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Is Geography Destiny? Lessons from Latin America

Author(s):Gallup, John Luke
Gaviria, Alejandro
Lora, Eduardo

Published by EH.NET (January 2005)

John Luke Gallup, Alejandro Gaviria and Eduardo Lora, Is Geography Destiny? Lessons from Latin America. Stanford: Stanford University Press (a co-publication with the Inter-American Development Bank), 2003. xiv + 171 pp. $21.95 (paperback), ISBN: 0-8213-5451-5.

Reviewed for EH.NET by Patrice Franko, Department of Economics, Colby College.

Although Is Geography Destiny? rejects a determinist view that geography controls growth in Latin American, it persuades the reader of the importance of geography in shaping the opportunities and constraints on economic change in the region. It is at once an obvious story — of course geography molds outcomes — and a provocative one — why hasn’t the growth literature historically paid more attention to the dramatic geographic characteristics shaping growth in the region? It is also an important policy piece. Growth strategies must more explicitly incorporate lessons of geography to address problems of poverty and inequality in Latin America.

The book proceeds in three parts. The first chapter analyzes the influence of geography on levels of economic and social development between countries. How have central geographic factors — the productivity of land, the presence of endemic disease, natural disasters, the location of populations and markets, particularly relative to the coast and urban settings — differentiated growth among Latin American countries and between the region and the rest of the world? The dramatic geographies of Patagonia, Machu Pichu, the Amazon and the Central American rainforests that make for sensational travel also create poverty when physical barriers cannot be overcome. Is Geography Destiny is rich in its description of the varied physical and human geographies of the region. The authors document that Latin American countries exhibit some of the highest degrees of geographic fragmentation in the world. That is, it is unlikely that two individuals drawn at random from the same population will live in the same ecozone. Their connection between geographical fragmentation, social cleavage and inequality make this an important conclusion for the design of poverty programs.

Geographical characteristics conditioned historical growth patterns. Highland populations in the Andes, Mexico or Central America isolated indigenous cultures from contact with European disease; such isolation also created minimal contact with emerging national markets and policies. Colonizers rejected the harsh conditions of the tropics where malaria and yellow fever wiped out occupying troops, steel quickly turned to rust, clothing never dried and furniture fell apart. Instead, they favored more temperate climates to establish colonial roots and implant stronger institutional frameworks, with the nontropical regions becoming the richest on the continent. Colonial settlement patterns were strongly correlated with less productive tropical land, leading to latitude as a strong predictor of GDP per capita in the 1800s.

The effects of poor land and frail institutions persist today. Even controlling for income, inhabitants of tropical latitudes can expect to live seven fewer years than those in desert or dry regions. Vulnerability to the physical environment increases death tolls during natural disasters, killing 227,000 people and costing the region between 700 million and 3.3 billion dollars over the past thirty years. It is estimated that less than four percent of damages in the region are insured, leaving a gaping hole in public and personal finances when a hurricane washes ashore or an earthquake rocks a densely concentrated city. Weak physical infrastructure in the face of geographical constraints acts as a tax on trade. Overland shipping across the continent can be as expensive as shipping goods half way around the world — adding to the explanation of why national integration, even under the incentives of import substitution industrialization, was historically compromised in Latin America. Instead, port cities, with huge concentrations of population and their associated problems of congestion and pollution, developed with an outward focus. A greater share of Latin Americans live in primary, mega cities than do people in other regions of the world. Geography has promoted unbalanced growth.

International competitiveness is conditioned by the geographical factors discussed in Is Geography Destiny. Health and human settlement patterns affect educational outcomes. Transportation challenges impact growth; the import substitution literature often lamented the lack of regional economies of scale — without facing head on the mountains, jungles or deserts as reasonable explanations for the failure of the model.

But how can we filter out the effect of geography from the simultaneous growth of institutions? How do we know that geography and not weak institutions caused suboptimal performance? The second part of Is Geography Destiny pushes the level of analysis to countries with geographically distinct regions within Latin America: Bolivia, Brazil, Colombia, Mexico and Peru. This country focus controls for the historical evolution of political institutions across countries, asking how, within the same framework, regional growth has responded to geographic constraints. The country studies presented in the book solidly link geographical condition with evolving institutions within and between countries and also highlight the strong degree of heterogeneity in response to geography across nations . The concluding section asks what can be done within the constraints of geography. The authors advocate a basic needs approach to infrastructure designed through a decentralized, participatory approach which incorporates market-based incentives. By ignoring hurricanes and earthquakes, endemic disease, urban infrastructure deficits and rural isolation, economic policy is made vulnerable to unexpected failure. Something must be done to provide greater resiliency in policymaking. The authors might be questioned, however, for assuming an uncritical stance toward global integration as the primary criterion for addressing geographical constraints. Their suggestion that access to international markets should be the primary criterion for investment in roads, ports, railways and markets should be carefully evaluated by policymakers for cultural and environmental impacts. The recent Asian tsunami has underscored the fragility of life in overpopulated areas vulnerable to natural disaster. In the Western Hemisphere, the Economic Commission for Latin America and the Caribbean documented $2.2 billion in losses due to the 2004 hurricane season in the Caribbean alone. As Is Geography Destiny accurately points out, the technological capabilities to reduce geographically-based vulnerability to extreme events is out of the reach of most Latin American nations. Achieving the United National Millennium Goal of reducing the number and effects of natural and man-made disasters will take strong cooperation and financing by the richer nations in the world. The argument for investment by both Latin American nations and the international community rests not only on the globalization of markets but also on the ethical argument of averting preventable tragedies brought on by geographic conditions. Is Geography Destiny makes an important contribution to our understanding of the underlying priorities for policy attention.

Patrice Franko is the Grossman Professor of Economics at Colby College in Waterville, Maine and is the author of The Puzzle of Latin American Economic Development, second edition (Lanham, MD: Rowman & Littlefield, 2003).

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

The Strictures of Inheritance: The Dutch Economy in the Nineteenth Century

Author(s):Zanden, Jan Luiten van
Riel, Arthur van
Reviewer(s):Broadberry, Stephen

Published by EH.NET (October 2004)

Jan Luiten van Zanden and Arthur van Riel, The Strictures of Inheritance: The Dutch Economy in the Nineteenth Century. Princeton: Princeton University Press, 2004. xvi + 384 pp. $55 (cloth), ISBN: 0-691-11438-2.

Reviewed for EH.NET by Stephen Broadberry, Department of Economics, University of Warwick.

This major work on the Dutch economy appears in the distinguished Princeton Economic History of the Western World series edited by Joel Mokyr, and fills an important gap in the English language literature on nineteenth century European economic history. Following the major project to reconstruct the Dutch historical national accounts carried out under the direction of Jan Luiten van Zanden, Professor of Economic History at Utrecht University and a senior scholar at the International Institute of Social History, there is now a much firmer quantitative basis on which to build a systematic account of the growth process in the nineteenth-century Netherlands ( Just by drawing on the new historical national accounts, van Zanden and his co-author Arthur van Riel, a Senior Economist in the Dutch Ministry of the Interior and a member of the Netherlands’ Economic Institute in Rotterdam, are able to dispel a number of myths and adjudicate on many debates. However, the authors clearly aimed to do more than quantify the existing literature, and have chosen to organize the book around an ambitious framework linking the process of economic growth and development to institutional structures and institutional change, drawing on the work of Douglass North.

The structure of the book is provided by first breaking down the “long nineteenth century” into four sub-periods, covering 1780-1813, 1813-40, 1840-70 and 1870-1913. Each sub-period is then further split into two separate chapters on institutional structures and economic developments, with the latter explained by the former. The eight main chapters are topped and tailed with an introduction and an epilogue, emphasizing the Northian framework.

There can be little doubt that the chapters on economic developments in each of the four sub-periods will become essential reading for all serious students of nineteenth-century European economic history. They provide a clear, quantitative discussion of the trends in economic growth and structural change, together with a detailed account of developments in the major sectors. I particularly welcome the full treatment of the service sector, so often neglected or reduced to the handmaiden of industry in traditional economic histories. Services clearly played a key role in Dutch economic development and fully warrant the attention that they receive in this study.

Following the tradition established by historical national accountants in many other countries, I fully expected van Zanden and van Riel to adopt a growth accounting framework to examine the different phases of economic growth in the Netherlands. However, growth accounting is eschewed here in favor of new institutional economics. Instead of explaining the phases of growth by factor inputs and total factor productivity, the authors relate then to the institutional structures outlined for each sub-period. Although I believe strongly in a link between long run economic development and institutional structures, I found myself uncomfortable on a number of occasions with the very short run nature of the linkages being proposed here. The basic idea is that the institutional structures of the Dutch Republic during the Golden Age became a hindrance during the era of modern economic growth pioneered by Britain from the late eighteenth century, and took time to change. A useful analogy is drawn with the problems faced by the British economy in adapting to the American innovations of the second industrial revolution from the late nineteenth century.

However, when dealing with shorter periods, I felt that the authors were in constant danger of turning too quickly to institutional factors to explain every development. A couple of examples will suffice to demonstrate my unease. First, for the period 1780-1813, economic stagnation is blamed on a decentralized institutional structure, which is held to have limited the ability of the Dutch Republic to raise revenue for defense expenditures, thus paving the way for naval defeat by the British and invasion by Prussian and then French troops. However, suppose the Dutch Republic had put in place the most perfect centralized institutional structures. Could such a small state have raised enough revenue to win an arms race against the major European powers with much larger populations? Second, the authors are to be congratulated on demonstrating the existence of positive per capita income growth during the period 1813-40, thus rebutting the claims of other economic historians arguing for continued stagnation. But now that we have become used to postwar reconstruction booms, should institutional change take all the credit for a bounce-back after the disruption of the previous decade? Third, van Zanden and van Riel characterize the period 1840-70 as a successful “liberal offensive,” with the state budget finally brought under control and economic liberalization achieved both at home and abroad. However, they also see this as a period of renewed stagnation. This forces them into an argument about under-investment in previous periods and specialization in the wrong sectors, which sits uneasily with the general message of a short run link between institutions and growth. It also seems to hint at the need for the growth accounting approach which has been eschewed.

The institutional chapters do contain much useful information and the emphasis on the link between institutions and growth is thought-provoking. For me, though, the real strength of the book lies in the chapters on economic developments. I particularly liked the section on Dutch development measured against a European norm, based on the Chenery-Syrquin methodology that Nick Crafts used so effectively for charting British exceptionalism during the first industrial revolution. Here, we see that the Netherlands clearly shared that British exceptionalism until 1800, with an early shake-out of labor in agriculture and a dynamic service sector. Unlike Britain, however, the Netherlands converged to the European norm during the nineteenth century. One comparative issue raised by the new Dutch historical national accounts is the timing of the British overtaking of the Netherlands, previously put at some time between 1780 and 1800 (p. 24), but now postponed until after 1820 (p. 264). A new Anglo-Dutch benchmark estimate of comparative per capita income for the early nineteenth century would now be very useful.

Stephen Broadberry is Professor of Economic History in the Department of Economics, University of Warwick and co-director of the Economic History Initiative at the Centre for Economic Policy Research, London. He has published widely on international comparisons of productivity and living standards, including The Productivity Race (Cambridge University Press, 1997) and “From the Counting House to the Modern Office: Explaining Anglo-American Productivity Differences in Services, 1870-1990”, Journal of Economic History, 2002 (with Sayantan Ghosal).

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII

Money Doctors: The Experience of Financial Advising, 1850-2000

Author(s):Flandreau, Marc
Reviewer(s):Schwartz, Anna J.

Published by EH.NET (September 2004)


Marc Flandreau, editor, Money Doctors: The Experience of Financial Advising, 1850-2000. New York: Routledge, 2003. xiv + 312 pp. $169.95 (cloth), ISBN: 0-415-32154-9.

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

Marc Flandreau, Professor of Economics, Institut d’Etudes Politiques de Paris, France, the editor of this volume of ten essays, has contributed an introduction as well the first essay. He organized a conference of which the product is this volume. It explores the historical evolution of the practice of money doctoring. It began with individual bankers and advisers giving way to multilateral agencies. The main themes are the need for international cooperation and the decisive role of the world’s economic and political order in understanding the diversity of experiences of money doctoring. Money doctoring is a political activity that involves economic analysis and has a long-term record.

In the introduction Flandreau quotes from a talk Edwin W. Kemmerer, the money doctor par excellence, gave at the December 1926 American Economic Association meeting on this field of work. What gave the best results, according to Kemmerer, was a government and public receptive to foreign advisers, the extent to which the advice was followed, and the absence of economic fallacies that obstructed the work of foreign advisers. Flandreau comments that the relevance of money doctors currently depends on whether they “can improve the stability of global capitalism.”

The pioneer money doctor, we read, was a French economist, Jean-Gustave Courcelle Seneuil who left political turmoil in France in the 1850s for a fairly tranquil Chile. There, as an opponent of government intervention, he helped draft a free banking law. Money doctors of later years, unlike Courcelle Seneuil, traveled from stable Western European nations and the United States to crisis-ridden nations in Latin America and Eastern and Southern Europe which sought advice on how to solve their financial difficulties. Resolving the crisis involved bitter medicine — budgetary austerity and monetary diet — but a prospective sweetener was an inflow of foreign money, provided the country in crisis undertook the right policies.

Money doctors in effect, Flandreau stresses, were brokers between local authorities and foreign investors, brokering money against reforms. Financial crises in the second half of the nineteenth century thus provided knowledge of how problems arose and insights on how to resolve them. The knowledge and the money resided in countries other than the ones where problems arose. According to Flandreau, this imbalance accounts for the rise of the advice relation. Usually economists gave advice to their home governments, but money doctors traveled abroad.

Flandreau finds a relation between the emergence of American money doctors after 1900 and their success in driving out European ones in several parts of the world and the rise of U.S. financial institutions as global players. He derides Kemmerer’s belief that it was honest, disinterested advice that Americans provided other governments, unsullied by efforts to extend U.S. political power, that accounts for the money doctors’ success. Flandreau argues that because funds and advice were complements politics were inevitably brought into the picture. For him, what clinches this argument is that Kemmerer, despite his genuine desire to help countries, was on the payroll of the New York brokerage firm Dillon, Read and Co.

For Flandreau the exchange of money for reforms is an “implicit contract” to provide borrowers with appropriate incentives, and that modern conditionality, which now describes these contracts, is meant to maximize economic welfare of the debtor by fostering good investment. The welfare function of the creditor, however, has different arguments. The link between both is loose and using international advice to achieve political ends has not been resisted. Politics shapes the remedies that are applied, depending on the specific strategic importance of ailing nations, as illustrated by which nations are chosen for IMF programs.

The essays are arranged in three parts: Part I (The long run: the institutionalization of a practice) includes the chapter by Flandreau. It traces the origins of conditionality before World War I to the relation between borrowing governments and European financiers, and emphasizes an attempt to improve creditors’ monitoring of borrowers. Steven Schuker’s chapter covers the interwar period when traditional money doctors were still practicing, and an international agency, the League of Nations, tried but failed to fill that role because of the absence of coordination and cooperation among the advisers. The chapter by Harold James on post- World War II international lending by the IMF emphasizes its concern to win the cooperation of countries that asked for stabilization assistance by giving them ownership of structural reform programs.

Part II (Case studies: physicians and politicians) covers four country experiences involving political and economic interactions. The study of the Russian default of 1998 by Charles Wyplosz and Nadezhda Ivanova shows that while hyperinflation of the early 1990s was overcome, political and fiscal reforms were delayed. Collapse was inevitable when speculators withdrew support of high-yield Russian government debt. French money doctors’ aid to Romania in the 1920s is the subject of Ken Mour?’s chapter. The Bank of England and the Banque de France each jockeyed for political advantage in this case. Elisabeth Glaser’s chapter on money doctoring in Chile covers episodes when classical economics prevailed (Courcelle-Seneuil 1855-57; Kemmerer monetary reforms 1926-31; the Klein-Sachs exchange rate and fiscal reforms 1955-57; Chicago boys post-1973), punctuated by episodes of inflation (1880-1925; inflows of foreign loans from the U.S. and Britain in 1926-30 were followed by government overspending and default in 1931 on foreign debt — despite a wish to rescue Chile by creditors whose attempt at crisis intervention failed because of rivalry between them — the exchange rate then plummeted and inflation surged; a brief fight against inflation in the mid-1950s ended when budget deficits mounted; vigorous anti-inflation policy from 1973 to 1982 ended hyperinflation.). Roumen Avramov’s chapter on Bulgaria surveys the country’s experience with conditionality from 1900 to 2000. French creditors initially exercised direct control over the economy. That was superseded by League of Nations monitoring. Internal problems, however, were met by state intervention.

Part III (Experts agree: international financial institutions and macroeconomic orthodoxy) begins with Patricia Clavin’s chapter on the League of Nations (1929-40), in which she discusses how its efforts to support reflation were limited by its questionable legitimacy. She finds that international financial institutions operate in a political context that hinders their ability to develop their own research and policy proposals. Eric Helleiner’s chapter on U.S. unorthodox money doctoring post-1945 in Latin America contrasts their Keynesian expansionary advice with the orthodox recommendations of French and British experts in the nations where they were influential. Louis Pauly’s chapter on structural conditionality in the Bretton Woods institutions focuses on the role of the U.S., whose decisions on which countries to fund are decisive. He finds that the U.S. has shaped conditionality to a greater extent than have the problems in the recipient countries.

Here are my reactions to this collaborative research effort. The archival research that underlies many of the chapters is truly impressive. The volume’s theme — that policy failure can be explained by lack of international cooperation — has become a popular mantra of economic historians. That emphasis, however, often obscures difficult underlying internal and external problems, such as undiversified economies dependent on a single export commodity, or misaligned exchange rates, or real interest rate differences among countries that international cooperation cannot cure. With respect to the theme that money doctoring has a political dimension, it is undoubtedly the case of multilateral institutions’ activities, but there clearly are exceptions when considering individual money doctors, such as Courcelle Seneuil, and probably Kemmerer, despite Flandreau’s animadversions.

The epigraph is a quotation from Moby Dick by Herman Melville:

It’s a mutual joint-stock world, in all meridians. We cannibals must help out those Christians.

The authors apparently regard the creditors in Western Europe and the U.S. as the cannibals and the debtors in Latin America and Eastern and Southern Europe as the Christians.

Anna Schwartz (with Owen Humpage and Michael Bordo) is writing a monograph on the history of U.S. official exchange market intervention.

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 Economic Future in Historical Perspective

Author(s):David, Paul A.
Thomas, Mark P.
Reviewer(s):Coelho, Philip R. P.

Published by EH.NET (June 2004)


Paul A. David and Mark P. Thomas, editors, The Economic Future in Historical Perspective. Oxford: Oxford University Press, 2003. xvi + 528 pp. $74 (hardcover), ISBN: 0-19-726237-6.

Reviewed for EH.NET by Philip R. P. Coelho, Department of Economics, Ball State University.

This book is a compilation of seventeen different papers written by twenty-six authors; the collected works were presented at a symposium convened to honor Charles H. Feinstein prior to his retirement as the Chichele Professor of Economic History at the University of Oxford. The essays are gathered into three broad categories proceeded by editorial comments that can be quite extensive. The three parts of the volume are: 1) “Drivers of Long-Term Economic Growth”; 2) “Changes in Economic Regimes and Ideologies”; and 3) “Welfare, Well-being, and Personal Economic Security.”

The overviews by the editors, Paul David and Mark Thomas, are both thought-provoking and frustrating. Thought-provoking because they do touch upon relevant issues, frustrating because they are opaque and deliberately refuse to evaluate arguments and render judgment. In their initial “Introduction,” the editors present a defense of economic history and a methodological review of equilibrium and path dependence. They defend the utility of economic history as a way “… of researching the past deliberately for the purpose of better informing future policy analyses” (p. 6). Yet they stress (p. 8) “the significance of specific institutional details” and “the timing of exogenous events” as being crucial in determining outcomes. I think economic history would be better served by stressing the commonalities of historical episodes and using the exceptional circumstances to explain confounding predictions. We use economic analysis to elucidate history because all societies at all times face fundamental economic problems that are amenable to rational analysis. What decisions are made and how they are made have effects both direct and indirect (feedback). Consequently, I am at a loss to explain what economic history is if it is not primarily about the application of economic analysis to history. The editors think otherwise (p. 10).

The editorial comments on path dependency are meant to deflect critics of economic history who argue that history is not relevant to the analysis of contemporary problems. The editors devote too much space to the defense of history to take the argument seriously. The critics of history, to be credible must know history and the analysis before their criticism can be credible; they do not, so their criticisms are uninformed.

The study of history is based on the premise that to understand the present it is necessary to have knowledge of the past. The resources and institutions that we have are legacies from the past; understanding them is crucial to any analysis of contemporary problems. Our species, H. Sapiens, is a social one; society, social norms and attitudes are a result of a series of interactions taken in the past. To argue that history, the path taken, does not affect the present, and will not affect the future is not credible. A more pertinent and insightful question concerning the importance of history is: How much does the past matter? The answer depends upon the particulars of the question and the historical circumstances. The past matters a great deal when assessing rates of return to competing investments in Denmark or Afghanistan, but it matters much less in a similar comparison between Denmark or Finland. The legacy of the past affects contemporaneous societies, but it does not condemn them to a predetermined future path. Societies do change, and the changes do affect their abilities to produce economic goods and services. Will these changes be beneficial or detrimental? An honest answer is that we do not know; that is why we do history and study current events.

The editorial discussion on equilibrium analysis is derivative from their discussion of history and path dependency. I believe that their discussion (and most discussions) of equilibria are fundamentally flawed. Equilibrium analysis, like supply and demand, is a way of organizing our thinking; equilibria are not observable phenomena. Restating it, equilibria have no physical presence; they can not be captured, observed, nor unambiguously defined and identified. Since they have no physical existence, proving equilibria exist, or are stable, is akin to proving that Superman can thrash Captain Marvel. “Proofs” of mathematical stability (or theorems) are mathematical exercises testing the internal consistency of mathematical descriptions. They are that, and just that; they should not be confused with incontrovertible evidence, which is another (and more commonly used) meaning of the word “proof.” The mathematical proof of the instability of a system, in and by itself, has no significance to economic reality or policy. To have any relevance to the world in which we live and work, the instability of a system has to be: 1) quantified (how unstable), and 2) its actual temporal sequence has to be predictable in real time. Deidre McCloskey made the point that there is a distinction between statistical and economic significance; to be economically significant, a statistically significance variable has to be large enough to have a meaningful impact on the specified functional relationship. Similarly, if a system is identified as mathematically unstable we have to predict not only how unstable, but its path in real time before we can assess its economic significance. More succinctly, in addition to McCloskey’s how much, we have to know how soon. Suppose that the mathematical model of our economy is unambiguously shown to be unstable, increasingly cyclical, and predicted to have a cataclysmic explosion (implosion). If the cataclysmic event is predicted to take place a thousand centuries from the present, will it have any measurable effects upon human behavior during the next ten generations? Rational economic behavior gives vanishingly small weights to economic events expected to take place a hundred years from now, and virtually none to events predicted to take place 100,000 years from the present. This means that without further information, the existence or non-existence of equilibria and whether they are stable or not, are questions that may concern mathematicians, but, by themselves are irrelevant to policy makers, economists, and historians. Nevertheless, the editors seem to be mesmerized by the importance of the methodological underpinnings of equilibria and path dependent analyses. And I, too, have devoted too much space to them.

The first essay in Part 1 is by Jan De Vries. He gives a very good summary of his thesis of an industrious revolution and how it affected economic growth. He argues that people working harder were the reasons for economic growth before the industrial revolution (pp. 48-51). He recognizes (p. 53) that work intensification may be the result of better nutrition; thus, rather than the cause of higher living standards, it could have been a result of economic growth. De Vries has a very interesting section summarizing how European consumption changed in the eighteenth century. Readers of this volume would to well to read De Vries’ essay in conjunction with Avner Offer’s essay (Chapter 12) on alternative measures of economic well-being. The juxtaposition illuminates both.

Jane Humphries has an interesting piece on apprenticeship. However the essay raises some issues that should be clarified; “In a competitive economy with no market imperfections workers invest in and firms provide efficient levels of general training.” (p. 81) The imperfections are unmentioned; if “market imperfections” include the cost of transaction and enforcement, then this is a restatement of the Coase Theorem. If it means something else, it should be clarified. Humphries provides a wealth of details, but the framework tying them together and quantifying the importance of apprenticeship programs is nebulous. She argues that the apprenticeship program was relatively benevolent, efficient and significant in providing England with skilled workers before the Industrial Revolution. She also believes that legislation, rather than codifying behavior, was instrumental in changing it, and necessary for the establishment of apprenticeships.

Stephen Broadberry’s essay on “Human Capital” is a comparative history of the growth of productivity in Germany, the United States, and the Britain. The essay summarizes his published works. It is a comprehensive essay continuing to the present. This causes a slight problem because he states that aggregate productivity in Britain is behind that of Germany and the United States, yet the last data (2004) released had Britain exceeding Germany’s per capita output. In identifying the contributions of “skills,” “capital,” and the “residual” to the differential in labor productivities (Tables 11 and 12) between Britain, and the United States and Germany, the “residual” is typically the largest single explanatory variable. In some observations the residual has the largest absolute contribution and is negative; this does not inspire confidence.

In “General Purpose Technologies” Paul David and Gavin Wright argue that sporadic surges in productivity are typically part of the economic landscape. Surges can be attributed to the adoption of a technology that has a myriad of facets, and affects many different productive activities. Their study emphasizes American electrification in the early twentieth century. They suggest the decline in the capital-output ratio that occurred in the period 1924-37 was attributable to electrification, and that it had a similar impact in other countries. The evidence is not entirely convincing; if wages were falling relative to capital prices, then rational behavior would substitute labor for capital. In the 1930s the decline in the capital-output ratio may have been a result of declining wages, rather than a productivity surge.

Nick Von Tunzelmann’s essay on “Technological Systems” concludes Part 1. It is not clear what he is attempting and he admits that his paper is “a start on trying to affect a union between such strange bedfellows” (p. 167). They may or may not be strange, but they are certainly not well identified. He argues innovation depends more on “knowledge rather than information,” (p. 168) where knowledge is uncodified, and information is available through the market. This dichotomy is simply asserted. His essay touches on a variety of subjects and countries that may have a relation to one another, but the relationships are not apparent. He does make some remarkable assertions; one of which is that late twentieth century America’s “shortcomings in learning production processes were partially solved by removing such processes off shore to cheaper labour countries … cost competitiveness was maintained by downgrading wages rather than upgrading methods” (p. 183). International trade is not his strong suit.

The editorial introduction to Part Two, “Changes in Economic Regimes and Ideologies,” argues that the unifying element in the six essays is how economies react to “shocks” that disrupt established regimes” (p. 197). In “The East Asian Escape” Nicholas Crafts examines and explains the growth of Asian economics in the twentieth century. This essay is valuable for its data and analysis. Part of the explanation for East Asian growth is a “catch-up” (or Gershenkron) effect. Crafts argues that in the developing East Asian economies: 1) the institutional groundwork had to have been in place, and conducive to growth before rapid growth could commence; and 2) their initial institutional endowment does not insure that these countries will, indeed, catch-up. Institutional changes may have to precede further development. The Japanese stagnation of the 1990s certainly supports the need for institutional change.

Christopher Davis and James Foreman-Peck’s essay on the “Russian Transition” in historical perspective makes comparisons between the Russian transition from Communism to the present post-Communist regime, and the United Kingdom from war to peace following the two World Wars. The essay describes the British transition from war to peace after World War I as failing relative to the transition that took place after World War II. Both post-war periods were adversely affected by fixed exchange rate policies. It seems that free-market policies were tried in all markets except the currency markets. The attempt to fix exchange rates after both wars led to severe problems — unemployment post-World War I, and price controls and other restrictions post-World War II. Their discussion of the Russian transition from Communism illuminates a confusing period. However they do not examine the data closely enough. Post-collapse Russian GDP fell substantially, but the fall in consumption per capita was significantly less. One could interpret this as implying that part of the output decline was fictitious because the output was not valued.

Carol Leonard’s article focuses on agricultural policies in Russia from 1861-2000. The details are interesting but the analytic framework is suspect: 1) (paraphrasing pp. 274-75) in the Post-Soviet period there was a misallocation of resources because low world grain prices led labor away from grain production into labor-intensive farming; 2) “After Emancipation, as the state gradually recovered from financial destabilization during the Crimean War, the need for ad hoc taxes grew, especially since Russia lacked a stable currency” (p. 277); and, 3) prior to the Revolution, “preference for the pooling of production resources was common as it was during and after collectivization in Soviet Russia.” (p. 275) Similar statements appear in the essay to its detriment.

Francis Wilson’s essay on South Africa, “Understanding the Past to Reshape the Future,” is marred by exaggeration. Examples are claims that: 1) equate the institutions governing race established in white-ruled South Africa with a “modernized form of slavery” (p. 302); 2) the educational system of white South Africa was designed with the intention of making black South Africans illiterate and innumerate; (p. 311) and 3) “the [labor] system was part of a process that generated poverty whilst simultaneously producing wealth for others” (p. 304). These statements betray a complete indifference to economic analysis; the author knows better, but moral indignation trumps scholarship.

In contrast, Leandro Conte, Gianni Toniolo, and Giovanni Vecchi in “Lessons from Italy’s Monetary Unification,” have a very good, scholarly essay explaining the ins and outs of the adoption of one currency after Italian unification. They do a commendable job describing and explaining the economic integration that occurred after political unification. A difficulty I have with their paper is that when analyzing the unification of labor markets they use nominal wage data. Rational behavior suggests that suppliers of labor respond to real wages, rather than money wages. But it is too much to expect the authors to develop a series of regional price indices on top of what they have done in fourteen pages. Their essay should be required reading on Italian economic and monetary unification.

In the article “Ideology and the Shadow of History,” Barry Eichengreen and Peter Temin argue that: 1) the consensus that the gold standard “turned an ordinary business downturn into the Great Depression” (p. 357) is correct; and 2) the ideology of the gold standard developed such a hold on the mind-set of the times that it prevented economic recovery and was a primal cause of the Great Depression (pp. 358-59). Unfortunately, ideology can not be measured, but if ideology caused policies designed to: 1) hold prices and wages above market clearing levels; 2) reduce real output; 3) increase taxes; 4) reduce world trade; 5) penalize economic success; 6) follow redistributionist policies and, 7) ignore the disastrous effects that governmental policies caused to the monetary and banking systems, then ideology did play an important role in bringing about and prolonging the Great Depression. But sans the policies and with the ideology, the economic history of the 1930’s would have been much brighter; their argument on the primacy of ideology is not persuasive.

The third and final section of the book, “Welfare, Well-being and Individual Economic Security,” starts with an admirable essay by Avner Offer, “Economic Welfare Measurements and Human Well-being.” It reviews the literature on the alternatives to income per capita as a measure of well-being. It is a comprehensive, wide-ranging, and useful guide to anyone who wants an introduction to the alternative measures of well-being. Per capita income is a widely accepted measure of well-being; this is an important reason why alternative measures should be considered. If the Physical Quality of Life Index or the Anthropometric Index give different accounts of changing living standards compared to income per capita, then a closer examination of all the measures is required. When basic economic attributes are changing (as in De Vries’ industrious revolution) less conventional measures of well-being may illuminate issues.

Essay thirteen, Roderick Floud’s “The Human Body in Britain,” fits very well with Offer’s work. It is a comprehensive review of the anthropometric history of Britain. The argument in favor of anthropometric history is that heights at various ages are an accurate gauge of the nutritional intake and exposure to disease, and that these variables are not captured in per capita output data. Furthermore anthropometric data may more accurately reflect the distribution of well-being among classes, ages, and the sexes. The charts and data presented are very interesting, including the revelation that male modern heights and standards were achieved by the birth cohort of 1925. Does this imply that the welfare policies of the post-World War II era had no affect upon British stature? This question explains why some find anthropometrics fascinating.

In chapter 14, “Height and the High Life,” Timothy Leunig and Hans-Joachim Voth continue with anthropometrics; they argue that in the future data on heights in developed countries’ will be less valuable as indicators of well-being because improved living standards will cease to affect heights. There is a biological limit on how tall human beings can be. Poor nutrition, diseases, and injuries can prevent humans from attaining their potential (genetic) height, absent these, increasing nutrition will not increase the maximum attainable stature. They also make an interesting speculation: because Communist regimes emphasized spending on (socialized) medical care and insuring a basic minimum diet, the economic history of the countries in transition from Communism to market oriented societies may show a divergence between anthropometric data and income per capita. Thirty years or so from now we will be able to test this speculation.

Anne Digby and Shelia Ryan Johansson in “Producing Health in Past and Present,” write a wide-ranging overview of medicine and health over the past millennium. Medicine did not extend the lives of elites relative to ordinary people at least to the seventeenth century. In the present day they point out that good health can be acquired at relatively low cost as a number low-income of countries and regions do (p. 454). Their essay concentrates on different systems’ medical delivery in the production of health; they do not place enough emphasis on the impact of non-medical expenditures on health, both past and present. The most cost-effective expenditures per life saved are those on: potable water, waste removal, sewers, sanitary food, and, probably most importantly, education. Ignaz Semmelweiss is widely credited with discovering that high rates of maternal mortality were caused by the unsanitary bodies of medical practitioners. Washing hands with chlorinated water was not high tech in the nineteenth century, but it was effective in reducing sepsis and puerperal fever. Drains and sewers were known in ancient Rome, and when they were employed in the nineteenth century they were highly effective in reducing contagions. Many of the health problems of the twenty-first century can be prevented most cheaply by changing behavior. The incidence of AIDS, venereal infections, pulmonary disease, and cardiovascular diseases can be reduced significantly by at-risk populations changing behaviors. The authors’ discussion of traditional/alternative versus biomedical/scientific medical system is interesting, but, in producing health in the past both systems take a back seat to public health systems.

Peter Solar and Richard Smith in “An Old Poor Law for New Europe?” have written a short synopsis of the English Poor Laws, both Old and New. They contend that: 1) the local oversight was effective and “served the English well” (p. 473) in the administration of the Old Poor Law; and 2) the Industrial Revolution and economic integration led to the more restrictive New Poor Law. The authors make some final comments that are interesting speculations on the effects that the enlargement of the European Union may have upon national welfare systems that differ in benefits delivered.

Mark Thomas and Paul Johnson, in “Paying for Old Age,” have the last chapter of the book. Their paper discusses the financial problems of increased life expectancy. They do an admirable job of laying out the data, and the financial issues facing societies with ageing populations, with one major exception: they ignore the elephant in the room. The “problem” is that people are living longer, and if retirement occurs at 65 (or earlier) the retirees will be unable to support their expenses over their remaining life without increased state expenditures. Increased life expectancy increases the percentage of retirees to the working population. In pay-as-you-go state pension schemes, this creates a severe financial crunch. The obvious solution is to increase the age of retirement. The average person of 65 in today’s developed world is healthier than the person of 55 years of age a century ago. Relative to the 55 year olds of 1904, today’s 65 year olds: 1) have longer life expectancies; 2) are taller and fitter; and 3) have more human capital. Hard physical labor in OECD countries is a small and diminishing percentage of employment. Services are the largest single employment sector and are growing; is there any reason why the providers of services cannot be 68 or even 70? The problem of pensions is a political problem. There is no reason that the retirement age picked by Bismarck in the late nineteenth century should be sacrosanct in the twenty-first century. Politicians whose careers depend upon not saying unpalatable truths have legitimate reasons for avoiding the “elephant,” but I can not understand intellectuals doing so. Increased life expectancies have made the “problem” of retirement at 65; designing solutions to maintain the current retirement age is analogous to finding ways to keep warm when frigid winds are blowing through an open door. It is much simpler to shut the door.

In sum this book has some very nice essays, and some others. Should you purchase it or order it for classes? Graduate courses surveying issues in economic history and policy could use these essays as a framework for discussing issues. For the most part, the essays are broad and wide-ranging; they do provide competent reviews of the current state of their various topics, but the topics (except for anthropometrics in chapters 12-14) are heterogeneous. Whether one does or does not acquire the book depends upon the overlap between the interests of the reader and the book’s topics.

Philip R. P. Coelho has written on and is continuing his study of long-run economic growth and the impact of biology upon economic growth and development; he is currently sidetracked writing on ethical behavior. His articles have been published in the Journal of Economic History, the American Economic Review, Explorations in Economic History, Economic Inquiry and other journals.

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

Discriminating Risk: The U.S. Mortgage Lending Industry in the Twentieth Century

Author(s):Stuart, Guy
Reviewer(s):Collins, William J.

Published by EH.NET (June 2004)

Guy Stuart, Discriminating Risk: The U.S. Mortgage Lending Industry in the Twentieth Century. Ithaca: Cornell University Press, 2003. xi + 248 pp. $39.95 (hardcover), ISBN: 0-8014-4066-1.

Reviewed for EH.NET by William J. Collins, Department of Economics, Vanderbilt University.

Readers who are interested in the historical interaction of American cities, race, and mortgage finance will find many aspects of Guy Stuart’s Discriminating Risk informative and insightful. The book sheds light on the grass-roots operation of the lending process, on the influence of conceptual debates on industry practices, and on the unusual interaction of public policy and private property that characterizes the mortgage industry. Stuart’s close reading of real estate journals, manuals, and guidelines, and his collection of field interviews, provide an inside view of how information has been collected, processed, and acted upon in the mortgage industry. He often clarifies the implications of this process for long-run racial disparities in housing market outcomes. Stuart accomplishes this in a framework that emphasizes “rules, networks, and the production of space.” Economic and financial historians, urban economists, and policy makers will find some aspects of the book frustrating, as discussed below, but the book is certainly a useful contribution to the literature on the history of American housing markets. Stuart is an Associate Professor of Public Policy at Harvard’s Kennedy School of Government.

The book is organized into seven main chapters, plus a substantial and informative introductory chapter. Chapters 1 and 2 are the most interesting chapters from an historical perspective. Chapter 1 is essentially a history of how real estate professionals have defined, appraised, and anticipated changes in property values. Stuart effectively combines this conceptual history with a recounting of the institutional changes that profoundly reshaped the American mortgage industry. Throughout, Stuart highlights the primacy that real estate professionals attached to neighborhood stability and homogeneity. Not surprisingly, the promotion of such high levels of neighborhood homogeneity has tended to reinforce residential segregation by income and race, and dismantling this segregation becomes the main target for Stuart’s policy recommendations. Chapter 2 documents the industry’s standard practices for evaluating the riskiness of loans and loan applicants, and it includes a fascinating discussion of the emergence of a network of credit bureaus in the early twentieth century. By itself, the disclosure of the FHA’s first “Standardized Factual Data Report” form (circa 1935) makes the chapter worth reading. In addition to the information one would expect (e.g., income and employment), the form included queries about the applicant’s “racial descent” (“answer whether Anglo-Saxon, Greek, Hebrew, Italian, Negro etc.”), about the applicant’s wife (“Does his wife lend encouragement to him?”), and about the applicant’s personality and family reputation (“Is he self-satisfied or ambitious?” “Does his family have the reputation of living extravagantly?”). Thus, perceived “character” and “willingness to pay” were explicit considerations in lending decisions. By the century’s end, automatic underwriting software and heavy reliance on simple credit scores had greatly altered the loan-screening process.

In Chapter 3, the book moves away from an historical orientation, and it focuses on the loan application process in recent decades. Here, interviews with real estate and mortgage professionals illustrate the strength of personal networks in the industry (e.g., between real estate agents and mortgage brokers, and between real estate agents and particular neighborhoods). The interviews also demonstrate how those evaluating loan applications exercise a certain amount of “common sense” discretion within a fairly well-understood set of rules for evaluating loan applications.

Chapters 4 and 5 both draw extensively on Stuart’s detailed knowledge of Chicago’s neighborhoods and real estate markets. The chapters are fairly ahistorical, in that readers will not learn much about Chicago’s housing history by reading them. Rather, the chapters’ goals are to provide case-study level illustrations of the author’s broader points about the shaping and packaging of homogeneous neighborhoods in the context of ever-shifting patterns of demand and supply. These are the only chapters that report and discuss housing market data, and they do so only for the 1990s. I had high expectations for chapter 5’s discussion of lending discrimination, but I was disappointed. The review of the existing literature is thin, and while the discussion of lending patterns in Chicago in the mid-1990s is insightful, there is not much compelling new evidence on the nature, extent, or ultimate impact of lending discrimination. Stuart’s point that concentrating people with poor credit in particular neighborhoods makes their property illiquid and thereby reinforces high likelihoods of default is interesting and plausible, but it would certainly benefit from a more thorough empirical exploration. More generally, plausibly important assertions about discrimination, housing segregation, and access to credit are found throughout the book, but readers are usually left without convincing econometric identification of cause-and-effect relationships and without an empirical sense of just how large such effects might be.

Chapter 6 revisits and reiterates arguments from the previous chapters. Chapter 7 concludes the volume with several policy recommendations. I have reservations about this chapter. Readers are told in the introduction that the book will attempt to initiate “a practical debate about how to embed social justice in the process of delivering financial capital to all people and neighborhoods that need it” (p. 2). It becomes clear that Stuart has a particular version of “social justice” in mind, a particular sense of who “needs” financial capital, and a particular set of policy ideas for getting capital markets to conform to his idea of justice. The book’s concluding sentence notes that “the value I most cherish in the context of this discussion is the ability of people of all races, ethnicities, and incomes to live in any neighborhood, subdivision, or suburb they choose” (p. 206). This vision is difficult to square with the central reality of urban economics: land is a scarce resource that is priced accordingly. The vision is also difficult to square with the population’s tendency to sort itself by income, independent of race, ethnicity, and real estate agents. Some of the policy recommendations of Chapter 7 are intriguing, for example the suggestion that government agencies should support the development of a risk-based pricing system for home loans that includes a mutual insurance provision. But it is impossible to gauge the potential benefits or costs of such reforms on the basis of the book’s discussion.

All books must draw boundaries and that means leaving out some potentially interesting issues. In this case, topics left out include: description of the origins of American mortgage markets, the connection between mortgage finance and the development of the American banking system, and the history of inter-regional financial market integration (Kenneth Snowden’s work would have been helpful here). Also missing are any empirical characterizations of home-ownership rates and of the influence of mortgage market innovations on the costs of home ownership.

While the book frequently cites racial disparities in loan rejection rates, readers get no sense of the extent to which the higher rate of rejection passes through to African-Americans’ home ownership status (i.e., once rejected, is ownership delayed, or is it never achieved, or is it achieved readily but only for less valuable housing?). Racial disparities in assets, which are much larger than racial disparities in income, are left in the background (Edward Wolff’s work would help in this regard). The 1968 Fair Housing Act is only lightly touched upon, though more recent legislation receives more thorough discussion.

In sum, Discriminating Risk is full of useful historical and contemporary information on the lending process, insightful interviews, and a valuable close-reading of the real estate industry’s standard operating procedures. I learned a great deal by reading the book, and I recommend it to other scholars with an interest in the history of American housing markets.

William J. Collins is an Associate Professor of Economics at Vanderbilt University and the Model-Okun Fellow at the Brookings Institution (2003-2004). He is the author of “The Economic Aftermath of the 1960s Riots in American Cities: Evidence from Property Values” (with Robert Margo), NBER Working Paper 10493; “The Housing Market Impact of State-Level Anti-Discrimination Laws, 1960-1970,” Journal of Urban Economics (May 2004); “Race and the Value of Owner-Occupied Housing, 1940-1990” (with Robert Margo), Regional Science and Urban Economics (May 2003); and “Race and Home Ownership: A Century-Long View” (with Robert Margo), Explorations in Economic History (January 2001).

Subject(s):Urban and Regional History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

British Trade Unions since 1933

Author(s):Wrigley, Chris
Reviewer(s):Friedman, Gerald

Published by EH.NET (March 2004)

Chris Wrigley, British Trade Unions since 1933. Cambridge: Cambridge University Press, 2002. viii + 106 pp. $40 (hardback), ISBN: 0-521-57231-2; $15 (paperback), ISBN: 0-521-57640-7.

Reviewed for EH.NET by Gerald Friedman, Department of Economics, University of Massachusetts at Amherst.

Professor of Modern British History at the University of Nottingham, Chris Wrigley prepared this volume for the Economic History Society as a summary text reviewing major issues in the history of British trade unions over the last seventy years. Despite its brevity, Wrigley’s text covers the most important topics in recent British history, including the rise of organized Labor in the mid-twentieth century, the role of unions in Britain’s survival and triumph in World War II, the question of a ‘British disease’ after World War II, and the decline of Labor since the election in 1979 of Margaret Thatcher. On each topic, Wrigley provides a succinct review of the major issues, a summary of recent scholarship, and a concise analysis. Both undergraduate and graduate students and all scholars unfamiliar with the terrain will find his work to be a useful introduction to the field.

Wrigley approaches British labor history judiciously, avoiding extreme statements or assertions of revolutionary changes. Instead, he emphasizes the continuity in British industrial relations and gradual historical change. He discounts, for example, arguments that the entry of Labor into Churchill’s wartime coalition governments marked a dramatic shift in the place of unions in British industrial relations. He acknowledges, for example, that British trade unions “emerged from the Second World War with both their size and their political and social status enhanced” (p. 7). But Wrigley also shows that union membership was growing rapidly even before the War, with half of the total growth in union membership for the 1935-45 period coming before 1939. Wrigley attributes much of the union growth in the 1930s to pro-union legislation and other state intervention in industrial relations by the National Government. Measures to rationalize wages and regulate competition, such as government sponsored Industrial Courts, had the effect of institutionalizing unions and insulating unionized firms and workers in them from nonunion competition. Wrigley questions whether these measures constitute full-blown corporatism in Britain. But they put wartime measures and union growth in a context of the longer term trend in British industrial relations towards corporatist-type arrangements.

Tight wartime labor markets and British Labor’s alliance with the government both contributed to continued rapid union growth during World War II. The appointment to the war cabinet of General Workers’ Union secretary general Ernest Bevin marked an explicit alliance of the British labor movement with the Churchill war government, and vice versa. Serving as Minister of Labor, Bevin supported regulations, such as the Emergency Powers (Defense) Act of 1940, that promoted production by restraining strikes and labor disputes. Wrigley outlines some of the concessions organized labor received in exchange for its support for production, including near automatic access to ministers and senior civil servants and regulations strengthening unions and their leadership. These two goals, maximizing production and strengthening unions, sometimes went together, such as when joint production committees of employers and trade union representatives were formed to discuss ways to boost production in the engineering and ordnance industries.

The involvement of unions in regulating labor relations and increasing production during World War II makes their post-war image particularly surprising. British unions were widely blamed for a ‘British disease’ where craft union organization led to disorderly labor relations, stagnant productivity, and inflationary wage settlements that forced monetary authorities to slow the economy. Drawing on an extensive scholarly literature, Wrigley defends British unions from most of these charges and denies that there was anything pathological about British industrial relations. Using comparative data on strike activity in ten industrialized economies, he shows that throughout the post-World War II period, the United Kingdom lost fewer workdays to strikes than most other countries. Wrigley also defends the macro-economic impact of British unions. Acknowledging that incomes policies were sometimes ineffectual, he vigorously defends them in general by arguing that agreements between governments and union leaders helped bring down inflation in some critical periods, such as when the Social Contract of the mid-1970s helped bring the inflation rate down quickly from 24 percent to 8 percent. Wrigley also cites evidence that incomes policies encouraged productivity bargains and sometimes fostered productivity growth.

After reaching over 12 million members in 1979, British trade union membership fell to barely 7 million members in 1997, or from over 50 percent of potential members to 30 percent. This marked a longer and further decline in union membership than in any previous period. Membership fell sharply during the Conservative Party governments of Margaret Thatcher and John Major, 1979-97, and has risen since the return of the Labor Party to power. The political climate was hostile to trade unions under the Conservative governments and Wrigley reviews a long series of legislation enacted to hinder unions and to discourage strikes. Still, it is hard to see how any, or even all, of this legislation could explain the period’s dramatic union decline.

It is also hard to explain the union revival under Tony Blair’s Labor Party government. Wrigley cites various efforts by unions to adapt to declining membership, including the amalgamation of several unions to save on administrative expense and to reduce jurisdictional disputes, as well as conscious efforts to recruit women, members of minority groups, and service and professional workers. He also cites union attempts to provide greater services to members to convince members, and nonmembers, of the value of union membership, including services such as discount credit cards, life insurance, telephone help lines, and legal services. Wrigley believes that these have “played a part in the … stabilization of membership at the end of the century” (page 39). One may question this conclusion.

Chris Wrigley has written a useful little book. It may be used profitably in undergraduate courses in British History, European Economic History, or Labor History. And it may be of value to scholars looking for a quick introduction and review of recent developments in British labor history.

Gerald Friedman has written on the economic history of the United States and Europe, on labor economics, and on the history of economic thought. He is the author of Statemaking and Labor Movements: The United States and France, 1870-1914 (Cornell University Press, 1998), and numerous articles on American and French unionism and union membership decline in advanced capitalist economies. Currently, he is writing a study of union decline in advanced capitalist economies, and a study of the decline of institutional economics in the United States.

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

The History of Family Business, 1850-2000

Author(s):Colli, Andrea
Reviewer(s):Kay, Alison C.

Published by EH.NET (December 2003)

Andrea Colli, The History of Family Business, 1850-2000. Cambridge, UK: Cambridge University Press, 2003. x + 114 pp. $40 (hardback), ISBN: 0-521-80028-5; $15 (paperback), ISBN: 0-521-80472-8.

Reviewed for EH.NET by Alison C Kay.

In The History of Family Business, Andrea Colli offers a historical and comparative perspective on family business. This book begins with a consideration of the definition of a family business and promotes the need to move beyond the traditional analytical dichotomy between family and managerial firms (pp. 6-22). The second part of the book considers family business in different institutional and political contexts. It also examines the different relationships within family firms over time (pp. 27-45). Finally, in the third part of the book, Colli compares the performance of family business with that of other economic organizations. He considers the impact of changes in technology and market structures characterizing the second and third industrial revolutions on family firms and the role of family business in the evolution of contemporary industrial capitalism. In this section of the book, the problem of the introduction of managerial hierarchies into family-controlled enterprises is examined, highlighting the different experiences in various national contexts (pp. 49-65). The book ends with a bibliographical essay, providing a synthesis of current debates and highlighting seminal works (pp. 77-84).

Central to Colli’s agenda are the reasons for both the decline and persistence of family business, the different forms it has taken over time, and how it has contributed to the growth of single economies. It is not merely, he writes, a device to handle uncertainty during the initial phases of industrialization (p. 27). However, he points out, it is clear that the degree of world-wide diffusion of the family firm depends largely on the stage of economic growth of each country, on the sectors involved, and on the structure of the enterprise itself inside these sectors. Therefore, even if the contribution of family business to GNP converges across modern economic nations, there are international differences in its pervasiveness and structure. A family firm is the product of a specific national culture. Despite these differences, Colli argues that it is the ability to fine-tune — to continually seek new survival strategies to bridge the aspirations of family members with the constraints imposed by market competition, institutional and legal systems — that accounts for the longevity of the family firm.

Much more could have been said on the role of smaller family business in the economy. Perhaps motivated by a desire to take the identification of the family business beyond the traditional perception of the small and elementary production unit, Colli’s picture often focuses on medium to large-scale business. Due to this, an opportunity is missed to examine the pivotal role of women in smaller family businesses across the globe. The book’s focus (and by default their exclusion) does permit a useful general picture to be developed and also reduces the family-managerial business analytical dichotomy. However, it also restricts from our view the rich variety of form that family business has historically taken. Although this book stresses “the extreme diversity of family businesses,” (p. 73) studies such as this — which in essence focuses on the medium to larger-scale operation — provide an essential, interesting but also partial picture. They overlook the role and dynamic of the smaller, equally as important, family business and the complex web of strategies, motivations, communities, networks and identities therein. Beyond this issue, in all fairness, Colli seeks to guide us through the “shifting controversy” surrounding the impact of family firms in modern advanced industrial economies, and reaffirm the importance of placing business history in its social, historical, institutional, and economic context (p. 76).

The History of Family Business has many strengths. Although the family firm as a specific organizational form has received attention from scholars, particularly of the industrial revolution, this book offers a new focus. A central theme is the resilient persistence of such an organizational form through the second and third industrial revolutions. Colli neatly outlines the resilience and efficiency often found within family business, contrary to its anecdotal image of family emotion over economic reason when compared with managerial capitalism. Furthermore, he champions the purposefulness of this form of business organization, arguing that it does not result from a supposed incapability of entrepreneurs to understand and adopt the managerial models of the American corporation. Instead, Colli presents a view of its enduring presence as a demonstration of its “efficiency” against a defined institutional framework, rather than as a failure. This book is succinct, provides a useful summary of research into family business, presents new and vital ideas and is well argued. It will be particularly useful for the student of economic and business history.

Alison C. Kay has recently completed her D.Phil. thesis at Nuffield College, Oxford University on the topic of London’s women in business, 1750-1880. She is currently researching women’s role in the metropolitan accommodation business.

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

A Companion to the History of Economic Thought

Author(s):Samuels, Warren J.
Biddl, Jeff F.
Davis, John B.
Reviewer(s):Boianovsky, Mauro

Published by EH.NET (December 2003)

Warren J. Samuels, Jeff F. Biddle and John B. Davis, editors, A Companion to the History of Economic Thought. Oxford: Blackwell, 2003. xvii + 712 pp. $134.95 (hardcover), ISBN: 0-631-22573-0.

Reviewed for EH.NET by Mauro Boianovsky, Department of Economics, Universidade de Brasilia.

The publication of this companion is a major event in the history of economic thought field. Warren Samuels, Jeff Biddle (both at Michigan State University) and John Davis (Marquette University, Wisconsin) have put together an impressive collection of thirty-nine essays covering the state of the art in the history of economic thought and historiography. The volume is divided into two parts — “Historical Surveys” and “Historiography” — plus an introductory chapter. The contributors are well-known experts in different aspects and periods of the history and methodology of economics.

Twenty-eight surveys comprise Part I, arranged chronologically from ancient times until postwar economics. Chapters 2 to 11 provide surveys of traditional topics such as ancient Greek and medieval economics, mercantilism, physiocracy, political arithmetic, Adam Smith, classical economics, and Marx. Chapters 14 to 18 and 23 cover the German and English historical schools, American economic thought before 1900, English and Austrian marginalists, early general equilibrium analysis and interwar institutional economics. Macroeconomics is discussed in chapters 21, 22 and 26, including pre-Keynesian business cycle theory, Keynes, and postwar monetary economics. Microeconomics is the theme of chapters 19, 20, 24 and 25, on interwar imperfect competition theory, perfect competition and the neoclassical synthesis, and postwar general equilibrium and game theories. Chapter 28 is divided into five subchapters surveying several branches of postwar heterodox economics. Other chapters (12, 13 and 27) deal with topics such as non-Marxian socialism, utopian economics and the economic role of the government. Although most of the entries in Part I may be described as surveys of the literature, some are written as papers where authors develop new insights about certain episodes in history of economic thought (e.g. chapters 9, 21, 25 and 27 on homogeneity and race in post-Ricardian economics, “the stabilization of price theory” between 1920 and 1955, “the formalist revolution” of the 1950s, and changes in the interpretation of the role of the government in the economy, respectively).

The only other collection to date that can be compared to the Companion in scope is the (1987) New Palgrave: A Dictionary of Economics, which included several entries on the history of economics. In the early 1990s a few thematic paperback volumes (on general equilibrium, capital theory, monetary economics, etc.) were made out of the entries in the New Palgrave, but there was no specific volume collecting the entries on history of thought. From that perspective, the Companion fills a gap in the literature. Many of the entries in the Companion refer to their matches in the New Palgrave (e.g., chapters 7, 11 and 16 on Smith, the surplus interpretation of classical economics, and English marginalism, respectively) and/or provide updated references to the vast secondary literature that has come out since the late 1980s. Some chapters do neither (e.g. chapter 8 on classical economics).

Although Part I of the Companion provides a comprehensive treatment of the main topics in the history of economics, a few gaps may be noticed. The organization of the collection according to schools of thought and/or time period has several advantages, but also some drawbacks. Important topics such as trade theory, public finance and the theory of public goods, and econometrics are barely mentioned. Other examples are Wicksell’s contribution to capital theory and Ramsey’s model of optimal growth. Malthus’s approach to effective demand is discussed in just one brief paragraph (pp. 123-24). Despite the positive reference to studies of “neglected” economists in the introductory chapter (p. 3), most of those economists continue to be neglected in this Companion (e.g., J. Dupuit and H. Gossen on price theory, F. B. Hawley and N. Johanssen on saving and investment).

Part II is formed mostly by new material, reflecting the intense debate that has taken place in the last few decades about historiographic matters in economic thought. Chapter 1 is a summing up of the main arguments of the second part of the Companion (there is no similar introductory chapter for the first part, presumably because the historical surveys deal with more familiar material). Chapter 29 provides a useful overview of the main themes of modern historiography in general and in economics. The next chapter discusses in detail the contribution of the recent “science studies” approach to the history of economics. Chapters 31 to 33 provide a fascinating account of the several aspects of textual exegesis in HET, including an assessment of the use of mathematical modeling in the rational reconstruction of texts of the past. Developments in economic methodology after Kuhn are surveyed in chapter 34. Chapter 35 takes up the role of biography in HET, a topic that was the object of heated debate between G. Stigler and W. Jaffe in the 1960s. The next two chapters study some crucial features of the use and acceptance of economic ideas associated with the history of the formulation of economic policy and of the transmission of economic theories across international boundaries, respectively. Chapter 38 claims that HET should be seen in the broad context of the history of ideas in general. The last chapter raises the important issue of the use of HET by both supporters and critics of orthodox economics.

One interesting exercise is to do some cross-reading of the two parts of the Companion in order to check in what extent the historiographic concerns discussed in part II are reflected in the historical surveys of the first part. It is worth noting, for instance, that although much attention is paid to the “constructivist” approach in the historiographic discussion, there are very few signs of its influence in the first part of the book, as witnessed by the relative lack of references to authors such as M. Foucault and P. Mirowski in the interpretations of physiocracy and of the marginalist revolution, respectively. In the same way, the reader would benefit from reading chapter 28 (on postwar heterodoxy) together with chapter 39, where the problems involved in the relation between HET and heterodoxy are taken up.

Given the range and diversity of views of this Companion, it is representative of some of the best work that has been done in HET recently. As the editors inform the readers (p. xvi), there are plans to put together another Companion dealing only with HET in the postwar period. One can hardly wait.

Mauro Boianovsky is associate professor of economics at Universidade de Brasilia. His main field of research is the history of macroeconomics. Recent and forthcoming publications include “Patinkin, the Cowles Commission, and the Theory of Unemployment and Aggregate Supply,” European Journal of the History of Economic Thought (2002); “Wicksell, Cassel, and the Idea of Involuntary Unemployment” (with Hans-Michael Trautwein), History of Political Economy (2003); “Some Cambridge Reactions to the General Theory: David Champernowne and Joan Robinson on Full Employment,” Cambridge Journal of Economics (forthcoming, 2004); and “The IS-LM Model and the Liquidity Trap Concept: From Hicks to Krugman,” History of Political Economy (2004).

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Agricultural Development in Jiangnan, 1620-1850

Author(s):Bozhong, Li
Reviewer(s):Pomeranz, Kenneth

Published by EH.NET (July 2003)

Li Bozhong, Agricultural Development in Jiangnan, 1620-1850. New York: St. Martin’s Press, 1998, and

Li Bozhong, Jiangnan de zaoqi gongyehua (Proto-Industrialization in the Yangzi Delta). Beijing: shehui kexue wenxian chubanshe, 2000.

Reviewed for EH.NET by Kenneth Pomeranz, Department of History, University of California at Irvine.

Like most other aspects of Chinese intellectual life, economic history suffered badly during the 1960s and 1970s. In the generation that began rebuilding the field thereafter, probably the single most productive scholar has been Li Bozhong, now of Qinghua University. Professor Li has also been noteworthy for his efforts throughout the last twenty years to encourage Chinese scholars to engage seriously with the very different paradigms favored by most of their colleagues in the West, Taiwan and Japan — and vice versa. Yet only a fraction of Li’s massive scholarly output is available to those who do not read Chinese. The following review attempts to hit many of the highlights of his work by considering two recent complementary volumes, only one of which is translated: Agricultural Development in Jiangnan, 1620-1850 and Jiangnan de zaoqi gongyehua (Proto-industrialization in Jiangnan). Together, they paint a fascinating, though incomplete, picture of the economy of the Yangzi Delta (or Jiangnan),1 which was the richest region in China, and among the richest regions in the world from roughly 1000 until the mid-nineteenth century, when the Opium Wars, Taiping Rebellion (1851-64 — probably the most destructive civil war in history, killing perhaps as many as 20,000,000 people), and the onset of rapid industrialization in Northwestern Europe fundamentally changed the social, political, and economic landscape.

In Agricultural Development, Li argues forcefully against two basic views of the Delta’s agriculture in the Ming (1368-1644) and Qing (1644-1912) periods: 1) the claims of some Chinese Marxist scholars that the Delta remained a subsistence-oriented “feudal” economy in which most peasants had very limited contact with the market until the nineteenth century; 2) the claim of some Western scholars that Malthusian pressures and very limited technological change produced a slow but steady trend of immiseration over the period from roughly 1250 (when the rate of technological progress seems to have slowed considerably) until at least the mid-nineteenth century, and perhaps until well into the twentieth century. (A variant of this latter view, sometimes called the “involutionary” position, claims that living standards remained basically unchanged over the long haul, while the amount of labor required to obtain this standard kept increasing, so that immiseration came in the form of more work for the same rather limited per capita output rather than in the form of a decline in per capita output.) Li argues instead that: a) positive technological change continued in Jiangnan agriculture throughout this period, particularly in the areas of fertilizer use and water control; b) local factor markets continued to become more efficient, facilitating the increasingly rational allocation of labor and capital; c) long distance trade in various products expanded dramatically, allowing the region to benefit by pursuing its comparative advantage in cotton and silk production, and importing rice, timber, soybeans, etc.; d) the gradual decline in farm size as population increased did not lead to under-employment.2 On the contrary, increased double-cropping and other measures meant that the labor year for peasant males stayed about the same, while output per labor day actually rose; meanwhile women increasingly exited agriculture (in which they had never been very productive anyway), and earned more per day by moving into rapidly-growing textile trades; e) deliberate fertility control became fairly widespread by the eighteenth century, considerably reducing any Malthusian pressures and; f) because of all these factors, both aggregate and per capita income increased slowly but steadily during this period. (Li does not attempt to calculate total factor productivity, but makes it clear that he thinks growth in output outstripped the rate of growth in inputs.) He sees these positive trends coming to an end — and even then, only a temporary end — with the coming of the Opium War (1839-42) and the Taiping Rebellion (1851-64), which he argues aborted the development of a national market, and led to the breakdown of law and order. (In a more recent paper, he has suggested a slightly earlier turning point, arguing that a prolonged period of exceptionally bad weather and flooding began about 1820, doing lasting ecological damage and contributing to the calamities of the mid-nineteenth century.)

The basic arguments of Proto-Industrialization are similar in spirit. Li’s most basic point — that handicraft production for the market by Delta households grew enormously between the mid-Ming and mid-Qing — is not much in doubt, but he adds a number of important further observations. First, he broadens the scope of inquiry beyond the relatively well-studied silk and cotton cloth industries, providing very useful discussions of food-processing, tool-making, bleaching and dyeing, residential construction, boat-building, and so on. While he does not have the level of detail on any one of these sectors that one would hope for, his work on most of these industries is a significant advance over anything we had before.

Second, Li shows us that the growth of production in almost all of these sectors was accompanied by increasing levels of specialization, in two senses: a) in the sense that the tasks of production were increasingly sub-divided; and b) that consumers were increasingly purchasing these goods rather than making them for themselves, and so increasingly concentrating their work effort on production for the market rather than “Z-goods” for auto-consumption. (The latter point is less well documented than the former; while Li is able to show burgeoning urban markets, both in the Delta and beyond, for all sorts of ready-made goods, the evidence on rural consumption is sparser.) Along with this increased specialization, Li also assembles evidence that the average size of production units was growing in most of these sectors. In the case of spinning and weaving, where most production continued to be done in households, he makes a generally convincing case that an increasing share of output was controlled by merchants operating on a large scale, who controlled access to often distant markets, imposed increasingly exacting quality standards in order to maintain those markets, and thus had an increasing influence on the production process, even without using credit and the provision of raw materials to control direct producers the way that European “putting-out” merchants often did.

Third, Li’s surveys of specific industries other than textiles make a strong case showing slow but continuing technological development, expansion of markets, and an increasingly complex division of labor. In contrast to an older version of Chinese economic history (pioneered by Japanese scholars in the 1930s, but later widely accepted around the world), which saw an enormous spurt of technological change during the Song dynasty (960-1279), followed by stagnation or even regression thereafter, Li argues that the Song revolutions have been over-emphasized: not because they weren’t important, but because the diffusion and subsequent small improvements of many major inventions pioneered in that period took centuries, and it was those processes that gave Song-era breakthroughs much of their impact. This, too, is a revision of the conventional wisdom that is gaining adherents among both Chinese and Western scholars. While Li has not unearthed enough quantitative data to let us make reliable estimates of, for instance, labor productivity for most of these sectors, what little we can do with this data tends to suggest continued improvements in most sectors, and snapshots of productivity levels in particular sectors that would compare well with other advanced areas in the world until probably some time in the eighteenth century. What we do not see, however, is a shift over time among sectors toward more capital intensive and energy intensive pursuits — and this, as we shall see, is crucial to Li’s overall argument.

Fourth, Li argues that the combination of proto-industrialization and rising yields in agriculture (discussed above) propelled a significant improvement in per capita income and standard of living between 1550 and 1850, despite significant setbacks in the mid-seventeenth century ( a period of civil war, foreign invasion, and massive epidemics) and a decline in the average size of family farms. Here he not only disagrees with the still-regnant Chinese Marxist orthodoxy, which insists that China remained essentially a subsistence economy until the Opium War, but also with American partisans of “involution,” who maintain that the late imperial period was characterized by miniscule gains in income achieved at the expense of very large increases in labor inputs. By contrast, his position comes much closer to what is sometimes called the “California school” of social and economic historians, who argue that economic development in the Delta more or less kept pace with that in the most advanced parts of Europe until the onset of widespread factory industrialization. (Full disclosure statement: this reviewer is a charter member of the California school.) But in some ways, he goes even further than they do: while most of the “Californians” see economic expansion (or at least per capita economic growth) in the Delta slowing by the late eighteenth century, Li’s argument in these two books (though not always since then) suggests that the basic dynamics of growth continued unchanged until China’s mid-nineteenth-century catastrophes.

But while Li is content to rely on largely exogenous factors to explain the decline of the Delta after 1840, he does devote considerable attention to analyzing why the highly productive agriculture, commerce and handicrafts he describes did not spawn something more like classical English industrialization sometime before that date. He argues that institutional structure, surplus available for investment, and the educational level of the workforce were all quite adequate, and that there was widespread interest in productivity-enhancing technological change. Consequently, he looks beyond social, intellectual, and political factors, and finds his answers in geography and the supply of natural resources. In particular, he emphasizes a dearth of energy sources that he says gave Jiangnan production a marked bias away from anything energy-intensive, creating what he calls “a super light industrial” economy. Being very densely populated (and to a great extent reclaimed from marshes, rather than by clearing forest), the Delta had relatively few trees and not very many large work animals; it had no coal or peat, and, being at sea level, relatively little water power. Conditions were even unfavorable for the large-scale use of wind power, though some windmills were established. Thus, Jiangnan did what it was best at: sustaining a very productive agriculture (especially in rice: cotton yields do not seem to have been outstanding), mobilizing the large numbers of people it could feed to produce handicrafts, and taking advantage of its location at the mouth of a river system draining roughly a third of China, plus the coastline and the one thousand mile Grand Canal, to engage in very widespread trade. That it did not shift much labor into areas in which it had serious natural deficiencies, such as energy-intensive heavy industry, should not blind us to what it did achieve, or to the ways in which, Li argues, Jiangnan’s “proto-industrialization,” like its Western counterpart, laid the basis for the growth of modern industry in the region later on.

Much of Li’s argument here parallels the arguments of Western scholars in the so-called “California school,” including myself: thus it is not surprising that I find most of his argument convincing, and welcome the wealth of additional data he has brought to bear. His reconstructions of agricultural productivity and factor inputs, while certainly open to question, are generally the best we have: in particular, I think his claim that both male and female labor productivity rose significantly between the sixteenth and eighteenth centuries, despite a large increase in population, is at least well-enough based that the burden of proof should now rest on those who wish to argue for stagnation or decline. (The problems with these estimates are that a) the documentary base is fairly narrow, and b) because this was an agriculture with both very high inputs of labor, fertilizer, etc., and very high outputs per acre, relatively small percentage changes in assumptions about either yields or the costs of inputs can lead to uncomfortably large changes in estimates of net output.) The particular care that Li has lavished on changes in fertilizer use and their effects has important implications for environmental history as well as economic history. In terms of industry, his attempt to broaden discussion beyond textiles is particularly welcome, as is his general argument that we should look at what happened within the major sectors of this economy, rather than focusing on why the relative size of light and heavy industrial sectors did not shift. And his attention to environmental and resource problems is also quite helpful, though I think there is evidence that these problems began to constrict the Jiangnan economy somewhat sooner than Li allows, and that some of them were exacerbated by state policies (especially restrictive mining policies, and very limited government investment in transportation infrastructure beyond maintaining the massive Grand Canal) in ways that he does not address. His discussion of the conditions for technological change also seems to me a bit too hurried. While he has certainly made an important contribution by showing that such change had not stopped in Qing-era Jiangnan, there is still some reason to think that its pace had slowed, and no sign that it was speeding up the way it was in Europe. And while Li makes a good case for enough literacy, availability of various manuals, and so on to perpetuate continued diffusion of best practices, we need to know considerably more than we currently do about the rate at which new innovations were being introduced, and about such matters as patterns of association among artisans, the extent to which they were aware of elite science, and what was happening in that science, among other things. But this is only to say that no one scholar can do everything. The main problem, for the foreseeable future, will remain data: Li’s re-interpretations of Chinese economic history have generated new hypotheses considerably faster than we have been able to find material that will satisfy skeptics. But this simply means that we can thank Li, along with his other contributions, for keeping ourselves and our students employed for quite some time to come.

Notes: 1. Technically, these two expressions are not synonymous, but they are now used interchangeably in Chinese studies. “Jiangnan,” meaning “South of the (Yangzi) River,” in Chinese, refers to only part of the geographic Delta, omitting the generally less prosperous North Bank. Most Westerners now use “Yangzi Delta” to refer to Jiangnan, rather than to a more geographically accurate, inclusive region. Jiangnan is also somewhat vague, since it does not refer to a political jurisdiction with officially set boundaries. Professor Li uses a fairly broad definition of the area, though still not as broad as that used by, for instance, Wang Yeh-chien or myself; some other scholars, such as Philip Huang, have adopted a much narrower definition, including only the most densely populated prefectures near Suzhou. Li’s Jiangnan, with an area of roughly 43,000 square kilometers (16,000 square miles), had perhaps as many as 36,000,000 people by 1850.

2. Li favors a population figure of 20,000,000 for Jiangnan in 1620, and 36,000,000 in 1850, for a 0.3 percent per annum growth rate. These figures roughly match those of Cao Shuji’s recent work on Chinese population (Zhongguo renkou shi (History of Chinese Population), Shanghai: Fudan daxue chubanshe, 2000), and appear to be widely accepted among Chinese scholars. Many Western scholars, however, favor a lower figure for 1850, following G. William Skinner’s argument that mid-nineteenth century population totals for various parts of China were seriously inflated. (“Sichuan’s Population in the Nineteenth Century: Lessons from Disaggregated Data,” Late Imperial China, 8:1 (1987): 1-79.) Population growth appears to have been minimal in the region after about 1770.

Ken Pomeranz is author of numerous works including The Great Divergence: China, Europe, and the Making of the Modern World Economy, Princeton University Press, 2000 and The Making of a Hinterland: State, Society, and Economy in Inland North China, 1853-1937, University of California Press, 1993.

Subject(s):Industry: Manufacturing and Construction
Geographic Area(s):Asia
Time Period(s):Medieval

A History of the Federal Reserve, Vol. I: 1913-51

Author(s):Meltzer, Allan H.
Reviewer(s):Wood, John H.

Published by EH.NET (June 2003)

Allan H. Meltzer, A History of the Federal Reserve, Vol. I: 1913-51. Chicago: University of Chicago Press, 2003. xiii + 800 pp. $75 (hardcover), ISBN: 0-226-51999-6.

Reviewed for EH.NET by John H. Wood, Department of Economics, Wake Forest University.

Allan Meltzer has given us a thorough history of the Federal Reserve’s monetary policy from its founding in December 1913 to the Treasury-Federal Reserve Accord in the spring of 1951. Several excellent descriptive and critical studies of various parts of this period of the Fed are available, led by a considerable portion of Friedman and Schwartz’s Monetary History. But Meltzer advances our understanding of the Fed in two respects that that I explore in this review: First, he considers all the significant episodes of monetary policy, usually in more detail than can be found elsewhere. This book must be the starting point for future studies of Federal Reserve monetary policy, not only for the period covered by the book, but also for the succeeding fifty years because the Fed’s organization and most of its beliefs and procedures were developed in the earlier period. The second main contribution is an extension of the first. Meltzer makes unequalled use of the unpublished minutes, correspondence, and other internal papers of the Federal Reserve Board and the Federal Reserve Bank of New York. He takes us further behind the scenes of policymaking.

This review seeks to locate the book in the literature on the Fed, a task made easier by Meltzer’s recognition of previous work and the absence of radically new interpretations. He supports the positions that have been associated with monetarist criticisms by Friedman and Schwartz and his work with Karl Brunner since the 1960s, especially the Fed’s lack of understanding of its role in the economy and its obsession with financial markets, commercial bank free reserves in particular. His support is in the form of information about the ideas, institutions, and personalities behind actions and inactions that are well known. We are told that the inflation and deflation of 1919-21, the Great Depression of 1929-33, the recession of 1937-38, and the post-World War II inflation would have been avoided or greatly moderated if the Fed had make money grow at a constant rate, as Friedman proposed (1959, 92) or as adjusted for velocity and inflation as Meltzer proposed (1984). Whether or not we accept these conclusions, Meltzer enables us to increase our understanding of the Fed’s intentions, or rather the intentions of different parts of an institution that was at war with itself.

The new material may be the book’s most important contribution to research because it adds to the information available for the study of the policy preferences of different interests in the Federal Reserve and their effects on decisions. Internal conflicts often involved battles for control between the Board in Washington and the regional Reserve Banks. The Federal Reserve Act of 1913 was vague about control. The powers of the Fed — particularly discounting and open-market operations — were vested in the Banks under the Board’s supervision. The extent of this supervision — broad or, as the Banks complained, amounting to the micro-management of a central bank from Washington — was the main source of these conflicts, which spilled over into policy decisions. It is also possible that policy differences between the Board and the Banks, especially New York, were partly due to the knowledge and interests arising from their political and economic environments. Given the importance attached to these differences, I would like to have seen more attention paid to their possible reasons beyond institutional grasps for power. It is no surprise to find the Board more sympathetic to (or under the thumb of) the Treasury during the latter’s pressures for continued bond supports after the two world wars. Less expected, perhaps, was the Board’s greater skepticism of market forces. Its preference for controls over interest rates helped to rationalize its support for Treasury low-interest programs. But the Board also differed from New York in believing that controls could control stock speculation in 1928-29 without impinging on “legitimate” credit. Havrilesky (288-331) found that the Banks’ greater reliance on interest rates continued in the second half of the century. Might those, like the New York Fed, who are immersed in the financial markets repose more trust in their operation, specifically in the efficacy of interest rates as rationing devices, compared with credit controls? On the other hand, this tack may not be appealing to monetarists who already find the Fed too sensitive to markets and interest rates. Meltzer finds that a good deal of the Board’s criticism of the New York Bank after the Crash was motivated more by concern for control than different perceptions of economic relations (289).

Meltzer confirms the charge that the Fed neglected to develop a model, or guide, to policy. This neglect can be interpreted with more sympathy than Meltzer and other critics have shown, although they recognize the Fed’s difficulties, because important conditions assumed by the Fed’s creators quickly disintegrated with war and its aftermath. They were adrift without a destination, compass, or anchor. The great inflow of gold caused by European inflations and other disorders divorced the Fed’s actions from the historic central bank concern for its reserve. The Fed’s timid support of credit during the Great Depression may have been partly due to a desire to preserve the gold standard (Eichengreen; Meltzer is doubtful, 405), but its interest in price stability between 1921 and 1929 prevented it from taking full advantage of its more-than-ample reserves.

We must also realize that prevalent economic models did not imply the countercyclical policy to which economists were converted a decade later. An influential theory that implied “liquidation” in depression stemmed from the belief that deflations are reactions to inflations that had been driven by speculations in inventories and fixed assets. These should be allowed to return to normal levels. Deflations must be allowed to run their course (Hayek; Treasury Secretary Mellon, discussed by Meltzer, 400). Attempts to force money into paths “where it was not wanted” merely sow the seeds of future inflation. We can see where this policy was conducive to long-run price stability under the gold standard — price indexes in 1933 still exceeded those of 1914. Even if Meltzer, like Friedman and Schwartz, is right that the Fed should have tried for constant money growth or at least a stable price level, the application of such a policy would have required remarkably prescient theoretical sophistication by a group of committees of mainly conventional businessmen unused to abstractions.

Irving Fisher was a notable exception in his resistance to conventional sound money. But his “compensated dollar” plan for stabilizing the price level by adjusting the price of gold (182) was ridiculed as “a rubber dollar” (Hoover, 119) and dismissed by the New York Fed’s Benjamin Strong as the work of “extreme quantity theorists” (Chandler, 203).

Meltzer’s criticisms of the Fed, like Friedman and Schwartz’s, are meant to be lessons for policy. In its theoretical and policy implications, the book is mainstream monetarism, deserving of the usual plaudits and criticisms: money and output are correlated, so that money must be important, but no convincing evidence of the direction of causation is offered.

Prospective buyers should note that the book is not about Federal Reserve activities that are not directly part of monetary policy. Check clearing and other parts of the payments system, on which most Fed employees work, are ignored, and the structure and regulation of banking receive little attention. The last omission is more the Fed’s than Meltzer’s. The Fed recognized the weakness of the banking system as evidenced by the high failure rate of banks during the 1920s, but it did not work towards an improvement — unlike President Hoover (121-25), who tried unsuccessfully for a system of larger and stronger banks. When Board Chairman Marriner Eccles (266-69) sought measures similar to Hoover’s in 1936, he was rebuffed by President Roosevelt. The Fed’s lack of attention to the banking structure is striking in light of England’s experience, where the encouragement of amalgamations after the Panic of 1825, which was attributed to the fragility of small banks, contributed to the decline in the frequency and severity of panics as the nineteenth century progressed (none after 1866). On the other hand, the Fed might have followed Congress in taking the banking structure as given because the protection of local banks had been a political condition of the Federal Reserve Act.

Returning to the Fed’s model, or lack thereof, Meltzer agrees with his predecessors that monetary policy was an irregular mix of the gold standard rules of the game, the real bills doctrine, and a concern for price stability that seemed important only when inflation threatened. The place of the real bills doctrine in Fed thinking is unclear. The Federal Reserve Act has been interpreted as a legal implementation of the doctrine by its limitation of private discounting to real bills of exchange, that is, short-term lending secured by inventories. This had always been regarded as sound practice for commercial banks, and the Fed favored it in aggregate because lending for productive purposes was more conducive to economic activity and price stability than “speculative” lending on securities. But favoring real bills is not the real bills “doctrine,” as Meltzer would have it. The doctrine’s fallacies had often been shown, particularly the indeterminacy of the price level when credit is linked to expected prices (Thornton, 244-59), and monetary policy (as opposed to rhetoric, for example, Senator Glass; Meltzer, 400) did not suggest that the Fed believed it. If it had, there would have been no role for interest rates. In the closest it came to expressions of policy guides, in the Board’s 1923 Annual Review and statements by Benjamin Strong (Chandler, 188-246), the Fed indicated less fear of inflation from real bills than other lending. But it depended on interest rates to rein in excessive borrowing, whatever the purposes. Whether credit was “excessive” tended to depend on what was happening to the price level, although this connection was cloudy in Fed statements at least partly because it did not wish to be held responsible for price stability. The reasons for the Fed’s opposition to an official goal of price stability probably included its constraints on the pursuit of other goals, such as the alleviation of financial stress, and the fact that its proponents in Congress (especially James Strong of Kansas) were most interested in restoring agricultural prices to previous heights.

Touching on Meltzer’s relations to other controversies: He continues to differ from Friedman and Schwartz (692) in his argument (with Brunner, 1968, and agreed by Wicker, 1969, and Wheelock, 1991) that the Fed’s actions during the Great Depression would have been approximately the same if Benjamin Strong (who died in 1928) had continued at the helm of the New York Bank. Meltzer believes that Strong’s “attachment” to commercial bank borrowing from the Fed and free reserves as policy guides continued after 1928, and were responsible for its failure to increase credit between 1929 and 1933 and its doubling of reserve-requirements ratios in 1936-37. This position dates at least from the 1960s, when he and Brunner assisted Congressman Patman’s investigation of the Fed that initiated the work leading to the book under review.

It was a common belief in government and Congress that “international cooperation,” specifically the creation of inflation in the interests of European currencies (Hoover, 1952, 6-14), interfered with domestic goals. Meltzer agrees with Hardy (228-32) and Friedman and Schwartz that the accusation is unsupported. Quoting the latter: “foreign considerations were seldom important in determining the policies followed but were cited as additional justification for policies adopted primarily on domestic grounds when foreign and domestic considerations happened to coincide” (279).

I do not think that Meltzer’s treatment of bank failures during the Great Depression adequately reflects Wicker’s (1996) investigations that seriously undermine Friedman and Schwartz’s interpretations and suggest that the name “runs” is inappropriate. The three banking crises of 1930-31 identified by Friedman and Schwartz (and accepted by Meltzer, 323, 731) involved mostly small banks that were insolvent. Farm and real estate prices had fallen drastically, and banks failed because their customers failed. The frequency of failures in the “crisis periods” was only slightly greater than in the period as a whole, and were geographically concentrated. None became national in scope or exerted pressure on, not to say panic in, the New York money market. The first consisted largely of the collapse of the Caldwell investment banking firm of Nashville, Tennessee, which controlled the largest chain of banks in the South and was heavily invested in real estate. There is no evidence of contagion. The “crisis” of mid-1931 was concentrated in northern Ohio and the Chicago suburbs, where small banks had multiplied with the real estate boom. The crisis of September-October 1931was wider, but concentrated in Chicago, Pittsburgh, and Philadelphia.

This brings us to Meltzer’s (and Friedman and Schwartz’s) criticism of the Fed’s failure to apply Bagehot’s proposal that the central bank act as lender of last resort. That is, as holder of the nation’s reserve it should stand ready to supply the cash demanded in times of panic. Meltzer contends that “Most of the bank failures of 1929 to 1932, and the final collapse in the winter of 1933, could have been avoided” (729) if the Fed had applied Bagehot’s rule. However, as he (283-91) and Friedman and Schwartz (335-39) recognize elsewhere, the New York Fed actively assisted the financial markets during and after the Crash, and withdrew when there was no evidence of panic in New York, that is, “once borrowing and upward pressure on interest rates” declined (Meltzer, 288). I find Meltzer convincing when he suggests that this “was consistent with the Riefler-Burgess [free reserves] framework,” as opposed to Friedman and Schwartz’s argument that New York eventually yielded to the Board’s opposition to its open-market purchases. “The dispute was mainly about procedure, not about substance,” Meltzer (289) argues. “They [the Board] disliked New York’s decision to act alone.” It appears to this reviewer that the Fed’s actions as described by Meltzer and Friedman and Schwartz, generally conformed with Bagehot’s advice to relieve illiquidity in the money market in times of panic. He had not recommended the rescue of insolvent banks in the hinterlands that did not threaten the money market. This includes at least the beginnings of the nationwide closures of 1933 that were precipitated by the Michigan governor’s decision to close the banks in his state to protect them from the possibility of a run when the failure of Ford’s bank in Detroit (which was also heavily invested in real estate) was announced.

I end with comments that are more differences of emphasis than of substance: The Fed’s irrelevance in planning postwar financial arrangements is interesting, although Meltzer may exaggerate its significance. He wrote: “In the 1930s, the Treasury replaced the Federal Reserve as the principal negotiator on international financial arrangements” (737). In fact, governments have always, directly and firmly, controlled monetary arrangements. Their seizures of the details of monetary policy in the U.S. and U.K. in the early 1930s were remarkable, but the U.S. government’s control of changes in the monetary system as exemplified by the devaluation of 1933, Bretton Woods in 1944, and the Nixon suspension of 1971 had also been the practice of Parliament, which decided (with more or less advice from the Bank of England) suspensions, resumptions, legal tender, and other trade and financial arrangements. The irrelevance of the Fed in the negotiation of post-World War II financial agreements was shared by the Bank of England. Their places in the row behind finance ministers during negotiations continued an age-old practice. It is interesting in light of the high visibility of central banks in the operation of monetary systems that the structures of those systems belong to governments. Without defending the Fed, which ought to have behaved better within the framework that it was given, the real failure to respond to the catastrophe should be laid at the feet of the government. Herbert Hoover was more active than he is often given credit for, but he departed from tradition in leaning on the “weak reed” that was the Federal Reserve (1952, 212; Meltzer, 413).

Meltzer suggests that the Great Depression was not considered a failure of monetary policy at the time (727). He refers to the Federal Reserve and economists, and I agree. But this was not true of the public or of substantial parts of Congress (which he acknowledges on p. 427). Carter Glass was a powerful defender of the Fed in the Senate, but the House passed the Goldsborough Bill directing the Federal Reserve “to take all available steps to raise the present deflated wholesale commodity level of prices as speedily as possible to the level existing before the present deflation” by a vote of 289-60 in 1932, before it was watered down into a meaningless resolution in the Senate. The 72nd Congress (1931-33) introduced more than fifty bills to increase the money supply, which came closer to passage as the depression worsened (Krooss, 2662). It would be difficult to imagine a more damaging commentary on Woodrow Wilson’s idealistic expert (read “remote”) institution than Chicago Congressman A.J. Sabath’s question to Chairman Eugene Meyer in 1931: “Does the board maintain that there is no emergency existing at this time” (letter entered into the Congressional Record, Jan. 19) — or a similar lack of sensitivity of legislators in a democracy. The monetary authority supplanted by the Fed — the Treasury with an attentive Congress — might have done no better. But the sharp actions in 1865 (when Congress reversed its decision to retire the greenbacks after voters complained) and 1890 and 1893 (when it increased and then reduced the monetization of silver during recession and then gold flight) suggest that it would not have stayed on the sidelines if it had not been inhibited by (and waiting for) its expert creation. This is not (necessarily) a plea for free banking, but at least for monetary authorities that are closer to the effects of their actions.

I would have liked to see Meltzer subject the Fed’s existence to a little scrutiny, and to consider what kinds of institutions might have better responded to events or (this is surely an oversight) been more likely to adopt his preferred policy model. My guess is that he, Friedman and Schwartz, and most of the rest of the economics profession share Woodrow Wilson’s desire for experts: The Fed should be independent but use the right model.


Karl Brunner and Allan H. Meltzer. The Federal Reserve’s Attachment to the Free Reserve Concept. For Subcommittee on Domestic Finance, The Federal Reserve after Fifty Years. House Committee on Banking and Currency. Washington, 1965.

Karl Brunner and Allan H. Meltzer. “What Did We Learn from the Monetary Experience of the United States in the Great Depression?” Canadian Journal of Economics, May 1968.

W. Randolph Burgess. The Reserve Banks and the Money Market. New York, 1927.

Lester V. Chandler. Benjamin Strong, Central Banker. Washington, 1958.

Marriner Eccles. Beckoning Frontiers. New York, 1951.

Barry Eichengreen. Golden Fetters: The Gold Standard and the Great Depression, 1919-39. New York, 1992.

Milton Friedman. A Program for Monetary Stability. New York, 1959.

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

Charles O. Hardy. Credit Policies of the Federal Reserve System. Washington, 1932.

Thomas Havrilesky. The Pressures on American Monetary Policy. Boston, 1993.

Freidrich A. Hayek. Prices and Production. London, 1931.

Herbert Hoover. Memoirs: The Great Contraction, 1929-41. New York, 1952.

Herman E. Krooss, editor. Documentary History of Banking and Currency in the United States. New York, 1969.

Allan H. Meltzer. “Overview,” in Federal Reserve Bank of Kansas City, Price Stability and Public Policy, 1984.

Winfield W. Riefler. Money Rates and Money Markets in the United States. New York, 1930.

Henry Thornton. An Inquiry into the Nature and Effects of the Paper Credit of Great Britain. London, 1802.

David C. Wheelock. The Strategy and Consistency of Federal Reserve Monetary Policy, 1924-33. Cambridge, 1991.

Elmus Wicker. “Brunner and Meltzer on Federal Reserve Monetary Policy during the Great Depression,” Canadian Journal of Economics, May 1969.

Elmus Wicker. Banking Panics of the Great Depression. Cambridge, 1996.

John Wood’s main research interest is a history of the ideas and behavior of British and American central bankers since 1694. Recent articles include “Bagehot’s Lender of Last Resort: A Hollow Hallowed Tradition,” Independent Review (Winter 2003), and “The Determination of Commercial Bank Reserve Requirements” (with Cara Lown), Review of Financial Economics (December 2002).

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