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

Monetary Policy and the Great Inflation in the United States: The Federal Reserve and the Failure of Macroeconomic Policy, 1965-79

Author(s):Mayer, Thomas
Reviewer(s):Perez, Stephen J.

Published by EH.NET (January 2000)

Thomas Mayer, Monetary Policy and the Great Inflation in the United States:


Federal Reserve and the Failure of Macroeconomic Policy,

1965-79. Cheltenham, UK and Northampton, MA: Edward Elgar Publishing,

1999. ix + 151 pp $70.00 (cloth), ISBN: 1-85898-953-1.

Reviewed for EH.NET by Stephen J. Perez, Department of Economics,

Washington State University.

Why did inflation rise to such frightening levels in the U.S. during the 1970s?

In his book, Monetary Policy and the Great Inflation, Thomas Mayer

analyzes and describes a vast amount of largely narrative evidence regarding

the formulation of monetary policy from 1965-1979. He uses a maintained

hypothesis that the Great Inflation was caused by monetary policy and takes as

his charge explaining the Federal Reserve’s willingness to accommodate the high


rates. According to Thomas Mayer,

“[t]here are several villains, and the biggest one turns out to be then

prevailing views of economists, and not malicious political interference with

the central bank, or cartel-imposed supply shocks. We have met the enemy and

he is (or rather was) us” (p. 117).

Professor Mayer uses sources ranging from the minutes of Federal Open Market

Committee (FOMC) meetings to economic textbooks of the time to interviews with

policy makers conducted in 1996 to try and sort through

several possible explanations for why the Federal Reserve pursued an

expansionary policy during the Great Inflation. The possible explanations

include: bad forecasting by the Federal Reserve, poor control over the money

supply, cognitive errors, political pressure, wage, price, dividend,

and interest rate controls (Nixon’s incomes policies), and poor economic


As a graduate student at UC Davis, I had the distinct pleasure of taking two

classes in monetary theory and policy from Professor Mayer. I

am heartened to know that he continues to attack problems with the methodical

and intellectual style with which he taught. Professor Mayer systematically

evaluates the possibility that each of the above reasons could have lead to the

Federal Reserve’s role in the Great Inflation. In each case, he makes great

use of the minutes and interviews he conducted detailing evidence both for and

against each explanation.

Is it possible that the Federal Reserve was simply misled by poor forecasts of

future economic performance? It is true that the Federal Reserve staff

systematically underestimated future inflation and overestimated potential

output. However, Professor Mayer attributes a maximum of 3 to 10% of the

inflation to these misestimates. Did poor control

over the money supply lead to excessive monetary growth? Although there may

have been an accommodative policy bias, poor control of the money supply should

have led to mistakes towards accommodative and restrictive policy.

Professor Mayer attributes a small possible role to cognitive errors such as

vagueness of policy, procrastination, a short run bias, the role of

expectations, etc. But, the most interesting analysis lies in chapters

regarding political

pressure, price controls, and the influence of economists.

Professor Mayer looks very carefully for evidence that the Federal Reserve

experienced pressure from the administration or Congress to follow an

accommodative policy. Other than a few instances, the following excerpt

summarizes the role of political influence: “The political pressures the Fed

actually experienced appear to have played only a relatively minor role in the

Great Inflation, so that direct cause of the Great Inflation was primarily the

Fed’s own inflationary proclivity. But if the Fed had been much less inclined

to tolerate inflation, political pressures might well have forced it to do so”

(p. 81).

The possibility of political pressure also plays a role in the discussion of

the role of how the Nixon wage and price controls affected

the formulation of monetary policy. Professor Mayer finds evidence that the

FOMC may have been influenced by the specter of interest rate controls if it

became too contractionary. The wage and price controls may have also lead the

FOMC to become more expansionary with the belief that the incomes policies

would hold down inflationary expectations.

Professor Mayer finds the main cause of the expansionary monetary policy to be

the correlation of the FOMC’s attitudes towards inflation with those of


economists. In particular, both the FOMC and academic economists felt that

monetary policy should play a reduced role in fighting cost-push inflation,

that the cost of fighting cost-push inflation was very high, and that the NAIRU

was relatively low and

both failed to fully realize the lack of a tradeoff between inflation and

unemployment in the long run. In summary, Professor Mayer states: “My own

ranking [of causes of the Great Inflation] is to put the intellectual

atmosphere in first place, and cognitive errors, political pressures and the

wish to avoid interest-rate fluctuations, in second, third and fourth place

respectively,  Well behind these come inadequate operating procedures, and

even further behind, the pressures exerted from the imposition

of wage and price controls” (p. 120).

Monetary Policy and the Great Inflation in the United States is a very

enlightening description of how monetary policy lead to the Great Inflation.

Professor Mayer displays his typically thorough analytical skills

and clear writing style while describing a wealth of source level evidence

regarding the thought process of monetary policy makers.

Stephen J. Perez is Assistant Professor of Economics at Washington State

University. He is author of numerous works including “Data Mining

Reconsidered: Encompassing and the General-to-Specific Approach to

Specification Search.” Econometrics Journal, Vol. 2, (with Kevin D.

Hoover); “Causal Ordering and the ‘Bank Lending Channel’.” Journal of

Applied Econometrics, (Nov.-

Dec. 1998); “Testing for Credit Rationing: An Application of Disequilibrium

Econometrics.” Journal of Macroeconomics,

(Fall 1998); “Post Hoc Ergo Propter Hoc Once More: An Evaluation of ‘Does

Monetary Policy Matter?’ in the Spirit of James Tobin.” Journal of Monetary

Economics, (August 1994) (with Kevin D. Hoover).

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

The Federal Landscape: An Economic History of the Twentieth Century West

Author(s):Nash, Gerald D.
Reviewer(s):Hill, Peter J.

Published by EH.NET (January 2000)

Gerald D. Nash, The Federal Landscape: An Economic History of the Twentieth

Century West. Tucson, AZ: University of Arizona Press, 1999. xvi

+ 214 pp. $40 (cloth), ISBN: 0-8165-1863-7; $17.95 (paper), ISBN:


Reviewed for EH.NET by P. J. Hill, Department of Economics, Wheaton


Gerald D. Nash, Professor of History at the University of New Mexico, has

written a survey of the influence of the federal government on the economic

growth of the American West. Nash hypothesizes that the federal government was


dominant force that shaped the western economy throughout the twentieth

century and his monograph details that role. The author also fits the region’s

economic history into a larger framework of Kondratieff cycles, arguing that

these cycles explain the successive waves of growth in the western United


Nash provides a useful compendium of the different ways that the national

government influenced the West. He discusses transportation, moving through

railroads, West Coast harbors and rivers, and en ding with automobiles. The

national government also had a substantial impact on agriculture through the

Reclamation Act of 1902 and the Taylor Grazing Act of 1934. The fact that it

retained ownership of much of the land also affected how agriculture was

organized and the path that agricultural production took.

During World War II, considerable industrial production moved to the West Coast

and after the war urbanization was sped up by housing subsidies and government

investment in city infrastructure. Finally, the increased demand for

recreation and other environmental amenities starting in the 1970s had a

substantial impact upon the western economy.

If one wants a cataloguing of the federal government involvement in the West,

Nash’s book may be an appropriate place to start. However, it is not

particularly useful beyond its descriptive details and even there it is not an

especially strong source. Nash does not have a felicitous writing style and the

overall tone is one of simplistic triumphalism. An appropriate subtitle might

be “How the Federal Government Won the West.” Also, the book is flawed in

several important ways. The use of Kondratieff cycles as the major form of

analysis is not particularly helpful. The author presents no evidence that such

cycles really do exist or that they have any substantial influence upon the

western economy. They are primarily used as a descriptive tool to explain

whatever events Nash wants to describe. It is unfortunate that, in his attempts

to provide a theoretical structure for his work, he drew upon a concept that

plays an insignificant role in most American economic history accounts of the


Second, Nash does not understand comparative advantage and the fact that

through much of its early history it was appropriate for the West to be a

resource intensive economy. He makes repeated references to the colonial status

of the West and finds the move to industrial production advantageous in that it

removed the West’s dependency upon the rest of the economy.

Certainly the scope of the economy widened during the twentieth century,

but it is not accurate to view this as the federal government rescuing the

region from its colonial status.

Finally, Nash assumes that the West was a capital scarce area and that the

investment by the national government was an appropriate response to capital

shortages. He presents no theories as to why private capital was inadequate or

why capital markets were not functioning well in the region.

The federal government is seen primarily as

an agent of positive change in capital markets and little attention is given

to special interests or rent seeking.

The book, while presenting some interesting details about the role of the

federal government in the region, is probably not of great interest to

economic historians. At the most, it can serve as a marginally useful reference

for someone looking for a catalog of federal government projects and influences

in the region.

Peter J. Hill is George F. Bennett Professor of Economics at Wheaton College

and Senior Associate at the Political Economy Research Center. His research

focuses on the evolution of property rights in the American West.

He has published articles in the Southern Economic Journal, the

Journal of Law and Economics, Economic

Inquiry, the Independent Review and other journals. Among his books

is Growth and Welfare in the American Past with Terry Anderson and

Douglass North.

Subject(s):Economic Planning and Policy
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The Economy and Material Culture of Russia, 1600-1725

Author(s):Hellie, Richard
Reviewer(s):Hughes, Lindsey

Published by EH.NET (January 2000)

Richard Hellie, The Economy and Material Culture of Russia, 1600-1725.

Chicago and London: University of Chicago Press, 1999. xi + 672 + pp. $42

(cloth), ISBN 0 226 32649 7

Reviewed for EH.NET by Lindsey Hughes, School of Slavonic and East European

Studies, University College, London.

Professor Richard Hellie of the University of Chicago is a major authority in

the field of early modern Russia history and a new book by him is bound to be

greeted with eager anticipation. The Economy and Material Culture of

Russia does not disappoint, although, like all Professor Hellie’s writings,

it challenges and occasionally provokes. The purpose of the study is

“to tell the reader what material commodities existed in Russia between 1600

and 1725 and how much they cost” (p. ix), an “elementary” exercise which turns

out to be both extraordinarily illuminating and occasionally frustrating. It

does this through an analysis of more than 107,000 records drawn from some 350

volumes of published documents, representing

“transactions”-purchases, sales, donations, bequests, confiscations, fees,

taxes, dues and so on-involving some 33,300 individuals and institutions. A

historical introduction is followed by twenty-two thematic chapters, each

covering a “sector” of the economy. I list them all in order to do justice to

the vast scope of the project: agricultural produce; domestic animals and

fowl; wild animals and furs; fish and sea produce; processed and imported food,

beverages and tobacco; forest products; construction materials; metals,

minerals, chemicals, gunpowder and currencies; paints,

in k, dyes and oils; gems, perfumes, spices, drugs and jewelry; manufactured

goods : (i) metal and glass, (ii) wood, and (iii) books, candles, paper,

rope, rugs, tapestries and tents; hides, leather, horn, feathers, bristles;

textiles; notions and linen; clothing and accessories; real estate; wages;

vehicles and transportation costs; services and income transfers; taxes,

fees, fines. Each chapter includes itemized charts (listing the number of

mentions, inclusive dates, minimum, median and maximum prices) and graphs

indicating price swings over decades or sometimes over the course of one year

(e.g. hay, figure 2.12, horses, figure 3.2). There are also case studies of two

rich men-M. I. Tatishchev (document from 1608) and Prince V.

V. Golitsyn (1689-90).

Although market behavior and price fluctuations in early modern Russia are not

without interest to the present reviewer, I approached this book mainly as a

cultural historian. On this level it yields insights too numerous to list: on

fees for weddings, payments for dishonor, taxes on caviar, wages for

gardeners; the role of candles in the Russian climate; reading habits

(books range in price from 1 kopeck to 100 rubles, with prices falling over the

period); nails (twenty-eight different kinds, priced in different units, some

in containers of unknown size). Beef was the most popular meat,

but fat was especially prized in the Russian diet (p. 98, with a slight detour

into the Moscow University cafeteria in the 1960s). Death “offered myriad fee


funeral payments to all officiating clergy,

burial prayers, commemorative services. The information on the possessions of

Prince Vasilii Golitsyn (ca. 1643-1714) is drawn from a remarkably complete

data set occasioned by the valuation of his property following his exile in

1689. Professor Hellie provides separate tables for different categories. Here

as elsewhere, certain cultural conclusions require further thought. Did

Golitsyn’s eighty-one mirrors express his desire to “look at himself as an


individual” (as suggested by Professor Hellie, p.

592) or were they in fact fashion accessories intended to make rooms look

bigger and their owner seem richer, often set too high on the walls actually to

look into? We learn that “Golitsyn was probably [

my italics]

some form of Orthodox believer” (p. 594), whereas the icons and religious books

found in his houses mark him out as much a believer as any of his

contemporaries. What we can be sure of is that, by Russian standards,

Golitsyn was very rich indeed, although he was probably only modestly wealthy

in comparison with a top French aristocrat, say. By comparison, the earlier

rich man studied, Tatishchev, was “not far from a peasant” (p.

602), while Golitsyn spent more on one set of curtains (400 rubles) than the

anonymous peasant could accumulate in a lifetime. (The composite picture of the

Russian peasant (ninety percent or more of the population)

as “an unwashed right-brained pre-literate eking out a drab existence in a log

hut” (p. 644) may offend


On a broader plane, this study throws light on the role of the state, one of

those “eternal questions” of Russian history. State intervention was large in

the factor market but small in the domestic product economy. The state did not

fix prices,

for example, except for slaves (3 rubles apiece from the 1630s). It helped to

lower costs by imposing standard measures and running the excellent state post

road system, and was also an innovator in technology transfer, but (in Hellie’s

view) it tended to stifle or crush initiative from below and did not promote

contracts (“never part of the Russian consciousness” (p. 642)).


data yields on Russia pre-1700 are very impressive. We can now calculate,

for example, that a Muscovite laborer with his 3 kopecks per day

(p. 419) could buy 10 inches of the cheapest woolen cloth , 3/50ths of a pig,

15 bricks and so on (p. 632). But given that the major source used for Peter

I’s reign was the incomplete Letters and Papers (Pis’ma i bumagi)

of Peter the Great

(so far published only to 1713) and that a paltry 432 of the records analyzed

were generated in St Petersburg (c.f. 37,584 in Moscow), I would urge caution

when it comes to drawing conclusions about cultural developments in the period

1700-25. Hellie notes that very few

new [my italics] items appear in his data set after 1700 and that “the

influence of the Petrine era on the material culture of Russia was trivial”

(p. 642), with borrowed vocabulary items mainly limited to naval and military

objects. But inclusion of just a few more Petrine documents could produce a

rather different picture. A part of my own research recently has concerned

Peter’s dress reforms and their impact on elite women. (As is well known, Peter

forced urban dwellers to adopt Western fashions by decree.) Hellie’s chapter

“Clothing and Accessories” provides a wealth of information on Muscovite

clothing (which represented a substantial investment in elite households) and

also points to the strong influence of Turkish/Tatar vocabulary: the extent to

which pre-Petrine Russians dressed more like “infidel” Turks and Tatars than

Christian Europeans is truly remarkable and under researched. But the data sets

fail to chart the appearance of Western vocabulary items, including only



and “shliapia” (the latter both pre-Petrine borrowings anyway). Delo o

pozhitkakh gosudaryni Natalii Alekseevny [1716] (Moscow, 1914) or

Doklady i prigovory sostoiavshiesia v pravitel’stvuiushchem Senate v

tsarstvovanie Petra Velikogo (6 vols , St Petersburg, 1880-1901) would

have yielded “shlaforok” (from German: informal unboned day dresses );

“bostrog” (from Dutch, short jacket); “fantanzh” (from French, “fontange,”

headdress with

ribbons and lace); “korsetki” (boned bodices) and much else

besides. These and other borrowed terms would not have showed up in Professor

Hellie’s data sets because they were not priced. A study of the extent to which

Peter changed the appearance of his subjects outside urban centers would

require a different kind of data set than the one used for a study of prices.

Despite this reservation, The Economy and Material Culture of

Russia, 1600-1725 is an indispensable compendium of information for

students of

early modern Russia. One of its many virtues is its accessibility to

non-economists, while economic specialists on Western Europe will find rich

comparative data. Professor Hellie and his team are to be congratulated.

Lindsey Hughes is Professor of Russian History, School of Slavonic and East

European Studies, University College London. Her most recent book is

Russia in the Age of Peter the Great, Yale University Press, 1998.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Europe
Time Period(s):17th Century

Mastering the Market: The State and the Grain Trade in Northern France, 1700-1860

Author(s):Miller, Judith A.
Reviewer(s):Liebowitz, Jonathan J.

Judith A. Miller, Mastering the Market: The State and the Grain Trade in

Northern France, 1700-1860. New York: Cambridge University Press, 1999.

xviii + 334 pp. $49.95 (cloth), ISBN: 0-521-62129-1.

Review by for EH.NET by Jonathan J. Liebowitz, Department of History,

University of Massachusetts Lowell.

Authorities in eighteenth and early nineteenth century France faced a dilemma:

How to keep the peace in the face of severe shortages of grain.

Harvest failure regularly (Miller finds nine incidents in the eighteenth

century) threatened consumers, who relied on a pound of bread a day for their

sustenance. Yet if the government acted to help them through price controls or

grain imports, it risked worsening the situation by provoking producers and

merchants to withdraw from the market.

Judith A. Miller (Department of History, Emory University) provides a

fascinating account of the State’s role in the grain trade as she reconstructs

the activities of local and national officials who sought to master the

treacherous market. She sympathizes with the plight of these officials as they

handled their next-to-impossible task. Miller’s theme is the growing success

they had in ‘mastering the market’ and bringing famine under control. Their

trial and error led them to conclude that too much government interference was

counterproductive but that a policy of total hands off would not be effective


Miller sets the stage by contrasting the failure of the state in the shortage

of 1709 with its effectiveness in that of 1 853. The goal of the rest of the

book is to show how the French government moved from the first to the second.

Miller emphasizes the role of the state because, whatever ideologues may have

wished, it could not stay out of the market. The region of study extends from

Paris to the Channel, with Miller stressing the competition between Paris and

Rouen, its Norman rival. The major sources are administrative archives, from

which she gathers information about the administrators’ goals and actions.

During the eighteenth century, down to 1789, under the influence of both

experience and the free trade movement, strategies moved toward influencing

supply and demand, rather than forcing particular actions on participants.

Part of the problem was that the grain trade was not only uncertain, but

highly regulated. Officially grain had to be sold in public markets, though

large buyers and sellers preferred to deal with each other privately. While

grain prices might fluctuate freely, bread prices, the focus of consumers’

concerns, had long been set by local authorities. They varied with the grain

prices, but, as Miller shows us, even the officials assumed that, as prices

rose, bakers would suffer a loss.

In the mid-eighteenth century the government found that its entry

into the market led to two major problems: owners (merchants and producers)

left the trade when they were undersold and treasuries suffered heavy losses

from selling at low prices. From their experience with this dilemma officials

worked out the tactics

called “simulated sales.” Their policy was to sell grain, but quietly and with

market-mimicking procedures, supporting the market rather than supplanting it.

With the influence of free trade ideas, price setting began to be abandoned in

the 1760s and 1770s. Turgot and officials like him hoped that with higher

prices, grain would become abundant. But that didn’t happen, and practicing

officials still had to intervene on behalf of buyers. Now they were guided by

the principles of “no forced sales, no set

prices.”(85) They continued to use the skill they had developed through long

experience to guide the market

The Revolution is usually at the heart of any discussion of grain prices in

France. Miller, however, treats it as essentially an interruption in the long

process of mastering the market. Eliminating the former authorities, who knew

what they doing, the upheaval brought in new ones, who had to go through a

long period of learning. In their efforts to secure food for the

cities and now for the revolutionary armies as well, officials adopted radical

policies like requisitions, public markets, and set prices (the maximum). Once

again, force did not work, whether because there just wasn’t enough grain or

because owners would not supply it at the fixed prices.

(Miller leans to the former conclusion.) Turmoil ensued and was only ended when

Napoleon, seeking practical solutions, returned to the pre-Revolutionary

policies of secrecy and planning in advance for possible shortages. The last

gasp of “radical measures”(226) like maximums and requisitions was the

shortage of 1812, when they proved to be disastrous.

At this point the Napoleonic prefects returned to the “well-organized,

finely tuned strategies”(233) that were in line with their predecessors’ as

well as those who followed them. The thrust of policy during the Restoration

and July Monarchy (1815-48) was toward lessening government controls and

relying on private business. The Parisian grain reserve that had been

instituted under

Napoleon was phased

out, but bakers were required to maintain their own stocks. Bread prices were

fixed, but the number of bakeries was limited to guarantee a profit. Slowly

controls were relaxed.

By the late nineteenth century the machinery was working well. Grain prices

still fluctuated, but arrangements had been worked out to provide stability.


state had created a framework for the trade and could step back and let it

operate on its own. Free trade (even then, not yet complete) had arrived but,

paradoxically, only through state involvement.

What can we learn from Miller’s tale – a narrative that is not flamboyant but,

like her officials, careful and painstaking, instructing its readers about many

things in many ways? Her main theme is that both the market and state

intervention were dangerous. Unfettered, they would lead to hunger and turmoil,

but the market could teach the state to limit its action and the state could

tame the market, calming its destructive tendencies.

Miller’s conclusions have implications for other questions. She supports the

argument that free markets (or free enterprise in general) do not result from

the absence of government intervention but from government shaping the rules

and structures that govern economic activity. She also reaffirms the

continuities in French history (particularly that of State intervention in the

economy) that overwhelm the disruptive upheavals of events like the Revolution.

Although Mastering the Market is neither cliometrics nor new


economic history;

it does have a lot to teach all economic historians.

Jonathan Liebowitz is the author of articles on draft animals and land tenure.

He is working on a study of the impact of the crisis of the late nineteenth

century on French tenants and sharecroppers.

Subject(s):Markets and Institutions
Geographic Area(s):Europe
Time Period(s):19th Century

A Monetary History of the United States, 1867-1960

Author(s):Friedman, Milton
Schwartz, Anna Jacobson
Reviewer(s):Rockoff, Hugh

Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press (for the National Bureau of Economic Research), 1963. xxiv + 860 pp.

Review Essay by Hugh Rockoff, Department of Economics, Rutgers University.

On Monetarist Economics and the Economics of a Monetary History

A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna J. Schwartz is surely one of the most important books in economic history, and indeed, in all of economics, written in the twentieth century. It has had a profound impact on the way economists think about monetary theory and policy. And it is still one of the most frequently cited books in economics. To some extent, it has suffered the fate of most classics: it is often cited, but seldom read. In the course of preparing this review essay, I have been repeatedly struck by the difference between what people think Friedman and Schwartz say, and what they actually say. Below I try to set out some of the reasons for the enormous impact of A Monetary History, and some of the reasons why there is such a large gap between (to subvert the title of Axel Leijonhufvud’s fine book on Keynes) “Monetarist Economics and the Economics of A Monetary History.”

The main point of A Monetary History is that “money matters: ” The quantity of money is an independent and controllable force that strongly influences the economy. This view, which is now accepted, at least in some measure, by most economists is very different from the view that prevailed when A Monetary History was published. At that time the professional consensus considered monetary policy ineffective. The job of central bankers was to keep interest rates as low as possible as long as unemployment was a problem. Following this policy would mean, however, only that investment might be bit higher than it would otherwise be and unemployment a bit lower. And although inflation might be countered with higher interest rates, the presumption was that monetary policy would have little impact. The rate of unemployment and the behavior of costs, particularly wage rates, largely determined the rate of inflation. Controlling labor unions was important for controlling inflation; monetary policy was at best a secondary consideration. The main tool for keeping the economy on an even keel was fiscal policy. It was a development in the real world, of course, the growing problem of inflation in the 1960s and 1970s, that was the main factor overturning the Keynesian orthodoxy. But A Monetary History was a powerful voice for restoring to monetary policy some of its former prestige. How did Friedman and Schwartz persuade the majority of the profession that money matters? The basic methodology of A Monetary History is to highlight “natural experiments,” occasions when the stock of money changed for reasons unrelated to the current state of the economy, so that we can then attribute the corresponding changes in the economy to changes in money.

Friedman and Schwartz offer an impressive array of case studies. To convey a sense of their approach, let me cite three of their most famous examples: (1) the contrast between 1879-1896 and 1896-1914 in terms of the behavior of the price level; (2) the contrast between World War I and World War II in terms of the behavior of the price level; and (3) the impact of restrictive actions taken by the Federal Reserve system in 1937.

(1) Prices (the NNP deflator) fell -0.93 percent per year between 1879, when the United States returned to the gold standard, and 1896, when the deflation came to an end, and then rose 2.08 percent per year between 1897 and 1914. The stock of money behaved in a similar way. Money per unit of output (money divided by real NNP) rose 2.99 percent per year from 1879 to 1896, and then rose 4.23 percent per year between 1897 and 1914. The acceleration in money growth was the result of the flow of new gold, much of it from the mines of South Africa. (High-powered money rose 3.49 percent per year between 1879 and 1896 and 4.83 percent per year between 1897 and 1914.) To be sure, the intense searches for new gold mines and new ways of refining gold ore that were rewarded when the mines of the Rand became productive and the cyanide process for refining it had been perfected, had been encouraged by rising real price of gold before 1896. But these events long preceded the post-1896 inflation. The correlation between rising money supplies and rising prices after 1896, Friedman and Schwartz argue, must be chance or must reflect a causal connection running from money to prices.

(2) Surprisingly, prices rose more in World War I than in World War II, and by about the same magnitude in World War I as in, to go outside the strict boundaries of A Monetary History, the Civil War. Yet measured in almost any conventional way (length of war, casualties, government deficits, etc.) World War I was a much smaller war for the United States than the Civil War or World War II. The monetary facts, however, are roughly in line with the inflation facts. From 1914 to 1920 money per unit of output rose 8.45 percent per year while the price level rose 10.84 percent per year. From 1939 to 1948 money per unit of output rose 7.90 percent per year while the price level rose 6.65 percent per year.

As these figures indicate, money cannot explain everything. The difference in inflation in the two wars exceeds the difference in the rate of growth of money per unit of output. Nevertheless, the striking fact is that the rate of inflation and the rate of growth of money per unit of output were broadly similar in the two wars. One would have expected, based on the degree of mobilization, far more money growth and inflation in World War II.

Part of the reason that the United States could “get away with” slower monetary growth in World War II was that the deposit-reserve ratio of the banking system was lower during World War II. The government, therefore, received a larger share of the revenues produced by increases in the stock of money. High-powered money, the main channel through which the government acquires seigniorage, rose 10.78 percent per year in World War II compared with 12.25 percent per year in World War I. Friedman and Schwartz conclude that the correlation between prices and money per unit of output suggests causation running from money to prices, rather than the common effect of some third factor, such as the intensity of the mobilization.

(3) One of the most famous and most hotly debated examples offered by Friedman and Schwartz is the 1937-1938 recession. In early 1937 the Federal Reserve doubled the required reserve ratios of the banking system with the purpose of immobilizing reserves and preventing future inflation. After some months, this action was followed by declines in the stock of money and real output. Money fell -0.37 percent between 1937 and 1938 while prices fell -0.50 percent, and real output fell -8.23 percent. High-powered money, responding to other forces, rose by 7.95 percent during the same year. Friedman and Schwartz conclude that the correlation between the decline in the stock of money and the decline in economic activity must have resulted from chance or from causation running from money to economic activity.

These case studies, I should note, arose in three different institutional regimes. In case (1) the United States was on the gold standard, and there was no central bank. In case (2) the Federal Reserve was constrained by the need to finance large wartime government deficits, and had to follow the Treasury’s lead. In case (3) the Federal Reserve was relatively independent, and could follow its own judgments about appropriate monetary policy. Drawing examples from different institutional environments strengthens the argument. In each case there is a rough correlation between monetary changes and changes in the economy, yet the factors determining the supply of money are very different. This suggests that the proposition “money matters,” represents a fundamental economic relationship, and is not the adventitious result of some particular set of institutional arrangements.

None of these “natural experiments” or the many others cited in A Monetary History, was conducted in a laboratory. Many variables were changing, and it is always possible, although not always easy, to construct an alternative explanation based on some other key factor. An extensive literature, for example, has grown up elaborating and contesting the Friedman-Schwartz interpretation of case (3), and attributing the 1937 downturn to other factors, such as fiscal policy. But for someone seeking to overturn A Monetary History, contesting one of these explanations is only the beginning. What gives weight to Friedman and Schwartz’s argument is the multiplicity of examples. So far, I would argue, none of Friedman and Schwartz’s critics has been able to forge an alternative explanation – whether based on fiscal policy, or labor union militancy, or technological change, or whatever – that fits all of the examples explored in A Monetary History. Indeed, to my way of thinking, the major advances since A Monetary History, have been the attempts by Brunner and Meltzer, Bernanke, and others to enrich the picture of how disturbances in the financial sector, and in particular the banking sector, affect the rest of the economy, rather than attempts to explain macroeconomic events from totally different perspectives.

Perhaps the greatest mystery is not that the Friedman-Schwartz methodology was persuasive, but rather that despite the enormous impact of A Monetary History, few economists use its methodology. Typically, when an economist attempts to persuade other economists, the first step is to feed the numbers through the computer and in the process strip away the historical circumstances that adhere to them.

Friedman and Schwartz’s interpretation of the Great Depression is both figuratively and literally at the heart of their book. The detailed discussion occupies about 30 percent of the total, and the episode is referred to by way of contrast in discussions of other episodes. Princeton University Press later issued this section as a separate volume, The Great Contraction.

Their point, as most college students of economics now know (or should know), is that the Great Depression could have been greatly ameliorated by better monetary policy. Today, only a few dyed-in-the-wool Keynesians reject any causal role for monetary policy, although many economic historians would place the major blame for the Depression on other factors, and relegate bad monetary policy to a secondary role. The Friedman-Schwartz interpretation of the Depression was crucial, moreover, to the revival of confidence in market-based economics. The Great Depression, and the way it was interpreted by Keynesian economists, convinced a generation of American intellectuals that only socialism (or near-socialism) could save the American economy from periodic economic meltdowns. If Great Depressions could be prevented through timely actions by the monetary authority (or by a monetary rule), as Friedman and Schwartz contended, then the case for market economies was measurably stronger.

It has been objected that Friedman and Schwartz don’t prove that monetary forces caused the Great Depression. They merely describe the Great Depression in great detail as if monetary forces were the causal factor. This objection is true, but not as decisive as it might seem at first glance. From the point of view of proving the importance of money, the Depression is merely another period, although a particularly revealing one, in which to search for natural experiments. It provides additional evidence, such as the case of the doubling of required reserve ratios in 1937 discussed above, and other episodes, but this one short period by itself cannot prove anything.

Friedman and Schwartz are doctors writing up the results of a detailed clinical examination of a patient who entered the hospital on the verge of death. Their observation that the patient was suffering from a bacterial infection is not by itself proof that the infection caused the patient’s illness. The fact that other patients with the same symptoms and the same infection have been seen at other hospitals in other places and at other times is what makes their argument persuasive. And it is the evidence taken as a whole that makes the prescription offered by Drs. Friedman and Schwartz, that the patient should have been given a strong dose of antibiotics (high-powered money), appear so sensible.

Perhaps the most misunderstood aspect of A Monetary History is the way that Friedman and Schwartz treat Nonmonetary factors. Their approach is to assume a “real” business cycle, which is then pushed a pulled by monetary factors. I use the term “real” with some trepidation. What Friedman and Schwartz have in mind is the sort of cycle described by Wesley C. Mitchell, Arthur Burns, and other scholars at the National Bureau of Economic Research in work that preceded A Monetary History, rather than what now goes by the name “real business cycle.” Yet there is a family resemblance worth stressing. Friedman and Schwartz, unfortunately for us, say little about the sources of this cycle, although at times they make some interesting observations about the tendency of good harvests in the United States to occur at the same time as bad harvests in Europe, and a few other factors. Nevertheless, it is clear that various supply-side shocks including technological shocks that now appear important to macroeconomists would fit easily into the Nonmonetary cycle that forms the backdrop for Friedman and Schwartz’s analysis.

The real cycles in which Friedman and Schwartz impound other factors are often forgotten when economic historians recount “monetarist” interpretations of historical episodes. I have heard economic historians claim that Friedman and Schwartz “say” that the recession of 1937 was caused by the doubling of reserve requirements in 1937. In fact, they write the following.

“Consideration of the effects of monetary policy [the increase in required reserve ratios] on the stock of money certainly strengthens the case for attributing an important role to monetary changes as a factor that significantly intensified the severity of the decline and also probably caused it to occur earlier than otherwise” (p. 544).

Similarly, I have heard economic historians claim that Friedman and Schwartz say that money caused the Great Depression, or that the stock market crash did not cause the Great Depression. In fact their statements on both points are more circumspect, and assume a Nonmonetary contraction of some magnitude. Of the stock-market crash Friedman and Schwartz write that “… its [the stock market crash’s] occurrence must have helped to deepen the contraction in economic activity. It changed the atmosphere within which businessmen and others were making their plans, and spread uncertainty where dazzling hopes of a new era had prevailed” (p. 306).

The crucial turning point in the Depression, according to Friedman and Schwartz, was late 1930 or early 1931, when they thought the contraction might have come to an end in the absence of the banking crises. But they acknowledge that even so, the contraction of the early 1930s “would have ranked as one of the more severe contractions on record” (p. 306).

In their counterfactual discussion of the effects of an open market purchase of $1 billion, they conclude that if undertaken between January 1930 and October 1930 the open market purchase would have “reduced the magnitude of any crisis that did occur and hence the magnitude of its aftereffects” (p.393). If undertaken between September 1931 and January 1932, the open market purchase would have produced a change in the monetary tide and as a result “the economic situation could hardly have deteriorated so rapidly and sharply as it did” (p. 399).

In discussing the banking panic of 1907, to give an earlier example, Friedman and Schwartz conclude that “There can be little doubt that the banking panic served to intensify and deepen the contraction: its occurrence coincides with a notable change in both the statistical indicators and the qualitative comment. If it had been completely avoided, the contraction would almost surely have been milder” (p. 163).

In short, Friedman and Schwartz tried to show that good monetary policy – best of all, as Friedman argued elsewhere, a monetary rule – would make the world a better place; they never promised a rose garden.

Although the central thesis is “money matters,” Friedman and Schwartz follow a large number of closely related threads. These range from the determinants of the greenback price of gold after the Civil War, to the relative effects of mild inflation and mild deflation on long-term economic growth, to the effects of deposit insurance on the stability of the banking system, and so on. Their discussions of these episodes are invariably intelligent, and often at variance with what was the conventional wisdom at the time they wrote. Not only do these discussions help us to understand these particular episodes; they also increase our confidence in their central thesis. They convince us that we are reading economic historians of outstanding ability who have explored every nook and cranny of American monetary history.

As most readers of A Monetary History recognize the book also succeeds in part because of how well it is written. Friedman and Schwartz employ a style that might be called high-NBER. It is written for the intelligent lay person. No special knowledge of statistics is required to read it, and no equations appear in the text, although there is an appendix on the determinants of the stock of money that uses equations. The quantity theory of money never appears in algebraic form. The sentences flow in magisterial fashion, and yet one is aware that the authors have thought about what they are discussing and are eager to make sure that the reader understands. In many ways their book, with its myriad of examples and its telling analogies, is the most similar, among all the classics of economics, to The Wealth of Nations. One can’t help but feel that the former lecturer on rhetoric would have approved of Friedman and Schwartz’s polished yet straightforward style.

For all these reasons, my choice for the most significant book in the field of economic history in the twentieth century is A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna J. Schwartz.

Annotated References:

There is a large and growing literature on A Monetary History. Here I will mention just a few sources that I have found particularly useful.

Bernanke, Ben S., Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression. American Economic Review. Vol. 73 (3): 257-76, June 1983.

Bordo, Michael D., editor, Money, History, and International Finance: Essays in Honor of Anna J. Schwartz. National Bureau of Economic Research Conference Report series. Chicago: University of Chicago Press, 1989. (This volume, a Festschrift for Anna J. Schwartz, contains a number of relevant essays, including one by Bordo that focuses explicitly on the contributions of A Monetary History.)

Brunner, Karl and Allan H. Meltzer, “Money and Credit in the Monetary Transmission Process.” American Economic Review. Vol. 78 (2): 446-51, May 1988.

Hammond, J. Daniel, Theory and Measurement: Causality Issues in Milton Friedman’s Monetary Economics. Cambridge: Cambridge University Press. 1996. (Hammond discusses all of the Friedman-Schwartz work on money focussing on methodological issues and the large volume of criticism their work generated).

Leijonhufvud, Axel, On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory. New York: Oxford University Press, 1968.

Lucas, Robert E, Jr., “Review of Milton Friedman and Anna J. Schwartz’s A Monetary History of the United States, 1867-1960.” Journal of Monetary Economics. Vol. 34 (1): 5-16, August 1994. (Lucas lays out what he considers the most important contributions of A Monetary History.)

Miron, Jeffrey A., “Empirical Methodology in Macroeconomics: Explaining the Success of Friedman and Schwartz’s A Monetary History of the United States, 1867-1960. Journal of Monetary Economics. Vol. 34 (1): 17-25, August 1994. (Miron explains why members of the younger generation of macroeconomists, even those not trained at Chicago, found A Monetary History so persuasive.)

Steindl, Frank G., Monetary Interpretations of the Great Depression. Ann Arbor: University of Michigan Press, 1995. (Steindl provides a useful overview, which compares and contrasts the Friedman-Schwartz interpretation of the Great Depression with the interpretations offered by other monetary historians.)

Temin, Peter, Did Monetary Forces Cause the Great Depression? New York: Norton, 1976 and Temin, Peter, Lessons from the Great Depression. Cambridge, MA: MIT Press, 1989. (Temin presents a detailed and extremely skeptical reading of the Friedman-Schwartz interpretation of the Great Depression.)

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

Unintended Consequences: The Impact of Factor Endowments, Culture, and Politics on Long-run Economic Performance

Author(s):Lal, Deepak
Reviewer(s):Tuttle, Carolyn

Published by EH.NET (December 1999)

Deepak Lal, Unintended Consequences: The Impact of Factor Endowments,

Culture, and Politics on Long-run Economic Performance. Cambridge, MA: MIT

Press, 1998. x + 287 pp. $45.00 (cloth), ISBN: 0-262-12210-3.

Reviewed for EH.NET by Carolyn Tuttle, Department of Economics, Northwestern


The book makes a significant contribution to the development literature by

exploring the interaction of factor endowments, culture and politics in

explaining when and why intensive growth occurred in the West. The

interdisciplinary approach and historical analysis challenges the economist to

look beyond the material (those related to ways of making a living)

determinants of growth to the cosmological (those related to understanding the

world around us) determinants of growth. Lal examines the great civilizations

to discern whether the developmental, cultural and political differences can be

explained by material beliefs alone or also require cosmological beliefs. He

concurs with many other economic historians that materialist forces (a

hospitable climate for merchants and commerce;

recognition of private property rights by the state and

the applications of the “inquisitive Greek Spirit”) lead to the European

miracle. He departs from most development economists, however, when he places

religion at the center of the early success and recent social decay of the


Although the content

of the book is extremely valuable, it is not for the faint hearted. A book that

explores the role of economic, cultural and political factors on the long run

economic growth of the West and “the Rest” from the dawn of ancient

civilizations to contemporary

day is a massive endeavor. To accomplish such a lofty feat, Lal must carefully

select and develop the kernels of insight that contribute to his explanation

for economic development while ignoring or condensing other material that may

offer alternate explanations for economic prosperity.

Thus, some readers may be frustrated because there is no discussion about the

differences in human capital, the role of education or technological innovation

in economic growth while others will be encouraged because the discussion about

the conflict between religion and secularism as well as individualism and

communalism contributes new answers to the age-old question of “What stimulates

and what hinders economic growth in a society?” In an attempt to cover so much

history, the book is extremely dense and the early chapters can leave the

reader with a disorganized array of insights into the past as he “gallops

through human history.”

Fortunately, the confusion subsides and the story becomes cohesive as Lal

ingeniously weaves together the role of religion, social psychology,

political theory and economics in long run economic growth in the second half

of the book. The effort the reader puts forth in sifting through a plethora of

information on the cultural, political, social and economic fabric of the Near

East, the Middle East and the Far East are rewarded with Lal’s provocative

conclusion that several nonwestern countries have the social basis for

modernizing without westernizing, citing Japan as a case in point.

The economic historian will appreciate the discussion of the role of religion

in cosmological beliefs and how religion affected intensive growth in several

countries. Lal contrasts the “religion of anxiety in the West”

with the “religions of tranquility of the

East” and demonstrates the role they have in establishing a value system which

restrains the destructive instincts of the individual in order to maintain

social order. The analysis is a complex one, however, because some “shame

based” societies like India


China and Islam have not experienced Promethean growth while others, like

Japan, have. At the same time, the West, with its “guilt-based” society has

successfully experienced Promethean growth although the death of God

(announced by Nietzsche is 1881) has left a “moral abyss” in the West which

has lead to a selfish society that worships wealth and casts aside family

values, care for the elderly and respect for human life. Politicians have

stepped in to fill this void and created the “welfare state” which takes on

the insurance and charitable functions of the family to care for the elderly,

the poor and the helpless. As Lal clarifies the economic and cultural

consequences of the welfare state, the economist must pause at the exploding

deficits, divorce rates, illegitimacy rates and rising number of single-parent

families that define the “successful” western countries. This deterioration of

the social fabric will not occur, however, in the “shame based” societies

because the Death of God cannot undermine

their belief and values. Thus, Lal concludes that countries like Japan can

enjoy the benefits of western materialism without suffering from its social


Another very interesting theme which runs throughout the book is the role of

individualism in promoting intensive growth. Lal carefully develops the two

opposing tendencies of man’s character-individualism and communalism.

The economic historian will find the development of this theme valuable because

it integrates the theories of several disciplines (economics,

anthropology, social psychology, and sociology ) in such a way to expose the

consequences of the tensions of an individual’s civilized character between

individual competitive survival strategies and group cooperative coexistence

tendencies. Lal concludes that the western family system promoted

individualism by allowing individuals to choose their marriage partners and

establish separate households early which eventually lead to great material

prosperity. Here again he points out that

one of the social determinants of growth had also become a determinant of

societal deterioration. The economist is on familiar ground in this discussion

of the benefits and costs of individualism as espoused by Adam Smith.

Individualism not only lead to

great material prosperity in the West but by its very egocentric nature

undermined the cement that holds these prosperous societies together-the

family. Lal hints at the possibility that the communal societies like India,

China, Islam and Japan which are family-oriented societies may choose laissez

faire to drive their economic system while not choosing democracy to drive

their political system. Hence,

a revelation to many libertarians that there is no necessary connection between

economic and political individualism. More importantly, Lal’s discussion

reveals there is a development path different from the one forged by the West

which attains economic prosperity without sacrificing a constructive set of

norms and values that promote social stability.


book has something for everyone and would appeal to a wide range of readers.

The interdisciplinary approach of this book will interest and intrigue the

inquisitive minds of economists, sociologists, political philosophers,

historians and social psychologists concerned with economic growth and

development. Economists will especially enjoy the discussion of four formal

models (the Boserup model, the model of the predatory state,

the dual preference model and Domar’s model of a labor-scarce economy) in the

appendix which capture the essence of Lal’s main arguments. Economic historians

will find this book to be a provocative addition to their bookshelf because it

integrates the evolutionary concerns of the hard scientist with the

humanitarian issues of the social psychologist and arrives at a conclusion

familiar to the dismal scientist (the economist).

Deepak Lal is the James S. Coleman Professor of International Development

Studies at the University of California, Los Angeles.

Carolyn Tuttle is a Full Professor in the Department of Economics and Business

at Lake Forest College. Currently, she is a Visiting Professor at Northwestern

University in the Economics Department. Her book, Hard at Work in Factories

and Mines: The Economics of Child Labor During the Industrial Revolution,

was recently published by Westview Press.

Subject(s):Economic Development, Growth, and Aggregate Productivity
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Exchange Rate Regimes in the Twentieth Century

Author(s):Aldcroft, Derek H.
Oliver, Michael J.
Reviewer(s):Schwartz, Anna J.

Published by EH.NET (November 1999)

Derek H. Aldcroft and Michael J. Oliver, Exchange Rate Regimes in the

Twentieth Century. Cheltenham, UK, and Northampton, MA, USA: Edward Elgar,

1998. xiii + 210 pp. $85.00 (cloth), ISBN: 1 85898 320 7.

Reviewed for EH. NET by Anna J. Schwartz, National Bureau of Economic


This is a chronological historical narrative of selected features of exchange

rate regimes since the interwar period. Fully half the book is devoted to the

1920s and 1930s. The treatment of the Bretton

Woods era and its aftermath is briefer and more succinct. The penultimate

chapter that traces the evolution of the European Monetary System ends before

the date when the 11 countries judged to have met the Maastricht criteria were

qualified as EMU members

. A six and one-half page concluding chapter asks

“Do Monetary Systems Matter?”

What is distinctive about the book is first, the series of tables that

accompany the text, and second, the extraordinary number of references that are

cited for each substantive point. The tables provide data, drawn from official

and academic sources, for various time periods on nominal and real variables,

as well as chronologies of important events. The references tend to include

competing views with regard to the topic under discussion. In some cases, the

authors find merit in all the competing views. In other cases, they express

strong priors in favor of one position, without much analysis of the factors

supporting their conclusion.

Chapter 1 deals with the restoration of

monetary stability in European countries, and countries in North America,

Central and South America,

Africa, Asia, and Oceania, following the post-World War I years of floating

exchange rates and hyperinflation. The attention paid to the experience of

countries that are not usually covered in this context is a strength of the

chapter. It ends with a discussion of the costs and benefits of floating

exchange rates of the early 1920s. This is an instance when the authors convey

an impression of ambivalence in their assessment: they offer pros and cons,

without any clear conclusion.

Chapter 2 deals with the consequences of the stabilization of the pound and the

franc at inappropriate levels, one of the key differences between the prewar

gold standard and the

restored gold standard of the later 1920s.

Inherent weaknesses in the restored arrangements doomed them. Peripheral

countries ran into trouble even before the disintegration of the standard in

the center countries in the summer of 1931. At this point, the authors take a

stand on the issue of US monetary policy during the Great Depression without

much supporting detail. They assert that “the Federal Reserve allowed the

monetary base to contract for fear of being forced off gold”

(p.58). That is a highly controversial view.

Chapter 3 takes up the story with the abandonment of the gold standard in the

early 1930s by most of the countries that had re-established it in the 1920s.

The authors discuss the rise of currency blocs after 1933: the sterling area,

the gold bloc, and countries with exchange controls. They note the extensive

management of exchange rates, for which purpose exchange stabilization funds

were created, and the Tripartite Agreement was negotiated. They also compare

the recovery experience from 1929 to 1937/38 of countries classified under

different regimes. They dispute an earlier finding that Spain avoided the worst

effects of the depression because its exchange rate floated. In general, they

argue that currency changes of the 1930s did not generate trade-induced


Chapter 4 covers the well-known elements of the Bretton

Woods system and the

reasons for its decline. In the authors’ view, Triffin’s prediction of the

inevitable demise of the system was wrong on two counts: (1) he believed that

large-scale conversion of dollars into gold by central banks would reduce

outstanding US dollar liabilities, when in fact they increased; and (2) he

claimed the conversion would be deflationary by reducing the total amount of

international reserves, contrary to the facts.

I concur with the authors’ statement, ” . . . it is strange that in the quarter

century since the end of generalized fixed rates, policymakers and politicians

have sought to return to some variant of fixed rates by frequently assuming

that the Bretton Woods system was a paragon of a rules-based system” (p. 120).

Chapter 5 on the aftermath of Bretton Woods discusses two broad problems under

floating rates: (1) endogenous and exogenous shocks that disturbed currencies;

and (2) volatility of exchange rates that was greater than predicted. The

authors conclude that, despite the difficulties associated with floating rates,

it is highly unlikely that the float will be replaced by a new Bretton Woods in

the foreseeable future.

Chapt4er 6 turns to the attraction of a fixed rate system to most of Western

Europe as a way of guaranteeing the stability of intra-European trade. New to

me is the discussion in this chapter of the biggest institutional reason for

this attraction, namely, the

close connection to European exchange rate policy of the Common Agricultural

Policy (CAP). Calls for greater exchange rate stability arose because of

problems for CAP under floating rates. The authors are skeptical about the

benefits of a single European

currency They might also have been more skeptical in accepting the theory of

self-fulfilling prophecies as a “more satisfactory explanation” of the turmoil

on the foreign exchanges under the European Exchange Rate Mechanism between

July 1992 and August 19 93 (p. 165).

To Fix or not to Fix? That is the question for which this book seeks to provide

an answer from twentieth century history.

(Derek H. Aldcroft is Research Professor in Economic History at Manchester

Metropolitan University. Michael J. Oliver

is Lecturer in Economic History at the University of Leeds.)

Anna J. Schwartz is a research associate of the National Bureau of Economic

Research. She is co-author with Michael D. Bordo of a chapter, “Monetary Policy

Regimes and Economic Performance: The

Historical Record,” in Volume 1 of the Handbook of Macroeconomics, John

Taylor and Michael Woodford

(eds.), North-Holland (forthcoming).

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

The Local Merchants of Prato: Small Entrepreneurs in the Late Medieval Economy

Author(s):Marshall, Richard K.
Reviewer(s):Court, Russell Ives

Published by EH.NET (November 1999)

Richard K. Marshall. The Local Merchants of Prato: Small Entrepreneurs in

the Late Medieval Economy. The Johns Hopkins University Studies in

Historical and Political Science. Baltimore and London:

Johns Hopkins University Press, 1999. xxi + 191pp. Tables, notes, bibliography

and index.

$42.50 (cloth), ISBN 0-8018-6057-1.

Reviewed for H-Business and EH.NET by Russell Ives Court, Department of

History, University of California, Los Angeles.

Upsetting the Apple Cart: Questioning our presumptions about pre-modern


Mr. Marshall’s monograph seems marginal, judging from the title. Yet this is

precisely his point. In the long and distinguished historiography of Medieval

economic history, it appeared that such big names as Melis, De Roover, Sapori,

Cipolla, etc. had written the book on the lack of sophistication of all but the

very elite of the Medieval world. Until late into the pre-modern period, in

Melis’s figuration, small

merchants and laborers restricted their business to “the money lying idle in

his cash box,” which “even if modest, was always sufficient for the

acquisitions and other needs of his business, which was based on tradition.”

Marshall tells us that his motivation for presenting us this study is to widen

the debate on the origins of credit. Great merchants, argued Melis, must have

seen the utility of credit, providing a ready source of capital while not tying

it up for long periods. Marshall claims a reason for the appearance of running

credit in the fourteenth century was its widespread use at all strata of

society. Marshall’s volume is based on his study of forty-five account books of

seventeen different petty tradesmen, found in the Archivio di Pratos famous F.

Datini Archive — a collection unparalleled in any other archive. The small

entrepreneurs include three druggists, two cheese mongers, two small-time cloth

merchants, a second-hand dealer, a broker, a sheerer, a tailor, a shirt-maker,

a grain dealer

and the partnerships of two bricklayers, a family of innkeepers and a butchery.

Economic sophistication and flexibility existed at all levels of Medieval


while all levels of this economy were fully monetized and integrated. The

universal use of all types of specie, unsecured loans and money of account

supports this contention. The book provides a counterpoint to the study of

elites and calls for a more organic study of Medieval economic life.

The Local Merchants of Prato is divided into seven chapters within two

sections and includes a foreword by Marco Spallanzani of the Istituto di Storia

Economica at the University of Florence. After a short introduction to the

local history of Prato, the first of the two sections sets the scene with a

reconstruction of the local economic landscape of Quattrocento Prato. Of

particular interest is the examination of a wide range of consumer prices,

salaries and net-worths of many of the tradesmen. In the first three chapters,

“Way of Life,” “The Conduct of Business,” and “An Independent Broker and a

Family of Innkeepers,” Marshall attempts to reconstruct the business climate

from fragmentary documentation, which paints a spotty picture at best, as cash

transactions are rarely noted in the ledgers. The effort

is admirable, and even though the author tells us it is not his goal, I would

have liked to see an effort to reconcile this picture of Prato’s petty economy

to more traditionally examined sectors.

This would offer a mediated view of the economy from which

we could better perceive the main thrust of the book. As per the author’s

expressed hope,

the examples he provides will no doubt stimulate a re-examination of older

historiography, which was based more on explaining the genesis of modern day


than is Marshall’s examination of the human experience.

The second section of the book, entitled “Business Practices,” lays out a far

more compelling analysis. In “Bookkeeping,” Marshall asserts that contrary to

popular belief, petty merchants kept writ ten accounts. One might think that

accounts books served to evaluate tactics. These merchants might have extracted

something from these poorly kept registers. Yet there is little evidence that

they produced balance sheets. Further, they logged very few cash transactions,

the very milieu in which Melis, Cipolla Saponi et al assumed they operated. The

raison d’etre of these books is to register a variety of petty loans and credit

transactions. The rich documentation explores down payments for supplies,

advances on laborers salaries, the commonality of pawning, purchases on credit,

both with and without guarantor, and many other unexpected devices. Such credit

transactions reveal a wider range of sophistication, as well as complexity

unappreciated by older studies. The remaining two chapters, “A World of

Credit” and “Trust and Loans,” make a convincing case for a rethinking of

pre-modern economy as a whole. They do this through diverse examples over a

significant span of time. Although the author shies away

from placing traders’ activities firmly into the greater context. Marshall does

not deem it his task to rewrite Medieval economic history. Regardless, the

author could have better situated the study within the greater context. As a

result, the reader is at a loss to gauge the importance of these petty

traders. After all, there were few of them — the elite of the non elite.

The Local Merchants of Prato leaves the impression that

Marshall is the

first to doubt the older historiography. His bibliography

seems strangely dated, given the task he has set himself. He makes no reference

to Berlow,

Reyerson, Pryor, Greif, and offers limited readings from Lopez. All of these

historians that have addressed the complexity of Medieval traders far down on

the food

chain. Marshalls great success is his introduction of a hitherto ignored

collection of ledgers which may have changed Melis point of view, had he seen

them. Placing them into an organic context, Marshall sheds light on one source

of the great financial innovation of the fourteenth century. Marshall might

have gone even further to suggest that we treat the historical object, rather

than look ceaselessly for origins that transformed us from Medieval clods into

the sophisticated, dynamic folks we are today.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):Medieval

Money and the Nation State: The Financial Revolution, Government and the World Monetary System

Author(s):Dowd, Kevin
Timberlake, Richard H. Jr
Reviewer(s):Bodenhorn, Howard

Published by EH.NET (November 1999)


Kevin Dowd and Richard H. Timberlake, Jr., editors, Money and the Nation State: The Financial Revolution, Government and the World Monetary System. New Brunswick, NJ and London: Transaction Publishers for the Independent Institute, 1998. vii + 453 pp. $39.95 (cloth), ISBN 1-56000-302-2; $24.95 (paper), 1-56000-930-6 (paper).

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

Kevin Dowd (Sheffield Hallam University) and Richard Timberlake (University of Georgia emeritus) bring together 13 essays, an introduction by the editors, and a foreword by Merton Miller, recipient of the 1990 Nobel Memorial Prize in Economic Science, all unified by an Austrian methodology. These authors believe that information and knowledge are dispersed so that centralized decision makers cannot possess the omniscience to effectively coordinate economic activity. True coordination or “catallaxy,” to employ Hayek’s preferred term, occurs through the operation of the invisible hand. While the Austrian approach is familiar enough to many, its application to monetary systems may not be. This book thus represents an important contribution because it “provides the essential framework for those willing to return to first principles in thinking about the role of monetary arrangements in economic life” (p. viii).

Money and the Nation State is divided into three sections. The first containing five chapters describing how the world abandoned a naturally evolving monetary arrangement (gold standard) for a government-controlled monopoly system. David Glasner (Chapter 1) walks us through the state’s involvement in money from ancient Lydia through Britain’s disastrous return to gold in 1925. Frank van Dun (Chapter 2) argues that money fell under state control through incremental expansion of the boundaries of sovereignty. Whatever becomes identified with the public interest or the common good quickly becomes a legitimate governmental activity.

Chapters 3 through 5 provide real insight into the mind of Austrian monetary analysts. Timberlake (Chapter 5 ), for example, reiterates Mises’s assertion that a gold standard acts as “an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs within the same class with political constitutions and bills of rights” (p. 179). Similarly, after detailing the gold standard, Britain’s interwar monetary machinations, Bretton Woods, and post-1973 developments, Leland Yeager (Chapter 3) concludes that all were “palliative policies of the usual variety; ” they were not “genuine commitment[s] by governments and central banks to currencies of stable purchasing power” (p. 101). Murray Rothbard (Chapter 4) summarizes by noting that these events ultimately plunged the world into a “chaos of fiat money, competing devaluations, exchange controls, and warring monetary and trade blocs, accompanied by a network of protectionist restrictions” (p. 155). All this seems like a lot to blame on modern monetary arrangements, and it is easy for critics to portray these writers as paranoid, conspiracy theorists, but a lot of what they have to say rings true and each makes a compelling case for his interpretation.

Section II includes four chapters that discuss the effects, intended and not, of central banks and modern monetary arrangements. Thomas Cargill (Chapter 6) recites a list of statutory changes in financial regulations in the post-Bretton Woods era. He argues that deregulation, while sometimes disruptive, was practically inevitable given the rapid advances in telecommunications and computer technologies, which opened the floodgates of financial innovation. Genie Short and Kenneth Robinson (Chapter 7) make the now familiar argument that financial safety nets, such as deposit insurance, generate moral hazard problems , which have the perverse effect of magnifying rather than eliminating financial instability. Alan Reynolds’ (Chapter 8) assessment of the International Monetary Fund’s activities is as unceasingly critical as any I have seen. He argues that the IMF doctors, like doctors of old, invariably prescribe the same wrong cure (the financial equivalent of purging and leeches) regardless of the patients’ illnesses. It is not surprising, then, that the IMF’s success stories are few and do not offset the devastation typically left in its wake.

Robert Keleher’s contribution (Chapter 9) on global economic integration provides a nice conclusion to the section. He posits that there are two broad approaches to increased integration: (1) a Keynes-gone-global approach; or (2) a classical Austrian-Hayekian approach. The former begins from the premise that governments can effectively coordinate economic activity, only now it needs to do so in an international setting. This implies a need for super-national organizations like the IMF, the World Bank, and the World Trade Organization because sovereign countries rarely relinquish control over domestic policy instruments even though most create international externalities. The latter, or Hayekian, approach suggests that coordination should occur at the micro level. Countries should not attempt coordinated monetary and fiscal policies aimed at manipulating the macroeconomy. Instead, they should eliminate tariffs, quotas, and other restrictions on the free movement of labor, capital, and commodities. Moreover, they should adopt consistent rules for such things as bankruptcies, intellectual property, and contracts. Consistent accounting and disclosure rules, too, would eliminate one level of uncertainty and promote cross-country economic harmonization.

The third section of Money and the Nation State contains four chapters that outline proposals for financial reform. Richard Burdekin, Jilleen Westbrook, and Thomas Willet (Chapter 10) provide a public choice analysis of several central bank reform proposals and conclude that central bank independence is critical. Kevin Dowd (Chapter 11) provides a blistering critique of European monetary union. While supporters of union have argued that the benefits of a common currency outweigh its costs, little supporting evidence has been provided. The move toward union, it seems, is more political than economic and is driven by French fears of German hegemony on the continent (p. 355).

Lawrence H. White (Chapter 12) reconstructs, in a modern context, Hayek’s 1937 proposals for optimal monetary arrangements. One proposal was for universal free banking; the other for an apolitical transnational central bank. Finally, Steve Hanke and Kurt Schuler (Chapter 13) offer a spirited defense of currency boards, which issue notes convertible into a reserve asset, usually a foreign currency, on demand at a fixed exchange rate. Currency boards do not accept deposits; they do not act as lenders of last resort; they do not guarantee commercial bank deposits ; they do not interfere in commercial bank portfolios, or engage in a host of other regulatory functions. Consequently, currency boards do not suffer from the moral hazard problems inherent in central bank and deposit insurance structures and are compatible with stable free banking systems.

Current debates on financial reform pit those with few shared ideological premises against one another. One side of the debate argues that rapid changes in telecommunications and computers, along with increased globalization and a quickening pace of financial innovation require greater regulatory efforts to deal with the developing complexities. The other side argues that recent and future innovations have and will occur too quickly and be so significant that no regulatory mechanism will keep up with them, much less reign them in. Moreover, many innovations develop to circumvent existing regulations. The latter camp, inspired by the Austrian approach to markets, argues that only market-driven discipline will be an effective promoter of financial stability. The contributors to this volume all begin from Austrian premises and trace the implication of those premises for modern monetary arrangements. Most show that intervention leads to sub-optimal economic outcomes, and many argue that it leads to usurpation of economic and political rights. In some cases, the point is overstated, but in some of the more reflective sections, the message is clear and powerful.

Marx and Engels argued in the Communist Manifesto that one of the preconditions for communism was centralization of credit in the hands of the state, by means of a central bank with an exclusive monopoly. While none of the contributors to this volume could convincingly argue that Marx and Engel’s precondition has been realized in any western-style economy, most would argue that central banking, by its very nature, entails the “fatal conceit” of central planning, one of the defining elements of socialism. Something to think about the next time you buy your morning coffee with a Federal Reserve note or, perhaps, your stored-value card.

Howard Bodenhorn is author of A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation-Building due from Cambridge University Press in January, 2000.


Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Entrepreneurship in Nineteenth-Century Brazil:The Formation of a Business Environment

Author(s):Birchal, Sergio de Oliveira
Reviewer(s):Woodward, Ralph Lee

Published by EH.Net (November 1999)

Sergio de Oliveira Birchal, Entrepreneurship in Nineteenth-Century Brazil:

The Formation of a Business Environment. New York: St. Martin’s Press,

1999. xiii + 233 pp. Tables, notes, bibliography, and index. $65.00

(cloth), ISBN 0-312-21716-1.

Reviewed for EH.NET by Ralph Lee Woodward, Jr., Department of History,

Texas Christian University.

This well-researched monograph, based on the author’s Ph.D.

thesis at the University of London, examines the emergence of entrepreneurship

in the Brazilian province of Minas Gerais during the nineteenth century,

suggesting that it is an example of economic development and business formation

in “latecomer” economies. The author’s stated purpose is to show how the

emergence of an entrepreneur class in the interior province of Minas Gerais

differed somewhat from such development in Sao Paulo or Rio de Janeiro. The

study centers on non-agricultural enterprises, specifically the iron, the

transport, the textile, and the electricity-generating industries, and deals

principally with the latter half of the nineteenth century.

The author is a lecturer in Economics and Business at the UNA School of

Business in Belo Horizonte. Based on a broad array of business and government

records and reports in the province, he first provides an overview of Brazilian

and Mineiro economic history in the nineteenth century. A second chapter

focuses on the formation of the Mineiro entrepreneur, with a brief review of

the literature followed by careful analysis of the social and economic

background of the Mineiro businessman.

While acknowledging that the businessmen in Minas Gerais possessed most of the

characteristics of their counterparts

in Rio or Sao Paulo, he also finds that they had significantly different

social and ethnic backgrounds and that immigrants were less important in Minas

Gerais. Local residents constituted the main source of entrepreneurs in

nineteenth-century Minas Gerais.

The third chapter explores the organizational structures of the Minas Gerais

business firms, comparing them to Max Weber’s “traditional” or

“bureaucratic” types. He comes easily to the conclusion that most Mineiro firms

were traditional, small family

affairs. “Their limited scale never required the development of a more complex

organization of the firm and

mineiro entrepreneurs continued to manage their firms with old-century

techniques” (p. 69). In analyzing the four industries mentioned above,

Oliveira Birchal provides considerable statistical data on the size,

structure, and activities of several firms. He adds, however, that toward the

end of the century there was a trend toward more bureaucratic organization,

even though the mineiro economy “continued to be dominated by traditional

firms which became more numerous and specialized towards the end of the

century” (p. 127). He notes that this was the same phenomena that preceded the

rise of large and modern enterprises and of managerial capitalism

in the United States, Britain, and Germany. “Therefore, it is reasonable to

conclude that from the organizational point of view the business environment in

nineteenth-century Minas Gerais was characteristic of the first stage of

capitalist development-traditional and personal capitalism” (p. 127).

The final chapter discusses the role of technology in these firms and their

heavy dependence on and absorption of foreign technical knowledge and the

limits to the development of an indigenous technology during the nineteenth

century. The process of bringing advanced foreign technology to Minas Gerais

was notably slow, and much of the author’s discussion here focuses on the last

two decades of the century. From his examination of technology the author

concludes that Minas Gerais was “an inhospitable environment for the

entrepreneur. . . . The narrowness of the capacity of the nineteenth-century

mineiro economy to absorb and refine imported technology was due to a

lack of skills and entrepreneurship, which was confirmed by the failure to

develop a capital goods industry” (p. 183).

This study “strongly supports the view that economic development of backward

countries does not necessarily follow the same path taken by advanced

economies” (p. 184). Among the differences it notes from development of “more

advanced countries” is the absence of “self-made”

businessmen coming from the bottom of the social ladder by the strength of

their own efforts. Such Horatio Alger figures were notably absent in Minas

Gerais as

business leaders usually came from the upper class and businesses were usually

family ventures. Moreover, strategies and internal organization of these firms

often resulted from considerations unrelated to the market, the social or

political contexts being more important factors.

And, the lack of indigenous technology and a capital-goods industry

“imposed solutions to problems that entrepreneurs in more technologically

advanced countries rarely had to worry about” (pp. 184-85).

It is clear from this study that social and cultural factors are major

determinants of economic development. To the extent that Minas Gerais’

historical development is unique, the reasons may be found in its social,

ethnic, and cultural patterns as Oliveira Birchal has demonstrate d. These or

other social and cultural characteristics certainly help to explain why some

regions have succeeded in implementing a modern capitalist economy more rapidly

than others. This case study of one such region thus makes an important

contribution to the literature on the development of “latecomer” economies.

Ralph Lee Woodward is Neville G. Penrose Professor of Latin American Studies in

the Department of History, Texas Christian University, Fort Worth, Texas. The

third edition of his Central America: A Nation Divided

(Oxford University Press) appeared in 1999. He is currently writing a history

of merchant guilds (consulados de comercio) in the Spanish World,


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