is owned and operated by the Economic History Association
with the support of other sponsoring organizations.

Business Elites and Corporate Governance in France and the UK

Author(s):Maclean, Mairi
Harvey, Charles
Press, Jon
Reviewer(s):Cerón-Anaya, Hugo C

Published by EH.NET (November 2006)

Mairi Maclean, Charles Harvey and Jon Press, Business Elites and Corporate Governance in France and the UK. Basingstoke: Palgrave Macmillan, 2006. xvii + 357 pp. $66 (hardcover), ISBN: 1-4039-3579-3.

Reviewed for EH.NET by Hugo Cer?n-Anaya, Department of Sociology, University of Essex.

In the current world, international corporations are able to control more human and economic resources than many nation states. The economic influence of these companies goes far beyond stock markets; they have a real impact on people’s lives, as the case of Enron showed in the U.S. In this context it is worth asking, who governs corporations? How are top executives appointed? Is economic globalization changing corporate governance practices? Mairi Maclean (University of the West of England), Charles Harvey (University of Strathclyde) and Jon Press (Bath Spa University) seek to answer these questions in a comparative study of England and France during the late twentieth and early twenty-first century.

In eight chapters the book covers issues such as the role of social elements in shaping business elites; the impact economic globalization is exerting on French and British business elites; corporate government structures; and recent transformations of corporate governance practices. These topics allow the authors to present a portrait of the men – and, to a lesser extent, women — who run the top corporations in these two countries. The contribution of this research is to expand the literature on international business; elites; social spaces; and social networks, in France and the UK. In this sense this book may appeal to business historians, economic sociologists and scholars researching elites, as well as academics analyzing social capital and networks.

In the Introduction the authors place their research within the context of studies of business elites. Their main objective is to analyze how governance practices (rules, regulations and practices) are influenced by national systems (business systems, structures, relationships) and ideologies (ideas, beliefs, values and assumptions) in the face of far-reaching global change. The findings of this study are based upon qualitative and quantitative data, the latter referring to statistical information about the directors of the top 100 companies in Britain and France, which is complemented by in-depth interviews.

Chapter 2, on ‘Theoretical Perspectives,’ discusses diverse theoretical approaches to the study and understanding of power and elites. The authors mainly draw ideas from Michael Foucault, Pierre Bourdieu, John Scott and Mark Granovetter. One of the main strengths of the book is precisely this attempt to understand business elites in a more complex way, taking into account social factors and national ideologies, not just economic elements. In Chapter 3, ‘Governance Regimes in Comparative Perspective,’ the authors seek to answer the question of how power works on French and British corporations, and review the main transformations experienced in corporate governance in both countries. The conclusion is that the UK and France have dealt with these matters in very different ways. For instance, British corporations have clearly separated the functions of CEOs and chairmen in different posts, whereas in France it is common to find one person simultaneously holding both roles.

Perhaps the most interesting chapters of the book are Chapter 4, ‘Social Origins and the Education of Business Elites,’ and Chapter 5, on ‘Elite Career and Lifestyles.’ These explain how social structures profoundly determine the shape and composition of business elites. The authors state that their analysis is not deterministic, but mention certain observable regularities in recruitment to the business elite. Chapter 4 mainly explores the importance of family and education for increasing an individual’s possibilities to join the business elite.

They conclude that education systems and the recruitment of business elites gradually have become more open in both countries, “nevertheless whilst undertaking this study we have been startled by the degree to which elitism still applies” (p. 122). Chapter 5 examines how top executives in France and the UK reached the positions they hold, and whether lifestyle patterns have influenced these businessmen’s careers. Issues such as the importance of sports, cultural and academic patronage, and marriage are analyzed in this chapter. The explanation that the authors give about why women are underrepresented in top corporate positions in both countries is of particular interest.

Chapter 6, ‘Networks, Power and Influence,’ studies the way elite business networks operate within these countries. The authors analyze how frequently top executives hold board positions in different companies, and also the impact family ties have on business networks. They conclude that the pattern is different in each country: in France ties are institutionally created through the grande ?coles, grands corps and business associations; whereas in the UK, the clubs of Pall Mall, the arts boards, not-for-profit groups and sporting associations are the key spaces for networking.

Chapter 7, on ‘Corporate Governance and the New Global Economy,’ evaluates the impact economic globalization has exerted on corporate governance practices and the composition of business elites. It explains that Britain and France have taken different paths to cope with globalization. The UK has indeed followed a liberal path, while France, by contrast, has combined elements of economic regulation with liberal practices. They conclude that, despite the influence that the British Code of Conduct exerts in global corporations and of so-called ‘Americanization,’ “the systems of governance obtaining in these two countries are rooted in each case in a distinct ‘habitus,’ the origins of which go deep” (p. 236).

The final chapter, ‘Elite, Power, and Governance,’ sums up their main findings. Regarding the nature of networks, the authors explain that social ties among French business elites are institutional and strong in nature. By contrast, social bonds among the British business elite are expressly social and relatively weak. In both cases, a strong tendency towards cultural reproduction was found. This means that continuity, and to some extent reinforcement, of values, ideas and perceptions of the world are encouraged among business elites. They add that the main structures that determine success in the business sphere in both countries are family, education and professional bodies.

The authors conclude that these two countries have responded in a different ways to the new global scenario. The British economy has gradually moved towards services whereas the French have supported large-scale manufacturing enterprises. “What we are witnessing, in effect, are the responses of two competing capitalisms to globalisation” (p. 256). Probably one of the main findings of the book is precisely that there is no trend of convergence between the French and British corporate governance systems. Instead, there are strong national traditions that have encouraged divergence.

Hugo Cer?n-Anaya is a Ph.D. candidate in the Department of Sociology at the University of Essex.

Subject(s):Business History
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

Cultures Merging: A Historical and Economic Critique of Culture

Author(s):Jones, Eric L.
Reviewer(s):Greif, Avner

Published by EH.NET (July 2006)

Eric L. Jones, Cultures Merging: A Historical and Economic Critique of Culture. Princeton, NJ: Princeton University Press, 2006. xvii + 297 pp. $30 (cloth), ISBN: 0-691-11737-3.

Reviewed for EH.NET by Avner Greif, Department of Economics, Stanford University.

For some scholars, a society’s culture determines its economic destiny. For others, culture is malleable reflecting deeper political and economic variables and hence is epiphenomenal to economic outcomes. In this interesting book, Eric Jones (author of The European Miracle among other publications, a Professorial Fellow at Melbourne Business School, University of Melbourne and an Emeritus Professor at La Trobe) provides a useful survey of this debate and argues for a middle ground.

Jones views culture — patterns of beliefs, habits, values, ideals, and preferences shared by groups of people — as both sticky and fluid. Because culture reflects habituation which one acquires at young age, it is slow to change. Yet, culture is also fluid; it is often of relatively recent vintage, changes rapidly, and is promoted, or even created by those who stand to gain from it. Culture changes in response to economic, political, and social forces. Cultural change reflects better knowledge of alternative cultures and such knowledge leads to cultural merger, new syntheses in languages, religion, and other domains. Culture therefore exhibits transient fixity.

Culture and the economy interrelate. A given culture influences transaction costs and thereby economic outcomes for a while. Yet, the economy shapes culture because it alters constraints and opportunities and provides knowledge regarding alternative cultures. Indeed, the rate of cultural change has accelerated in modern times because of the decline in information cost and the global reach of goods — such as movies, contraceptives, and cars — which embody alternative cultures. Cultural change also accelerated recently because the modern economy provides individuals with choices and opportunities that were not available in the past. Since culture is malleable, its impact on economic outcomes is less than often asserted. The global economy, however, will not lead to a globally uniform culture as it also enables new cultures to develop and prosper. This is the case because communication and information costs are so low in this new economy.

Culture and institutions also interrelate. The distinction between institutions and culture, according to Jones, is that the latter is informal, socially transmitted, and taken for granted while institutions tend to be conscious, even political constructs. Culture is relatively intangible while institutions have a more rule-bound existence. Institutions can shape culture although informal culture is difficult to alter. Jones asserts, without much elaboration, that a growth enhancing culture must be protected by law and not man. It seems that he means to contrast the European traditional rule of law with some unspecified alternatives.

Following this general discussion, Jones devotes a lengthy discussion to the important controversy in economic history regarding economic growth in China and Europe. While the “California School” of Chinese history claims that Europe was first to industrialize because it had better endowments, Jones argued that institutional distinctions mattered, particularly those influencing the use of resources, motivating technological advances, and enabling complex contracting. Rule of law was the most important principle. More generally, the fragmentation of power led to diversity of institutional development and institutionalized equalities brought peace and prosperity. “The institutions of the West were impersonal and decentralized; its institutional network held out the promise of extension to fresh social groups and new societies; and … it evinced great power of self-correction” (p. 132).

As the discussion of institutions illustrates, Jones does not hold all cultures to be born equal. He emphasizes that cultures are neither chosen rationally nor selected by evolutionary forces according to their functionality. Mediocre — welfare reducing practices — can and do prevail. Yet, competition can eradicate mediocre cultures. When alternative cultures are competing, a materially and emotionally beneficial culture is likely to be adopted, particularly by young adults.

The first five chapters of the book elaborate on the above point and the following three illustrate particular points by providing “cultural commentary.” In this commentary, Jones presents evidence the culture of immigration is uniform — second and third generations tend to exhibit cultural mobility and adopt the local culture while potentially changing it in the process. He then takes issue with the claims that “Asian culture” is underpinning the remarkable growth in Asia, that the resentment to the Western cultural role model is more than a reflection of deeper economic and political problems, and that local cultural protection reflects the will of the local people rather than interest group politics.

Regarding the debate over culture being immutable or epiphenomenal, Jones advances an appealing and intuitively correct assertion: culture is neither immutable nor epiphenomenal. Jones has done a wonderful job of reviewing both sides of the debate while exposing and articulating on the deficiency of the opposing views. Furthermore, Jones exposes various political and economic reasons that motivate the opposing sides to adopt the positions they do. Among these reasons are nationalistic sentiments, the fear of political and social elites that new culture will erode their positions, and the desire of local cultural producers to gain from subsidies. A novel aspect of the analysis is the emphasis on the role of knowledge regarding cultural diversity on cultural change. This enables Jones to link technological changes that reduce information costs and globalization of markets with the rate and direction of cultural change.

The book does not employ quantitative evidence. Yet, Jones draws on an amazing array of anecdotal evidence, both historical and contemporary, to make his point. Indeed, it is relatively easy to knock out the two extreme positions — that culture is either everything or nothing — by providing counter examples. Lacking, however, is good evidence regarding the stronger claims made — explicitly or implicitly — in this work. Among these claims are that all cultures are similarly malleable, that distinct cultures do not differ in their endogenous dynamics, that the interrelationships between culture and institutions cannot undermine the process of cultural change that Jones is describing, that Western institutions were more accommodating to cultural diversity than those of other societies, that the cultural assimilation of immigrants is universal, that mediocre cultures can perpetuate even in the presence of cultural competition, etc.. (For an analysis of how culture and institutions can mutually reinforce each other, see Greif 2006.)

Similarly unsatisfying is the multiplicity, and sometimes contradictorily implicit models that Jones invokes in his analysis. Only the conclusion verbally presents a model of culture and cultural change. This is an evolutionary model of cultural development in which information about alternatives and exogenous economic shocks causes cultural change. Some individuals respond to new information and exogenous shocks by altering their behavior and hence the resulting culture. Because culture reflects historical habituation, such change is often gradual and usually the old are more resistant to change.

No doubt, this individualistic model captures what may indeed be a mechanism for cultural change. Yet, central to it is that individuals can freely choose their culture and a rejection of the importance of culture as social phenomenon. This assertion is in contrast to the recent empirical finding (e.g., Guiso, Sapienza, and Zingales 2006) indicating that culture is a social phenomena. Moreover, it opposes many chapters in the book that consider the social dimensions of culture. These chapters argue, for example, that institutions influence culture, that the powerful attempt to shape culture, and that interest groups manipulate policies regarding culture. The book does not resolve the tension between the individualistic and the social-based models of culture. It does not, for example, elaborate on the factors determining which model is more applicable in a particular time and place.

These reservations notwithstanding, Jones provides an accessible, illuminating, and inspiring book on a complex issue, while providing thought-provoking ideas regarding where more research is warranted.


Avner Greif, 2006. Institutions and the Path to the Modern Economy: Lessons from Medieval Trade. Cambridge University Press, 2006.

Luigi Guiso, Paola Sapienza, and Luigi Zingales, 2006. “Does Culture Effect Economic Outcomes?” Journal of Economic Perspectives 20: 23-48.

Avner Greif teaches economic history and institutional analysis at Stanford University. Among his recent publications are Institutions and the Path to the Modern Economy: Lessons from Medieval Trade (Cambridge University Press, 2006); “The Origin of Impersonal Exchange: The Community Responsibility System and Impartial Justice” (Journal of Economic Perspective, 2006); “Commitment, Coercion, and Markets: The Nature and Dynamics of Institutions Supporting Exchange” (in the Handbook for New Institutional Economics, edited by Claude Menard and Mary M. Shirley, 2005); and “A Theory of Endogenous Institutional Change” (American Political Science Review, 2004.)

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920

Author(s):Khan, B. Zorina
Reviewer(s):Margo, Robert A.

Published by EH.NET (June 2006)

B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920. New York: Cambridge University Press, 2005. ix + 322 pp. $60 (cloth), ISBN: 0-521-81135-X.

Reviewed for EH.NET by Robert A. Margo, Department of Economics, Boston University.

If one had to list the top five issues in economic history, technical change would surely be among them. Institutions and institutional change, of course, would also be on the list. But the connection between the two — institutions and technical change — is certainly understudied by cliometricians. Zorina Khan’s new book is meant to help remedy this situation by focusing on the role of intellectual property institutions — patents and copyrights — in technical progress in nineteenth-century America. (Khan is an associate professor of economics at Bowdoin College, and a Research Associate of the National Bureau of Economic Research.)

Democratization is divided into ten chapters and an index (there is no separate bibliography). After an introduction that sets the stage and makes a case for the use of patent statistics and related data, chapter two surveys the legal history of patent systems in France, England, and the United States. In comparison with France, the American system was less arbitrary; in comparison with England, it was far less costly, opening up the possibility of ordinary Americans obtaining a patent.

Chapter three examines outcomes in the universe of reported cases of patent litigation before the Civil War. Khan’s analysis reveals, among other results, that the shift in 1836 to patent examinations (in the application/granting process) was associated with an increase in favorable outcomes for plaintiffs, which Khan (p. 99) attributes to the greater likelihood that the “Patent Office would … filter out those claims that failed to meet the standards for novelty” thereby altering the set of cases that went to trial. Chapter four studies another novel data set on antebellum patentees. Over time, patenting per capita increased, not because of a greater likelihood of invention among a small, core elite, but rather an increase in the proportion of individuals who patented. Patenting was also correlated with various features of local economies that suggest a role for market expansion, such as urbanization or access to transportation networks.

Chapters five and six switch gears, focusing on female patentees. Khan argues that women’s role in technical change has been slighted in favor of other topics (such as labor force participation). Although women were far less likely to be patentees than men, there was growth over time — indeed more rapid growth among women later in the century — and certain patterns suggest responsiveness to market signals. In Chapter six, Khan uses a data set on married women’s property laws to test whether the passage of such laws — a form of economic emancipation — raised the probability that women would engage in patenting. Chapter seven returns to the basic theme, showing that “great inventors” of the nineteenth century were also, in many ways, not very distinguishable from ordinary Americans.

To this reviewer, Chapters eight and nine are perhaps the most interesting in the book. Chapter eight, sort of a reprise of chapter two, elucidates the history of copyright in the United States against a European background. By comparison, American copyright emphasized widespread access to intellectual output whereas the European model (that is, the French) imagined that authors had natural rights to their work. Chapter nine is an entertaining analysis of the American refusal, until late in the nineteenth century, to extend copyright protection to “foreign” authors. Using a variety of data including a sample of book prices, Khan investigates various assertions in the literature — for example, that the policy permitted book publishers to charge lower prices for foreign authors (apparently not). Chapter ten summarizes the central findings and also further explores variations in patent systems across countries and economic outcomes.

Democratization has many virtues. The general topic is, without question, of first-order importance. Above all, the book is very well-written. It is obvious from the beginning that Khan has an erudite command of the relevant literature and historical sources, both American and European, a command that is especially evident in the copious and detailed footnotes. She has a flair for telling anecdotes, written and visual, that personalize the hard numbers. The quantitative data examined in the book are fresh and quite varied. By and large, cliometricians have paid relatively little attention to historical data on legal outcomes. In this regard, the analysis of patent litigation in Chapter three may prove useful as a blueprint in other contexts.

Virtues aside, however, I found myself flagging about halfway through largely because the book’s mantra — that America possessed a patent system that was, by world standards, egalitarian — does not seem particularly surprising and, at the very least, is of debatable economic significance. The two chapters on women, frankly, could easily have fit into one, much briefer chapter that would have better kept this reader’s attention.

For a book that is quite self-consciously “cliometric” — there are 37 tables and 20 figures — the cliometrics on display do not go far enough, at least for my tastes. Hypotheses to be tested are not derived from formal models but rather from the prior literature and, consequently, the connection to the empirical work can seem vague (as, for example, in the claim mentioned at various points that the preponderance of ordinary Americans among patentees sheds useful light on Joel Mokyr’s well-known distinction between macro- and micro-inventions). The many regressions are descriptive exercises — multivariate versions of (the many) two-way tables, if you will. As such, the coefficients are subject to multiple interpretations that are not always considered in sufficient detail to convince a skeptical reader of Khan’s preferred spin. For example, in her econometric analysis of patent specialization (Table 4.3), Khan draws on previous work by Kenneth Sokoloff (Journal of Economic History 1988) to give a plausible explanation of the negative coefficient of the presence of a navigable waterway. The “average patentee,” we are told (p. 121), “became less specialized when water transportation became available, but … this change was reversed over time as urbanization … progressed.” This may be true, but it imposes a dynamic interpretation on an econometric specification that is not designed for this purpose. In another example, Table 6.4 reports regressions that claim to show that states that passed married women’s property laws experienced increases in female patenting that were statistically and economically (given the low base) significant. This, too, may be true but, as best as I can tell, the econometric analysis is not true difference-in-difference, and potential endogeneity issues regarding the laws do not seem to be fully explored.

Criticisms aside, Democratization is an important book on a subject — the economic history of intellectual property — that heretofore has received insufficient attention from economic historians. The book’s style of argument emphasizing a wide array of sources will appeal to a much broader audience than is usually the case with monographs in economic history. And it will be a very good thing if Khan’s quantitative work with historical legal documents stimulates others to follow suit.

Robert A. Margo is Professor of Economics and African-American Studies, Boston University; and Research Associate, National Bureau of Economic Research. He is the editor of Explorations in Economic History.

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

Native Capital: Financial Institutions and Economic Development in S?o Paulo, Brazil, 1850-1920

Author(s):Hanley, Anne G.
Reviewer(s):Triner, Gail D.

Published by EH.NET (March 2006)

Anne G. Hanley, Native Capital: Financial Institutions and Economic Development in S?o Paulo, Brazil, 1850-1920. Stanford, CA: Stanford University Press, 2005. xviii + 286 pp. $55 (cloth), ISBN: 0-8047-5072-6.

Reviewed for EH.NET by Gail D. Triner, Department of History, Rutgers University.

Native Capital: Financial Institutions and Economic Development in S?o Paulo, Brazil offers an incisive history of the origins of modern financial institutions in a region that became, by the middle of the twentieth century, one of the largest urban and industrial centers of the “third world.” Anne G. Hanley, Associate Professor of History at Northern Illinois University, has constructed an excellent, detailed history of the organizations and legal structures that fueled an extraordinary period of financial innovation in S?o Paulo. In doing so, she finds dynamic entrepreneurialism bringing Brazilians together to pool their resources in constructive ways to fund explosive growth of financial markets at the end of the nineteenth and beginning of the twentieth centuries.

During the late nineteenth century, while the Brazilian state was organized as an “empire,” slow developments in the forms of joint stock companies, debenture issues, and banking were limited by the scale of financial requirements and by regulation at the national level. However, the expansion of coffee production, which ultimately fueled regional growth, the shift from slave to free (Brazilian and immigrant) labor and increasing demand for industrial capacity, provided incentive for entrepreneurs in S?o Paulo to seek new forms of financial organization.

In January 1890, almost simultaneously, and closely associated, with the introduction of republican government in November 1889, financial reforms opened the way for massive expansion in the forms and scale of corporate finance. Eased legal and capital requirements for limited liability corporations resulted in large numbers of new companies and banks opening their doors. Capital markets for equities and debentures and banks emerged from the reforms. As Hanley adroitly demonstrates, these reforms allowed existing economic elites to expand their activities at the same time that wider groups could participate in the boom, by investing their smaller pools of savings.

The securities exchange for equities and debentures (the Bolsa de Valores) suffered a rapid crash in 1891, but re-emerged strongly after a national debt re-scheduling in 1898 and additional reforms in 1905. Then, its “vigor disappeared after 1913” (p. 111) in the light of disruptions that World War I created in Brazil’s trading and financial networks. Hanley emphasizes the surviving companies and banks, rather than the many bankruptcies, acquisitions and liquidations. Without explicit quantification, it is difficult to determine the most common outcome for the companies newly formed during the 1890s. It is possible that opportunity for financial dynamism (with many regulatory loopholes) supported both real growth and widespread failures simultaneously.

In analyzing banking, Hanley makes a useful distinction between commercial and universal banks. The sample of universal banks is small (n=3), reflecting their inability to gain a foothold in the prevailing business environment. The few universal banks pursued long-term finance through mortgage and construction lending; they tried to raise long-term funding with mortgage-backed notes. The discussion of their failure raises more questions than it answers. Low profitability may have been the proximate cause of their demise. But, the theoretical discussion, leading to expectations of beneficial success, and findings of problems with asset valuation, suggest deeply seated business or regulatory problems that deserve attention. Commercial banks fared better: more of them served the S?o Paulo economy and they survived longer than universal banks. Although deprived of easy branch banking and long-term facilities, the liquidity and secure collateral that characterized commercial banks’ conservative portfolios served them well.

The causes and effects of the crises of 1891 and 1913/14, debt rescheduling of 1898, bank reforms and failures of 1900; the role (and feasible alternatives) of national monetary policy, and the relationship of S?o Paulo’s with the national economy receive cursory attention in Native Capital. But, given the importance of S?o Paulo for the economy and politics of Brazil, detailed questions relating the macroeconomic setting, the dynamics of national policy decisions and the trajectory of paulista business development arise. As examples, the specific “macroeconomic instability” that contributed to the failure of universal banks, as distinct from commercial banks (p. 148), the relationships between debt re-financing in 1898, bank failures of 1900-01, banking reform of 1905 (Chapter 6), and the formation of business enterprises could benefit from more exploration. Perhaps most importantly, reconciling the beneficial linkages of vastly expanded coffee production that Hanley refers to throughout the book, with seriously depressed world coffee prices from the mid-1890s through much of the first decade of the twentieth century and public sector support for coffee (with price supports and monetary reforms in 1905) may go a long way towards identifying the ways in which paulista entrepreneurs could apply their innovative dynamism.

Native Capital carefully describes the development of financial institutions and markets within S?o Paulo at the turn of the twentieth century, and it convincingly demonstrates a period of intense dynamism. However, the introduction’s claim that “the financial institutions so neglected in the Brazilian literature were precisely what made S?o Paulo’s development so successful” (p. 19) has broader implications on two interrelated counts that deserve attention. First, the implicit counterfactual — the possibility of other sources for successful development — is not the subject of empirical or analytical exploration. This concern taps into a very long-standing debate in financial theory and history about the causal relationship between finance and economic development; that it remains unresolved here only demonstrates its continued difficulty.

Second, and of more immediate concern for Hanley’s research, the relationship between these findings of financial and economic dynamism during this period and long-term development in S?o Paulo come into question. The period of financial dynamism was short-lived. After the early spectacular growth of the Bolsa, and especially after 1913, the story became very different. By the 1990s, when S?o Paulo boasted one of the largest, most modern industrial sectors in the developing world, its Bolsa listed only three-and-a-half times the number of companies that it had in 1917 (p. 189). While some aspects of early industrial structure saw their impetus in S?o Paulo during the decades surrounding the turn of the twentieth century, the volume of industrial growth can be traced to the post-World War II years. Therefore, if Brazilian financial markets remained moribund through much of the twentieth century after World War I (as seems to have been the case), can the financial dynamism of the earlier period really explain the success of S?o Paulo’s long-term development? What prevented sustained institutional dynamism? Attention to these questions provides an interesting challenge for future research.

Finally, the title of this book deserves more attention than it receives. Brazilian capital and money markets relied on Brazilian capital for their formation. This finding taps into one of the fundamental debates underlying Latin American economic history, the question of “dependency.” While Hanley alludes to the debate, an explicit discussion of the implications she draws for the finding of “native” capital would help both Latin Americanists with vested interests in varying sides of the debate and non-Latin-Americanists. From an empirical perspective, a useful subsequent question is whether, or how, the access that Brazilians had to international capital during the years of domestic financial innovation affected the dynamism of the S?o Paulo market.

Native Capital is very well-written. The prose is clear, and free of unexplained financial or theoretical jargon. The quantitative methods of the book rely on accounting principles that allow Hanley to explicate clearly the underlying businesses of financial institutions. The text situates the S?o Paulo case in the larger context of comparative financial history. The discursive footnotes are informative. Hanley is fully convincing on her theme of the extraordinary surge of entrepreneurialism in S?o Paulo during the late nineteenth and early twentieth centuries. Native Capital provides an important case study for very important questions in Brazilian and financial history. That the book raises provocative questions is a measure of its success.

Gail D. Triner, Associate Professor of History at Rutgers University, is author of Banking and Economic Development: Brazil, 1889-1930 (New York: Palgrave Press 2000) and a variety of articles on Brazilian economic and financial history, most recently, with Kirsten Wandschneider, “The Baring Crisis and the Brazilian Encilhamento, 1889-1891: An Early Example of Contagion among Emerging Capital Markets?” Financial History Review, Vol. 12, no.2, October 2005.

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

The Political Economy of Protection: Theory and the Chilean Experience

Author(s):Lederman, Daniel
Reviewer(s):Irwin, Douglas A.

Published by EH.NET (January 2006)

Daniel Lederman, The Political Economy of Protection: Theory and the Chilean Experience. Stanford: Stanford University Press, 2005. ix + 191 pp. $55 (cloth), ISBN: 0-8047-4917-5.

Reviewed for EH.NET by Douglas A. Irwin, Department of Economics, Dartmouth College.

This slim volume provides an overview of the political economy of trade policy in the case of Chile over two centuries. This is efficiently done in four chapters. The first chapter reviews the economics and political science literatures on the political economy of protection as a way of setting the stage for the analysis of Chilean policy. The second chapter consists of a historical overview of Chile’s trade policy from the early nineteenth century to the present. Chapter three undertakes an econometric analysis of Chile’s trade to GDP ratio since 1810, and chapter four addresses the forces behind Chile’s open trade policies since 1974.

The literature on the political economy of trade policy is such a large and sprawling one that it is difficult to provide a synthesis of the whole. Still, Lederman provides a good overview of the literature in both economics and political science. Economists tend to focus on economic interests and income distribution, while political scientists tend to focus on ideological and institutional considerations. These approaches can be complementary, but Lederman tends to treat them separately rather than propose an integrated framework that he will use throughout the book in analyzing Chile.

The book then moves on to examine Chile’s openness (trade to GDP ratio), terms of trade, and real exchange rate for as long a period as data exist. These indicators are then related to discrete changes in Chile’s trade policy in terms of legislation and other policy actions. Of particular note is how liberalism was discredited as a policy approach in the economic chaos between 1911 and 1927. As a result of changed economic circumstances, in particular, a severe and negative terms-of-trade shock in 1918, interest groups and ideas about the economy led to an institutionalization of protection.

The next chapter uses unit root tests to determine when there were structural breaks in Chile’s openness ratio and explores how various independent variables (openness, fiscal balance, terms of trade, economic growth, etc.) affect the probability of liberalization. This is a rather heavy-handed use of time series econometrics that is informative only in a limited way. One of the major problems with the political economy literature, reviewed in chapter one of the book, is the relatively low quality of empirical work. The standard approach has been to throw a bunch of independent variables on the right hand side of the equation and predict tariffs, openness, probability of trade policy change, etc. It is easy to raise questions about whether the independent variables are truly independent, or how one should interpret the results. The degree of measured openness of an economy depends not only (or even primarily) on government policy, but also on economic structure at home and abroad, making it difficult to fully capture in a parsimonious econometric equation. (The estimation of more structural models of the political economy of protection has many problems as well.) Lederman’s contribution is to look specifically at Chilean data rather than provide any methodological breakthroughs in this area.

Chapter four is an interesting and enlightening case study of how Chile changed its trade policy toward a more liberal stance in the early 1970s and thereafter. Lederman describes what happened, the interest group participation in the change, the various compensation mechanisms that were employed to ensure political support for the change, and how the change persisted. This chapter would be excellent reading for anyone interested in a succinct and informative analysis of Chile’s policy change.

In sum, economic historians will benefit from the availability of this succinct overview of Chilean trade policy. While the economic history of Argentina’s trade policy is known from the work of Carlos Diaz Alejandro in the past and Alan Taylor more recently, and Mexico’s policy has been illuminated by the work of Stephen Haber, more work is needed on other important Latin American countries. Lederman’s book is a good contribution that provides some diversity in historical experience beyond the standard studies of European or North American trade policy.

Douglas A. Irwin is the author of Free Trade under Fire.

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: WWII and post-WWII

How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan

Author(s):Thelen, Kathleen
Reviewer(s):Maloney, Thomas N.

Published by EH.NET (November 2005)

Kathleen Thelen, How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan. Cambridge: Cambridge University Press, 2004. xv + 333 pp. $30 (paperback), ISBN: 0-521-54674-5.

Reviewed for EH.NET by Thomas N. Maloney, Department of Economics, University of Utah.

Kathleen Thelen, Professor of Political Science at Northwestern University, has written a very ambitious book, examining institutions related to skill development in four countries, tracking changes in these institutions in one country over the course of a century, and embedding this analysis in a rich theoretical context. She wants to understand how these institutions came to be and how they have evolved over time. The American Political Science Association named this book a co-recipient of the 2005 Woodrow Wilson Foundation Award, given to the best book published in the previous year on a topic in government, politics, and international affairs, and I am not going to take a contrarian position in this review. This is an excellent piece of scholarship. It adds substantially to our understanding of labor markets and of economic and political institutions in general.

In the first chapter, “The Political Economy of Skills in Comparative-Historical Perspective,” Thelen lays out her expansive agenda. She provides a very clear and useful discussion of the Beckerian framework of “general” and “specific” human capital investment. She then emphasizes the concrete institutional arrangements that are required to make this system work, including forms of skill certification that make investment in general human capital appealing to young workers. Thelen also examines theories of institutional development and change: “Functionalist” theories that intuit the origins of institutions from the purposes those institutions currently serve, and “path dependent” theories that focus on institutional formation in specific historical episodes, leading to positive feedback and “lock in.” Her empirical work exposes weaknesses in both of these approaches to understanding institutions.

That empirical work is of two types: a cross-national comparison of training institutions in Germany, Britain, Japan, and the U.S. in the late 1800s and early 1900s, and a “longitudinal” analysis of the evolution of German training institutions through the twentieth century. The cross-national comparisons are presented in chapters two (Germany), three (Britain), and four (Japan and the U.S.). Each of these case studies is densely detailed and clearly written. After immersing us in this detailed discussion, though, Thelen reliably pulls our attention back to the larger issues of institutional evolution and the operation of labor markets.

In the German case, the Handicraft Protection Law of 1897 created a system of compulsory artisanal “chambers,” which regulated apprenticeship and skill certification. This law largely removed these issues from the realm of negotiation between firms and workers and was in fact, according to Thelen, intended to thwart the development of unionism around these issues. The law also made participation in apprenticeship appealing to workers by giving them confidence that they would receive useful training that they could demonstrate to potential employers. These chambers were limited to traditional craft skills, though, and the developing industrial sector struggled to create an analogous system of training and certification.

None of the other three countries examined developed such a formal system of human capital investment. In the British case, firms would take on apprentices without much commitment to train them in any particular skills. This led to young workers forgoing apprenticeship for initially better-paying unskilled jobs. In Japan, skilled masters (oyakata) controlled training. They and their apprentices were highly mobile across firms, and employers sought to develop new institutions that would rein in this mobility. Their strategies included internal job ladders, seniority-based promotion, and company unions. U.S. labor markets were always characterized by relatively weak craft traditions. In addition, employers’ imperatives for mechanization and control of the shop floor were greater in the U.S. due to the scale of the market, leading to the “deskilling” of production and reliance on internal labor market policies to develop worker loyalty and reduce turnover.

Thelen’s discussion of these four cases is quite informative and forces us to think more rigorously about how textbook models of human capital investment play out in the world. One thing lacking in her presentation, though, is evidence on the relative performance of the industries she examines. Did Germany’s more formal system of skill certification give it a productivity advantage over other nations, or were these simply alternative methods of organizing work and training, without a clear ranking in terms of performance? In the preface and introduction, Thelen motivates her investigation by noting the persistence of a spectrum of types of economic institutions, from “coordinated” to “liberal market,” even in the context of highly mobile capital. This seems to suggest that we should understand these various forms of skill development as alternatives that are qualitatively similar in terms of their performance. However, in the body of the book, the failure of Britain, Japan, and the U.S. to develop formal skill certification mechanisms as Germany did seems to be treated as just that, a “failure.” Some discussion of economic performance would clarify these conflicting impressions.

These cross-national comparisons, then, give us a sense of the variety of possible training frameworks and the relationship of these frameworks to the political and economic history of each country. The longitudinal examination of the German case (in chapter 5) develops more fully the theme of institutional evolution. Thelen describes how the Nazi era increased the government’s role in skill standardization and certification and extended these practices beyond the traditional crafts. This standardization was important for the flexible allocation of labor during wartime, and the formality of these labor market institutions was useful for incorporating political indoctrination and monitoring into training mechanisms. After the war, the occupying forces saw apprenticeship and training as important tools for keeping young people economically engaged and hopeful, though the Allies also wanted to decentralize power and so promoted the return of the control of training to private organizations.

Thelen’s primary point here is that the tremendous crises of the Nazi era, the war, and postwar reconstruction left the basic mechanisms of skill training in place. Though we might typically expect such events to cause discontinuous change in economic institutions, Thelen argues that people might actually prefer to maintain existing institutional forms in times of crisis as a means of promoting security and order. This is not to say that Germany’s training institutions were rigid and inflexible. Rather, the important changes that did occur were incremental.

This issue of the cumulation of incremental change, though, could use some additional development. Thelen repeatedly emphasizes that the German training system came to be associated with the goals of organized labor even though it was created for the purpose of circumscribing the influence of unions. However, those of us who are not familiar with the German case are left with only a vague sense of this transition.

Thelen’s concluding chapter is not merely a recapitulation of her findings but rather provides important new insights on her topics, especially the broader issues of institutional evolution. She examines how the various institutions in an economy, all shaped by different political and historical contingencies, might come to be complementary over time. She also contrasts evolution in the political context with evolution in the market context. In markets, “losers” will ultimately exit, and positive feedback effects will be preeminent; in politics, individuals who “lose” in the formation of institutions may stick around to help reshape those institutions later on, so positive feedback effects are less dominant.

While all of this work is of very high quality, the theoretical discussion in chapters one and six and the long-term examination of Germany are the most engaging and informative. Though Thelen is not herself an economist, she cites economic historians and labor economists thoroughly and presents penetrating insights on their work. Researchers focused on specific issues of human capital investment, as well as those interested in very large questions about the nature of institutions, will find this book to be a provocative read.

Thomas N. Maloney is Associate Professor and Director of Undergraduate Studies, Department of Economics, University of Utah. His most recent publication is “Ghettos and Jobs in History: Neighborhood Effects on African-American Occupational Status and Mobility in World War I-Era Cincinnati,” Social Science History 29:2 (Summer 2005).

Subject(s):Markets and Institutions
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Other People’s Money: Debt Denomination and Financial Instability in Emerging Market Economies

Author(s):Eichengreen, Barry
Hausmann, Ricardo
Reviewer(s):Voth, Hans-Joachim

Published by EH.NET (November 2005)


Barry Eichengreen and Ricardo Hausmann, editors, Other People’s Money: Debt Denomination and Financial Instability in Emerging Market Economies. Chicago: University of Chicago Press, 2005. vii + 296 pp. $55 (cloth), ISBN: 0-226-19455-8.

Reviewed for EH.NET by Hans-Joachim Voth, Department of Economics, Universitat Pompeu Fabra, Barcelona.

In 1998, South Korea was in trouble. As the Asian financial crisis unfolded, its real GDP declined by five percent. At the same time, the won depreciated rapidly, and dollar-denominated GDP fell an astonishing 41 percent. Many South Korean firms that had borrowed in dollars before the peg was abandoned were now effectively bankrupt, the cost of servicing their debts almost doubled as a result of devaluation. Governments also tend to get into similar trouble. As the nation’s balance sheet collapses under the mounting burden of debt, the slump gets ever deeper. The situation in South Korea was not unusual — Indonesia saw a decline by 60 percent in dollar-denominated GDP, and Suriname holds the record in recent history for extreme movements, with a decline of 94 percent (in 1995).

There is little doubt that currency mismatches are an important contributing factor to instability in the third world. Countries often find it difficult to borrow abroad in their own currency. This exposes them to severe balance-sheet problems in case of devaluation. The debt burden can go from reasonable to crushing almost overnight if the devaluation is large enough, leaving the government and indebted firms bankrupt. As a result, sudden meltdowns — such as the Asian financial crisis — can turn flourishing countries into basket cases overnight. It is not quite clear if the crisis problem has grown more severe over the past hundred years, but financial crises occur with frightening frequency. They also pack a punch. They cost approximately nine percent of GDP, and the probability of any one country being hit in a given year is about eight percent. This suggests that financial crises — many of them involving foreign-currency denominated debt — cost emerging countries about one percent of average annual GDP growth.

If dollar-denominated debt is so dangerous, why don’t emerging countries issue in their own currency? Of the $5.8 trillion in debt floated on international markets in 1999-2001, fully $5.6 trillion were denominated in dollars, euros, yen, Swiss francs, and pounds. There are two schools of thought why this might be the case. Emerging markets may not be able to borrow in their own currency because their monetary institutions are poor, and fears of investors linger. This is what happened to Germany in the interwar period. After the hyperinflation, it could not float loans denominated in Reichsmarks. Only repayment in hard currencies like the dollar would then convince investors to part with their cash.

The alternative interpretation argues that the cards are somehow stacked against emerging markets — even with sound institutions, international investors discriminate against bonds denominated in the currency of third world borrowers to the point that they can’t be issued at all. This is what “original sin” is all about. Without ever having reached for forbidden fruits themselves, third world governments have been evicted from the financial Garden of Eden — borrowing in one’s own currency. In other words, the structure of the international financial system is to blame for the excessive volatility and wrenching crises that hit the third world every so often.

Barry Eichengreen and Ricardo Hausmann, who introduced the concept of “original sin,” have assembled an all-star line-up to investigate how far this story can be pushed. Economic historians, theorists, and specialists in contemporary macro/international economics are part of the team. In their introduction, Eichengreen and Hausmann show just how volatile exchange rates in emerging markets are — dollar-denominated GDP growth is twice as unstable as that of real GDP. This implies that the ability to repay debt is largely determined by exchange rate movements. As a result, the ability of governments to pursue counter-cyclical policies is severely constrained — fiscal expansion, for example, may be pointless if a declining exchange rate pushes debt servicing costs (in domestic currency) up and many firms to the wall.

Cespedes, Chang and Velasco present an elegant model that captures the consequences of original sin. This is surprisingly hard — the declining exchange rate should offset (through expenditure switching etc.) some of the negative consequences that come from the balance-sheet effect. With sufficient financial frictions, the key features of “original sin” crises can be replicated. At the same time, their model suggests that the total level of debt (domestic-currency and foreign-denominated), openness and the elasticity of output with respect to the exchange rate all matter in addition. In other words, countries with reasonable debt levels, a high degree of integration into the world economy, specializing in price-sensitive products will be able to reduce the effects of original sin.

Important evidence on the determinants of original sin comes from the nineteenth century. Marc Flandreau and Nathan Sussman show that countries with stable institutions and a high degree of fiscal rectitude (such as the Scandinavian countries) issued debt in sterling, while unstable countries with underdeveloped institutions such as Russia and Austria-Hungary succeeded in floating debt denominated in their own currency. They argue convincingly that the key factor for the ability to issue in their own currencies must have been the liquidity of the foreign exchange markets — countries whose currencies were quoted around the globe found enough takers of their bonds, too. This is powerful reinforcement of the transactions-cost interpretation of the “original sin.”

Michael Bordo, Chris Meissner and Angela Redish examine issuance by British dominions and the U.S. These countries all issued long-term debt in their own currency domestically, and they did not experience financial crises caused by balance sheet effects. The U.S. issued its foreign debt in dollars, but used a foreign exchange clause to reassure foreign bond holders. Issuance by the dominions in their own currency only started during WWI. Bordo, Meissner and Redish conclude that original sin “didn’t really matter.” While their title suggests that the U.S. and the dominions overcame original sin, their evidence seems to suggest that these countries never suffered much from it in the first place.

Olivier Jeanne examines why countries fail to borrow in their own currency. His paper is less supportive of original sin as an unfair mistake in the workings of the international financial system. Instead, he shows how debt denomination can be rationalized by lack of monetary credibility. His empirical work offers some support for this — the domestic issuance in countries like Brazil is largely in dollars, by both the government and the private sector. Redesigning the “international financial architecture” cannot resolve this issue directly.

Eichengreen, Hausmann and Panizza work hard to show that the standard explanations for original sin — weak domestic institutions, lack of credibility of the monetary authorities, etc. — do not hold water. They also highlight the interesting fact that in a number of exotic currencies such as the South African Rand and Czech Kronor, there is an active bond market. In all of these, much of the issuance is not by domestic institutions but by foreigners. For example, the Inter-American Development Bank has issued debt in Greek drachmas, New Zealand dollars, and the like. The authors argue that issuance by foreigners avoids the bundling of risks that comes from sovereign borrowers — when a government issues in its own currency, the risks of devaluation and default will be highly correlated. If this is the real lesson to be learnt from these cases, then the role of international financial architecture may be smaller than the editors think. They emphasize that diminishing returns to diversification — adding one more currency to a portfolio — plus transactions costs stop the developing world from issuing. Yet active bond market issuance in Czech Kronors, Singapore dollars and Taiwanese dollars by foreign entities suggests that the diversification benefits exist, or that the hedging needs of domestic entities make it possible to swap the currencies back into dollars at good rates. Since foreigners can clearly live with the currency risk, getting the default risk down to acceptable levels (and reducing the likely correlation between the two) by reforming institutions etc. should produce benefits that may be larger than the authors allow.

The authors demonstrate that indicators of institutional quality are not good predictors of “original sin” — coefficients are never robust and rarely significant. Yet this can only tell us so much. Measuring institutions is no small matter, with recent research demonstrating that most variables used so far exhibit deeply troubling short-run instability[ ]. At this stage, this reviewer remains agnostic about the extent to which the non-result for institutional variables demonstrates that the international financial system is at fault. Problems of measuring institutions remain formidable, and the authors do not demonstrate which features of the international capital market are at fault. Instead, they arrive at the conclusion by process of elimination of plausible alternatives. None of this detracts from the quality of the analysis presented in this book. It does much to further our understanding of an important feature of international capital markets, and it raises crucial policy issues. Some fifteen years ago, Robert Lucas asked why capital wasn’t flowing to the third world in huge quantities, given the capital scarcity and abundant labor supply. Today, capital flows are still a long way from equalizing returns, but their total volume is impressive compared to 1990. For international capital mobility to fulfill its promise, the “original sin” problem needs to be solved. Not content with highlighting the problem and analyzing its origins, Eichengreen and Hausmann present a detailed proposal, based on issuance by international financial institutions. Not everyone will agree that their suggestion is the best way forward, but no serious discussion about financial globalization’s discontents can avoid the issues raised in this book.


1. E. Glaeser, R. La Porta, F. Lopez-de-Silanes and A. Shleifer (2004) “Do Institutions Cause Growth?” Journal of Economic Growth, 9: 271-303.

Hans-Joachim Voth is ICREA Research Professor at the Economics Department, UPF, Barcelona, and a Research Fellow in the International Macro Program at the CEPR (London). He is currently working on the history of equity markets and the evolution of financial institutions in eighteenth century England. Recent publications include “Riding the South Sea bubble” [with Peter Temin], American Economic Review 2004, “Credit Rationing and Crowding Out during the Industrial Revolution: Evidence from Hoare’s Bank, 1702-1862” [with Peter Temin], Explorations in Economic History 2005, and “With a Bang, Not a Whimper: Pricking Germany’s “Stockmarket Bubble” in 1927 and the Slide into Depression,” Journal of Economic History 2003.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Deflation: Current and Historical Perspectives

Author(s):Burdekin, Richard C.K.
Siklos, Pierre L.
Reviewer(s):Mitchener, Kris James

Published by EH.NET (November 2005)


Richard C.K. Burdekin and Pierre L. Siklos, editors, Deflation: Current and Historical Perspectives. Cambridge: Cambridge University Press, 2004. xxii + 359 pp. $75 (cloth), ISBN: 0-521-83799-5.

Reviewed for EH.NET by Kris James Mitchener, Department of Economics, Santa Clara University,

With oil prices accelerating rapidly over the past year, housing prices “frothing” in coastal areas, and the Federal Reserve raising the federal funds rate twelve times since the end of the most recent recession, the timing of a new book addressing the topic of deflation seems somewhat inopportune. Nevertheless, it is worth remembering that, as little as two years ago, American policy makers were seriously pondering the possibility of deflation. Improvements in labor productivity and the expanding use of global supply chains to manage input costs were holding the lid on the overall price level, and short-term interest rates were approaching the zero bound in the wake of the 2001 recession and the collapse in spending on information technologies. Such circumstances warranted the consideration of the small-probability event of sustained deflation, given Alan Greenspan’s risk-management approach to central banking. Deflation and related issues such as asset price booms and busts, liquidity traps, and the operation of monetary policy in extremely low interest-rate environments consequently received renewed attention from domestic policymakers and economists. Moreover, policy debates over the effects of deflation and the appropriate response to it had been taking place for some time in other parts of the world. In particular, Japan was bearing witness to the first recorded deflation in an industrialized country since the Great Depression. These issues and policy debates form the backdrop for the edited volume by Richard Burdekin and Pierre Siklos, which offers a critical evaluation of historical episodes of deflation and some long-run perspective on more recent events.

The edited conference volume consists of twelve chapters that examine deflation by drawing on theory, history, and empirical evidence. The book features interesting contributions by many eminent financial and economic historians. This alone would make it appealing to specialists working in macroeconomic history, but it ought to attract a broader readership, including macroeconomists, central bankers, and policymakers, since the editors were careful to include papers that employ more recent data and theory. Indeed, one of the strengths of the volume is that the contributors employ a variety of methodological perspectives to analyze monetary phenomena and compare present issues with past episodes of deflation.

After an introductory chapter that provides a useful summary by the editors, the book is divided into four sections. The first part of the book, entitled “Fears of Deflation and the Role of Monetary Policy,” begins with an essay by Hugh Rockoff. He suggests that the U.S. bank failures of the 1930s exhibit characteristics that are similar to twin crises (banking and exchange rate crises) that have occurred more recently in national economies. Rural regions in the U.S. experienced “capital flight” because depositors feared that declining export prices and demand would undermine the ability of borrowers to repay; this eventually prompted runs on some banks and led authorities to impose restrictions on withdrawals (bank holidays). Rockoff contributes to the growing literature on regional differences in bank performance during the Great Depression by focusing on “silent runs” — the withdrawal of deposits from rural areas and their movement to Eastern financial centers — a process that was driven in part by declining prices and deflation. The interregional evidence is consistent with his argument, although individual bank data showing that losses of deposits had important consequences for the survival of banks would further strengthen his argument.

In the second chapter of this section, Forrest Capie and Geoffrey Wood take a longer-run perspective and examine whether debt-deflation had damaging effects on the British economy between 1870 and the 1930s. J.M. Keynes’ views on debt deflation suggested that expected real rates are important for generating real effects, whereas Fisher emphasized that rising realized rates produced dilatory effects on existing debtors. The authors use simple time-series analysis to produce price-expectation series and then construct real interest rates that take into account either expected inflation or actual inflation, according to the respective ideas of Keynes and Fisher. They use these series as well as bond spreads to assess the effects of debt deflation, and find little statistical evidence that debt-deflation in Britain created adverse effects for the real economy (or for financial stability). The authors rightly point out, however, that Britain’s experience with deflation was much milder than that which occurred in the U.S., so it is difficult to rule out the debt-deflation hypothesis in general.

Klas Fregert and Lars Jonung close out the first section of the book by examining two cases of interwar deflation in Sweden, 1921-23 and 1931-33. They use the relatively short interval of time between these two episodes to assess how policymaking and macroeconomic outcomes in the first episode were influenced by the inflationary period of World War I, and how this deflationary episode (and the persistent and high unemployment that emerged in the 1920s) in turn influenced beliefs and behavior ten years later. Fregert and Jonung employ qualitative evidence to argue that the large deflation in the early 1920s greatly influenced the thinking of economists, policymakers, and wage setters in the latter episode. Heterogeneous expectations across these groups limited the deflation of 1931-33 as wage contracts were shortened and, in some cases, abandoned.

The second section of the book, entitled “Deflation and Asset Prices,” provides new contributions to the growing literature examining the relationship between monetary policy and asset prices. The first, by Michael Bordo and Olivier Jeanne, develops a model to assess whether monetary policymakers should respond to an asset price “boom” — a term which, according to the authors, differs from a “bubble” in that it is not necessary for policymakers to determine if asset prices reflect fundamentals in order to act. If monetary policies decide not to lean against the wind, they run the risk of a boom being followed by a bust, and a collateral-induced credit crunch dampening the real economy. On the other hand, pursuing restrictive monetary policy implies immediate costs in terms of lower output and inflation. Although the model is very stylized, they find that a proactive monetary policy is optimal when the risk of a bust is large and the monetary authorities can let the air out at a low cost; moreover, they argue that such a policy rule will not look like a Taylor rule in that it will depend on the risks in the balance sheets of the private sector. They then present some preliminary empirical evidence that the boom-bust cycles of their model appear to be much more frequent in real property prices than in stock prices and more common in small countries than in large. (The obvious exceptions to this are Japan’s experience in the 1990s and the U.S. during the Great Depression.) Moreover, they suggest that such busts can create banking crises and lead to severe reductions in output.

The second chapter in this section also examines boom-bust cycles in credit markets, but focuses on the linkages between bank lending and asset prices. Using vector autoregressions, Charles Goodhart and Boris Hofmann argue that movements in property prices during the period 1985-2001 had significant effects on bank lending in a sample of twelve developed countries. Their impulse response functions, however, show that bank lending appears to be insensitive to changes in interest rates. On the other hand, asset prices seem to respond negatively to interest-rate movements. The authors provocatively conclude that there is limited scope for effectively using monetary policy as an instrument to provide financial stability in periods when there are asset-price swings, in part because the effects of interest rates on asset prices and bank lending are highly nonlinear. One challenge to their interpretation of the evidence is that monetary policy is treated in isolation from changes in bank regulation that also took place during this period. Regulatory changes likely also influenced bank lending decisions. One prominent example of this was the adoption of BIS capital-asset requirements in 1988 by Japanese banks, which strengthened the relationship between bank lending and equity prices. Banks could count 45 percent of latent capital as part of tier-II capital requirements; this ensured that increases in equity prices increased bank capital, which in turn, encouraged banks to lend more on real estate and supported rising asset prices.

The third part of the book provides additional case studies of deflation. Michael Bordo and Angela Redish point out that “good” deflations are often defined as periods when prices are falling as a result of positive supply shocks (like technological progress); hence, aggregate supply outpaces aggregate demand. “Bad deflations” are periods when prices fall because aggregate demand increases faster than aggregate supply; this can occur when there are money demand shocks. They suggest, however, that this simple classification can be difficult to square with empirical evidence. Examining the United States and Canada during the classical gold standard period, they find some evidence that both negative demand shocks and positive supply shocks drove prices downward between 1870 and 1896. Output growth was more rapid during the inflationary period of 1896-1913 than the preceding period of deflation, but their time series evidence suggests that there was no causal relationship: price changes were not driving the determination of output.

Michele Fratianni and Franco Spinelli look at Italian deflation and exchange-rate policy during the interwar period, and Michael Hutchinson analyzes Japan in the 1990s. These two chapters make use of a comparative historical approach. Fratianni and Spinelli compare and contrast the Italian deflation of 1927-33 with the disinflation that took place during the adoption of the EMS (1987-92) to argue that fixed exchange rates became unsustainable as economic fundamentals deteriorated. In particular, the interwar gold-exchange standard imparted a deflationary bias, which eventually led authorities to abandon the fixed exchange rate regime in order to pursue lender of last resort activities (thereby assisting failing banks and preventing banking panics) and stabilize the money supply. Hutchinson provides a nice overview of the most important recent episode of deflation, Japan, and shows how injections of liquidity by the central bank (which eventually reduced nominal rates to zero) have not been very effective at improving the growth in broad money aggregates (at least until the last few years). He examines both the liquidity trap and “credit crunch” views of the Heisei Malaise, and argues that, in spite of some policy mistakes that prolonged the deflation and made it more costly, Japan’s deflationary experience has been nowhere near as disastrous as the experience of the U.S. in the 1930s. However, Hutchinson suggests that Japanese policymakers could have made their commitment to zero-interest-rate policy more effective by also adopting an explicit inflation target.

The last section provides three studies that explore the behavior of asset prices during deflations. Lance Davis, Larry Neal, and Eugene White examine how the 1890s deflation affected the core financial markets of the time. Largely narrative in its treatment, this chapter examines how the corresponding financial crisis of that decade prompted different degrees of institutional redesign and regulation in the financial markets of Paris, Berlin, New York, and London. In the next chapter, Martin Bohl and Pierre Siklos study the behavior of German equity prices during the 1910s and 1920s. They argue that this period of German history is particularly useful for analyzing the long-run validity of the present value model of asset price determination because the model can be studied for periods of deflation and hyperinflation. Their empirical results suggest that, while the theory holds for the long run, German share prices exhibited large and persistent deviations in the short run, perhaps the result of noise trading or bubbles. The final chapter by Richard Burdekin and Marc Weidenmier suggests that gold stocks might be a useful hedge against asset price deflation. They find evidence of excess returns on gold stocks after the 1929 and 2000 equity-market declines, but scant evidence of excess returns after the 1987 crash, and interpret these results as indicating that gold stocks only serve a useful hedge if asset price reversals are prolonged.

Even though deflation has lost some of its immediate relevance to policymakers, there is much to be commended in the editors’ efforts to design a book that demonstrates the importance of developing a greater empirical and theoretical understanding of deflation. Although one can always quibble with the compromises that occur when assembling such a volume (for example, in this book, despite the fact that many of the chapters discuss the interwar period, there is no single chapter that attempts to examine deflation using a true panel-data approach), this book’s chapters certainly have enough thematic overlap that the sum of the articles still ends up being of greater value than the individual parts — something that is often difficult to achieve in conference volumes. In this respect, it is a welcome addition to the literature for those interested in monetary economics or those wanting an enhanced historical perspective on recent policy debates.

Kris James Mitchener is assistant professor of economics and Dean Witter Foundation Fellow in the Leavey School of Business, Santa Clara University, as well as a Faculty Research Fellow with the National Bureau of Economic Research. He is currently researching sovereign debt crises during the classical gold standard period and the effects of supervision and regulation on financial stability and growth. Recent publications include “Bank Supervision, Regulation, and Financial Instability during the Great Depression,” Journal of Economic History (March 2005) and “Empire, Public Goods, and the Roosevelt Corollary” (with Marc Weidenmier), Journal of Economic History (September 2005).


Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Exceptionalism and Industrialisation: Britain and Its European Rivals, 1688-1815

Author(s):De la Escosura, Leandro Prados
Reviewer(s):Clark, Gregory

Published by EH.NET (October 2005)


Leandro Prados de la Escosura, editor, Exceptionalism and Industrialisation: Britain and Its European Rivals, 1688-1815. Cambridge: Cambridge University Press, 2004. xv + 335 pp., $90 (hardcover), ISBN: 0-521-79304-1.

Reviewed for EH.NET by Gregory Clark, Department of Economics, University of California, Davis and Fellow, Wissenschaftskolleg zu Berlin.

This book, edited by Leandro Prados of Carlos III, Madrid, is a Festschrift for the well-known English economic historian Patrick O’Brien, the papers for which originated in a conference held in his honor in Madrid in 2001. The contributors include Robert Allen, Daniel Baugh, Richard Bonney, Forrest Capie, Nick Crafts, Stanley Engerman, Javier Cuenca Esteban, Rainer Fremdling, Knick Harley, Christine MacLeod, Larry Neal, James Simpson, James Thompson, and Gianni Toniolo.

“When traveling should you eat the local specialties?” A widely circulated economic theorem in the U.S. asserts “No.” If the local specialty was any good, it would be available everywhere. (This perhaps explains why American economists have an international, and not just a national, reputation for dullness.) There is a lesser known corollary amongst academics which similarly answers “Should you read Festschrifts?” with “No, anything good in them is available elsewhere.” Given the incentives of academic life, contributors to Festschrifts have an unfortunate motive to deliver what is on the menu else where, or to offer from the larder something that for good reason has been long lying on the bottom shelf untouched.

It is thus a mark of the esteem with which Patrick O’Brien is held by his students and colleagues that this volume, though of variable quality, contains interesting pieces of original research that are unique to this outlet. The thirteen contributions each give at least lip service to detailing what allowed Britain to achieve the great lead in industrialization by 1815. But the diversity of answers reveals once again just how mysterious the Industrial Revolution is, and how little hope there seems at present of a convincing answer to the questions “Why Britain? Why 1770?” They are loosely organized into six sections labeled respectively: the origins of British primacy, agriculture and industrialization, technological change, institutions and growth, war and hegemony, and conclusions.

This reviewer found the pieces on agriculture and technology the most informative and thought provoking. Nick Crafts and Knick Harley, for example, employ their computable general equilibrium (CGE) model of the English Industrial Revolution to ask what explains England’s unusually low share of employment in agriculture by 1841? Was it population growth, agricultural productivity gains, or the peculiar institutional structures of English agriculture? Their conclusion vindicates a long held position of Patrick O’Brien and Caglar Kaydar in their 1978 book that England’s advantage lay more in very high labor productivity in agriculture in the nineteenth century than in high industrial labor productivity. Using the CGE model Crafts and Harley argue that had two thirds of English land remained farmed by peasant farmers, as they assume for 1770, then the share of labor in agriculture in 1841 would have been 47% instead of 22%. The reason this assumption has such a large effect on employment in agriculture is that it would imply that two thirds of all land rents in 1841 were allocated to subsidizing workers to stay in agriculture.

This conclusion seems, to say the least, a little suspect. Already by 1770 English farmland was mainly owned by large owners and rented out for cash rents at market rates to cultivators, who paid the rents to the landlords, not to surplus relatives with low value to their labor time on the farm. And there are strong indications that labor productivity in English agriculture was already high by 1770 by European standards before the Industrial Revolution was under way. But agree or disagree, anyone interested in these issues will want to read this piece.

James Simpson, in another piece that is original to this volume, also supports the O’Brien/Kaydar hypothesis through a consideration of the details of English agriculture versus that of its continental competitors. This piece again is a fresh perspective on these issues.

There are three essays on the role of technological change. The first of these, by Christine MacLeod, though just a survey of technological developments and their institutional structures in Britain and its competitors is well executed, and is an excellent introduction to the subject. The main conclusion is that, if anything, institutions in France provided more incentives for innovation than those in England in the eighteenth century. The other articles in this section by James Thompson and Rainer Fremdling, while not uninteresting, seemed to get lost in the details of the innovations discussed and forget the larger question “Why was Britain different?”

The sections on institutions and war were less rewarding. Another version of the “restaurant theorem” above is the following. “Can local institutions explain the success of particular economies? No, because if any local institution was particularly valuable it would have been copied everywhere.” The authors of these sections seem not to have taken on board this maxim, and attribute wonderful powers to the most mundane institutional differences.

Every institutional difference between England and less successful economies is taken as evidence of the true power and wonder of institutions. No matter how trivial these differences might appear, or how little theory there is in advance of what Industrial Revolution producing institutions look like, the writers have faith they matter. Money, banks, government bonds, taxes, naval organization – did any of these make the British Industrial Revolution? To a skeptic it all seems on a par with those fervent believers who see Weeping Madonnas in tree stumps. But with belief every institution becomes wondrous, and the power of institutions is manifest in every detail of ordinary life.

Gregory Clark is author of “Human Capital, Fertility, and the Industrial Revolution,” Journal of the European Economic Association 3 (2005), and “The Condition of the Working-Class in England, 1209-2004,” Journal of Political Economy (forthcoming, December, 2005).


Subject(s):Industry: Manufacturing and Construction
Geographic Area(s):Europe
Time Period(s):19th Century

Chairman of the Fed: William McChesney Martin Jr. and the Creation of the American Financial System

Author(s):Bremner, Robert P.
Reviewer(s):Toma, Mark

Published by EH.NET (October 2005)

Robert P. Bremner, Chairman of the Fed: William McChesney Martin Jr. and the Creation of the American Financial System. New Haven: Yale University Press, 2004. vi + 357 pp. $38 (cloth), ISBN: 0-300-10508-8.

Reviewed for EH.NET by Mark Toma, Department of Economics, University of Kentucky.

Robert Bremner’s Chairman of the Fed begs to be read at multi-levels. At surface level, Chairman is a standard biography of an important public figure, William McChesney Martin, whose life story has been relatively neglected. The story line, summarized on the jacket-flap, portrays Martin as a courageous bureaucrat, whose lifelong struggles converted the nineteenth-century boom-bust U.S. financial system into a twentieth-century efficiently run machine. Just below surface lurks a more nuanced biography, where Bremner reveals Martin as a sometimes-troubled figure, who at the end of a career as chairman of the Fed under five Presidents (1951-1970), judged his professional life a failure. Finally, the deepest reading of Bremner’s biography, at least from an economic historian’s perspective, is as a real world economic experiment that addresses the hypothesis that appointment of a “conservative” central banker helps offset the inflationary bias of discretionary monetary policy.

Although Chairman of the Fed covers Martin’s entire life, the book focuses on Martin’s professional career starting with his breakthrough as the first paid President of the New York Stock Exchange in 1938. For me, the book starts to shine and the multiple levels of interpretation come to center stage in chapter 5, “From Crisis to Crisis: The Truman Administration and the Fed.” In 1949, Martin joined the Truman administration as assistant secretary of Treasury for International Affairs. From that position, he served as a go-between for Treasury secretary John Snyder and Fed chairman Thomas McCabe in the famous March 1951 Accord, which ended the decade-old bond price support program. During these negotiations, Martin defended the status of the Fed as an independent agency, institutionally insulated from short-run money creation pressures. By the time Truman appointed him to chair the Fed in the aftermath of the Accord, Martin had established a reputation as one willing to compromise, but not to the point of forsaking the monetary policy goal of long run price stability.

Martin solidified this reputation as chairman of the Fed in the 1950s. By implementing the bills only policy calling for the Fed to conduct open market operations exclusively in short-term Treasury bills, he sought to preempt pressures to peg long-term interest rates. To be sure, by the end of the 1950s there were chinks in Martin’s anti-inflation armor — he abandoned the bills only policy (with some reluctance) and generally was more receptive to use monetary policy to “pick up” the economy in the short run (p. 142). But for the most part, his public persona as a conservative central banker remained intact.

Turning to the Kennedy and Johnson years, Martin faced challenges that ultimately defined his career. The Kennedy administration’s New Frontier economists (most notably Walter Heller and James Tobin, with Paul Samuelson behind the scenes) transformed the political landscape from one where government fine-tuning was anathema to a stable economy to one where fine-tuning corrected economic instability and monetary expansion was necessary for economic growth. Intellectually, the New Frontier was aware that there could be too much of a good thing — high inflation could lead to its own set of problems. Nevertheless, the New Frontier philosophy rationalized an inflationary bias in monetary policy.

Three chapter titles — “Gunfight in the New Frontier,” “Sowing the Wind,” and “Reaping the Whirlwind” — reveal much about not only the tenor of the times and Martin’s personal struggles, but foretell the outcome of a novel monetary experiment. “Does appointment of a conservative central banker in a New Frontier environment make a difference?” The experiment could play out in two ways: (1) Martin, as the conservative holdover from the Eisenhower years, could stake a claim to low inflation and stand ground or (2) Martin could succumb to administration money creation pressures by giving ground in piecemeal fashion.

Even though the reader knows the overall results of the experiment up-front, Bremner’s rendering of the details is sobering. While Martin puts up a good fight at first (“Gunfight in the New Frontier”), it is a losing fight. By the time Kennedy is assassinated and Johnson assumes the presidency, inflation is rearing. Bremner paints Martin during this period as a tragic figure who feels trapped by circumstances outside his control but who deep down knows that the finger of blame must point inward. The reader can feel the pain of the conservative central banker in Martin’s 1963 remarks to his Federal Open Market Committee: “For the first time in a long while, the committee might find itself faced with serious problems with prices and with an incipient expansion at an unsustainable rate” (p. 184).

The spending propensities of Lyndon Johnson would be the true test of the efficacy of central bank conservatism. In the early years of the new administration, Johnson’s fiscal strategy crystallized: Secretly understate the military expenditures associated with the Vietnam War and then pressure Martin to finance the excess with money creation. That Martin became aware of the strategy made little difference. Nominally, Martin’s quest for increases in the discount rate during this period signaled monetary tightness, but in reality increases simply matched the upward climb of market interest rates fueled by inflation expectations. All the while, the monetary base expanded rapidly, sowing the seeds of inflation (hence the chapter title, “Sowing the Winds”).

By late in Johnson’s administration, inflation had become a whirlwind (“Reaping the Whirlwind”) with Martin abashedly playing the reaper. Bremner ponders, “We are left to speculate as to why he did not move decisively against inflation when its effects were so plainly visible” (p. 255). Ultimately, Bremner answers with Martin’s own words in a statement to the Federal Open Market Committee: “‘The line between political and economic decisions has been almost obliterated.’ Politicians who once left economic issues to technicians were no longer willing to do so, and ‘that was causing a great deal of trouble on a world-wide basis'” (p. 250). Though only one data point, this economic experiment offers scant support for the hypothesis that the steely-will of a conservative central banker could trump a policy-induced inflation bias. Human psychology seems to be sufficiently malleable, that few real world central bankers are able to act as technical eunuchs, oblivious to the incentives and pressures presented by bureaucratic institutions in a discretionary environment.

Bremner’s biography is a sympathetic one. First and foremost, Bremner portrays Martin as a public servant whose heart was in the right place. But reading a little between the lines, Bremner also casts the New Frontier monetary policy in a sympathetic light. One can almost hear Bremner saying, “With a little luck, William Martin’s fortunes as a modern manager of the economy would have turned out better.” Here, Bremner’s faith in human reason as a method of controlling a macro-economy seems misplaced. I came away convinced that if the same scenario played out one hundred times, in ninety-something cases the beginnings of an inflation wind would have turned into a whirlwind. My skepticism here does not detract from Robert Bremner’s authoritative and fascinating account of William Martin’s years as chairman of the Fed.

Mark Toma is an Associate Professor of Economics at the University of Kentucky. His recent research is on “The Deflationary Bias of Government Central Banking under a Gold Standard.”

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