-value goods were transported cheaply to the Midwest. When midwestern industrialists faced choices about which manufactures to enter, the eastern light, high-value goods were being sold in the Midwest at prices which were so low that it was too risky for midwestern firms to attempt to compete. Instead, these firms moved into a wide range of local and regional market manufactures which also existed in the East, but which cost too much to transport to the Midwest. These goods included lumber and food products (e.g., flour and whiskey), bricks, chemicals, machinery, and wagons.

The American Manufacturing Belt

The Midwest Joins the American Manufacturing Belt after 1860

Between 1840 and 1860, Midwestern manufacturers made strides in building an industrial infrastructure, and they were positioned to join with the East to constitute the American Manufacturing Belt, the great concentration of manufacturing which would sprawl from the East Coast to the edge of the Great Plains. This Belt became mostly set within a decade or so after 1860, because technologies and organizations of production and of sales channels had lowered costs across a wide array of manufactures, and improvements in transportation (such as an integrated railroad system) and communication (such as the telegraph) reduced distribution costs. Thus, increasing shares of industrial production were sold in interregional markets.

Lack of Industrialization in the South

Although the South had prosperous farms, it failed to build a deep and broad industrial infrastructure prior to 1860, because much of its economy rested on a slave agricultural system. In this economy, investments were heavily concentrated in slaves rather than in an urban and industrial infrastructure. Local and regional demand remained low across much of the South, because slaves were not able to freely express their consumption demands and population densities remained low, except in a few agricultural areas. Thus, the market thresholds for many manufactures were not met, and, if thresholds were met, the demand was insufficient to support more than a few factories. By the 1870s, when the South had recovered from the Civil War and its economy was reconstructed, eastern and midwestern industrialists had built strong positions in many manufactures. And, as new industries emerged, the northern manufacturers had the technological and organizational infrastructure and distribution channels to capture dominance in the new industries.

In a similar fashion, the Great Plains, the Southwest, and the West were settled too late for their industrialists to be major producers of national market goods. Manufacturers in these regions focused on local and regional market manufactures. Some low wage industries (such as textiles) began to move to the South in significant numbers after 1900, and the emergence of industries based on high technology after 1950 led to new manufacturing concentrations which rested on different technologies. Nonetheless, the American Manufacturing Belt housed the majority of the nation’s industry until the middle of the twentieth century.

This essay is based on David R. Meyer, The Roots of American Industrialization, Baltimore: Johns Hopkins University Press, 2003.

Additional Readings

Atack, Jeremy, and Fred Bateman. To Their Own Soil: Agriculture in the Antebellum North. Ames, IA: Iowa State University Press, 1987.

Baker, Andrew H., and Holly V. Izard. “New England Farmers and the Marketplace, 1780-1865: A Case Study.” Agricultural History 65 (1991): 29-52.

Barker, Theo, and Dorian Gerhold. The Rise and Rise of Road Transport, 1700-1990. New York: Cambridge University Press, 1995.

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

Brown, Richard D. Knowledge is Power: The Diffusion of Information in Early America, 1700-1865. New York: Oxford University Press, 1989.

Clark, Christopher. The Roots of Rural Capitalism: Western Massachusetts, 1780-1860. Ithaca, NY: Cornell University Press, 1990.

Dalzell, Robert F., Jr. Enterprising Elite: The Boston Associates and the World They Made. Cambridge, MA: Harvard University Press, 1987.

Durrenberger, Joseph A. Turnpikes: A Study of the Toll Road Movement in the Middle Atlantic States and Maryland. Cos Cob, CT: John E. Edwards, 1968.

Field, Alexander J. “On the Unimportance of Machinery.” Explorations in Economic History 22 (1985): 378-401.

Fishlow, Albert. American Railroads and the Transformation of the Ante-Bellum Economy. Cambridge, MA: Harvard University Press, 1965.

Fishlow, Albert. “Antebellum Interregional Trade Reconsidered.” American Economic Review 54 (1964): 352-64.

Goodrich, Carter, ed. Canals and American Economic Development. New York: Columbia University Press, 1961.

Gross, Robert A. “Culture and Cultivation: Agriculture and Society in Thoreau’s Concord.” Journal of American History 69 (1982): 42-61.

Hoke, Donald R. Ingenious Yankees: The Rise of the American System of Manufactures in the Private Sector. New York: Columbia University Press, 1990.

Hounshell, David A. From the American System to Mass Production, 1800-1932: The Development of Manufacturing Technology in the United States. Baltimore: Johns Hopkins University Press, 1984.

Jeremy, David J. Transatlantic Industrial Revolution: The Diffusion of Textile Technologies between Britain and America, 1790-1830s. Cambridge, MA: MIT Press, 1981.

Jones, Chester L. The Economic History of the Anthracite-Tidewater Canals. University of Pennsylvania Series on Political Economy and Public Law, no. 22. Philadelphia: John C. Winston, 1908.

Karr, Ronald D. “The Transformation of Agriculture in Brookline, 1770-1885.” Historical Journal of Massachusetts 15 (1987): 33-49.

Lindstrom, Diane. Economic Development in the Philadelphia Region, 1810-1850. New York: Columbia University Press, 1978.

McClelland, Peter D. Sowing Modernity: America’s First Agricultural Revolution. Ithaca, NY: Cornell University Press, 1997.

McMurry, Sally. Transforming Rural Life: Dairying Families and Agricultural Change, 1820-1885. Baltimore: Johns Hopkins University Press, 1995.

McNall, Neil A. An Agricultural History of the Genesee Valley, 1790-1860. Philadelphia: University of Pennsylvania Press, 1952.

Majewski, John. A House Dividing: Economic Development in Pennsylvania and Virginia Before the Civil War. New York: Cambridge University Press, 2000.

Mancall, Peter C. Valley of Opportunity: Economic Culture along the Upper Susquehanna, 1700-1800. Ithaca, NY: Cornell University Press, 1991.

Margo, Robert A. Wages and Labor Markets in the United States, 1820-1860. Chicago: University of Chicago Press, 2000.

Meyer, David R. “The Division of Labor and the Market Areas of Manufacturing Firms.” Sociological Forum 3 (1988): 433-53.

Meyer, David R. “Emergence of the American Manufacturing Belt: An Interpretation.” Journal of Historical Geography 9 (1983): 145-74.

Meyer, David R. “The Industrial Retardation of Southern Cities, 1860-1880.” Explorations in Economic History 25 (1988): 366-86.

Meyer, David R. “Midwestern Industrialization and the American Manufacturing Belt in the Nineteenth Century.” Journal of Economic History 49 (1989): 921-37.

Ransom, Roger L. “Interregional Canals and Economic Specialization in the Antebellum United States.” Explorations in Entrepreneurial History 5, no. 1 (1967-68): 12-35.

Roberts, Christopher. The Middlesex Canal, 1793-1860. Cambridge, MA: Harvard University Press, 1938.

Rothenberg, Winifred B. From Market-Places to a Market Economy: The Transformation of Rural Massachusetts, 1750-1850. Chicago: University of Chicago Press, 1992.

Scranton, Philip. Proprietary Capitalism: The Textile Manufacture at Philadelphia, 1800-1885. New York: Cambridge University Press, 1983.

Shlakman, Vera. “Economic History of a Factory Town: A Study of Chicopee, Massachusetts.” Smith College Studies in History 20, nos. 1-4 (1934-35): 1-264.

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

Sokoloff, Kenneth L. “Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846.” Journal of Economic History 48 (1988): 813-50.

Sokoloff, Kenneth L. “Productivity Growth in Manufacturing during Early Industrialization: Evidence from the American Northeast, 1820-1860.” In Long-Term Factors in American Economic Growth, edited by Stanley L. Engerman and Robert E. Gallman, 679-729. Chicago: University of Chicago Press, 1986.

Ware, Caroline F. The Early New England Cotton Manufacture: A Study in Industrial Beginnings. Boston: Houghton Mifflin, 1931.

Weiss, Thomas. “Economic Growth before 1860: Revised Conjectures.” In American Economic Development in Historical Perspective, edited by Thomas Weiss and Donald Schaefer, 11-27. Stanford, CA: Stanford University Press, 1994.

Weiss, Thomas. “Long-Term Changes in U.S. Agricultural Output per Worker, 1800-1900.” Economic History Review 46 (1993): 324-41.

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

Wood, Frederic J. The Turnpikes of New England. Boston: Marshall Jones, 1919.

Wood, Gordon S. The Radicalism of the American Revolution. New York: Alfred A. Knopf, 1992.

Zevin, Robert B. “The Growth of Cotton Textile Production after 1815.” In The Reinterpretation of American Economic History, edited by Robert W. Fogel and Stanley L. Engerman, 122-47. New York: Harper & Row, 1971.

Citation: Meyer, David. “American Industrialization”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-roots-of-american-industrialization-1790-1860/

Credit in the Colonial American Economy

David T Flynn, University of North Dakota

Overview of Credit versus Barter and Cash

Credit was vital to the economy of colonial America and much of the individual prosperity and success in the colonies was due to credit. Networks of credit stretched across the Atlantic from Britain to the major port cities and into the interior of the country allowing exchange to occur (Bridenbaugh, 1990, 154). Colonists made purchases by credit, cash and barter. Barter and cash were spot exchanges, goods and services were given in exchange for immediate payment. Credit, however, delayed the payment until a later date. Understanding the role of credit in the eighteenth century requires a brief discussion of all payment options as well as the nature of the repayment of credit.

Barter

Barter is an exchange of goods and services for other goods and services and can be a very difficult method of exchange due to the double coincidence of wants. For exchange to occur in a barter situation each party must have the good desired by its trading partner. Suppose John Hancock has paper supplies and wants corn while Paul Revere has silver spoons and wants paper products. Even though Revere wants the goods available from Hancock no exchange occurs because Hancock does not want the good Revere has to offer. The double coincidence of wants can make barter very costly because of time spent searching for a trading partner. This time could otherwise be used for consumption, production, leisure, or any number of other activities. The principle advantage of any form of money over barter is obvious: money satisfies the double coincidence of wants, that is, money functions as a medium of exchange.

Money’s advantages

Money also has other functions that make it a superior method of exchange to barter including acting as the unit of account (the unit in which prices are quoted) in the economy (e.g. the dollar in the United States and the pound in England). A barter economy uses a large number of prices because every good must have a price in terms of each other good available in the economy. An economy with n different goods would have n(n-1)/2 prices in total, not an enormous burden for small values of n, but as n grows it quickly becomes unmanageable. A unit of account reduces the number of prices from the barter situation to n, or the number of goods. The colonists had a unit of account, the colonial pound (£), which removed this burden of barter.

Several forms of money circulated in the colonies over the course of the seventeenth and eighteenth centuries, such as specie, commodity money and paper currency. Specie is gold or silver minted into coins and is a special form of commodity money, a good that has an exchange value separate from the market value of the good. Tobacco, and later tobacco warehouse receipts, acted as a form of money in many of the colonies. Despite multiple money options some colonists complained of an inability to keep money in circulation, or at least in the hands of those wanting to use it for exchange (Baxter, 1945, 11-17; Bridenbaugh, 153).1

Credit’s advantages

When you acquire goods with credit you delay payment to a later time, be it one day or one year. A basic credit transaction today is essentially the same as in the eighteenth century, only the form is different.2 Extending credit presents risks, most notably default, or the failure of the borrower to repay the amount borrowed. Sellers also needed to worry about the total volume of credit they extended because it threatened their solvency in the case of default. Consumers benefited from credit by the ability to consume beyond current financial resources, as well as security from theft and other advantages. Sellers gained by faster sales of goods and interest charges, often hidden in a higher price for the goods.3

Uncertainty about the scope of credit

The frequency of credit versus barter and cash is not well quantified because surviving account books and transaction records generally only report cash or goods payments made after the merchant allowed credit, not spot cash or barter transactions (Baxter, 19n). Martin (1939, 150) concurs, “The entries represent transactions with those customers who did not pay at once on purchasing goods for [the seller] either made no record of immediate cash purchases, or else there were almost no such transactions.” The results of Flynn’s (2001) study using merchant account books from Connecticut and Massachusetts found also that most purchases recorded in the account books were credit purchases (see Table 1 below).4 Scholars are forced to make general statements about credit as a standard tool in transactions in port cities and rural villages without reference to specific numbers (Perkins, 1980, 123-124).

Table 1

Percentage of Purchases by Type

Purchases by Credit Purchases by Cash Purchases by Barter
Connecticut 98.6 1.1 0.3
Massachusetts 98.5 1.0 0.4
Combined 98.6 1.0 0.4

Source: Adapted from Table 3.2 in Flynn (2001), p. 54.

Indications of the importance of credit

In some regions, the institution of credit was so accepted that many employers, including merchants, paid their employees by providing them credit at a store on the business’s account (Martin, 94). Probate inventories evidence the frequency of credit through the large amount of accounts receivable recorded for traders and merchant in Connecticut, sometimes over £1,000 (Main, 1985, 302-303). Accounts receivable are an asset of the business representing amounts owed to the business by other parties. Almost 30 percent of the estates of Connecticut “traders” contained £100 or more of receivables as part of their estate (Main, 316). More than this, accounts receivable averaged one-eighth of personal wealth throughout most of the colonial period, and more than one-fifth at the end (Main, 36). While there is no evidence that enables us to determine the relative frequencies of payments, the available information supports the idea that the different forms of payment co-existed.

The Different Types of Credit

There are three different types of credit to discuss: international credit, book credit, and promissory notes and each facilitated exchange and payments. Colonial importers and wholesalers relied on credit from British suppliers while rural merchants received credit from importers and wholesalers in the port cities and, finally, consumers received credit from the retailers. A discussion starts logically with international credit from British suppliers to colonial merchants because it allowed colonial merchants to extend credit to their customers (McCusker and Menard, 1985, 80n; Martin, 1939, 19; Perkins, 1980, 24).

Overseas credit

Research on colonial growth attaches importance to several items including foreign funds, capital improvements and productivity gains. The majority of foreign funds transferred were in the form of mercantile credit (Egnal, 1998, 12-20). British merchants shipped goods to colonial merchants on credit for between six months and one year before demanding payment or charging interest (Egnal, 55; Perkins, 1994, 65; Shepherd and Walton, 1972, 131-132; Thomson, 1955, 15). Other examples show a minimum of one year’s credit given before suppliers assessed five percent interest charges (Martin, 122-123). Factors such as interest and duration determined for how long colonial merchants could extend credit to their own customers and at what level of markup. Some merchants sold goods on commission, where the goods remained the property of the British merchant until sold. After the sale the colonial merchant remitted the funds, less his fee, to the British merchant.

Relationships between colonial and British merchants exhibited regional differences. Virginia merchants’ system of exchange, known as the consignment system, depended on the credit arrangements between planters and “factors” – middlemen who accepted colonial goods and acquired British or other products desired by colonists (Thomson, 28). A relationship with a British merchant was important for success in business because it provided the tobacco growers and factors access to supplies of credit sufficient to maintain business (Thomson, 211). Independent Virginia merchants, those without a British connection, ordered their supplies of goods on credit and paid with locally produced goods (Thomson, 15). Virginia and other Southern colonies could rely on credit because of their production of a staple crop desired by British merchants. New England merchants such as Thomas Hancock, uncle of the famous patriot John Hancock, could not rely on this to the same extent. New England merchants sometimes engaged in additional exchanges with other colonies and countries because they lacked goods desired by British merchants (Baxter, 46-47). Without the willingness of British merchant houses to wait for payment it would have been difficult for many colonial merchants to extend credit to their customers.

Domestic credit: book credit and promissory notes

Domestic credit was primarily of two forms, book credit and promissory notes. Merchants recorded book credit in the account books of the business. These entries were debits for an individual’s account and were set against payments, credits in the merchant’s ledger. Promissory notes detailed a debt, including typically the date of issue, the date of redemption, the amount owed, possibly the form of repayment and an interest rate. Book credit and promissory notes were substitutes and complements. Both represented a delay of payment and could be used to acquire goods but book accounts were also a large source of personal notes. Merchants who felt payment was either too slow in coming or the risks of default too high could insist the buyer provide a note. The note was a more secure form of credit as it could be exchanged and, despite the likely loss on the note’s face value if the debtor was in financial trouble, would not represent a continuing worry of the merchant (Martin, 158-159).5

Figure 1

Accounts of Samuell Maxey, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
5/28/1748 To Maxey earthenware by Brock 62.00 5/30/1748 By cash & Leather 45.00
10/21/1748 To ditto by Cap’n Long 13.75 8/20/1748 By 2 quintals of fish @6-0-0 [per quintal] 12.00
5/25/1749 To ditto 61.75 11/15/1748 By cash received of Mr. Suttin 5.00
6/26/1749 To ditto 27.35 5/26/1749 By sundrys 74.75
10/1749 By cash of Mr. Kettel 9.75
12/1749 By ditto 18.35

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.7.

The settlement of debt obligations incorporated many forms of payment. Figure 1 details the activity between Samuell Maxey and Jonathan Parker, a Massachusetts merchant. Included are several purchases of earthenware by Maxey and others and several payments, including some in cash and goods as well as from third parties. Baxter (1945, 21) describes similar experiences when he says,

…the accounts over and over again tell of the creditor’s weary efforts to get his dues by accepting a tardy and halting series of odds and ends; and (as prices were often soaring, especially in 1740-64) the longer a debtor could put off payment, the fewer goods might he need to hand over to square a liability for so much money.

Repayment means and examples

The “odds and ends” included goods and commodity money as well as other cash, bills of exchange, and third party settlements (Baxter, 17-32). Merchants accepted goods such as pork beef, fish and grains for their store goods (Martin, 94). Flynn (2001) shows several items offered as payment, including goods, cash, notes and others, shown in Table 2.

Table 2

Percentage of Payments by Category

Repayment in Cash Repayment in Goods Repayment by note Repayment by Reckoning Repayment by third- party note Repayment by Bond Repayment by Labor

Conn.

27.5 45.9 3.3 7.5 6.9 0.0 8.9
Mass. 24.2 47.6 2.8 7.5 13.7 0.2 2.3
Combined 25.6 46.9 3.0 7.5 10.9 0.1 5.0

Source: Adapted from Table 3.4 in Flynn (2001), p. 54.

Cash, goods and notes require no further explanation, but Table 2 shows other items used in payment as well. Colonists used labor to repay their tabs, working in their creditor’s field or lending the labor services of a child or yoke of oxen. Some accounts also list “reckoning,” which occurred typically between two merchants or traders that made purchases on credit from each other. Before the two merchants settled their accounts it was convenient to determine the net position of their accounts with each other. After making the determination the merchant in debt possibly made a payment that brought the balance to zero, but at other times the merchants proceeded without a payment but a better sense of the account position. Third parties also made payments that employed goods, money and credit. When the merchant did not want the particular goods offered in payment he could hope to pass them on, ideally to his own creditors. Such exchange satisfied both the merchant’s debts and the consumer’s (Baxter, 24-25). Figure 1 above and Figure 2 below illustrate this.

Figure 2

Accounts of Mr. Clark, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
9/27/1749 To Clark earthenware 10.85 11/30/1749 By cash 3.00
4/14/1750 By ditto 1.00
?/1762 By rum in full of Mr. Blanchard 6.35

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.2.

The accounts of Parker and his customer, Mr. Clark, show another purchase of earthenware and three payments. The purchase is clearly on credit as Parker recorded the first payment occurring over two months after the purchase. Clark provided two cash payments and then a third person Mr. Blanchard settled Clark’s account in full with rum. What do these third party payments represent? For answers to this we need to step back from the specifics of the account and generalize.

Figures 1 and 2 show credits from third parties in cash and goods. If we think in terms of three-way trade the answer becomes obvious. In Figure 1 where a Mr. Suttin pays £5.00 cash to Parker on the account of Samuell Maxey, Suttin is settling a debt with Maxey (in part or in full we do not know). To settle the debt he owes Parker, Maxey directs those who owe him money to pay Parker, and thus reduce his debt. Figure 2 displays the same type of activity, except Blanchard pays with rum. Though not depicted here, private debts between customers could be settled on the merchant’s books. Rather than offering payment in cash or goods, private parties could swap debt on the merchant’s account book, ordering a transfer from one account to another. The merchant’s final approval for the exchange implied something about the added risk from a third party exchange. The new person did not pose a greater default risk in the creditor’s opinion, otherwise (we would suspect) they refused the exchange.6

Complexity of the credit system

The payment system in the colonies was complex and dynamic with creditors allowing debtors to settle accounts in several fashions. Goods and money satisfied outstanding debts and other credit obligations deferred or transferred debts. Debtors and creditors employed the numerous forms of payment in regular and third party transactions, making merchants’ account books a clearinghouse for debts. Although the lack of technology leaves casual observers thinking payments at this time were primitive, such was clearly not the case. With only pen and paper eighteenth century merchants developed a sophisticated payment system, of which book credit and personal notes were an important part.

The Duration of Credit

The length of time outstanding for credit, its duration, is an important characteristic. Duration represents the amount of time a creditor awaited payment and anecdotal and statistical evidence provide some insights into the duration of book credit and promissory notes.

The calculation of the duration of book credit, or any similar type of instrument, is relatively straightforward when the merchant recorded dates in his account book conscientiously. Consider the following example.

Figure 3

Accounts of David Forthingham, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
10/1/1748 To Forthingham earthenware 7.75 10/1/1748 By cash 3.00
4/1749 By Indian corn 4.75

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.2.

The exchanges between Frothingham and Jonathan Parker show one purchase and two payments. Frothingham provides a partial payment for the earthenware at the time of purchase, in cash. However, £4.75 of debt remains outstanding, and is not repaid until April of 1749. It is possible to calculate a range of values for the final settlement of this account, using the first day of April to give a lower bound estimate and the last day to give an upper bound estimate. Counting the number of days shows that it took at least 182 days and at most 211 days to settle the debt. Alternatively the debt lasted between 6 and 7 months.

Figure 4

Accounts of Joseph Adams, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
9/7/1747 to Adams earthenware -30.65 11/9/1747 by cash 30.65
7/22/1748 to ditto -22.40 7/22/1748 by ditto 12.40
No Date7 by ditto 10.00

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.4.

Not all merchants were meticulous record keepers and sometimes they failed to record a particular date with the rest of an account book entry.8 Figure 4 illustrates this problem well and also provides an example of multiple purchases along with multiple payments. The first purchase of earthenware is repaid with one “cash” payment sixty-three days (2.1 months) later.9 Computation of the term of the second loan is more complicated. The last two payments satisfy the purchase amount, so Adams repaid the loan completely. Unfortunately, Parker left out the date for the second payment. The second payment occurred on or after July 22, 1748, so this date is the lower end of the interval. The minimum time between purchase and second payment is zero days, but computation of a maximum time, or upper bound, is not possible due to the lack of information.10

With a sufficient number of debts some generalization is possible. If we interpret the data as the length of a debt’s life we can use demographic methods, in particular the life table.11 For a sample of Connecticut and Massachusetts account books the average duration looks like the following.12

Table 3

Expected Duration for Connecticut Debts, Lower and Upper Bound

(a) (b) (c) (d) (e)
Size of debt in £ eo lower bound (months) Median lower bound (interval) eo upper bound (months) Median upper bound (interval)
All Values 14.79 6-12 15.87 6-12
0.0-0.25 15.22 6-12 15.99 6-12
0.25-0.50 14.28 6-12 15.51 6-12
0.50-0.75 15.24 6-12 18.01 6-12
0.75-1.00 14.25 6-12 15.94 6-12
1.00-10.00 13.95 6-12 15.07 6-12
10.00+ 7.95 0-6 10.73 6-12

Table 4

Expectation Duration for Massachusetts Debts, Lower and Upper Bound

(a) (b) (c) (d) (e)
Size of debt in £ eo lower bound (months) Lower bound median (interval) eo upper bound (months) Upper bound median (interval)
All Values 13.22 6-12 14.87 6-12
0.0-0.25 14.74 6-12 17.55 12-18
0.25-0.50 12.08 6-12 12.80 6-12
0.50-0.75 11.73 6-12 13.08 6-12
0.75-1.00 11.01 6-12 12.43 6-12
1.00-10.00 13.08 6-12 13.88 6-12
10.00+ 14.28 12-18 17.02 12-18

Source: Adapted from Tables 4.1 and 4.2 in Flynn (2001), p. 80.

For all debts in the sample from Connecticut, the expected length of time the debt is outstanding from its inception is estimated between 14.78 and 15.86 months. For Massachusetts the range is somewhat shorter, from 13.22 to 14.87 months. Tables 3 and 4 break the data into categories based on the value of the credit transaction as well. An important question to ask is whether this represents a long- term or a short-term debt? There is no standard yardstick for comparison in this case. The best comparison is likely the international credit granted to colonial merchants. The colonial merchants needed to repay these amounts and had to sell the goods to make remittances. The estimates of that credit duration, listed earlier, center around one year, which means that colonial merchants in New England needed to repay their British suppliers before they could expect to receive full payment from their customers. From the colonial merchants’ perspective book credit was certainly long-term.

Other estimates of duration of book credit

Other estimates of book credit’s duration vary. Consumers paying their credit purchases in kind took as little time as a few months or as long as several years (Martin, 153). Some accounting records show book credit remaining unsettled for nearly thirty years (Baxter, 161). Thomas Hancock often noted expected payment dates, such as “to pay in 6 months” along with a purchase, though frequently this was not enough time for the buyer. Thomas blamed the law, which allowed twelve months for people to make repayments, complaining to his suppliers that he often provided credit to country residents of “one two & more years” (Baxter, 192). Surely such a situation is the exception and not the rule, though it does serve to remind us that many of these arrangements were open, lacking definite endpoints. Some merchants allowed accounts to last as long as two years before examining the position of the account, allowing one year’s book credit without charge, and thereafter assessing interest (Martin, 157).

Duration of promissory notes

The duration of promissory notes is also important. Priest (1999) examines a form of duration for these credit instruments, estimating the time between a debtor’s signing of the note and the creditor’s filing of suit to collect payment. Of course this only measures the duration for notes that go into default and require legal recourse. Typically, a suit originated some 6 to 9 months after default (Priest, 2417-18). Results for the period 1724 to 1750 show 14.5% of cases occurred within 6 months after the initial contraction date, the execution of the debt. Merchants brought suit in more than 60% of the cases between 6 months and 3 years from execution, 21.4% from six to twelve months, 27.4% from one to two years and 14.1% from two to three years. Finally, more than 20% of the cases occurred more than three years from the execution of the debt. The median interval between execution and suit was 17.5 months (Priest, 2436, Table 3).

The duration of promissory notes provides an important complement to estimates of book credit’s term. Median estimates of 17.5 months make promissory notes, more than likely, a long-term credit instrument when balanced against the one year credit term given colonial importers. The estimates for book credit range between three months and several years in the literature to between 13 and 16 months in Flynn (2001) study. Duration results show that merchants waited significant amounts of time for payment, raising the issue of the time value of money and interest rates.

The Interest Practices of Merchants

In some cases credit was outstanding for a long period of time, but the accounts make no mention of any interest charges, as in Figures 1 through 4. Such an omission is difficult to reconcile with the fairly sophisticated business practices for the merchants of the day. Accounting research and manuals from the time demonstrate clearly an understanding of the time value of money. The business community understood the concept of compound interest. Account books allowed merchants to charge higher and variable prices for goods sold on book credit (Martin, 94). While in some cases interest charges entered the account book as an explicit entry in many others interest was an added or implicit charge contained in the good’s price.

Advertisements from the time make it clear that merchants charged less for goods

purchased by cash, and accounts paid promptly received a discount on the price,

One general pricing policy seems to have been that goods for cash were sold at a lower price than when they were charged. Cabel[sic] Bull advertised beaver hats at 27/ cash and 30/ country produce in hand. Daniel Butler of Northampton offered dyes, and “a few Cwt. of Redwood and Logwood cheaper than ever for ready money.” Many other advertisements carried allusions to the practice but gave no definite data. A daybook of the Ely store contained this entry for October 21, 1757: “William Jones, Dr to 6 yds Towcloth at 1/6—if paid in a month at 1/4. (Martin, 1939, 144-145)

Other advertisements also evidence a price difference, offering cash prices for certain grains they desired. Connecticut merchants likely offered good prices for products they thought would sell well as they sought remittances for their British creditors. Hartford merchants charged interest rates ranging from four and one-half to six and one-half percent in the 1750s and 1760s, though Flynn (2001) arrives at different rates from a different sample of New England account books (Martin, 158). Many promissory notes in South Carolina specified interest, though not an exact rate, usually just the term “lawful interest” (Woods, 364).

Estimates of interest rates

Simple regression analysis can help determine if interest was implicit in the price of goods sold on credit though there are numerous technical issues, such as borrower characteristics, market conditions and the quality of the good that make a discussion here inappropriate.13 In general, there seems to be a positive correlation, with the annual interest rates falling between 3.75% and 7%, which seem consistent with the results from interest entries made in account books. There is some tendency for the price of a good to increase with the time waited for repayment, though many other technical matters need resolution.

Most annual interest rates in Flynn’s (2001) study, explicit and implicit, fall in the range of 4 to 6.5 percent making them similar to those Martin found in her examination of accounts and roughly consistent with the Massachusetts lawful rate of 6 percent at the time, though some entries assess interest as high as 10 percent (Martin, 158; Rothenberg, 1992, 124). Despite this, the explicit rates are insufficient on their own to form a conclusion about the interest rate charged on book credit; there are too few entries, and many involve promissory notes or third parties, factors expected to alter the interest rate. Other factors such as borrower characteristics likely changed the assessed rate of interest too, with more prominent and wealthy individuals charged lower rates, either due to their status and a perceived lower risk, or possibly due to longer merchant-buyer relationships. Most account books do not contain information sufficient to judge the effects of these characteristics.

Merchants gained from credit use by charging higher prices; credit required a premium over cash sales and so the merchant collected interest and at the same time minimized the necessary amount of payments media (Martin, 94). Interest was distinct from the normal markups for insurance, freight, wharfage, etc. that were often significant additions to the overall price and represented an attempt to account for risk and the time value of money (Baxter, 192; Thomson, 239).14

Conclusions

Credit was significant as a form of payment in colonial America. Direct comparisons of the number of credit purchases versus barter or cash are not possible, but an examination of accounting records demonstrates credit’s widespread use. Credit was present in all forms of trade including international trade between England and her colonies. The domestic forms of credit were relatively long-term instruments that allowed individuals to consume beyond current means. In addition, book credit allowed colonists to economize on cash and other means of payment through transfers of credit, “reckoning,” and other means such as paying workers with store credit. Merchants also understood the time value of money, entering interest charges explicitly in the account books and implicitly as part of the price. The use of credit, the duration of credit instruments, and the methods of incorporating interest show credit as an important method of exchange and the economy of colonial America to be very complex and sophisticated.

References

Baxter, W.T. The House of Hancock: Business in Boston, 1724-1775. Cambridge: Harvard University Press, 1945.

Bridenbaugh, Carl. The Colonial Craftsman. Dover Publications: New York, 1990.

Egnal, Marc. New World Economies: The Growth of the Thirteen Colonies and Early Canada. Oxford: Oxford University Press, 1998.

Flynn, David T. “Credit and the Economy of Colonial New England.” Ph.D. dissertation, Indiana University, 2001.

McCusker, John J., and Russel R. Menard. The Economy of British America, 1607-1789. Chapel Hill: University of North Carolina Press, 1985.

Main, Jackson Turner. Society and Economy in Colonial Connecticut. Princeton: Princeton University Press, 1985.

Martin, Margaret. “Merchants and Trade of the Connecticut River Valley, 1750-1820.” Smith College Studies in History. Department of History, Smith College: Northampton, Mass. 1939.

Parker, Jonathan. Account Book, 1747-1764. Mss:605 1747-1815. Baker Library Historical Collections, Harvard Business School; Cambridge, Massachusetts

Perkins, Edwin J. The Economy of Colonial America. New York: Columbia University Press, 1980.

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

Price, Jacob M. Capital and Credit in British Overseas Trade: The View from the Chesapeake, 1700-1776. Cambridge: Harvard University Press, 1980.

Priest, Claire. “Colonial Courts and Secured Credit: Early American Commercial Litigation and Shays’ Rebellion.” Yale Law Journal 108, no. 8 (June, 1999): 2412-2450.

Rothenberg, Winifred. From Market-Places to a Market Economy: The Transformation of Rural Massachusetts, 1750-1850. Chicago: University of Chicago Press, 1992.

Shepherd, James F. and Gary Walton. Shipping, Maritime Trade, and the Economic Development of Colonial North America. Cambridge: University Press 1972.

Thomson, Robert Polk. The Merchant in Virginia, 1700-1775. Ph.D. dissertation, University of Wisconsin, 1955.

Further Reading:

For a good introduction to credit’s importance across different professions, merchant practices and the development of business practices over time I suggest:

Bailyn, Bernard. The New England Merchants in the Seventeenth-Century. Cambridge: Harvard University Press, 1979.

Schlesinger, Arthur. The Colonial Merchants and the American Revolution: 1763-1776. New York: Facsimile Library Inc., 1939.

For an introduction to issues relating to money supply, the unit of account in the economy, and price and exchange rate data I recommend:

Brock, Leslie V. The Currency of the American Colonies, 1700-1764: A Study in Colonial Finance and Imperial Relations. New York: Arno Press, 1975.

McCusker, John J. Money and Exchange in Europe and America, 1600-1775: A Handbook. Chapel Hill: University of North Carolina Press, 1978.

McCusker, John J. How Much Is That in Real Money? A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States, Second Edition. Worcester, MA: American Antiquarian Society, 2001.

1 Some authors note a small amount of cash purchases as well as small numbers of cash payments for debts as evidence of a lack of money (Bridenbaugh, 153; Baxter, 19n).

2 Presently, credit cards are a common form of payment. While such technology did not exist in the past, the merchant’s account book provided a means of recording credit purchases.

3 Price (1980, pp.16-17) provides an excellent summary of the advantages and risks of credit to different types of consumers and to merchants in both Britain and the colonies.

4 Please note that this table consists of transactions mostly between colonial retail merchants and colonial consumers in New England. Flynn (2001) uses account books that collectively span from approximately 1704 to 1770.

5 In some cases with the extension of book credit came a requirement to provide a note too. When the solvency of the debtor came into question the creditor, could sell the note and pass the risk of default on to another.

6 I offer a detailed example of such an exchange going sour for the merchant below.

7 “No date” is Flynn’s entry to show that a date is not recorded in the account book.

8 It seems that this frequently occurs at the end of a list of entries, particularly when the credit fully satisfies an outstanding purchase as in Figure 4.

9 To calculate months, divide days by 30. The term “cash” is placed in quotation marks as it is woefully nondescript. Some merchants and researchers using account books group several different items under the heading cash.

10 Students interested in historical research of this type should be prepared to encounter many situations of missing information. There are ways to deal with this censoring problem, but a technical discussion is not appropriate here.

11 Colin Newell’s Methods and Models in Demography (Guilford Press, 1988) is an excellent introduction for these techniques.

12 Note that either merchants recorded amounts in the lawful money standard or Flynn (2001) converted amounts into this standard for these purposes.

13 The premise behind the regression is quite simple: we look for a correlation between the amount of time an amount was outstanding and the per unit price of the good. If credit purchases contained implicit interest charges there would be a positive relationship. Note that this test implies forward looking merchants, that is, merchants factored the perceived or agreed upon time to repayment into the price of the good.

14 The advance varied by colony, good and time period,

In 1783, a Boston correspondent wrote Wadsworth that dry goods in Boston were selling at a twenty to twenty-five percent ‘advance’ from the ‘real Sterling Cost by Wholesale.’ The ‘advances’ occasionally mentioned in John Ely’s Day Book were far higher, seventy to seventy-five per cent on dry goods. Dry goods sold well at one hundred and fifty per cent ‘advance’ in New York in 1750… (Martin, 136).

In the 1720s a typical advance on piece goods in Boston was eighty per cent, seventy-five with cash (Martin, 136n). It should be noted that others find open account balances were commonly kept interest free (Rothenberg, 1992, 123).

13

Citation: Flynn, David. “Credit in the Colonial American Economy”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/credit-in-the-colonial-american-economy/

African Americans in the Twentieth Century

Thomas N. Maloney, University of Utah

The nineteenth century was a time of radical transformation in the political and legal status of African Americans. Blacks were freed from slavery and began to enjoy greater rights as citizens (though full recognition of their rights remained a long way off). Despite these dramatic developments, many economic and demographic characteristics of African Americans at the end of the nineteenth century were not that different from what they had been in the mid-1800s. Tables 1 and 2 present characteristics of black and white Americans in 1900, as recorded in the Census for that year. (The 1900 Census did not record information on years of schooling or on income, so these important variables are left out of these tables, though they will be examined below.) According to the Census, ninety percent of African Americans still lived in the Southern US in 1900 — roughly the same percentage as lived in the South in 1870. Three-quarters of black households were located in rural places. Only about one-fifth of African American household heads owned their own homes (less than half the percentage among whites). About half of black men and about thirty-five percent of black women who reported an occupation to the Census said that they worked as a farmer or a farm laborer, as opposed to about one-third of white men and about eight percent of white women. Outside of farm work, African American men and women were greatly concentrated in unskilled labor and service jobs. Most black children had not attended school in the year before the Census, and white children were much more likely to have attended. So the members of a typical African American family at the start of the twentieth century lived and worked on a farm in the South and did not own their home. Children in these families were unlikely to be in school even at very young ages.

By 1990 (the most recent Census for which such statistics are available at the time of this writing), the economic conditions of African Americans had changed dramatically (see Tables 1 and 2). They had become much less concentrated in the South, in rural places, and in farming jobs and had entered better blue-collar jobs and the white-collar sector. They were nearly twice as likely to own their own homes at the end of the century as in 1900, and their rates of school attendance at all ages had risen sharply. Even after this century of change, though, African Americans were still relatively disadvantaged in terms of education, labor market success, and home ownership.

Table 1: Characteristics of Households in 1900 and 1990

1900 1990
Black White Black White
A. Region of Residence
South 90.1% 23.5% 53.0% 32.9%
Northeast 3.6% 31.8% 18.9% 20.9%
Midwest 5.8% 38.5% 18.9% 25.3%
West 0.5% 6.2% 9.2% 21.0%
B. Share Rural
75.8% 56.1% 11.9% 25.7%
C. Share of Homes Owner-Occupied
22.1% 49.2% 43.4% 67.3%

Based on household heads in Integrated Public Use Microdata Series Census samples for 1900 and 1990.

Table 2: Characteristics of Individuals in 1900 and 1990

1900 1990
Male Female Male Female
Black White Black White Black White Black White
A. Occupational Distribution
Professional/Technical 1.3% 3.8% 1.6% 10.7% 9.9% 17.2% 16.6% 21.9%
Proprietor/Manager/Official 0.8 6.9 0.2 2.6 6.5 14.7 5.4 10.0
Clerical 0.2 4.0 0.2 5.6 10.7 7.2 29.7 31.9
Sales 0.3 4.2 0.2 4.1 2.9 6.7 4.1 7.3
Craft 4.2 15.9 0 3.1 17.4 20.7 2.3 2.1
Operative 7.3 13.4 1.8 24.5 20.7 14.9 12.4 8.0
Laborer 25.5 14.0 6.5 1.5 12.2 7.2 2.0 1.5
Private Service 2.2 0.4 33.0 33.2 0.1 0 2.0 0.8
Other Service 4.8 2.4 20.6 6.6 18.5 9.0 25.3 15.8
Farmer 30.8 23.9 6.7 6.1 0.2 1.4 0.1 0.4
Farm Laborer 22.7 11.0 29.4 2.0 1.0 1.0 0.4 0.5
B. Percent Attending School by Age
Ages 6 to 13 37.8% 72.2% 41.9% 71.9% 94.5% 95.3% 94.2% 95.5
Ages 14 to 17 26.7 47.9 36.2 51.5 91.1 93.4 92.6 93.5
Ages 18 to 21 6.8 10.4 5.9 8.6 47.7 54.3 52.9 57.1

Based on Integrated Public Use Microdata Series Census samples for 1900 and 1990. Occupational distributions based on individuals aged 18 to 64 with recorded occupation. School attendance in 1900 refers to attendance at any time in the previous year. School attendance in 1990 refers to attendance since February 1 of that year.

These changes in the lives of African Americans did not occur continuously and steadily throughout the twentieth century. Rather, we can divide the century into three distinct eras: (1) the years from 1900 to 1915, prior to large-scale movement out of the South; (2) the years from 1916 to 1964, marked by migration and urbanization, but prior to the most important government efforts to reduce racial inequality; and (3) the years since 1965, characterized by government antidiscrimination efforts but also by economic shifts which have had a great impact on racial inequality and African American economic status.

1900-1915: Continuation of Nineteenth-Century Patterns

As was the case in the 1800s, African American economic life in the early 1900s centered on Southern cotton agriculture. African Americans grew cotton under a variety of contracts and institutional arrangements. Some were laborers hired for a short period for specific tasks. Many were tenant farmers, renting a piece of land and some of their tools and supplies, and paying the rent at the end of the growing season with a portion of their harvest. Records from Southern farms indicate that white and black farm laborers were paid similar wages, and that white and black tenant farmers worked under similar contracts for similar rental rates. Whites in general, however, were much more likely to own land. A similar pattern is found in Southern manufacturing in these years. Among the fairly small number of individuals employed in manufacturing in the South, white and black workers were often paid comparable wages if they worked at the same job for the same company. However, blacks were much less likely to hold better-paying skilled jobs, and they were more likely to work for lower-paying companies.

While the concentration of African Americans in cotton agriculture persisted, Southern black life changed in other ways in the early 1900s. Limitations on the legal rights of African Americans grew more severe in the South in this era. The 1896 Supreme Court decision in the case of Plessy v. Ferguson provided a legal basis for greater explicit segregation in American society. This decision allowed for the provision of separate facilities and services to blacks and whites as long as the facilities and services were equal. Through the early 1900s, many new laws, known as Jim Crow laws, were passed in Southern states creating legally segregated schools, transportation systems, and lodging. The requirement of equality was not generally enforced, however. Perhaps the most important and best-known example of separate and unequal facilities in the South was the system of public education. Through the first decades of the twentieth century, resources were funneled to white schools, raising teacher salaries and per-pupil funding while reducing class size. Black schools experienced no real improvements of this type. The result was a sharp decline in the relative quality of schooling available to African-American children.

1916-1964: Migration and Urbanization

The mid-1910s witnessed the first large-scale movement of African Americans out of the South. The share of African Americans living in the South fell by about four percentage points between 1910 and 1920 (with nearly all of this movement after 1915) and another six points between 1920 and 1930 (see Table 3). What caused this tremendous relocation of African Americans? The worsening political and social conditions in the South, noted above, certainly played a role. But the specific timing of the migration appears to be connected to economic factors. Northern employers in many industries faced strong demand for their products and so had a great need for labor. Their traditional source of cheap labor, European immigrants, dried up in the late 1910s as the coming of World War I interrupted international migration. After the end of the war, new laws limiting immigration to the US would keep the flow of European labor at a low level. Northern employers thus needed a new source of cheap labor, and they turned to Southern blacks. In some cases, employers would send recruiters to the South to find workers and to pay their way North. In addition to this pull from the North, economic events in the South served to push out many African Americans. Destruction of the cotton crop by the boll weevil, an insect that feeds on cotton plants, and poor weather in some places during these years made new opportunities in the North even more attractive.

Table 3: Share of African Americans Residing in the South

Year Share Living in South
1890 90%
1900 90%
1910 89%
1920 85%
1930 79%
1940 77%
1950 68%
1960 60%
1970 53%
1980 53%
1990 53%

Sources: 1890 to 1960: Historical Statistics of the United States, volume 1, pp. 22-23; 1970: Statistical Abstract of the United States, 1973, p. 27; 1980: Statistical Abstract of the United States, 1985, p. 31; 1990: Statistical Abstract of the United States, 1996, p. 31.

Pay was certainly better, and opportunities were wider, in the North. Nonetheless, the region was not entirely welcoming to these migrants. As the black population in the North grew in the 1910s and 1920s, residential segregation grew more pronounced, as did school segregation. In some cases, racial tensions boiled over into deadly violence. The late 1910s were scarred by severe race riots in a number of cities, including East St. Louis (1917) and Chicago (1919).

Access to Jobs in the North

Within the context of this broader turmoil, black migrants did gain entry to new jobs in Northern manufacturing. As in Southern manufacturing, pay differences between blacks and whites working the same job at the same plant were generally small. However, black workers had access to a limited set of jobs and remained heavily concentrated in unskilled laborer positions. Black workers gained admittance to only a limited set of firms, as well. For instance, in the auto industry, the Ford Motor Company hired a tremendous number of black workers, while other auto makers in Detroit typically excluded these workers. Because their alternatives were limited, black workers could be worked very intensely and could also be used in particularly unpleasant and dangerous settings, such as the killing and cutting areas of meat packing plants, foundry departments in auto plants, and blast furnaces in steel plants.

Unions

Through the 1910s and 1920s, relations between black workers and Northern labor unions were often antagonistic. Many unions in the North had explicit rules barring membership by black workers. When faced with a strike (or the threat of a strike), employers often hired in black workers, knowing that these workers were unlikely to become members of the union or to be sympathetic to its goals. Indeed, there is evidence that black workers were used as strike breakers in a great number of labor disputes in the North in the 1910s and 1920s. Beginning in the mid-1930s, African Americans gained greater inclusion in the union movement. By that point, it was clear that black workers were entrenched in manufacturing, and that any broad-based organizing effort would have to include them.

Conditions around 1940

As is apparent in Table 3, black migration slowed in the 1930s, due to the onset of the Great Depression and the resulting high level of unemployment in the North in the 1930s. Beginning in about 1940, preparations for war again created tight labor markets in Northern cities, though, and, as in the late 1910s, African Americans journeyed north to take advantage of new opportunities. In some ways, moving to the North in the 1940s may have appeared less risky than it had during the World War I era. By 1940, there were large black communities in a number of Northern cities. Newspapers produced by these communities circulated in the South, providing information about housing, jobs, and social conditions. Many Southern African Americans now had friends and relatives in the North to help with the transition.

In other ways, though, labor market conditions were less auspicious for black workers in 1940 than they had been during the World War I years. Unemployment remained high in 1940, with about fourteen percent of white workers either unemployed or participating in government work relief programs. Employers hired these unemployed whites before turning to African American labor. Even as labor markets tightened, black workers gained little access to war-related employment. The President issued orders in 1941 that companies doing war-related work had to hire in a non-discriminatory way, and the Fair Employment Practice Committee was created to monitor the hiring practices of these companies. Initially, few resources were devoted to this effort, but in 1943 the government began to enforce fair employment policies more aggressively. These efforts appear to have aided black employment, at least for the duration of the war.

Gains during the 1940s and 1950s

In 1940, the Census Bureau began to collect data on individual incomes, so we can track changes in black income levels and in black/white income ratios in more detail from this date forward. Table 4 provides annual earnings figures for black and white men and women from 1939 (recorded in the 1940 Census) to 1989 (recorded in the 1990 Census). The big gains of the 1940s, both in level of earnings and in the black/white income ratio, are very obvious. Often, we focus on the role of education in producing higher earnings, but the gap between average schooling levels for blacks and whites did not change much in the 1940s (particularly for men), so schooling levels could not have contributed too much to the relative income gains for blacks in the 1940s (see Table 5). Rather, much of the improvement in the black/white pay ratio in this decade simply reflects ongoing migration: blacks were leaving the South, a low-wage region, and entering the North, a high-wage region. Some of the improvement reflects access to new jobs and industries for black workers, due to the tight labor markets and antidiscrimination efforts of the war years.

Table 4: Mean Annual Earnings of Wage and Salary Workers

Aged 20 and Over

Male

Female

Black White Ratio Black White Ratio
1939 $537.45 $1234.41 .44 $331.32 $771.69 .43
1949 1761.06 2984.96 .59 992.35 1781.96 .56
1959 2848.67 5157.65 .55 1412.16 2371.80 .59
1969 5341.64 8442.37 .63 3205.12 3786.45 .85
1979 11404.46 16703.67 .68 7810.66 7893.76 .99
1989 19417.03 28894.69 .67 15319.29 16135.65 .95

Source: Integrated Public Use Microdata Series Census samples for 1940, 1950, 1960, 1970, 1980, and 1990. Includes only those with non-zero earnings who were not in school. All figures are in current (nominal) dollars.

Table 5: Years of School Attended for Individuals 20 and Over

Male

Female

Black White Difference Black White Difference
1940 5.9 9.1 3.2 6.9 10.5 3.6
1950 6.8 9.8 3 7.8 10.8 3
1960 7.9 10.5 2.6 8.8 11.0 2.2
1970 9.4 11.4 2.0 10.3 11.7 1.4
1980 11.2 12.5 1.3 11.8 12.4 0.6

Source: Integrated Public Use Microdata Series Census samples for 1940, 1950, 1960, 1970, and 1980. Based on highest grade attended by wage and salary workers aged 20 and over who had non-zero earnings in the previous year and who were not in school at the time of the census. Comparable figures are not available in the 1990 Census.

Black workers relative incomes were also increased by some general changes in labor demand and supply and in labor market policy in the 1940s. During the war, demand for labor was particularly strong in the blue-collar manufacturing sector. Workers were needed to build tanks, jeeps, and planes, and these jobs did not require a great deal of formal education or skill. In addition, the minimum wage was raised in 1945, and wartime regulations allowed greater pay increases for low-paid workers than for highly-paid workers. After the war, the supply of college-educated workers increased dramatically. The GI Bill, passed in 1944, provided large subsidies to help pay the expenses of World War II veterans who wanted to attend college. This policy helped a generation of men further their education and get a college degree. So strong labor demand, government policies that raised wages at the bottom, and a rising supply of well-educated workers meant that less-educated, less-skilled workers received particularly large wage increases in the 1940s. Because African Americans were concentrated among the less-educated, low-earning workers, these general economic forces were especially helpful to African Americans and served to raise their pay relative to that of whites.

The effect of these broader forces on racial inequality helps to explain the contrast between the 1940s and 1950s evident in Table 4. The black-white pay ratio may have actually fallen a bit for men in the 1950s, and it rose much more slowly in the 1950s than in the 1940s for women. Some of this slowdown in progress reflects weaker labor markets in general, which reduced black access to new jobs. In addition, the general narrowing of the wage distribution that occurred in the 1940s stopped in the 1950s. Less-educated, lower-paid workers were no longer getting particularly large pay increases. As a result, blacks did not gain ground on white workers. It is striking that pay gains for black workers slowed in the 1950s despite a more rapid decline in the black-white schooling gap during these years (Table 5).

Unemployment

On the whole, migration and entry to new industries played a large role in promoting black relative pay increases through the years from World War I to the late 1950s. However, these changes also had some negative effects on black labor market outcomes. As black workers left Southern agriculture, their relative rate of unemployment rose. For the nation as a whole, black and white unemployment rates were about equal as late as 1930. This equality was to a great extent the result of lower rates of unemployment for everyone in the rural South relative to the urban North. Farm owners and sharecroppers tended not to lose their work entirely during weak markets, whereas manufacturing employees might be laid off or fired during downturns. Still, while unemployment was greater for everyone in the urban North, it was disproportionately greater for black workers. Their unemployment rates in Northern cities were much higher than white unemployment rates in the same cities. One result of black migration, then, was a dramatic increase in the ratio of black unemployment to white unemployment. The black/white unemployment ratio rose from about 1 in 1930 (indicating equal unemployment rates for blacks and whites) to about 2 by 1960. The ratio remained at this high level through the end of the twentieth century.

1965-1999: Civil Rights and New Challenges

In the 1960s, black workers again began to experience more rapid increases in relative pay levels (see Table 4). These years also marked a new era in government involvement in the labor market, particularly with regard to racial inequality and discrimination. One of the most far-reaching changes in government policy regarding race actually occurred a bit earlier, in the 1954 Supreme Court decision in the case of Brown v. the Board of Education of Topeka, Kansas. In that case, the Supreme Court ruled that racial segregation of schools was unconstitutional. However, substantial desegregation of Southern schools (and some Northern schools) would not take place until the late 1960s and early 1970s.

School desegregation, therefore, was probably not a primary force in generating the relative pay gains of the 1960s and 1970s. Other anti-discrimination policies enacted in the mid-1960s did play a large role, however. The Civil Rights Act of 1964 outlawed discrimination in a broad set of social arenas. Title VII of this law banned discrimination in hiring, firing, pay, promotion, and working conditions and created the Equal Employment Opportunity Commission to investigate complaints of workplace discrimination. A second policy, Executive Order 11246 (issued by President Johnson in 1965), set up more stringent anti-discrimination rules for businesses working on government contracts. There has been much debate regarding the importance of these policies in promoting better jobs and wages for African Americans. There is now increasing agreement that these policies had positive effects on labor market outcomes for black workers at least through the mid-1970s. Several pieces of evidence point to this conclusion. First, the timing is right. Many indicators of employment and wage gains show marked improvement beginning in 1965, soon after the implementation of these policies. Second, job and wage gains for black workers in the 1960s were, for the first time, concentrated in the South. Enforcement of anti-discrimination policy was targeted on the South in this era. It is also worth noting that rates of black migration out of the South dropped substantially after 1965, perhaps reflecting a sense of greater opportunity there due to these policies. Finally, these gains for black workers occurred simultaneously in many industries and many places, under a variety of labor market conditions. Whatever generated these improvements had to come into effect broadly at one point in time. Federal antidiscrimination policy fits this description.

Return to Stagnation in Relative Income

The years from 1979 to 1989 saw the return of stagnation in black relative incomes. Part of this stagnation may reflect the reversal of the shifts in wage distribution that occurred during the 1940s. In the late 1970s and especially in the 1980s, the US wage distribution grew more unequal. Individuals with less education, particularly those with no college education, saw their pay decline relative to the better-educated. Workers in blue-collar manufacturing jobs were particularly hard hit. The concentration of black workers, especially black men, in these categories meant that their pay suffered relative to that of whites. Another possible factor in the stagnation of black relative pay in the 1980s was weakened enforcement of antidiscrimination policies at this time.

While black relative incomes stagnated on average, black residents of urban centers suffered particular hardships in the 1970s and 1980s. The loss of blue-collar manufacturing jobs was most severe in these areas. For a variety of reasons, including the introduction of new technologies that required larger plants, many firms relocated their production facilities outside of central cities, to suburbs and even more peripheral areas. Central cities increasingly became information-processing and financial centers. Jobs in these industries generally required a college degree or even more education. Despite decades of rising educational levels, African Americans were still barely half as likely as whites to have completed four years of college or more: in 1990, 11.3% of blacks over the age of 25 had four years of college or more, versus 22% of whites. As a result of these developments, many blacks in urban centers found themselves surrounded by jobs for which they were poorly qualified, and at some distance from the types of jobs for which they were qualified, the jobs their parents had moved to the city for in the first place. Their ability to relocate near these blue-collar jobs seems to have been limited both by ongoing discrimination in the housing market and by a lack of resources. Those African Americans with the resources to exit the central city often did so, leaving behind communities marked by extremely high rates of poverty and unemployment.

Over the fifty years from 1939 to 1989, through these episodes of gain and stagnation, the ratio of black mens average annual earnings to white mens average annual earnings rose about 23 points, from .44 to .67. The timing of improvement in the black female/ white female income ratio was similar. However, black women gained much more ground overall: the black-white income ratio for women rose 50 points over these fifty years and stood at .95 in 1989 (down from .99 in 1979). The education gap between black women and white women declined more than the education gap between black and white men, which contributed to the faster pace of improvement in black womens relative earnings. Furthermore, black female workers were more likely to be employed full-time than were white female workers, which raised their annual income. The reverse was true among men: white male workers were somewhat more likely to be employed full time than were black male workers.

Comparable data on annual incomes from the 2000 Census are not available at the time of this writing. Evidence from other labor market surveys suggests that the tight labor markets of the late 1990s may have brought renewed relative pay gains for black workers. Black workers also experienced sharp declines in unemployment during these years, though black unemployment remained about twice as great as white unemployment.

Beyond the Labor Market: Persistent Gaps in Wealth and Health

When we look beyond these basic measures of labor market success, we find more disturbingly large and persistent gaps between African Americans and white Americans. Wealth differences between blacks and whites continue to be very large. In the mid-1990s, black households held only about one-quarter the amount of wealth that white households held, on average. If we leave out equity in ones home and personal possessions and focus on more strictly financial, income-producing assets, black households held only about ten to fifteen percent as much wealth as white households. Big differences in wealth holding remain even if we compare black and white households with similar incomes.

Much of this wealth gap reflects the ongoing effects of the historical patterns described above. When freed from slavery, African Americans held no wealth, and their lower incomes prevented them from accumulating wealth at the rate whites did. African Americans found it particularly difficult to buy homes, traditionally a households most important asset, due to discrimination in real estate markets. Government housing policies in the 1930s and 1940s may have also reduced their rate of home-buying. While the federal government made low interest loans and loan insurance available through the Home Owners Loan Corporation and the Federal Housing Authority, these programs generally could not be used to acquire homes in black or mixed neighborhoods, usually the only neighborhoods in which blacks could buy, because these were considered to be areas of high-risk for loan default. Because wealth is passed on from parents to children, the wealth differences of the mid-twentieth century continue to have an important impact today.

Differences in life expectancy have also proven to be remarkably stubborn. Certainly, black and white mortality patterns are more similar today than they once were. In 1929, the first year for which national figures are available, white life expectancy at birth was 58.6 years and black life expectancy was 46.7 years (for men and women combined). By 2000, white life expectancy had risen to 77.4 years and black life expectancy was 71.8 years. Thus, the black-white gap had fallen from about twelve years to less than six. However, almost all of this reduction in the gap was completed by the early 1960s. In 1961, the black-white gap was 6.5 years. The past forty years have seen very little change in the gap, though life expectancy has risen for both groups.

Some of this remaining difference in life expectancy can be traced to income differences between blacks and whites. Black children face a particularly high risk of accidental death in the home, often due to dangerous conditions in low-quality housing. African Americans of all ages face a high risk of homicide, which is related in part to residence in poor neighborhoods. Among older people, African Americans face high risk of death due to heart disease, and the incidence of heart disease is correlated with income. Still, black-white mortality differences, especially those related to disease, are complex and are not yet fully understood.

Infant mortality is a particularly large and particularly troubling form of health difference between blacks and whites.

In 2000 the white infant mortality rate (5.7 per 1000 live births) was less than half the rate for African Americans (14.0 per 1000). Again, some of this mortality difference is related to the effect of lower incomes on the nutrition, medical care, and living conditions available to African American mothers and newborns. However, the full set of relevant factors is the subject of ongoing research.

Summary and Conclusions

It is undeniable that the economic fortunes of African Americans changed dramatically during the twentieth century. African Americans moved from tremendous concentration in Southern agriculture to much greater diversity in residence and occupation. Over the period in which income can be measured, there are large increases in black incomes in both relative and absolute terms. Schooling differentials between blacks and whites fell sharply, as well. When one looks beyond the starting and ending points, though, more complex realities present themselves. The progress that we observe grew out of periods of tremendous social upheaval, particularly during the world wars. It was shaped in part by conflict between black workers and white workers, and it coincided with growing residential segregation. It was not continuous and gradual. Rather, it was punctuated by periods of rapid gain and periods of stagnation. The rapid gains are attributable to actions on the part of black workers (especially migration), broad economic forces (especially tight labor markets and narrowing of the general wage distribution), and specific antidiscrimination policy initiatives (such as the Fair Employment Practice Committee in the 1940s and Title VII and contract compliance policy in the 1960s). Finally, we should note that this century of progress ended with considerable gaps remaining between African Americans and white Americans in terms of income, unemployment, wealth, and life expectancy.

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Citation: Maloney, Thomas. “African Americans in the Twentieth Century”. EH.Net Encyclopedia, edited by Robert Whaples. January 14, 2002. URL http://eh.net/encyclopedia/african-americans-in-the-twentieth-century/

?Merely for Money?? Business Culture in the British Atlantic, 1750-1815

Author(s):Haggerty, Sheryllynne
Reviewer(s):Hoppit, Julian

Published by EH.Net (January 2013)

Sheryllynne Haggerty, ?Merely for Money?? Business Culture in the British Atlantic, 1750-1815. Liverpool: Liverpool University Press, 2012. xiv + 287 pp. $100 (hardcover), ISBN: 978-1-84631-817-7.

Reviewed for EH.Net by Julian Hoppit, Department of History, University College London.

In a way, this book is a behavioral study of merchants trading across the Atlantic in the era of the American, French, and early industrial revolutions. As such, it is much less concerned with prices and profits, supply and demand, ships and ports, laws and government, than with hopes and fears, conventions and customs, friendships and networks. It explores the culture of business practice, not how merchants conspicuously consumed, engaged in philanthropy, or donated to the libraries and assembly rooms of the ports they worked from.

The great strength of the book is the extent of primary research on which it rests and how that evidence is related to modern research into business practice from the fields of economics, business studies, and sociology. Throughout that relationship is developed thoughtfully and suggestively. Moreover, Haggerty also engages with a large body of secondary work by economic historians. Given such efforts, the many footnotes provide lead after lead to follow up on. This is a book to make one think, even if its conclusions are unsurprising.

A key aspect of Haggerty?s book is its geographical and chronological ambition. In practice, the ?British Atlantic? is viewed from Liverpool primarily (though not exclusively) to the Caribbean and, more especially, North America. In Britain, Glasgow, Bristol, and London are given some consideration, Whitehaven none at all. Records of merchants in the Caribbean and North America are employed, trade with West Africa is mentioned in passing, but Ireland is completely ignored. Chronologically, the weight of the book lies from the mid-1760s to the abolition of the British slave trade in 1807. This was, to put it mildly, a challenging time to be a merchant in the British Atlantic and Haggerty?s book is suggestive in helping us to understand how those challenges were met.

To a considerable extent the book rests upon the correspondence of a number of merchants. Material from 30 archives in several countries is employed, as well as numerous printed primary sources. Yet weighty though this material is, it plays a supporting role in determining the book?s approach and direction. The titles of the six substantive chapters in the book make clear Haggerty?s focus: Risk, Trust, Reputation, Obligation, Networks, and Crises. Each of these chapters begins by carefully setting out recent and mainly theoretical work on these from beyond history: terms are defined with real care, previous assumptions critically considered, and telling questions nicely posed. This is a very valuable feature of the book. Those questions are then addressed in the body of the chapter by detailed exploration of the primary sources. Haggerty is notably skilled in identifying the apposite quote and showing how a jigsaw with many missing pieces can, nonetheless, be plausibly reconstructed.?

This is then a book, full of good things. But one its great sources of strength, the attention to the subtleties of business relationships to be found in letters, arguably makes it harder for more general arguments to be made. Haggerty?s approach is mainly qualitative and illustrative, dipping in and out of particular sources with a focus upon individuals and their business connections. There is very little quantitative analysis, and only in the chapter on networks is her approach more systematic, and even then the presentation makes it hard to compare her case studies and little attention is paid to how representative they are. Take therefore Haggerty?s statement near the end of the book that ?the United States continued to be Britain?s largest single trading partner. This success was largely due to a business culture which facilitated trade despite long-term structural changes and short-term crises? (p. 235) To write ?largely due? is to make a big claim for the role of business culture which Haggerty has not attempted to support by systematically considering other possible explanations, such as terms of trade and the international division of labor.

A further marked feature of the book is that six of the seven substantive chapters pay scant attention to balancing issues of continuity and change. Haggerty skillfully and deftly shows aspects of business culture, habits, and etiquette, but is less interested in showing how they did or did not change over time. Developments are not ignored, but just what was distinctive about business culture in this period needs more concerted consideration. This matters because a number of her key features might be supposed to have a timeless aspect to them ? such as the role of trust or networks. Perhaps more weight might have been paid to the influence upon business culture of the evolution in the period of marine insurance, the emergence of chambers of commerce (on which Robert Bennett has done path-breaking work, including a detailed study of Liverpool), pre-war Anglo-American debts after 1783, the growth of the Lancashire cotton industry, and the Continental System. None of these are ignored, but they crop up only in passing and are only foregrounded near the end of the book in a discussion of crises.

A lot of outstanding work has been published on the mercantile world of the British Atlantic in this period by the likes of Bernard Bailyn, Ralph Davis, Tom Devine, David Hancock, John McCusker, Kenneth Morgan, and Jacob Price. It is no mean achievement of Haggerty that she has made a distinctive contribution to such a rich field of research.

Julian Hoppit?s recent publications include Nehemiah Grew and England’s Economic Development (Oxford University Press, 2011), ?Compulsion, Compensation and Property Rights in Britain, 1688-1833,? Past and Present (2011), and ?The Nation., the State, and the First Industrial Revolution,? Journal of British Studies (2011). j.hoppit@ucl.ac.uk
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Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (January 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Business History
International and Domestic Trade and Relations
Geographic Area(s):Europe
Latin America, incl. Mexico and the Caribbean
North America
Time Period(s):18th Century
19th Century

Hired Hands or Human Resources? Case Studies of HRM Programs and Practices in Early American Industry

Author(s):Kaufman, Bruce
Reviewer(s):Pearson, Chad

Published by EH.NET (October 2010)

Bruce Kaufman, Hired Hands or Human Resources? Case Studies of HRM Programs and Practices in Early American Industry.? Ithaca: Cornell University Press, 2010.? xi + 254 pp.? $55 (Cloth), ISBN: 978-0-8014-4830-0.

Reviewed for EH.NET by Chad Pearson, Department of History, University of Alabama ? Huntsville.

For more than two decades, Bruce Kaufman has produced notable studies that have deepened our understanding of the evolution of industrial relations policies.? In Hired Hands or Human Resources? Case Studies of HRM Programs and Practices in Early American Industry, Kaufman continues his service to the historical profession by providing in-depth descriptions of the industrial relations and early human resource practices adopted by fifteen industries from the late nineteenth century to the first three decades of the twentieth century.? He makes several claims throughout, including his belief that the era of World War I, rather than the New Deal years, represented the watershed moment with respect to the development of modern human resource management.? More controversially, Kaufman downplays the role that the labor movement and legal pressures played in convincing employers to improve their labor relations polices.?

Divided into two parts, Kaufman begins with numerous case studies of late nineteenth and early twentieth century companies.? Drawing mostly on secondary sources, he describes the different ways in which employers responded to strikes, high turnover rates, and what commentators generally called the labor problem.? Employers? responses varied.? Companies like the Pullman Car Company and the Atlanta-based Fulton Bag and Cotton Mills imposed what Kaufman calls an ?autocratic model.?? Here employers, in Kaufman?s words, ?set the labor policy and acted as the final court of appeal in disputes? (p. 50).? Managers at Fulton Bag and Cotton Mills forced employees to sign contracts promising that they would refrain from joining labor unions and that they would give at least a week?s notice if they planned to quit; failing to notify management resulted in a deduction of a week?s pay.?

Other companies employed policies that were far more benevolent than the techniques used by Pullman and the Fulton Bag and Cotton Mills.? Shoe manufacturing giant Endicott-Johnson Company embraced what Kaufman calls ?the paternalistic model? while department store company William Filene and Sons adopted ?the participative model.?? Led by the paternalistic George Johnson, Endicott-Johnson promoted a workplace culture called the ?Square Deal.?? In return for high pay and company-sponsored social programs, including sports teams and outings, Johnson insisted that his employees work efficiently and demonstrate loyalty.? ?The idea behind the square deal,? Kaufman notes, ?was quid pro-quo ? what the company gave it expected back in equal proportion? (p. 56).? Johnson?s interests were hardly unique.? Indeed, all managers expected their workers to show loyalty.????????????

In part two, Kaufman illustrates the ways in which several companies created professional human resource management (HRM) models after World War I.? This is the most valuable part of the book principally because he used the records of the Industrial Relations Councilors (IRC), a consulting firm that began assisting employers in the 1910s.? The IRC offered consulting services, provided research, and ran courses on industrial relations topics throughout the nation.? Kaufman, the first scholar to examine these records, believes that ?no other [industrial relations consulting firm] before World War II had IRC?s reach and influence? (p. 108).? Given the confidentiality agreements that the various firms made with the IRC, Kaufman does not disclose the identities of the particular workplaces.? But he does provide us with an inside look at the ways in which managers at the ?Top-Grade Oil Company,? ?The Great Eastern Coal Company,? ?The United Steel and Coal Company,? ?The Mega-Watt and Light Power Company,? ?New Era Radio,? and ?High-Beam Steel,? professionalized industrial relations polices.

In several cases, the contents of these internal reports are rather unsurprising: details about company pay rates, the implementation of safety programs, the creation of medical services, and the development of company sponsored housing and social activities.? That the ?Great Eastern Coal Company? sought to, according to one report, ?promote and maintain a spirit of cooperation between the operator and the employee? in the aftermath of a strike is hardly news (p. 137).? In this situation, these sources simply reinforce what historians and industrial relations scholars have long known.?

Yet Kaufman discovered some real gems during the course of his research.? For instance, the context surrounding the coal company?s implantation of a non-union employee representation plan is especially revealing.? Here, the IRC warned the company that it needed to take communist leader William Foster?s critique of non-union representation programs seriously.? Presumably stung by Foster?s statement that such programs served ?to delude the workers into believing they have some semblance of industrial democracy,? the IRC insisted that the company ?recognize these charges and examine diligently the means for preventing their foundation in fact? (p. 153).? The reports are also instructive in highlighting the considerable sums of money that companies spent on various employee benefits.? High Beam Steal, for instance, allocated $95, 000 for ?community affairs.??????

In most cases, these firms, in consultation with the IRC, began to, in Kaufman?s words, treat labor not as ?a short-term commodity,? as was common in previous decades, but rather as ?a longer-term human capital asset (the ?human resource? approach)? (p. 219).? Why?? Pressure from unions and the law were factors, but ?they were less than half the story in the time period we are examining? (p. 228).? In his view, employers? desires to improve ?management and productivity? better explain why companies improved workplace conditions (p. 227).? This argument is somewhat confusing and not entirely convincing in light of his evidence.? Most of the firms he examined confronted pressure from labor unions in different contexts, and employers in general opposed unions primarily because they believed that organized labor impeded productivity.? Most post-World War I employers embraced the open-shop principle and routinely maintained that unions were inefficient third parties that undermined the supposedly natural relationship between managers and workers.? Many supported both carrot and stick methods in the face of labor unrest.?

Nevertheless, for the most part, business and labor historians as well as economists will find Hired Hands or Human Resources? informative and thought-provoking.? Readers may discover a minor error or two (President Rutherford Hayes, not Grover Cleveland, called in federal troops during the 1877 railroad strike to restore order.) but most will certainly appreciate this readable study for introducing us to the private world of pre-World War II industrial relations consulting.?
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Chad Pearson is currently writing a book about the Progressive Era Open-Shop Movement.

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Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII