Published by EH.NET (May 2003)


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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