Published by EH.NET (August 2003)

Robert E. Wright, Hamilton Unbound: Finance and the Creation of the American Republic. Westport, CT: Greenwood Press, 2002. xii + 230 pp. $62.95 (cloth), ISBN: 0-275-97816-8.

Reviewed for EH.NET by Howard Bodenhorn, Department of Economics, Lafayette College.

Robert Wright, formerly of University of Virginia, now of New York University, lays out his objective up front. He writes: “A financial interpretation of early U.S. history can increase scholars’ understanding of important historical issues” (p. 1). In six substantive, loosely-connected chapters, Wright provides finance-based interpretations of important events, from the underlying causes of the American Revolution to the adoption of the U.S. Constitution, from economic growth to the role of banks and urban finance in the election of 1800, from dueling to the subjugation of women. My reading of the book is that Wright’s target audience is not so much financial or economic historians as historians proper with minimal training in modern economics or finance. Although he raises issues that will be of interest to economic historians, his book is decidedly old-style, pre-cliometric economic history. Wright is a gifted storyteller and makes exceptional use of documentary archival sources, such as ledgers, letterbooks, and diaries. Economic historians of the cliometric persuasion, however, will be frustrated as often as they are enlightened. Wright offers a number of insightful, interesting, and potentially testable hypotheses at several turns, but relies on anecdotes, commentaries and reflections from contemporary observers instead of marshaling much in the way of quantitative data to support his hypotheses. Economic history is a large enough tent to accommodate a number of methodological approaches, and there is certainly room for Wright’s. Nevertheless, a little data often go a long way in tempering speculation and to that end we can regard this review as a call for Wright and, perhaps, others to take up the challenge to provide refinements and tests of his more provocative theses.

In the first chapter Wright argues that one of the driving influences behind the American Revolution was rising and volatile interest rates. Consistent with Benjamin Franklin’s contention that money matters were a common cause of complaint, Wright contends that interest rate volatility, aggravated by British refusal to cede the colonies much control over their own monetary institutions, aligned the interests of Boston’s merchants and Virginia’s planters. Rapid and unexpected inflation drove up nominal rates, which (holding all else constant) was associated with falling asset prices, which had deleterious effects on balance sheets, firm solvency, and the ‘pursuit of happiness.’

In the second essay Wright contends that the framers of the Constitution understood the fundamental principal-agent problems inherent in representative democracies and constructed a system that largely aligned the interests of the electorate and the elected. Such now commonplace institutions as tripartite governments, bicameral legislatures, judicial review, bills of rights, and term limits were seen as solutions to the principal-agent problem. Each limitation tied the government’s hands, and made it more responsive to the desires of the electorate.

Chapter 3 provides a case for the importance of British-style legal institutions and a vibrant and innovative financial system in laying the groundwork for broader economic growth. In Chapter 4 Wright argues that Jefferson won the election of 1800 not because he appealed to the rural yeoman farmer, but because the Republicans were more responsive to artisans’ calls for greater access to bank-supplied credit. Artisans did not shift allegiance because they feared moneyed institutions and a commercial elite. Rather artisans jumped ship because the Federalists were more concerned with protecting the privileged monopoly position of the then existing banks. Chapter 5 provides a financial interpretation of dueling, its decline in the North, and its continuance in the South. Dueling, according to Wright, signaled character and banks, in the absence of objective credit criteria, relied on signals of character (e.g., dueling) to determine who received loans. Northern banks adopted more formal credit assessments sooner than Southern banks. Thus, dueling continued in the South after it had disappeared in the North. Finally, Chapter 6 argues that declining relative female education in the early nineteenth century prompted by the emergence of the so-called cult of womanhood changed investment opportunities open to women. Instead of active investors in their own businesses, the increasing complexity of business and credit transactions forced undereducated women to the sidelines, left to passive investments in government debt and investment-grade corporate equity.

As I wrote at the outset, this is old-style economic history in that it is much less empirical than a typical group of articles in the Journal of Economic History. It is also highly speculative at many points. Wright is trained as an historian and wants to address important economic issues. Given that his economics is mostly self-taught, he does have a remarkable grasp of the big issues in the banking and finance literature, but his discussions sometimes reveal his lack of appreciation for the subtle nuances of a complex and technical literature. Before writing this collection of essays, Wright seemingly came to grips with the modern information-theoretic approach to financial intermediation, and like the proverbial carpenter with a hammer, everything seemingly looked like a nail. Most of the time, his intonations of information asymmetries, principal-agent problems, moral hazard and adverse selection, and so on are plausible, but there are also instances where the enterprise does not ring quite true. Thus, I have some minor quibbles with some parts of the book; larger ones with other sections.

In the first essay concerning interest rate volatility, for example, Wright recognizes that asset prices will be driven by productivity growth, changes in supply and demand, and interest rates, but dismisses the first three as irrelevant and ignores them rather than adopting a more sophisticated approach of decomposing asset price movements into parts driven by each of the four factors. It is probably accurate to assert that productivity growth was slow, but we know that commodity prices were as volatile as interest rates, which may have led to equally volatile short-term fluctuations in asset prices and lots of bankruptcies unrelated to movements in the interest rate.

In the second essay, Wright offers several gross oversimplifications that actually undermine his main point; namely, that the founding fathers understood the principal-agent problem and devised a government likely to mitigate its worst effects. I was more disappointed, however, in his lack of explanations for how a tripartite structure (executive, legislative, judicial branches) or a bicameral legislature aligns the incentives of the electorate and the elected. He leaves it to the reader to fill in far too many blanks. Relative to the existing literature, the third essay does not add much value to what we already think. Much of what is said here has been said before by such notable economic historians as Douglass North, Rondo Cameron, Lance Davis and Robert Gallman, and economists such as Rafael LaPorta, Andrei Shleifer, Robert Vishny and Daron Acemoglu. These scholars have plowed this ground before, generally more productively.

My concern with Wright’s dueling essay is that dueling was really acceptable only among the wealthy to begin with. These were men, like Andrew Jackson, Alexander Hamilton and Aaron Burr, who could borrow in personal markets because lenders had a good sense of their business acumen, as well as their assets and liabilities (though some were remarkably adept at hiding large debts). It was small farmers, even middling planters, who had the hardest time conveying information about their acumen and assets, yet among this group dueling was frowned upon. A second problem with Wright’s interpretation is that it relies on an outdated notion of southern society as precapitalist aristocracy. It is an interesting irony that in a book purporting to show that Americans became financially sophisticated at an early stage of development, Wright reverts to an old argument that southerners were financially backward, forced to rely on ancient notions of honor instead of modern capitalist allocation mechanisms.

Despite my quibbles with some of Wright’s conclusions, the book is well worth reading. The author writes in an engaging style and offers more than a couple provocative, well-defended hypotheses. I would characterize Wright’s book as an ambitious attempt to apply the techniques of modern finance to a number of topics not generally thought to be amenable to such an approach. While his reach exceeds his grasp at several points, this shortcoming does not deal a fatal blow to Wright’s book. I fully expect the author, and others, to revisit and refine many of the conclusions offered in this book. I look forward to seeing the results of that research.

Howard Bodenhorn is an associate professor of economics at Lafayette College. His recent publications include A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation Building (Cambridge University Press, 2000) and State Banking in Early America: A New Economic History (Oxford University Press, 2003).