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Deconstructing the Monolith: The Microeconomics of the National Industrial Recovery Act

Author(s):Taylor, Jason E.
Reviewer(s):Vickers, Chris

Published by EH.Net (August 2019)

Jason E. Taylor, Deconstructing the Monolith: The Microeconomics of the National Industrial Recovery Act. Chicago: University of Chicago Press, 2019. viii + 206 pp. $55 (hardcover), ISBN: 978-0-226-60330-8.

Reviewed for EH.Net by Chris Vickers, Department of Economics, Auburn University.

The National Industrial Recovery Act (NIRA) was in effect for only two years between 1933 and 1935 but has attracted interest from economists from a variety of subfields ever since. The law created the National Recovery Administration, a vast cartelization of the American economy under which individual industries were allowed to organize themselves under “Codes of Fair Competition” as an attempt to prevent “ruinous” competition. Macroeconomists have conjectured that it slowed the economy by reducing output (or, counterintuitively, accelerated the recovery by increasing inflation expectations), while industrial organization economists have used the program as an experiment in a near-suspension of antitrust law.

Jason Taylor (Central Michigan University) has spent much of his career documenting various aspects of this law, a program of research ably synthesized and expanded on in Deconstructing the Monolith: The Microeconomics of the National Industrial Recovery Act. The book takes a microeconomic approach to studying the NIRA, with the analysis generally performed at the level of individual industries. He goes to this level because, as he documents, the effects of the NIRA were wildly different across industries. Some of this heterogeneity was in terms of content of the codes, with some codes having contained far more serious restrictions on competition than did others. Another source of variation is in timing: Although President Roosevelt signed the NIRA in June 1933, the process of code adoption was slow, with some being approved weeks before the Supreme Court invalidated the law in May 1935. As the book makes clear, aggregate empirical specifications that, for example, have a binary variable for “NIRA in effect” are senseless.

Chapter 2 of the book lays out the intellectual underpinnings of the NIRA, with roots in the World War I experience. The NIRA strikes most modern economists as an odd way of trying to achieve “recovery.” Taylor carefully documents the intellectual history of the law, in particular the worries from the 1920s about “overproduction,” which helps explain how the law came to be structured as it was. Chapter 3 documents the process of code organization with various case studies.

The quantitative discussion starts in Chapter 4’s analysis of the often neglected “President’s Reemployment Agreement” (PRA) of August 1933. The basic idea here was to reduce unemployment by sharing work among individuals by reducing the length of the workweek. The organization of industry under codes was slower, and so the beginning of the cartelization of the economy was heterogeneous. The labor policies of the PRA, by contrast, fit much more into the framework of a “monolithic” shock, both in terms of timing, as the agreement came into force all at once, and in terms of policy, with (generally) constant standards for workweeks and minimum wages. The analysis at the macroeconomic level makes it clear that this policy “worked” in terms of lowering unemployment. The larger contribution of the book, however, is to take this argument apart at the level of the industry, and this task is performed particularly well in this chapter. Given the large variation in both average nominal earnings and workweeks across industries, the actual treatment effect of the PRA is heterogeneous as well, hitting low-earning and long-workweek industries more severely. Taylor convincingly uses this heterogeneity to show that the effects of the PRA on employment really were causal.

Chapter 5 lays out explanations for various dimensions of heterogeneity in codes, including the length of time to adoption and in provisions regarding both labor regulation and competitive conduct. The results are generally inconclusive with respect to the latter. The purpose here is not to establish a causal explanation for the heterogeneity, but rather to highlight the vast amount of differences in code content. In this area, industry level data may be insufficient to explain code composition, and further research at the level of individual firms or establishments may be a different avenue to explore why some industries were more collusive under the NIRA than others.

Chapters 6 and 7 are devoted to the gradually worsening level of compliance with the NIRA, with the former analyzing the mechanisms of compliance and the latter the effects of deterioration in efficacy. The most convincing part of the analysis here looks at the effects of various efforts at increasing compliance in particular areas and industries. After a mass drive in the boot and shoe manufacturing industry just prior to the invalidation of the NIRA, workweeks decreased relative to manufacturing as a whole as the industry moved closer to the code standard. Although the sketchiness of the available data (through no fault of Taylor) makes it somewhat more difficult to make precise statements about how strong compliance really was across industries at different times, the analysis here is good evidence that government efforts could have “saved” the NIRA from the compliance crisis, at least for a while.

Taylor concludes by asking if the invalidation of the law had lasting effects. The most straightforward part of the analysis finds that subsequent economic growth was larger in industries with longer, more complex codes. This analysis speaks more to the question of the efficacy of the codes than whether there were lingering effects per se. Taylor suggests that there mostly were not: The long run increase in real wages was more a function of technology than the law. While this is almost certainly correct as a whole, it is conceivable that one long lasting effect of the law was faster technological growth in these high wage industries, a possibility recently raised by Robert J. Gordon in The Rise and Fall of American Growth. Further work here could also analyze whether the NIRA period affected heterogeneity within industries, as opposed to industry-wide averages.

Although the book is emphatically oriented to the level of individual industries, Taylor concludes with some speculation as to how his results should shape macroeconomic debate over the effects of the program. This serves more as a direction for future research than as a summation of the evidence in the book, and it seems probable that subsequent research will leverage the work here to break new ground in understanding aggregates. While there is clearly work to be done in going to these higher levels of aggregation, as well as drilling down towards the levels of firms and establishments, Taylor has written the definitive word on how industries experienced the NIRA differentially, and anyone working in this period will need to be familiar with his arguments.

Chris Vickers is associate professor of economics at Auburn University. He is currently studying firm behavior during the Great Depression and income inequality during World War II.

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

Subject(s):Economic Planning and Policy
Government, Law and Regulation, Public Finance
Industry: Manufacturing and Construction
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The Technology Trap: Capital, Labor, and Power in the Age of Automation

Author(s):Frey, Carl Benedikt
Reviewer(s):Field, Alexander J.

Published by EH.Net (August 2019)

Carl Benedikt Frey, The Technology Trap: Capital, Labor, and Power in the Age of Automation. Princeton, NJ: Princeton University Press, 2019. xiv + 465 pp. $30 (hardcover), ISBN: 978-0-691-17279-8.

Reviewed for EH.Net by Alexander J. Field, Department of Economics, Santa Clara University.

Carl Benedikt Frey has written an important and timely book. Its concern is the impact of new technologies on labor earnings and employment prospects in different time periods, principally in Britain and the United States. Frey, who codirects the Program on Technology and Employment at Oxford University, agrees that over the long run technological change is the fundamental driver of improvements in (average) material living standards. But averages conceal a great deal of variation. The author emphasizes that when technologies change, some people lose. These individuals are not necessarily compensated by the winners, their losses may persist throughout the remainder of their lifetimes, and it is small consolation to tell them that their “sacrifices” are laying the foundation for a better tomorrow. It follows that it can be individually rational for those who see their livelihoods threatened by technical change – handloom weavers in eighteenth century Britain, or perhaps truck drivers in the twenty-first century — to do whatever they can to try to stop or otherwise obstruct the changes, even if this has the effect of reducing average incomes. This observation is critical to Frey’s understanding of the past and his concerns about the future.

In particular, Frey endorses an explanation of the timing and location of the world’s first industrial revolution that is ultimately political. The availability of a new technology, particularly if it is labor saving, is not necessarily the proximate cause of its adoption. Politics matters. The landed classes feared the potential disruption and threat to their rule that might result from new processes that put people out of work. So long as they held uncontested power, they were prepared to stand in the way of such changes. The eighteenth century industrial revolution went forward in Britain when and because the government switched from siding with guilds and other artisans who opposed labor replacing technologies to a policy of cracking down, with thousands of troops if necessary, on those who would smash machinery or otherwise block the productivity and profit enhancing impact of the new equipment. These innovations were critical for maintaining and increasing Britain’s growing commercial supremacy.

Frey’s main conceptual apparatus is a distinction between labor replacing and labor enabling technologies. Labor replacing technologies, he says, use physical capital to reduce unit labor requirements and can pose a real threat to livelihoods. Labor augmenting or enabling changes, he suggests, increase workers’ productivity in their existing jobs or open up new opportunities for employment. But the distinction is not quite so straightforward. One would like these terms to be dependent on the nature of the technologies themselves. Even when the introduction of machinery throws many out of work, those remaining will likely find productivity in their existing jobs increased. This disrupts the bright line Frey is trying to draw between these two categories of technical change. Whether livelihoods are threatened in an industry directly impacted depends greatly on the price elasticity of the demand for the good or service whose production is affected. Frey’s treatment of these interconnections is somewhat opaque and incomplete.

Theorists and economic historians have long acknowledged that labor saving technical change may reduce wages and/or labor’s share of national income. That is a different question from whether it results in widespread and persisting unemployment. Ultimately the cost reductions in the industries affected increase people’s real incomes, and lead to expanded demand for other goods and services, and for the labor necessary to produce them. In some cases, however, this transition may take the better part of a generation or more. And, as noted, labor’s share may fall, even after reattainment of more or less full employment. That is apparently what happened in the first part of the nineteenth century, and the trend has reappeared in the years since Margaret Thatcher and Ronald Reagan came to power.

Frey’s book has five parts. The first, The Great Stagnation, covers economic history up to the industrial revolution, and emphasizes repeatedly that availability of new technologies did not necessarily lead to their adoption. The political (and arguably cultural) context had to be right. In the eighteenth century it was in Britain but not in France. Thus the development of industry was very different in France as compared with Britain. These contrasts are discussed in Part II, The Great Divergence. Part III, The Great Leveling, describes how a period of growing inequality and immiseration of the working class (Engels’ Pause) led eventually to more than a century of more broadly shared income growth in Britain and the U.S. Part IV, the Great Reversal, details how this dynamic came to an end in the 1980s.

Frey blames growing wealth and income inequality on a change in the bias of technical change once again towards the labor replacing variety. But this seems to me overly simplistic, particularly in a book emphasizing political factors in explaining the timing and location of the first industrial revolution. It would have helped to have a more explicit treatment of the effects in both Britain and the United States of the resurgence of conservative and generally anti-labor and anti-union ideology and power. Surely Reagan and Thatcher mattered, along with the ensuing dramatic reductions in income and inheritance taxes, the remaking of the judiciary in the United States, and what this has meant for the operation of democracy (Frey does mention some of these developments).

The last part of the book, Part V, focuses on the future. Frey is optimistic about the potential of new technologies, particularly artificial intelligence (AI) coupled with big data, but is concerned implementation may be blocked by those who stand to lose, in the same way that the industrial revolution may have been delayed for decades, perhaps even centuries, by similar obstructionism. His last chapter considers policy initiatives that might prevent or partially mitigate some of this dynamic in the future.

The Technology Trap is carefully and extensively documented, and includes references to the very latest research, including NBER working papers published as recently as 2018. That said, the history is based almost entirely on secondary sources. But Frey has read widely, and his interpretations are considered and almost always consistent with the latest research. Many works of this nature, which attempt to cover centuries, indeed millennia of economic history, as well as look into the future, end up being superficial and often error-ridden. On these dimensions the book is largely if not entirely an exception. A great deal of effort, thought, and scholarship went into its writing, and it shows. There is much food for thought here and I can envision this assigned in upper division economics classes as well as some graduate courses.

Alexander J. Field is the Michel and Mary Orradre Professor of Economics at Santa Clara University. He is the author of A Great Leap Forward: 1930s Depression and U.S. Economic Growth (New Haven: Yale University Press, 2011), and is currently working on a book about the supply side consequences of U.S. economic mobilization for the Second World War.

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

Subject(s):Economywide Country Studies and Comparative History
History of Technology, including Technological Change
Labor and Employment History
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):General or Comparative

Cash and Dash: How ATMs and Computers Changed Banking

Author(s):Bátiz-Lazo, Bernardo
Reviewer(s):Burns, Scott A.

Published by EH.Net (June 2019)

Bernardo Bátiz-Lazo, Cash and Dash: How ATMs and Computers Changed Banking. Oxford: Oxford University Press, 2018. xiv + 324 pp. $75 (hardcover), ISBN: 978-0-19-878281-0.

Reviewed for EH.Net by Scott A. Burns, Department of Economics, Troy University.

The impact of new financial technologies from mobile money in the developing world to payment apps like Venmo, Square, and Apple Pay in the developed world as well as the potential of blockchain technology has attracted enormous scholarly attention in recent years. In his latest book, Bernardo Bátiz-Lazo draws our focus to the one of the original transformational FinTech innovations: the ATM.

Bátiz-Lazo, a professor of business history and bank management at Bangor University, has already established himself as one of the world’s leading experts on financial technology. Cash and Dash takes a deep dive into the intriguing and underappreciated history of what former Fed Chairman Paul Volcker called “the most important financial innovation” of the twentieth century (p. 1) – the ATM.

Given the enormous impact the ATM has had and how little we knew about its origins, the book certainly fills an important gap in the FinTech literature. It is the culmination of more than a decade’s worth of research and is extensively sourced, including more than fifty interviews of bankers and engineers as well as patent records, press releases and hundreds of academic articles.

After an introductory chapter, chapters two through four provide a detailed look into the invention and development of early ATMs in the 1960s. One of the core insights from these chapters is that, contrary to a popular misconception, the ATM’s invention cannot be traced to a single person or entity. Like so many other financial innovations, it emerged through a gradual process of trial and error to both reduce costs and accommodate changes in customer demands. Early “cash machines” were developed to help banks grapple with challenges they faced in the post-war era such as meeting the sharp rise in the use of checks amid a growing labor shortage. This shift in payment preferences created a need for banks to find innovative ways to reduce payment processing costs – a job the ATM was well-suited for.

The most illuminating insights of the book come in chapters four through six where the author discusses the development of the networks that were necessary to sustain the ATM in the 1970s and 1980s. These networks, Bátiz-Lazo stresses, mattered far more to the banking sector than the invention of the cash machine. By connecting machines at different banks and branches, this network-building explains how “the cash machine evolved into the ATM” that we know today. These chapters are arguably the most important for understanding how the development of the networks connecting early ATMs can inform our understanding of how more recent financial technologies, like mobile money and various other payment apps, can develop interoperable platforms capable of sharing information within and across borders.

After a concluding chapter that includes a discussion of the cultural impact of the ATM and recommendations for future research, the book concludes with a technical appendix detailing the greatest “technological and regulatory milestones” in automated banking. It is here that we see most clearly the author’s effort to situate his own scholarly contribution on the history of the ATM in the broader literature on financial innovation. As Bátiz-Lazo writes in the introduction, “[t]his book is as much about technological change in retail banking since the 1960s as it is an exploration of cash machines” (p. 5).

It is in this claim that readers might find the book wanting. Although the author deserves enormous credit for providing arguably the most detailed and exhaustive account of the development and evolution of the ATM, the book itself often focuses too narrowly on the ATM without fully explaining what policymakers today might learn from its evolution and rapid dissemination. Rather than providing what are, at times, excessive details on the origins of the cash machine, the project would have benefited from taking a more outward and forward-looking perspective at what the success of the ATM can teach us about future financial innovations.

The book would also benefit from a deeper discussion of the interaction between regulations and financial innovations. Although the topic of how regulations shape innovations is touched upon throughout, there is too little analysis of the all-important role that establishing an institutional environment that is conductive to new financial technologies plays in making these transformative innovations possible in the first place (Di Castri and Gidvani, 2014). In this respect, the author would be wise to include some discussion of some of the earlier research on the connection between regulatory environments and financial innovation, particularly in the U.K. where much of his early analysis takes place (see, for instance, White, 1984).

Lastly, I would have liked to see more discussion of how automation has led to more and better jobs — not fewer, as is so often argued — that enhance the efficiency of banks and improve the overall customer experience. Bátiz-Lazo rightly acknowledges the important role that ATMs played in reducing banking costs and disrupting the labor market in banking. But more attention should be placed on how the changes ushered in by the ATM helped contribute not only to the increased efficiency of the banking sector (since bank branches no longer needed as many tellers, they were able to hire and train more loan officers, etc., to improve the quality of their services), but also an increase in bank penetration and employment as banks could afford to open more branches (Bessen, 2015). Although the author does dedicate a brief discussion at the end towards this topic (pp. 250-256), the point deserves greater elaboration, particularly at a time when concerns about technological unemployment are running high.

All in all, Bátiz-Lazo should be commended for his tireless work and painstaking detail. Cash and Dash is an important contribution for historians and scholars of the unpredictable and often chaotic world of financial innovation. Although the book would have benefited from a more forward-looking perspective, it remains an essential contribution to the canon on the history of financial innovation.


Bessen, J. (2015). Learning by Doing: The Real Connection between Innovation, Wages, and Wealth. New Haven: Yale University Press.

Di Castri, S. and Gidvani, L. (2014). “Enabling Mobile Money Policies in Tanzania: A ‘Test and Learn’ Approach to Enabling Market-led Digital Financial Services.” GSMA.

White, L. H. (1984). Free Banking in Britain Theory, Experience and Debate, 1800-45. Cambridge: Cambridge University Press.

Scott A. Burns is an assistant professor of economics at the Manuel H. Johnson Center for Political Economy at Troy University. His most recent publications focus on the mobile money revolution in Sub-Saharan Africa and the impact of the Dodd-Frank Act on bank expenses in the United States.

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

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 Winding Road to the Welfare State: Economic Insecurity and Social Welfare Policy in Britain

Author(s):Boyer, George R.
Reviewer(s):Huberman, Michael

Published by EH.Net (June 2019)

George R. Boyer, The Winding Road to the Welfare State: Economic Insecurity and Social Welfare Policy in Britain. Princeton: Princeton University Press, 2018. xiii + 360 pp. $45 (hardcover), ISBN: 978-0-691-17873-8.

Reviewed for EH.Net by Michael Huberman, Department of History, Université de Montréal.

The specter haunting this timely book on the making of the British welfare state is the presence of inevitability. In a typical history of the modern state, the establishment of welfare policy is treated in a separate chapter in which the forces of reform slowly but assuredly overcome obstacles and interests hostile to the introduction of welfare spending. George Boyer in this exhaustive study of the classic British case shows this was not the case.

Drawing on contemporary accounts, the book begins with different measures of economic insecurity and poverty lines that serve as baselines in the pivotal periods Boyer studies. The book returns to these indicators as the author proceeds in chronological fashion, each of the eight chapters dealing with a distinct historical episode. The Old Poor Law casts a long shadow in this narrative. Although transformed in 1834, spending on outdoor relief remained important into the 1860s. Resurrecting the Victorian ideal that pauperism represented individual deficiencies, and with the support of skilled workers who desired to rid themselves of the stigma of the workhouse, the Crusade Against Our Relief succeeded in reducing benefits. This proved temporary. By the mid 1880s there was renewed interest in the question of poverty based on the recognition that, while real wages may have been rising, the nature of unemployment, increasingly cyclical, had shifted from a voluntary to an involuntary basis. Throughout these chapters, as in the rest of book, Boyer carefully breaks down the incidence of poverty and the take up of relief by gender, age, region, skill level, and sector of activity, showing a masterful grasp of contemporary and recent literatures.

To Boyer, the adoption of Liberal reforms between 1906 and 1911 was an inflection point because old age pensions were funded entirely by London and national insurance by contributions from employers, workers, and the state. The domestic and international shocks of the interwar put these policies to test. Eligibility was not universal and many non-union families turned to the Poor Law, which remained a parallel system for supplementary benefits. Following the adoption of the recommendations of the Beveridge Report, the Poor Law, 350 years old, was terminated in 1948. The debate over the costs of universal coverage echoed earlier guiding principles, Beveridge himself recognizing that social insurance was to guarantee the minimum income needed for subsistence. What were the drivers of changes in social policy? Boyer’s scorecard is mixed: ideology, efficiency, the extension of the vote, the rise of trade unions and the Labor Party, and affinity with those in need all have had a part to play. In this historically rich account, replete with feedback mechanisms, Boyer decidedly avoids causal inference.

While avoiding the trap of a Whig-like interpretation, Boyer’s account is nonetheless national in scope. With exception, international competition rarely figures in discussion on the timing of adoption or the generosity of benefits. Lloyd George did pay a celebrated visit to Germany to study Bismarck’s reforms, but the impression is that this was mainly showmanship to garner support and stave off opposition. Boyer also eschews labor regulation as an alternative form of insurance. Laws that limited working hours of women and children contracted the labor supply, thereby narrowing wage distributions. To be sure, such measures benefited those at work, but they would have improved the position of low skilled workers relative to poverty lines and at reduced cost to the state.

Among its many merits, this book reminds us that the British welfare state was not designed on the blackboard. The winding path to the New Jerusalem was replete with potholes as it was unpredictable and uncertain. The inference is sobering: the danger today is that after successive rounds of austerity cutbacks it may prove difficult to retrace our steps.

Michael Huberman is Professor of History at the Université de Montréal where he holds the Chaire McConnell en études américaines. He has several ongoing research projects in international economic history.

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

Subject(s):Economic Planning and Policy
Government, Law and Regulation, Public Finance
Geographic Area(s):Europe
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

People Must Live by Work: Direct Job Creation in America, from FDR to Reagan

Author(s):Attewell, Steven
Reviewer(s):Stabile, Donald R.

Published by EH.Net (April 2019)

Steven Attewell, People Must Live by Work: Direct Job Creation in America, from FDR to Reagan. Philadelphia: University of Pennsylvania Press, 2018. vii + 269 pp. $75 (cloth), ISBN: 978-0-8122-5043-5.

Reviewed for EH.Net by Donald R. Stabile, Professor of the College, St. Mary’s College of Maryland.

As the Roosevelt New Deal recedes further into the past, historians keep finding new approaches to analyze its policies and legacy. Steven Attewell, who teaches public policy at the Joseph S. Murphy Institute for Worker Education and Labor Studies at the City University of New York, offers an especially insightful history of New Deal thinking by focusing on its programs for direct job creation. By direct job creation, he means programs where to alleviate unemployment the federal government hired workers to perform the tasks needed for public works projects instead of having private firms contract for those projects and hire the workers they needed. Direct job creation is more effective, he argues, because the government can make sure that the jobs go to persons who are unemployed, while private contractors may use workers who are already on their payrolls. Attewell’s argument is that direct job creation was a key feature of the New Deal that has become a forgotten policy.

To be sure, direct job creation was not an original concept of the New Deal, and Attewell gives a history of the idea that dates back to sixteenth century England. Still, it was during the New Deal that the idea attained its broadest application. Historians of the New Deal, however, have missed its significance. They have done so by thinking of public works programs and direct job creation as comparable. Rather, as Attewell argues, they were distinct ideas with different intellectual backgrounds and contrasting justifications.

As a way of establishing the significance of direct job creation during the New Deal, Attewell begins with a revised history of the Social Security Act (SSA) of 1935. Most histories of the New Deal focus on the SSA as the product of a Committee of Economic Security (CES), established by executive order of President Roosevelt on June 29, 1934. Staffed by experts in the area of social insurance, the CES proposed the system of unemployment insurance and old-age pensions that still exists in the U.S. Lost in this history is that “a full analysis of the CES’s deliberations reveals the origin of direct job creation” in the New Deal (p. 21). A crucial element of that origin was the inclusion of social welfare experts from the Federal Emergency Relief Administration (FERA) in the deliberations of the CES. Those experts had already formulated the idea of direct job creation as the solution to the high levels of unemployment during the Great Depression. They argued that as long as many persons in the U.S. were without a job, there would be inadequate consumption to restore the economy. This lack of purchasing power argument was a popular explanation as a cause of the Great Depression. Because they believed that relief programs stigmatized the unemployed, these social welfare experts focused on direct job creation to boost consumption. Their first effort was to gain a hearing as part of the report the CES made to the president, arguing that persons not eligible for the social insurance of the SSA be given jobs directly by the federal government.

Roosevelt took the CES report and used it to propose two bills, the SSA and the Emergency Relief Appropriation Act (ERAA) of 1935. The SSA would take care of the social insurance programs and the ERAA would facilitate job creation with $4.88 billion in spending. The ERAA set off another debate over the merits of direct job creation. There was a struggle over the use of the ERAA funds between the Works Progress Administration (WPA), which wanted to use the funds for direct job creation, and the Public Works Administration (PWA), which wanted to use the funds to have private firms be given contracts for public works projects. As Attewell describes in great and fascinating detail, the WPA won out over the PWA and gained the bulk of the funds from the ERAA, which was renewed annually. As a result, Attewell concludes, “by the end of 1935 direct job creation was a commanding economic policy within the New Deal” (p. 88). The policy was very successful in reducing unemployment. Attewell uses revised estimates of the unemployment rate during the 1930s to argue that the Great Depression ended before World War II. The WPA was terminated in 1943, however, and the program of direct job creation fell out of favor.

For the rest of the book, Attewell analyzes efforts to revive direct job creation through the Employment Act of 1946, Lyndon Johnson’s Great Society and the Humphrey-Hawkins Act of 1978. Each effort failed, he argues, due to the political popularity of alternative programs such as Keynesian fiscal policy, job training programs, the negative income tax idea and traditional public works projects using private firms. Conservative counterattacks on direct job creation also took their toll, and liberals too readily gave up on the New Deal vision. As a result, during the 2007-2009 recession, direct job creation was not tried by the Obama administration. Still, the idea has not gone away, and Attewell ends with his own program for how to institute a direct job program.

There is much to admire in Attewell’s book and I hope I have made it clear that I do admire the book. Through my own research on the place the idea of a living wage held in the economic policies of the New Deal and in its legacy, I have reviewed much of the same information. My own work would have been greatly informed if Attewell’s book had been available to me.

At the same time, I must question Attewell’s attribution of direct job creation as “a commanding economic policy within the New Deal” (p. 88). Attewell gives many arguments in favor of direct job creation as an important policy. In one case, however, he inadvertently highlights the difficulty of assessing the degree of that importance by arguing that “FDR’s Second Bill of Rights, announced in 1944, put the right to a job first and foremost among the economic rights of all citizens in postwar America” (p. 126). Roosevelt’s Second Bill of Rights, set forth in his State of the Union Message to Congress in January 1944, gave the first right as “The right to a useful and remunerative job in the industries or shops or farms or mines of the nation.” To me this right was more complex than a guaranteed job by the government; it implied that workers were entitled to a job in the private sector at a living wage. Direct job creation might be important in reaching this goal but it would take cooperation from the private sector as well. Regardless of the complexity of Roosevelt’s goals for his economic policy, Attewell has added to our understanding of those goals.

Donald R. Stabile is Professor of the College at St. Mary’s College of Maryland and the author of two recent books, The Political Economy of a Living Wage: Progressives, the New Deal and Social Justice (Palgrave Macmillan, 2016) and Macroeconomic Policy and a Living Wage: The Employment Act as Redistributive Economics, 1944-1969 (Palgrave Macmillan, 2018).

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

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

American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold

Author(s):Edwards, Sebastian
Reviewer(s):Richardson, Gary

Sebastian Edwards, American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold. Princeton: Princeton University Press, 2018. xxxiii + 252 pp. $30 (cloth), ISBN: 978-0-691-16188-4.

Reviewed for EH.Net by Gary Richardson, Department of Economics, University of California at Irvine.

The risk-free rate of return on investments is often considered to be the yield on United States government debt. “The risk-free rate is hypothetical,” Investopedia indicates, “as every investment has some type of risk associated with it. However, T-bills [United States Treasury debt obligations with a maturity of 52 weeks or less] are the closest investment possible to being risk-free for a couple of reasons.” The first is “the U.S. government has never defaulted on its debt obligations, even in times of severe economic stress.” Similar statements appear in Wikipedia’s entry on the risk-free interest rate as well as in scores of economics and finance textbooks used around the world. Sebastian Edwards’ new book, American Default: The Untold Story of FDR, the Supreme Court, and the Battle Over Gold, questions this concept underlying modern financial markets by asserting that the United States defaulted on federal debt during the 1930s, when it withdrew monetary gold from circulation and abrogated the gold clause in contracts, both public and private.

Before I delve into the details of Edwards’ insightful study, I want to give you an overall assessment of the book It is fascinating, well-written, and thoroughly researched. It provides new perspective on an important era of American history. It discusses the ideas, personalities, politics, economics, and finance underlying the principal policies by which the Roosevelt administration resuscitated the United States economy after the catastrophic contraction of the early 1930s. An academic press published the book, but the clarity of its prose and vividness of the narrative make it accessible to a general audience. The book should and will be widely read. It’s worth pondering and debating, and I will debate some aspects of it later in this review.

Edwards’ book asks provocative questions about fundamental features of the U.S. and international financial systems. The author lists these questions at two points in the book: the end of the introduction and beginning of the conclusion. The lists contain fifteen total queries. A short summary is:
• Did the United States default on federal government debt in 1934 when it abrogated the gold clause for government bonds (particularly the fourth Liberty Bond)?
• Why did the federal government abrogate the gold clause? Was this action necessary?
• Who made the key decisions during this episode and how did they justify their actions?
• What were the consequences for investors and for the economy as a whole, both in the United States and abroad?
• Could this happen again?

Edwards answers these questions over the course of 17 chapters plus an introduction, an appendix, a timeline, and a list describing the men around whom the story revolves. The introduction lays out the issues of interest. Chapters 1 through 15 narrate the story. The narrative revolves around policymakers, such as President Franklin Roosevelt, Senator Carter Glass, and members of the Supreme Court, and the men who advised them, including Roosevelt’s Brain Trust, whose initial members included Raymond Moley and Adolf Berle, law professors from Columbia University and Rexford Tugwell, an economics professor at Columbia. The narrative describes the decisions that these men made (or had to make), their rationales for making these decisions, and the state of knowledge and state of the world at the times the men made these decisions.

The narrative starts in March 1932, during the economic downturn now known as the Great Depression. A few pages describe the poverty and desperation imposed upon people from all walks of life. Nearly a quarter of the labor force experienced unemployment. Commodity prices declined more than half. These declines proved particularly hard on men and women running small businesses, such as family farmers who made up a quarter of the United States population. Declining farm prices accentuated farmers’ debt burden, since the nominal value of debts remained fixed. This forced farmers who wanted to pay their mortgages and crop loans to double production (which was often impossible) or cut consumption (particularly of durable goods like cars, radios, and clothing) — and forced other farmers (and eventually almost all farmers) to stop paying their debts, default on their loans, and face bankruptcy, which often resulted in the loss of lands and livelihoods.

Chapters 1 through 4 cover Roosevelt’s campaign platform and policies and the economic turmoil from November 1932 through February 1933. During these last five months of the Hoover administration, a nationwide panic drained funds from the banking system and gold from the vaults of the Federal Reserve. The public feared for the safety of deposits, and rushed to convert their claims against banks into coins and cash. The public (particularly foreign investors) also feared for the value of the dollar, since they anticipated that the Roosevelt administration might lower the gold content of U.S. currency or leave the gold standard all together, as had Britain and numerous other nations. In March, gold outflows forced the Federal Reserve Bank of New York below its gold reserve requirement. To prevent the New York Fed from shutting its doors, the newly inaugurated President Roosevelt declared a national banking holiday. This segment of the story ends by describing the policies that the Roosevelt administration implemented as it resuscitated the financial system and sparked economic recovery.

This review will not go into details about decisions and the logic underlying them. For that information, you should read the book, which presents the materials cogently and clearly. You may also peruse other recent readable treatments on the topic, including The Defining Moment (Alter, 2006), FDR: The First Hundred Days (Badger, 2008), Nothing to Fear (Cohen, 2009), and Freedom from Fear (Kennedy, 1999). All of these cover similar material and reach similar conclusions. I also recommend the memoirs of Herbert Hoover and Roosevelt’s principal advisors. A list appears in Edwards’ bibliography. To it, I recommend adding the memoir of Jesse Jones, who was head of the Reconstruction Finance Corporation, Fifty Billion Dollars: My Thirteen Years with the RFC (1951).

Chapters 5 through 10 describe the Roosevelt administration’s efforts to help the economy recover from the spring of 1933 through the winter of 1934. The administration believed a key cause of the catastrophic contraction was the devaluation of the dollar and decline in prices — particularly of farm commodities — that occurred during the 1920s and early 1930s. Prices of wholesale goods fell an average of 25% between 1926 and 1933. Consumer prices fell by the same amount. The average price of farm crops fell more than 66%. Declining prices made it difficult for farmers and other producers to earn sufficient profits to pay their debts, which were fixed in nominal terms, forcing families and firms to cut consumption and investment, in order to avoid bankruptcy, or forcing families and firms to default on their debts, which was often worse for them and which also put banks out of business, restricting the availability of credit, triggering banking panics, and leading to further economic contraction. The administration sought to alleviate this cycle of debt-deflation by convincing (or forcing) individuals and firms to redeposit funds in banks, encouraging banks to lend, and refilling the Federal Reserve’s vaults with gold. All of these actions would expand the money supply and eventually raise prices.

The administration also sought to speed the process by directly influencing commodity prices, particularly those traded on international markets, which had fallen substantially due to foreign governments’ decisions to devalue their own currencies, usually by abandoning the gold standard and allowing the price of their currencies to be determined by market forces. The quickest way to raise commodity prices and alter the exchange rate was to change the dollar price of gold. The federal government had lowered and raised gold’s dollar price in the past. The constitution provided Congress with the power to do so. Congress authorized the president to act, by raising the dollar price of gold up to 100% (or synonymously by cutting the gold content of dollar coins up to 50%), with the Thomas Amendment to the Agricultural Adjustment Act in May 1933. The Roosevelt administration used these powers to the utmost, periodically and persistently raising gold’s dollar price from the spring of 1933 through the winter of 1934. Roosevelt’s gold program concluded in January 1934, with the passage of the Gold Reserve Act, which set gold’s official price at $35 per troy ounce.

Gold clauses in contracts impeded this policy. An example was printed on Liberty Bonds: “The principal and interest hereof are payable in United States gold coin of the present standard of value.” Clauses like this were common in public and private contracts. Their intent was to protect creditors from declines in the value of currency or inflation, which is the same phenomenon but stated as an increase in the average price of goods. Gold clauses ensured lenders that they would be repaid with currency or gold coins with the same real value, in terms of the goods and services that they could purchase, as the funds that they had lent.

Gold clauses had a pernicious effect, however, when deflations and devaluation decisions of foreign governments reduced prices and economic activity. Then, gold clauses prevented governments from quickly and effectively remedying the situation by altering the money supply, interest rates, exchange rates, and prices to push the economy back toward equilibrium. In Chapter 16, Edwards admits monetary expansion was the optimal policy to pursue. He “strongly” believes it was the “main force behind the recovery” (p. 188). He indicates, correctly, that this is the consensus of scholars who have studied the issue. He offers no alternative. The Roosevelt administration understood this problem, and on May 29, convinced Congress to void gold clauses in all contracts retroactively and in the future.

Chapters 5 through 10 do a good job of conveying this material and describing the thought-process of the Roosevelt administration as it struggled to make difficult decisions in real time with limited information. The chapters reflect the conventional wisdom found in canonical accounts of this period including Milton Friedman and Anna Schwartz’s (1960) Monetary History of the United States, Peter Temin’s (1989) Lessons from the Great Depression, and Barry Eichengreen’s Golden Fetters (1992). The chapters also do a good job of describing concerns and criticisms of Roosevelt’s recovery plans. Perhaps as a narrative device, the chapters do not tell you who was right. That material appears one hundred pages later in Chapter 16.

Chapters 11 to 15 contain the novel part of the narrative. They describe investors’ reactions to Roosevelt’s gold policies and the abrogation of the gold clause. Investors quickly sued in state and federal courts, demanding that borrowers repay debts with gold coin, as required by gold clauses, rather than currency, as determined by Congress. Courts consistently ruled against plaintiffs, usually indicating that the Constitution gave Congress the power “to coin money and regulate the value thereof” and to determine what was legal tender for the discharge of public and private debts. Plaintiffs appealed these decisions, and the cases quickly reached the Supreme Court.

American Default’s coverage of these court cases is seminal and stimulating. I know the literature on this topic well. As the official Historian of the Federal Reserve System, I wrote essays on “Roosevelt’s Gold Program” and the “Gold Reserve Act of 1934” which appear on the Federal Reserve’s historical web site. I have read much of what scholars have published on this topic. I know of no comparable source for information on these court cases, the arguments presented by the plaintiffs and defendants, and the rationale underlying the Supreme Court’s confusing decision that Congress’s abrogation of the gold in private contracts was constitutional while Congress’s abrogation of the gold clause for government bonds, particularly the Liberty Bonds, was constitutional in some ways but unconstitutional in others, did not harm the plaintiffs, and therefore would not be overturned by the courts.

Now, we get to one point on which I disagree with the author. Edwards clearly believes the United States federal government defaulted on its debts. The Supreme Court equivocated, but generally seemed to think that the United States did not default, and I agree with the Supreme Court. Let me explain.

Merriam-Webster’s dictionary defines a default as either a (1) failure to do something required by duty or law or (2) a failure to pay financial debts. The United States Supreme Court decision in the gold cases indicated that the federal government defaulted in the first sense. It did not fulfill a promise printed on the bonds, which was to literally repay bondholders with United States gold coins at the standard of value that prevailed when the bonds were issued in 1918. At that time, the basic gold coin was the Eagle. It was worth $10 and contained 0.48375 troy ounces of gold and 0.05375 troy ounces of copper. So, a Liberty Bond with a face value of $100 promised upon maturity payment of 10 gold Eagles containing a total of 4.8375 troy ounces of gold and 0.5375 troy ounces of copper. When Liberty Bonds matured in 1938, however, the government gave bondholders neither the Eagles nor the metals that they contained.

The Supreme Court ruled that the federal government did not default in the second sense. The government fully paid its financial debts. The latter conclusion requires explanation, particularly because the book emphasizes the “American Default” aspect of the Supreme Court’s decision. The Supreme Court justified this conclusion based upon two arguments originally advanced by the federal government. The first argument began with the fact that in 1933, the federal government had withdrawn all monetary gold from circulation and paid in return paper currency at the standard of value which had prevailed since 1900. This meant that an individual holding 10 Eagle coins had to give them to the government and accept $100 in paper currency in return. The government argued that Liberty bond holders could and should be treated the same way as everyone else in the United States. In a hypothetical scenario, when the bonds matured, the government would pay bondholders the gold coins as promised, but then the government would also immediately confiscate those coins and compensate the former bondholders with currency at the same rate as everyone else had been compensated a few years before. This hypothetical sequence of transactions was legal. The U.S. Constitution enumerated Congress’s power to determine the standards of coinage and legal tender. These enumerated powers enabled Congress to convert gold coins to paper currency and/or redefine the standards of value and objects accepted as payment for public and private debts. If the government executed this hypothetical sequence of transactions when the bonds matured in 1938, an individual who had purchased a $100 Liberty Bond in 1918 would in the end receive $100 in currency. The Supreme Court ruled that it was acceptable for the government to give that currency directly to the bondholders upon maturity, rather than go to the hassle of giving them gold coins, taking them back, and then paying the currency to them.

To understand the second argument that abrogating the gold clause did not involve a financial default, it may help to step back from the legal technicalities and think of the repayment in an economic sense. The purpose of the gold clause was the protect bond holders from a fall in the value of American currency, a phenomenon known as inflation. The clause promised that individuals who invested in the United States would be repaid with dollars whose real value in terms of goods and services was equivalent to the real value of the dollars with which they purchased the bonds. Did the United States government do this? The answer is yes. The purchasing power of the dollar rose four percent between 1918, when the fourth Liberty Bond was issued, and 1938, when the fourth Liberty Bond matured. So, an American citizen who in 1918 purchased a $100 Liberty Bond received in 1938 funds sufficient to purchase goods and services that would have cost $104 in 1918. The government also paid 4.5% interest each year along the way. So, the government did honor its pledge to maintain the purchasing power of the funds entrusted to it by purchasers of Liberty Bonds and return that to them plus interest.

What about foreigners? They owned many U.S. bonds. The largest group of foreign investors were English. Their position is worth considering. In October 1918, when the Liberty Bonds were issued, the dollar-pound exchange rate was 4.77. An English investor could exchange ₤1 for $4.77 and purchase a $100 Liberty Bond for ₤20.96. In October 1938, when the Liberty Bonds matured, the dollar-pound exchange rate was 4.77. So, an English investor who redeemed his bond for $100 in U.S. currency could convert that into ₤20.96, exactly what they had paid for it, and with those funds, they could buy goods which would have been valued at ₤46.69 in 1918, since the purchasing power of the pound had risen substantially since that time. So, English investors, like many others overseas, made large profits from investing in Liberty Bonds.

Plaintiffs in the gold clause cases before the Supreme Court hoped that their suit would allow them to reap even higher returns. They argued that the government should be required to pay them with old gold coins, like the Eagle, at the 1918 standard of value, and then they should be able to convert the Eagles to dollars at the price established by the Gold Reserve Act of 1934 ($35 per troy ounce of gold). The government countered that this plan was infeasible. There was not enough gold in the U.S. to pay gold to all Liberty Bond holders. That plan was also illegal. The law no longer allowed the public to own, save, or spend monetary gold. In that case, the plaintiffs argued, they should receive the amount which would result from a hypothetical sequence of transactions where the government gave them gold coins at the 1918 standard of value (as stated on the bonds) and then immediately converted that gold to currency at the 1934 standard of value. This sequence would pay $166.67 on a $100 Liberty Bond upon maturity in 1938, a sum sufficient to purchase goods and services which would have cost $174.19 in 1918. The majority of the Supreme Court rejected this claim and referred to it as unjust enrichment.

Chapter 16 discusses the consequences of the abrogation of the gold clause. At the time, opponents of the policy contended that its effects could be catastrophic. Contracts would not be trusted. Creditors would no longer want to extend loans. Interest rates would rise. Investment would fall. The economy would stagnate. Edwards looks for evidence of these ailments in data on investment, borrowing, bonds, stocks, prices, interest rates, and output and finds none. After abrogation, the government actually found it easier to borrow, rather than harder. Edwards concludes that there is “no evidence of distress or dislocation in the period immediately following the abrogation, or the Court ruling. … it is possible that if the gold clause had not been abrogated, output and investment would have recovered faster than they did, and that the costs of borrowing would have declined even more. Those outcomes are possible, but in my view, highly unlikely” (p. 195).

The reason abrogation had no detectable impact, Edwards concludes, was that it was an excusable default. Excusable defaults occur under circumstances “when the market understands that a debt restructuring is, indeed, warranted, and beneficial for (almost) everyone involved in the marketplace” (p. 197), when the restructuring is done according to existing legal rules, and when the default is largely a domestic matter, with few foreigners involved. Excusable defaults do not stigmatize sovereigns, since they do not change borrowers’ expectations of sovereigns’ probability of repaying future debts. I agree with Edwards that the abrogation of the gold clause fit these circumstances, and I argued, in the preceding paragraphs, that the abrogation fit another classic characteristic of an excusable default. Bondholders received payment equal to (or better than) what they expected when the debt was issued. Since past holders of Liberty Bonds received the repayments that they expected when they purchased the bonds on origination in 1918, despite the tremendous shocks to the United States and world economies between then and maturity in 1938, future bondholders had no reason to doubt that their expectations would not be met.

Could it happen again? The author asks that question at the beginning and end of the book (and in the title to Chapter 17), because he says “among all questions, [it was] the one that kept coming back again and again” (p. 201). In emerging economies, Edwards indicates, “situations that mirror what happened in the United States during 1933-1935 have occurred recently in a number of … countries, and it is almost certain that they will continue to arise in the future” (p 203). Examples from the recent past include Argentina, Mexico, Turkey, Russia, Indonesia, and Chile. Advanced economies are not immune from these economic forces. In 2008, Iceland faced “a gigantic external crisis with a massive devaluation and a complete collapse of the banking sector. It took almost ten years for Iceland to recover” (p. 205). Greece continues to struggle with a similar situation. So do other European nations, such as Portugal, Italy, and Spain. These nations may be tempted to leave the Eurozone, reintroduce independent currencies, and devalue their exchange rate in order to speed economic recovery. But, any nation that tries (or is forced) to do this will struggle with contracts, all of which are written requiring payment in Euros. If these are rewritten to permit repayment in new currencies of lesser value, the issue is sure to end up in domestic and foreign courts as well as the World Bank’s tribunal for international investment disputes.

While the rest of the world may be in danger of experiencing events similar to the U.S. abrogation crisis of the 1930s, Edwards argues that “it is almost impossible that something similar will happen again in the United States” (p. 201). The main reasons are the change in the monetary system and the exchange rate regime. The United States’ exchange rates are now determined by market forces. Gold no longer underlies the monetary system. Most contracts are denominated in lawful currency, not gold, commodities, or foreign currency. Even if a repeat is extremely unlikely, the chance of the United States restructuring its debt, Edwards argues, is not zero. The federal debt outstanding is now nearly equal to gross domestic product. A tenth of the debt is fixed in real terms, because upon maturity, bondholders receive a premium payment linked to increases in the Consumer Price Index. The implicit debt for future entitlement, particularly Medicare, Medicaid, and Society Security, exceeds 400 percent of gross domestic product. There is little agreement on how to pay for these promises, Edwards notes, and at some point in the not-too-distant future, the U.S. government may be forced to restructure these payments. This potential crisis, Edwards argues, differs from the crisis of the 1930s, because the abrogation crisis stemmed from deflation, exchange rates, and the structure of the monetary system. The modern problem arises from promises made in the present for the future delivery of services.

On all of these points, I agree with Edwards. I am, however, less hopeful for the future. The unsustainable federal debt is not an accident. It was consciously created by Republican politicians to justify reducing (or eliminating) future federal entitlements. With Republicans in control of all three branches [When the review was published by Cato, this was true. However, Republicans now control only half of Congress] of the federal government, taxes cut, deficits up, and a recession on the horizon, the day of reckoning may be upon us in the near future. I anticipate a massive abrogation of federal medical and retirement entitlements within the next decade and sooner if Republicans retain control of Congress and the Presidency through 2020.

The roots of the past and current crises may have more in common than Edwards indicates. Most payments for federal entitlement programs are indexed for inflation. Federal entitlement obligations are, in other words, guaranteed in real terms, just like payments for Liberty Bonds one hundred years ago. They cannot be adjusted on aggregate by monetary policies that generate inflation. The can only be adjusted through the legislature and the courts. On this point, Edwards’ American Default ends on a high note. The ability of the United States to deal with the crisis of the 1930s and the abrogation of the gold clause demonstrates the strength of our legislative and judicial institutions. Given these, it is likely that our nation will be able to overcome future federal financial restructurings. Memories of those events will fade. The will be forgotten just like the events that Edwards masterfully recounts in his book, and America’s federal debt will remain the risk-free standard for the rest of the world.

Alter, Jonathan. The Defining Moment: FDR’s Hundred Days and the Triumph of Hope. Simon & Schuster, 2006.

Badger, Anthony J. FDR: The First Hundred Days. Hill and Wang, 2008.

Cohen, Adam. Nothing to Fear: FDR’s Inner Circle and the Hundred Days That Created Modern America. Penguin Press, 2009.

Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press, 1992.

Friedman, Milton and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Kennedy, David M. Freedom from Fear: The American People in Depression and War, 1929-1945. Oxford University Press, 1999.

Investopedia. “Risk-Free Rate of Return”. Retrieved June 21, 2018.

Investopedia. “How is the risk-free rate determined when calculating market risk premium?” Retrieved June 21, 2018

Richardson, Gary, Michael Gou, and Alejandro Komai. “Gold Reserve Act of 1934.” Federal Reserve History Web Site. Retrieved June 26, 2018.

Richardson, Gary, Michael Gou, and Alejandro Komai. “Roosevelt’s Gold Program.” Federal Reserve History Web Site. Retrieved June 26, 2018.

Temin, Peter. Lessons from the Great Depression. MIT Press, 1989.

Wikipedia. “Risk-Free Interest Rate.” Retrieved June 21, 2018

This review was originally published in Regulation, Fall 2018.
Gary Richardson was the editor of the Federal Reserve’s historical web site,, on which he wrote a series of articles about the Roosevelt Administration’s gold policies. He is the author of numerous academic articles on the history of money, banking, and the Federal Reserve.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The Role of Economic Advisers in Israel’s Economic Policy: Crises, Reform and Stabilization

Author(s):Schiffman, Daniel
Young, Warren
Zelekha, Yaron
Reviewer(s):Rivlin, Paul

Published by EH.Net (July 2018)

Daniel Schiffman, Warren Young, and Yaron Zelekha, The Role of Economic Advisers in Israel’s Economic Policy: Crises, Reform and Stabilization. Cham, Switzerland: Springer, 2017. xi +176 pp. $140 (hardback), ISBN: 978-3-319-60680-4.

Reviewed for EH.Net by Paul Rivlin, Moshe Dayan Center for Middle East and African Studies, Tel Aviv University.
This book examines the impact that economic advisors have had in Israel. The foreign advisors examined are Michal Kalecki, Raymond Mikesell, Abba Lerner, Richard Kahn, Milton Friedman, Stanley Fischer, and Herbert Stein. The only local advisor is Yaron Zelekha, who is one of the authors of this volume.

The first chapter is a theoretical introduction that examines what the role of advisors can be, with emphasis on that of foreign advisors. Well known foreign advisors may be better suited than others to promote the public interest because they are detached from local pressures and interest groups. On the other hand, they are likely to be less well informed than policymakers or local advisors. In a crisis, public interest may overcome sectoral interests. When there is a limited difference between the policymaker’s original policy and interests and the advisor’s perceptions of the public interest, then the advisor can strengthen the policy decided a priori by the policymaker. When there is a significant difference between the policymaker’s original policies and interests and the advisor’s perceptions, the latter’s recommendations undermine policies already decided on and are thus unlikely to be accepted.

Michal Kalecki, who came to Israel in the 1950s, was the only advisor who had what might be called a socialist perspective. In 1952, although there was a Labor government in office, his advice was not taken because a more liberal economic policy was favored. Raymond Micksell examined Israel’s foreign exchange needs, which were a central issue given the chronic deficits on the current account of the balance of payments. In 1953, an Economic Advisory Staff was created by the government and included a number of U.S. economists, including Abba Lerner who maintained the longest and closest association with Israel. Among other things, Lerner called for the Bank of Israel to be independent. He also made recommendations to increase economic independence through restrictions on imports, wage cuts and higher productivity. His critique of the cost of living adjustments system (COLA) that protected wages from the effects of Israel’s chronic inflation was prescient because inflation was to become a much greater problem in the 1970s and 1980s. This was to be a recurring theme in economic advice given from abroad.

In the late 1950s and early 1970s, Richard Kahn, famous for his contributions to Keynes’s General Theory, was an informal advisor. Apart from Kalecki, he was the only foreign advisor to come from Europe. Kahn noted that creation of the European Economic Community would adversely affect Israeli exports and he also recommended reforms of COLA. In his view, wage rises were not only designed to catch up with increases in the cost of living but also to maintain relative wages, as different sections of the labor force struggled to maintain their position vis-a-vis others. Given the government’s desire to avoid unemployment, unions would, according to Kahn, only accept wage moderation if the fiscal system redistributed income and invested in social services.

If Kalecki and Kahn were sympathetic to the Labor governments that ruled Israel until 1977, it was appropriate that the Likud government invited Milton Friedman to visit Israel in July 1977. He recommended a move towards free markets, the ending of foreign exchange controls, the introduction of a flexible exchange rate system, privatization, and deregulation. In October 1977 the government eliminated foreign currency controls, unified the exchange rate, introduced a value added tax, abolished a series of other taxes on imports and foreign exchange purchases, and cut subsidies. It also permitted the opening of foreign exchange linked bank accounts. Friedman welcomed the government announcement and predicted that it would be a huge success. The government distanced itself from Friedman, saying that his recommendations were unsuitable for the Israeli economy.

The measures introduced in 1977 resulted in an acceleration of inflation, capital inflows and currency appreciation and, in 1979, capital controls were re-imposed. The 1977 program failed primarily because of a lack of fiscal discipline. The governor of the Bank of Israel, Arnon Gafni, warned about this but Friedman did not. Other problems that developed were the dollarization of the economy and the rapid increase in foreign borrowing. Israel’s economic situation worsened until the economic stabilization program was introduced in July 1985.

In the early 1980s, Herbert Stein and Stanley Fischer were appointed by U.S. Secretary of State George Schultz to assess Israel’s economic situation. Two other economists, Paul McCracken and Abe Siegel, were also appointed but left the team early on. Due to the depth of the economic crisis and the need for foreign aid, the U.S. had a major impact on the development of the economic stabilization program of July 1985. Stanley Fischer, who was very familiar with the economy and also understood its politics, worked closely with a team of Israeli economists on the program. One of the leading Israelis on the team, Professor Michael Bruno, an economist who understood political constraints, became governor of the Bank of Israel in 1986 and Stanley Fischer was given the same appointment in 2005.

The U.S. advisors told Schultz that American aid should be conditional on Israeli action. He rejected explicit conditionality but warned Israel that it had to solve its own problems and only then would the U.S. extend assistance. In a joint paper published in 1984, Bruno and Fischer explained that political factors would undermine a stabilization program if measures were spread out over time. Tough medicine should be administered at once and this is what happened in July 1985. Perhaps the most significant difference between that program and its predecessors was the inclusion of a large cut in public spending, mainly in the form of a reduction in subsidies.

The control of public spending and the public sector in general is the subject of the penultimate chapter. This looks at the measures taken by Yaron Zelekha, the accountant general in the Ministry of Finance, in 2003. The chapter explains the rationale and effectiveness of controls. It also explains the need for spending cuts in terms of what are called the “negative non-Keynesian effects” of excessive government spending that had prevailed after 1985.

The choice of foreign advisors examined in this book is comprehensive but the inclusion of only one local advisor (who is one of the authors) is strange given the prominence of many others, notably Arye Gaathon (a leading authority on economic planning), David Horovitz (governor of the Bank of Israel, 1954-1971), Don Patinkin (often described as the founder of modern economics in Israel) and Michael Bruno (Governor of the Bank of Israel, 1986 to 1991, member of the Economic Stabilization Program planning team in 1980s, Vice-President and Chief Economist of the World Bank).

Chapter 4 and subsequent chapters contain “primers” or introductions, on the state of the economy in 1957, 1977, 1980-84, and 2000-2003. The first three are accompanied by statistical tables and a useful review of economic issues in the early 1950s appears on p. 126. The first chapter, however, lacks a primer and this leaves the reader who is new to the Israeli economy struggling to understand the issues without the necessary background.

This book will be of interest to aficionados of economic policy making and cognoscenti of the Israeli economy.
Paul Rivlin is a senior fellow at the Moshe Dayan Center for Middle East and African Studies, Tel Aviv University. He is the author of The Israeli Economy from the Foundation of the State through the 21st Century (Cambridge University Press, 2011).

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Subject(s):Economic Planning and Policy
History of Economic Thought; Methodology
Geographic Area(s):Middle East
Time Period(s):20th Century: WWII and post-WWII

Mutual Insurance, 1550-2015: From Guild Welfare and Friendly Societies to Contemporary Micro-Insurers

Author(s):Van Leeuwen, Marco H.D.
Reviewer(s):Guinnane, Timothy

Published by EH.Net (May 2018)

Marco H.D. Van Leeuwen, Mutual Insurance, 1550-2015: From Guild Welfare and Friendly Societies to Contemporary Micro-Insurers. Basingstroke, UK: Palgrave Macmillan, 2016. xiii + 321 pp. $120 (cloth), ISBN: 978-1-137-53109-4.

Reviewed for EH.Net by Timothy Guinnane, Department of Economics, Yale University.

The social-welfare state, despite assaults from various quarters, appears to be a durable feature of advanced capitalist societies. Most citizens of wealthy countries do not suffer (at least the entire) financial burden of sickness, accident, old age, or unemployment. The way societies insure against these events differs considerably; to take one example, some countries have effectively turned medical care into a state function, while others rely on a combination of direct state medical care and private entities such as insurance companies.

Any sensible understanding of today’s social-welfare state requires some historical understanding of how these systems evolved. Economists are not alone in viewing the transition to centralized, bureaucratic systems as the “creation” of the welfare state. This approach confuses changes in methods, cost, scope, and coverage with the actual origins of provision for social welfare. (For a good recent example that largely avoids this confusion, see Peter Lindert’s Growing Public: Social Spending and Economic Growth since the Eighteenth Century, Cambridge University Press, 2004). Today’s social insurance schemes largely supplanted earlier forms of support organized and financed by local communities, by religious bodies, or by other private entities. Students of English history, for example, are well versed in the intricacies of its Poor Law, both Old and New. Continental poor relief systems differed from the English in important ways, typically relying less on taxation and more on charity. (For a good overview, see Peter Solar, “Poor Relief and English Economic Development before the Industrial Revolution,” Economic History Review, 1995.) The design of older poor-relief systems matters because when “social insurance” came to be, the new programs often built on or reflected earlier weaknesses in the poor relief system. Britain’s National Health Service, for example, dates in its current form to 1948. State-financed medical care was not new, however; the nineteenth-century Poor Law had provided medical care to ever-larger fractions of the population, including those not eligible for poor relief per se. Other features of the welfare state reflect the older systems’ inability to deal with some new consequences of industrial life. Poor relief systems relied on local taxation or other local resources. Local taxes on dangerous facilities such as factories or mines did not reflect the strain a single disaster could place on the local fund’s resources. German workplace accident insurance (1884) came about in part because of notorious cases where an accident created more widows and orphans than local resources could handle.

The economic history literature gives pride of place to relief systems that relied on explicit taxation or institutional charitable systems such as churches and other foundations. We know, however, that people found other ways to insure themselves against misfortune. Some mechanisms were so informal as to beg the difference between informal mutual insurance and just being a kind neighbor. Some organizations made an insurance function a definite, if usually small, part of their activities. The individual components of this lost world have been the object of scholarly attention, but there has been little effort to put it all together and draw out the lines of historical development. Marco Van Leeuwen’s effort is thus welcome and important. He surveys the world of mutual insurance (as he calls it) in the Netherlands in all its forms from 1550 to the present, stressing both the individual insurance functions and the way they interacted with each other and the growing welfare state.

Guilds are an important part of this story. In much of the urban Netherlands (and the Netherlands was very urban), guilds controlled the ability to produce and distribute a wide range of goods and services. Van Leeuwen devotes considerable attention to guild insurance because for this long period, some two and one-half centuries, guilds consistently (but not universally) tried to find ways to insure their members without going broke. They guaranteed members work and monopoly rents, but some of those rents accrued to members as implicit or explicit insurance. Van Leeuwen documents a range of schemes, including payment for medical costs, support for widows and orphans, and the costs of burials. Some guilds had explicit insurance funds that briefly survived the guilds’ abolition in 1820.

The Dutch also had friendly societies. These voluntary organizations provided sociability and a sense of local status. They also insured their members (and in some cases, members’ survivors) against sickness, as well as burial insurance. The insurance functions were an outgrowth of the sociability; when a member was ill, fellows visited, and when a member died, fellows provided a decent burial. English friendly societies famously neglected actuarial principles in the later nineteenth century, charging ever-higher fees that discouraged younger and healthier individuals in an effort to cover the mounting costs of benefits to their older members. (For an economically sound discussion of this issue for friendly societies in a Canadian context, see Herbert Emery, and George Emery, A Young Man’s Benefit: The Independent Order of Odd Fellows And Sickness Insurance in the United States and Canada, 1860-1929, Montreal and Kingston: McGill-Queen’s University Press, 1999). As the membership became ever older and sicker, the only apparent solution was to raise fees even more, thus exacerbating the problem. The resulting adverse-selection death spiral played some role in the United Kingdom’s Old Age Pensions Act of 1908. Van Leeuwen documents similar problems in Dutch friendly societies, but notes (as some have for England) that declining mortality rates offered some respite for organizations that ignored their actuaries.

Trade Unions existed to increase their members’ bargaining power in labor markets, but they also offered insurance benefits. Van Leeuwen notes that the trade union enjoyed some advantages as an insurer; the commitment that brought someone to organized labor might induce them to refrain from abusing benefits and to report fellow-members who did. On the other hand, requiring insurance might discourage membership and thus frustrate the Union’s core mission. Perhaps a greater advantage was the trade union’s size, geographic scope, and bureaucratic infrastructure, which provided much of the conditions for low-cost insurance.

Guilds, friendly societies, and trade unions provided insurance as a benefit of membership in an organization whose primary goal was something else. Van Leeuwen also documents a long history of “pure” insurance schemes organized on a mutual or, later in the nineteenth century, for-profit basis. Many of these paid for the cost of a funeral, sparing the insured’s family this burden (which usually came with other financial stress, such as the loss of wages) and avoiding the indignity of a pauper’s funeral. Burial insurance is relatively simple; death is observable, and burial costs are a fixed, one-time expense. Insurers taking advantage of the life tables available from the early nineteenth century could price this coverage to break even (for a mutual insurer) or, later in the nineteenth century, to make a profit. Not all insurers priced their coverage appropriately and thus failed.

Today insurance is among the most highly-regulated of businesses. This regulation reflects, in theory, a need to ensure companies that can pay the promised benefits. Van Leeuwen’s examples point to a different interest for the state: people who relied on unsound mutual-insurance promises would turn to the poor relief system. In some cases, governments subsidized insurance schemes in the hope the insurance would reduce reliance on poor relief.

The book is entirely about the Netherlands, with a few welcome but brief comparative asides, usually limited to Britain. This focus on a single country is understandable, given the work’s scope. We know, however, that the Netherlands differed in important ways from other societies; a relatively small and highly urban population speaking a funny dialect of German might seem the ideal place for mutual insurance to thrive. Van Leeuwen’s work raises a host of comparative question, and one of this book’s virtues is that it implicitly calls for similar works on other societies.

Van Leeuwen achieves a nice balance between analytical care and respect for the evidence. An insurance provider faces the problems of adverse selection (the insurance program may attract only relatively risky, and thus costly, individuals); the insurance might induce the insured to take more risk (moral hazard); and for some types of insurance, the provider might have to pay out many claims at once. This correlated risk would face a life insurance company, for example, if epidemics caused spikes in deaths among the insured. Van Leeuwen bears these problems in mind when discussing the strengths and weakness of the various schemes. Sometimes economists looking at historical institutions pay more attention to their models than to the evidence, and see in any mention of a rule or practice indications of an appreciation for the niceties of mechanism design. Van Leeuwen is more cautious; he notes, for example, that burial insurance schemes ordinarily imposed a period between when an individual joined and when they would first pay out, to discourage opportunism by those on death’s door. He refrains from claims about the insurance providers offering an optimal contract, and stresses the ad hoc and often puzzling ways insurers dealt with a mismatch between assets and liabilities.

The final substantive chapter concerns the period 1965-2015, when the Dutch welfare state had achieved its current form. Some of this discussion concerns efforts to reform (read: “limit the cost of”) that welfare state, and there are some discussions concerning the survival of mutual-insurance schemes. He wisely does not push claims about modern mutual insurance in the modern Netherlands too far. Van Leeuwen appears reconciled to the fact that bureaucratic regulation, the state’s power to tax, and actuarial science have largely put an end to the less formal mutual insurance of friendly societies and the like, at least in wealthy countries.

One of Van Leeuwen’s consistent concerns is the interaction between the private insurance and the relief system. For example, poor Dutch people knew that their widows and orphans could expect modest assistance from local relief, and that the poor law would not support survivors who had assets or flows of payments from an insurance fund. The relief system’s implicit tax thus limited the appeal of private insurance schemes and raised their cost; there was little point in paying to insure one’s widow if the benefits would not appreciably exceed what the relief system would provide. We are accustomed to thinking of the modern welfare state as potentially crowding out private initiative, but the earlier poor relief systems offered their own complications for private insurance.

Van Leeuwen reports careful, if frankly speculative, estimates of the number of people covered by each type of insurance. The figures provide a warning to anyone attempting to read into his discussion claims about a Nirvana on the North Sea. Burial insurance was by far the most common type of insurance. In the period 1800-1810, however guilds covered at most seven percent of the Dutch population this way. Coverage under all burial schemes rose to more than 50 percent by 1890, but this figure dwarfs that for other types of insurance. Insurance against the costs of medical care reached some 16 percent of the populace in that year; insurance against loss of income due to illness reached 9 percent. Old age or widowhood insurance reached at most one percent of the Dutch population.

There is much to admire in Van Leeuwen’s open and frank approach to his material. He resists the temptation to fall in love with the institutions he studies, realizing, for example, that guilds owed their (comparative) success as insurance providers to an ability to restrict entry into their ranks. Guilds could also exploit non-member workers whose comparatively low wages subsidized all the guild’s activities, including insurance. (He does not point out that by allowing widows to operate their deceased husband’s shops, in defiance of the usual rule against female master, the guilds provided a generous form of widow’s insurance.) Similarly, Van Leeuwen approaches earlier historical commentary with appropriate caution. Left-wing historians sometimes dismiss civil-society organizations, and the services they offered, as threats to working-class solidarity. This confuses what civil-society organizations actually did with what today’s historians want. Others view half a loaf as worse than nothing, and convey the false impression that early schemes did not provide services valuable to their members simply because they did not provide the services the welfare state provides today. Van Leeuwen’s historical sensibility keeps him out of these traps.

Mutual Insurance provides a clear-sighted, readable, and comprehensive account of a neglected topic. The book will appeal to anyone interested in mutual organizations or insurance, and should be read by anyone studying the welfare state today or in the past.

Timothy W. Guinnane is the Philip Golden Bartlett Professor of Economic History in the Department of Economics at Yale University. Recent publications include “Sample-Selection Biases and the ‘Industrialization Puzzle’” (with Howard Bodenhorn and Thomas Mroz), Journal of Economic History 2017; “Choice of Enterprise Form: Spain, 1885-1936” (with Susana Martínez Rodríguez), Journal of Law, Economics, and Organization, 2018; “Incentives That (Could Have) Saved Lives: Government Regulation of Accident Insurance Associations in Germany, 1884-1914” (with Jochen Streb), Journal of Economic History 2015; and “The Costs and Benefits of Size in a Mutual Insurance System: The German Miners’ Knappschaften, 1854-1923” (with Tobias A. Jopp and Jochen Streb) in Bernard Harris, ed., Welfare and Old Age in Europe and North America: The Development of Social Insurance.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Markets and Institutions
Geographic Area(s):Europe
Time Period(s):16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Myth of Independence: How Congress Governs the Federal Reserve

Author(s):Binder, Sarah
Spindel, Mark
Reviewer(s):Santos, Joseph M.

Published by EH.Net (March 2018)

Sarah Binder and Mark Spindel, The Myth of Independence: How Congress Governs the Federal Reserve. Princeton, NJ: Princeton University Press, 2017. xv + 282 pp. $35 (cloth), ISBN: 978-0-691-16319-2.

Reviewed for EH.Net by Joseph M. Santos, Department of Economics, South Dakota State University.

In the final months of 2017, everyone wondered whom President Trump would appoint, with Senate confirmation, to chair the Federal Reserve System. Would the next chair be a hawk or a dove? Would future U.S. monetary policy be politicized — left to pursue short-run macroeconomic objectives instead of low and stable inflation? Basically, observers believed the central bank’s independence from Congress and the White House was either immutable — and so monetary policy would be reliably conditioned on the chair’s relative aversion to high and variable inflation — or not.

Congress passed the Federal Reserve Act in December 1913. A relatively modern notion of independence — immutable or otherwise — emerged decades later with the Treasury-Federal Reserve Accord in March 1951. The two institutions agreed the central bank would not peg yields on Treasury bonds, which it had done since April 1942 in order to cap the cost of financing the U.S. war effort. In a narrow sense, then, the Accord recognized central-bank independence as a monetary policy framework for price stability. This is because the agreement restored monetary dominance over a deficit-spending fiscal authority that issued nominal debt. In practice, monetary policy remained largely discretionary, inflationary, and influenced by Treasury (Timberlake 1993, 339-40). Thus, at best, the Accord afforded the Federal Reserve System independence “within the government” (Meltzer 2003, 713).

According to Sarah Binder and Mark Spindel, the Federal Reserve System has never been independent, though its authority to manage the economy has increased over time. Rather, in The Myth of Independence, the authors chronicle a history of interdependence between the central bank and Congress, both federalist institutions that rely on the support of (necessarily overlapping) constituencies. End-the-Fed rhetoric notwithstanding, denizens of reserve-bank districts have resisted congressional restraints on their regional central bank. Meanwhile, the body politic has accepted congressional accusations that the central bank, broadly conceived, is alone responsible for poor macroeconomic performance. Thus, in the aftermath of macroeconomic troubles, Congress has often increased the central bank’s authority and, in turn, its culpability. Simultaneously, Congress has asserted, often in response to executive-branch meddling, the legislature’s ultimate control of monetary policy.

For evidence of this countercyclical “blame game,” the authors mine public-opinion surveys — public sentiment toward the Fed from 1979 to 2015 and Chair Janet Yellen in 2014 — and bills introduced in Congress from 1947 to 2014. Generally, controlling for respondents’ education, household income, and so forth, Republicans and retirees disproportionally disapprove of the Fed’s stewardship of the economy. Increases in unemployment, but not the inflation rate, drive the number of congressional bills targeting the Fed; though, macroeconomic performance is relatively weakly associated with Republican-sponsored bills. For politically vulnerable legislators who are members of the president’s party, the Fed is a particularly attractive target of blame. Meanwhile, calls to audit the Fed are countercyclical and longstanding — they have been around for over sixty years; so, yes, “the Pauls are newcomers to the campaign” (p. 43). In the postwar period, Democrats have sponsored twice as many such calls; and recent calls have come from the fringes of both parties.

The authors examine the origins and evolution of the Fed through this political-economic lens. The creation narrative is fairly conventional. To wit, the Panic of 1907 revealed the extant limits of governmental interventions, which were “precarious, primitive, partial, and probably illegal” (p. 55). Divided Republicans effectively afforded united Democrats the White House, the Sixty-Third Congress (1913-15), and the opportunity to drive currency reform. The central bank that emerged placated (Southern) Democrats, (Midwestern) Populists, and (urban) Progressives, who preferred a quasi-public structure and decentralized reserve banks. It also placated Republicans, who preferred a quasi-private structure and centralized governance. More broadly, Democrats and their political kin sought easier access to credit; Republicans sought greater financial stability. Neither party sought an independent monetary authority of the sort we imagine today.

Identifying the forces that determined the locations of reserve-bank cities (including two in Missouri) and the number of reserve-bank districts — operational features of the System that fell to the Reserve Bank Organization Committee (RBOC) — adds significant value to this book. In some instances, the RBOC assigned reserve banks based on the density of a region’s financial sector, of course. However, conditional on financial sector, the RBOC assigned reserve banks based largely on region (most likely, the South). The authors cannot say whether, in doing so, the RBOC responded to credit demands or constituents, because the relatively credit-starved South was then overwhelmingly Democratic. In any case, these early decisions to regionalize the System in this way “baked political support for the Federal Reserve into its statutory skeleton,” effectively assuring its survival, if not its absolute independence from Congress (p. 81).

This statutory skeleton fractured in the wake of the Great Depression, when Congress quickly passed a series of inflationary currency reforms: namely, the Thomas Amendment to the Agricultural Adjustment Act (1933) and the Gold Reserve Act (1934), including the latter’s Exchange Stabilization Fund provision. Broadly speaking, Democrats and agrarians favored these reforms; Republicans and manufacturers opposed them. The authors econometrically demonstrate this, and something else: states that were home to a Federal Reserve Bank were less likely to vote for these reforms — a manifestation of baked-in political support, presumably. Similar voting patterns emerged a short time later, when exigencies of war finance reduced monetary policy to ensuring a market for Treasury debt, sowing tensions that would culminate in the Accord of 1951. Why 1951? It’s complicated; chapter 5 is well worth a close read.

The Myth of Independence is a timely analysis of political and economic countervailing forces that render the Fed and Congress interdependent. Based, in part, on Fed and congressional archives, the authors cleverly marshal econometric evidence — estimated coefficients of categorical dependent-variable specifications, for the most part — to substantiate their claims, which do not easily lend themselves to quantitative-hypotheses tests. The book’s takeaway is cautionary, and aptly captured by Paul Volcker’s reflection on leading the Fed through the Great Inflation: “You just can’t go do something that is just outside the bounds of what people can understand, because you won’t be independent for very long if you do that” (p. 200). Hawks and doves, take note: ascend from the zero-lower bound in a way people can understand.


Meltzer, Allan H. (2003) A History of the Federal Reserve, Volume 1: 1913–1951 (Chicago: University of Chicago Press).

Timberlake, Richard H. (1993) Monetary Policy in the United States: An Intellectual and Institutional History (Chicago: The University of Chicago Press).

Joseph M. Santos is the Dykhouse Scholar in Money, Banking, and Regulation in the Department of Economics at South Dakota State University, where he teaches and writes on macroeconomics, banking, and financial markets.

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

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

John Bascom and the Origins of the Wisconsin Idea

Author(s):Hoeveler, J. David
Reviewer(s):Johnson, Marianne

Published by EH.Net (July 2017)

J. David Hoeveler, John Bascom and the Origins of the Wisconsin Idea. Madison: WI: University of Wisconsin Press, 2016. xi + 229 pp. $45 (hardcover), ISBN: 978-0-299-30780-6.

Reviewed by EH.Net by Marianne Johnson, Department of Economics, University of Wisconsin — Oshkosh.

In 2014, as part of the biennial budgetary process, Governor Scott Walker proposed to modify the University of Wisconsin’s mission, known as the Wisconsin Idea, striking the statements to “extend knowledge and its application beyond the boundaries of its campus,” to “serve and stimulate society,” and to “extend training and public service designed to educate people and improve the human condition.” He also proposed to delete the phrase “Basic to every purpose of the system is the search for truth.” Instead, the university system was to “meet the state’s workforce needs.”

When discovered buried deep within the budget proposal, the changes were met with outcry and condemnation from the University and its supporters. University of Wisconsin System President Ray Cross stated “The Wisconsin Idea is embedded in our DNA. It is so much more than words on a page. It is the reason the UW System exists. It defines us and forever will distinguish us as a great public university” (Milwaukee Journal Sentinel, 4 February 2015). The New York Times editorialized “Save the Wisconsin Idea” (16 February 2015).

When confronted, the governor denied instigating the changes and blamed a “drafting error.” Sued by the Center for Media and Democracy and several Wisconsin citizens under Wisconsin’s Open Records Law, documents revealed a deliberate attempt to circumscribe the mission of the University of Wisconsin and its system of affiliated schools.

To understand both why the governor had sought the change and the reaction of those in the University of Wisconsin system, it is important to have a book such as that by David Hoeveler on John Bascom and the Origins of the Wisconsin Idea. Combined with Nancy Unger’s biography of Robert La Follette (2000) and Malcolm Rutherford’s The Institutionalist Movement in American Economics (2011), academics and interested readers now have a trio of excellent historical works on the Wisconsin Idea, Wisconsin Progressivism, and Wisconsin’s unique brand of Institutional economics.

Wisconsin gained outsized influence in the early part of the twentieth century, driven by larger-than-life personalities such as “Fighting Bob” La Follete and his partner in reform, University of Wisconsin President Richard Van Hise. The latter is usually credited with the first complete statement of the Wisconsin Idea. Richard T. Ely and E.A. Ross remade the social sciences as taught at American universities, drawing on the German academic tradition of seminars. John R. Commons and his army of disciples oversaw an expansive national political advocacy campaign for labor reform, unemployment insurance, social security and the minimum wage.

Ely was famously prosecuted for espousing socialist doctrines in 1894. The Board of Regents ruled in Ely’s favor, setting the standard for academic freedom. University President, Charles Kendall Adams, writing on behalf of the Board of Regents concluded that “Whatever may be the limitations which trammel inquiry elsewhere, we believe that the great state University of Wisconsin should ever encourage that continual and fearless sifting and winnowing by which alone the truth can be found.” This statement can be found on a plaque at the entrance of Bascom Hall, the best-known building on campus.

Though Bascom predates the great hey-day of Wisconsin Progressivism, Hoeveler makes a compelling case for Bascom’s importance in laying the foundation for change at the end of the nineteenth century.

During Bascom’s professional lifetime, two socio-demographic trends emerged that were to fundamentally alter higher education in the United States: an increased demand for specialized education and an increased demand by women for professional training and careers. American universities responded to the first of these changes by expanding course work at all levels. The second shift involved the transformation of educational opportunities for women. With the influence of Progressivism and the suffrage movement, public opinion slowly shifted to support higher education for women. Having lost the battle for co-education at Williams College, Bascom accepted the presidency of the University of Wisconsin in 1874. Earlier that same year, the university had affirmed a co-educational curriculum. Bascom was an avid supporter of women’s access to higher education. Rather than limiting women’s education to domestic subjects and finishing schools, Bascom argued forcefully for their access to a full liberal education stating that “This exclusion of women from our highest seats of learning is among the remnant…[of] a dark and savage past” (Bascom 1872, 2). Bascom’s two daughters both earned their bachelor’s degrees at Wisconsin, where he defended the right for women to face an identical curriculum to men. Florence Bascom became the second woman to earn a Ph.D. in geology in the U.S.

Much of the book is given over to Bascom’s biography and intellectual influences, including German philosophical idealism, the liberal Protestantism associated with the Social Gospel movement in the U.S., and the theory of evolution. Hoeveler argues that “Bascom made a creative synthesis of these intellectual systems and from them forged the beginning of the Wisconsin Idea” (p. 5). Individuals interested in the intellectual influences of the period will find the book particularly useful.

The first two chapters consider Bascom’s education and early career years, with a heavy emphasis on his own writings and philosophical struggles, particularly in reaction to the American Civil War. Chapter 3 addresses Bascom’s move to Wisconsin, where he served as president from 1874 to 1887. Chapter 4 deals with the changing nature of American universities and their role in society at the end of the 1800s, and Chapter 5 looks at the impact of the Social Gospel movement on the University of Wisconsin and American universities more generally.

The next three chapters address the origins of Progressivism which Hoeveler identifies in three distinct forces: (1) the temperance movement, (2) the women’s suffrage movement, and (3) the profound shift in perceptions of class struggles and of labor rights in the last decades of the nineteenth century. Though much of the book provides interesting background for those that study intellectual history, it is Chapter 8 that will capture the attention of historians of economic thought. Most of the material in this chapter will be familiar to economists who work in this period, but Hoeveler does a nice job of situating Bascom in this milieu of change and to introduce Ely who would later play such a significant role for the University of Wisconsin.

Chapter 9 returns to the Wisconsin Idea and guides the reader through Bascom’s departure from Wisconsin, the hiring of Richard T. Ely, Charles Van Hise’s presidency, the arrival of John R. Commons, and the great debates between La Follette and the university over World War I.  These changes left Wisconsin to be viewed as either the “the outstanding liberal university” (Howe 1989, 247) or a “hot bed of radicalism” (New York Times 1930, 34). Though Bascom’s presidency had ended before these momentous events, Hoeveler does a great service by presenting an excellent account of the life of Bascom and reminding us that ideas emerge from a complex interaction of social, political, philosophical and personal forces.


Bascom, John. 1872. “College Organization,” Independent, September 5 (1872), 2 – 3.

Howe, Florence. 1989. “Practical in Her Theories: Theresa Schmid McMahon,” in Lone Voyagers: Academic Women in Coeducational Universities, 1870–1937, ed. G.J. Clifford, 223 – 280. New York: The Feminist Press at the City University of New York.

Rutherford, Malcolm. 2011. The Institutional Movement in American Economics, 1918–1947. New York: Cambridge University Press.

Unger, Nancy C. 2000. Fighting Bob La Follette: A Righteous Reformer. Chapel Hill, NC: University of North Carolina Press.

“The Wisconsin Idea,” University of Wisconsin Madison.

Marianne Johnson is the author of several works on Wisconsin Institutionalism and Progressivism in economics including papers in the Journal of Economic Issues (2017, 2015, 2011) and History of Political Economy (2014) — and a book chapter on the “Daughters of Commons” for Routledge (forthcoming).

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (July 2017). All EH.Net reviews are archived at

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII