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The Changing Face of Central Banking: Evolutionary Trends since World War II

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

Published by EH.NET (May 2003)

Pierre L. Siklos, The Changing Face of Central Banking: Evolutionary Trends since World War II. New York: Cambridge University Press, 2002. xix + 347 pp. $70 or ?50 (hardback), ISBN: 0-521- 78025-X.

Reviewed for EH.NET by Richard C. K. Burdekin, Department of Economics, Claremont McKenna College.

Ideally, a new book on central banking in the postwar era would do more than just set out the evolution of central bank laws and policy actions. It would add perspective by relating these events to changes in the exchange rate regime, fiscal and political pressures, and macroeconomic trends in the countries concerned. It would also relate the evolution in policymaking to developments in macroeconomic analysis and incorporate the new emphasis on such issues as accountability, transparency and the ascendance on inflation targeting. Finally, the book would have sufficient rigor to satisfy academics and yet be accessible to undergraduates and practitioners. Remarkably, in this volume Pierre Siklos of Wilfrid Laurier University has done all of these things and more. This is a tour de force that deserves to be the standard reference on central banking for many years to come.

The volume begins with a broad overview of the development of central banks over the postwar era, their governing structures and key trends in inflation performance, the real economy and interest rate setting over the decades. The author communicates an unusually rich understanding of twenty central banks and countries, covering most of the major industrialized economies, and also relates his analysis to the set up of the European Central Bank. Tests for shifts in inflation persistence suggest that, on average, more independent central banks are associated with lower inflation persistence. Common inflationary trends across countries are explored in relation to such factors as changes in the exchange rate regime and the widespread adoption of inflation targeting in the 1990s. The author also points out that “mean inflation rates across countries are lower in the 1990s than in the 1960s while mean nominal interest rates are, on average, higher in the 1990s than in the 1960s” (p. 64). Although this does not in itself prove that monetary policy became too tight, it does seem that 1990s real interest rates remained high by historical standards.

Siklos challenges the importance of personalities in central bank policymaking. Empirical results suggest that exceptionable episodes of monetary policy appear to be more a response to crisis than evidence of a systematic importance of the particular individuals involved. For example, Paul Volcker’s standout role as an “inflation fighter” is statistically similar to that played by many other “inflation fighters” who also took office in the late 1970s or early 1980s. To say that these individuals were a product of their times does not, of course, mean that they do not deserve credit for what they accomplished. And the author later points to Volcker’s success in breaking inflationary expectations even though “many of the benefits and the prestige conferred on the Fed would accrue to Volcker’s successor, Alan Greenspan” (p. 97). Typical of the level of detail featured throughout the volume, the author’s analysis includes information on the average tenure at each central bank and even a table characterizing the record of each individual governor. Additional case studies detail developments in Canada and Germany, as well as the United States.

Actual central bank policymaking is modeled based on the popular “Taylor rule,” whereby central banks raise interest rates when inflation rises above target as well as when real output rises above (or, alternatively, unemployment falls below) its sustainable target level. Siklos estimates forward-looking “forecasts” of inflation, output and unemployment for each country and allows for the influence of inflation abroad. The almost bewildering array of specifications includes testing for variation by exchange rate regime or by decade, and allowing for partisan or electoral influences on monetary policy, fiscal pressures, and an impact of interest rate volatility. Interestingly, more than half the central banks appear to be systematically influenced by changes in government control (partisan effects) or the electoral cycle, including the supposedly independent central banks of Germany and the United States. Perhaps the most striking feature of the empirical work is not, however, the differences in behavior across countries but rather the similarities. Not only are the actual interest rate paths shown in Figure 4.2 (p. 176) well explained by the author’s model but also cross-sectional “panel” estimation suggests that there is a common “group” response to variables like inflation and unemployment “shocks.”

Just as individual central bank governors seem to stand out only in times of crisis, fiscal and exchange rate pressures prior to the 1990s may help to explain more heterogeneous behavior in the earlier postwar decades. It may not be coincidental that greater consensus in favor of anti-inflationary policies emerged at a time of reduced economic stress. Moreover, “it is telling that de jure independence is a phenomenon that appeared to gather momentum after a consensus had been reached to reduce inflation, and not as a direct vehicle through which lower inflation per se was attained” (p. 269). Even though the new institutional arrangements implemented in a number of countries in the 1990s may have followed the anti-inflationary trend, rather than leading it, the author nevertheless identifies tangible benefits stemming from increased transparency and accountability — in particular, the adoption of inflation targets and the release of information on inflation forecasts and monetary policy strategy. Once again a wealth of institutional detail is offered on the communication strategies adopted by all the central banks under study.

Overall, the 1990s saw the central banks in the major industrialized countries not only behaving more similarly but also apparently at the top of their game. The European Central Bank is portrayed as something of an anachronism, however, insisting on “a prominent role for money growth and a range of other economic indicators” (p. 308). Other economists may argue that a focus on money growth is not necessarily any less consistent with inflation targeting than is a reliance upon interest rates. After all, interest rate setting has its ambiguities too — do lower rates imply expansionary policy or simply a validation of disinflationary (or even deflationary) pressures? And, historically, the German Bundesbank arguably combined these two features well before the 1990s. Beginning in 1975, the Bundesbank provided information on both its money growth target and a so-called “unavoidable rise in prices” that could reasonably be interpreted as an inflation forecast if not an early form of inflation targeting. (For an early suggestion that the Bundesbank anchored inflation expectations with their announced “unavoidable rise in prices,” see Rudolf Richter and Frank Diener, Weltwirtschaftliches Archiv, 1987).

Leaving aside the role of money growth, should we expect the favorable perspective of the 1990s to be maintained? Two obvious concerns spring to mind. First, given that fiscal and political pressures seem to have produced looser monetary policy in the past, will the same thing happen again if the deficit expansion of the early years of the twenty-first century continues? Second, to the extent that new monetary policy arrangements help prevent this, will inflationary targeting regimes also be effective in warding off the other threat that has emerged — deflation? Indeed, the most vehement recent criticisms of the European Central Bank seem focused less on the methods than on the monetary policy outcomes themselves, which have, if anything, looked to be too tight. Based on the present volume, it is doubtful that anyone is better qualified than Professor Siklos to assess central bank performance in light of these new trends. While enjoying the present book, we can also hope that more is to come. For the moment, in addition to the excellent detail and analysis, readers will enjoy an outstanding bibliography and an extremely well-stocked dedicated website, not to mention some well-chosen quotes. Let me conclude with my favorite of these: “One is reminded of a former governor of the Bank of England who, when asked: “Do you feel your bank has the right to defy the government?” replied, “Oh, yes, we value that very highly — and wouldn’t think of exercising it” (p. 86).

Richard C. K. Burdekin is Jonathon B. Lovelace Professor of Economics at Claremont McKenna College. His main research interests include inflation and deflation, central bank policymaking and Chinese economic reforms. Recent articles include “Inflation Is Always and Everywhere a Monetary Phenomenon: Richmond vs. Houston in 1864” (with Marc D. Weidenmier), American Economic Review (December 2001) and “German Debt Traded in London during the Second World War: A British Perspective on Hitler” (with William O. Brown, Jr.), Economica (November 2002).

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

A History of Household Government in America

Author(s):Shammas, Carole
Reviewer(s):Main, Gloria L.

Published by EH.NET (March 2003)


Carole Shammas, A History of Household Government in America. Charlottesville, VA: University of Virginia Press, 2002. xv + 232 pp. $55 (hardback), ISBN: 0-8139-2125-2; $19.50 (paperback), ISBN: 0-8139-2126-0.

Reviewed for EH.NET by Gloria L. Main, Department of History, University of Colorado, Boulder.

This is an important book about families in American history not only because it synthesizes a vast literature, but also because it introduces an entirely new perspective on the subject by substituting the term “household” for the “family.” Doing so illuminates the crucial component of dependency in American family law. As Carole Shammas puts it so tersely, yet so meaningfully, the dependent household member is not free to leave. From colonial times until the Civil War, households in the United States consisted of a single head, usually a male aged 25 to 64, and all those living with him were his dependents including wife, children, widowed parents, other kin, apprentices, servants, and slaves. The head of the household was a master to whom all other members had to submit in exchange for his protection. Legal institutions brought over from England at the founding of the colonies defined all these dependent relationships (except slavery) and powerful religious traditions sanctified them.

Yet the transplantation of household institutions from the old world to the new could not proceed unaltered, as Shammas, professor of history at the University of Southern California, points out. The ocean barrier attenuated governmental power and the availability of land undercut the dependency of sons on their fathers. Except among the Puritans in New England and the Quakers of the Middle Colonies, neither church nor state could muster sufficient authority to command the obedience of dispersed settlers. Colonial governments therefore enhanced fathers’ powers over wives, children, apprentices and servants. The expansion of slavery and high marital fertility further extended that body of legal dependents, the total proportion of which reached some 80 percent of the colonial population compared to just 64 percent in Britain. Although Shammas emphasizes the need of colonial governments to have powerful masters and fathers in order to keep the peace, she finds little evidence that fathers effectively managed their children’s marriages, underscoring the rocky underpinnings of patriarchy where land was cheap and labor dear.

Despite high-flown rhetoric concerning liberty, Shammas finds nothing revolutionary about the American Revolution insofar as dependents were concerned. She is particularly effective in contrasting French reforms with those of the U.S. Yes, she acknowledges the decline of slavery in the North and the tweaking of inheritance laws in the South, but in both cases, masters and fathers found their hands strengthened rather than weakened. Slaves worked for their own emancipation, after all, and many northern owners simply sold their chattels to the South rather than see them gain their freedom. Changing the inheritance laws in the South did not alter practice, since fathers had always been remarkably free to dispose of their freehold property as they chose simply by writing a will. What needed to change, from most men’s point of view, was the ability of fathers-in-law to prevent a husband from managing his wife’s property in land and slaves through the use of entail, a perquisite that prevented the upwardly mobile male from achieving his business goals. Shammas demonstrates this wittily through fascinating case studies of the marriage alliances made by favorite Founding Fathers.

Republican ideology shored up family patriarchy only temporarily. Female literacy and religious evangelism in the nineteenth century encouraged an expansion of women’s rights that directly threatened male privilege. Relaxation of divorce laws enabled more women to exit their husband’s household, ending dependency. Likewise, the opening of the West and the expansion of wage work enabled children, servants and apprentices also to leave. Shammas argues that these reforms provoked a civil war within the household that rivaled its military counterpart in historical importance. But the post-Civil War era inaugurated a counter-attack on dependents’ rights through a continual redefinition of their legal status, designed to shelter them from the “pain and the privilege of full equality,” as Shammas dryly puts it (p.145). Of particular interest to the non-specialist is her description of the reaction of Protestant reformers in the North to the competition by Roman Catholic parochial schools and orphanages, staffed by many thousands of nuns and priests. Suddenly these liberals began attacking the institutionalizing of poor children as bad for the children and bad for the country. They thereby reversed direction on orphan care and argued for shipping the children of the urban poor to farm homes in the Midwest and West where hard work and a wholesome family environment would produce healthy, useful citizens. Shammas compares the orphan trains and their passengers to the epic trans-Atlantic journeys of indentured servants in colonial times. The richness of the book’s contents is further enhanced by her stunning use of census samples to demonstrate the long-term decline in household size since the end of slavery, the small scale of institutionalization in the nineteenth century, and the rise of households headed by single mothers.

As a writer, Shammas is feisty and often flip although occasionally her text loses clarity. A great strength of the book, however, is her ability to place American practice in an historical and international context. In sum, Carole Shammas has very usefully revisited an enormous and eclectic literature on “the family” extending from colonial times to nearly the present, and brings to bear critical census data on a scale we have never seen before. The book’s long-term perspective will make this work exceptionally valuable to specialists and non-specialists alike.

Gloria L. Main is the author of Peoples of a Spacious Land: Families and Cultures in Colonial New England (Harvard University Press, 2001), which won the Economic History Association’s Alice Hanson Jones in 2002.

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

The Marshall Plan: Fifty Years After

Author(s):Schain, Martin A.
Reviewer(s):Ritschl, Albrecht

Published by EH.NET (March 2003)


Martin A. Schain, editor, The Marshall Plan: Fifty Years After. New York: Palgrave, 2001. xiv + 297 pp. $59.95 (hardcover), ISBN: 0-312-22962-3.

Reviewed for EH.NET by Albrecht Ritschl, School of Business and Economics Humboldt-Universitaet zu Berlin (Germany).

This conference volume includes fourteen contributions, drawn from history, political science, and economics. This blend gives the book a distinct flavor and makes for interesting reading. The book chapters are organized around five major themes rather than country studies. The economic impact of the Marshall Plan, with contributions, inter alia, by Barry Eichengreen and Imanuel Wexler, is one of them. Security is another. Both leitmotifs are pervasive, and there is hardly any contribution where the two do not take center stage.

Michelle Cini traces the possible links between the Marshall Plan and the establishment of the European Economic Community a decade later. Given the limited enthusiasm of U.S. politicians for any Pan-European federalist designs, any such links could necessarily be only indirect. Cini cautiously leans toward Hogan’s (1987) hypothesis that the War Department’s preference for revitalizing Germany prevailed, even if this came at the expense of France’s security interests.

Security aspects and national policy responses to the Marshall Plan also reappear in the chapters by Jolyon Howorth (on Britain) and Robert Latham (on the Marshall Plan and NATO). Howorth’s is a critical analysis of Britain’s military euroskepticism and a defense of the French against the planned European Defense Community of 1951 — for good military reasons. Latham points out that it was probably NATO more than the Marshall Plan that shaped Europe’s long-run trajectory, combined with the intriguing observation that US leadership in NATO reduced the need for Europeans to really cooperate on thorny issues such as defense and supranational institutions.

Roy Gardner asks intriguing counterfactual questions, both to the passing of the European Cooperation Act of 1948 and to the Soviet response to the Marshall Plan. In a neat backward induction exercise, he argues that offering Marshall Aid to the Soviets was a dominant strategy for the US. Given the political strings attached, the US could safely assume that the Soviets would never accept. For the same reason (this link is not being made), increasing Soviet resistance to America’s designs for post-war Europe ensured a majority for the Economic Cooperation Administration (ECA) sooner or later. The paper becomes fascinating when it turns its lessons into prediction: the author forecasts that Europe will never get around to providing its own recovery plan for its candidate members in Eastern Europe. However, contrary to the prediction, this is what has just happened as this review is being written.

Barry Eichengreen’s paper is an exercise in versatility and adaptation. Both the linguistics and the texture of the argument speak to the political scientist. Despite the initial mimicry, the paper drives home a bold economic point: government transfers were only a palliative in the absence of international capital movements, and any comparison of the Marshall Plan with other stabilization programs that fails to include private capital flows is necessarily moot.

Rival designs for post-war Europe have been on the map since Milward’s (1984) claim that Europe’s post-war reconstruction was not of American design but rather followed a rival French concept. This is echoed in Irwin Wall’s contribution on French policy. Wall examines the use that France made of its Marshall funds for colonial adventures, pursuit of military grandeur, and finally, for the agony of its Algerian war. No doubt, not everything went according to plan. Allocation of the Marshall Plan’s counterpart funds, accumulated from retained local currency payments for US deliveries, often created its very own political economy in the recipient countries. Stewart Patrick’s version on a related theme provides the opposing view, as he identifies embedded liberalism as having infected and altered France’s political culture after World War II. Adopting the Monnet Plan for French economic reconstruction, France also imported institutions and a mindset formed in the U.S. during the New Deal, which changed its institutional balance decisively.

The volume closes with two nice essays on public opinion in France and the U.S., which are able to draw on data from the early days of opinion polling. Little of this is surprising: France’s communists supported the USSR, all others were distinctly less enthusiastic. The U.S. received high ratings for its aid, but not for its supposed intentions.

The benefits of the volume are obvious. Most of the papers adopt a unifying political perspective on the Marshall Plan. This nicely complements the older discussion of the economics of the Marshall Plan. It shifts the focus away from quantities and flows of funds to the importance of institution building and America’s long-term commitment to postwar reconstruction. Still, the separate literatures that exist on the topic have not been integrated here, and the volume edited by Eichengreen (1995) is as necessary as ever. Probably the best the reader can do is to consult both volumes alongside each other.


Barry Eichengreen, editor (1995), Europe’s Postwar Recovery. Cambridge: Cambridge University Press.

Michael J. Hogan (1987), The Marshall Plan, Britain, and the Reconstruction of Western Europe, 1947-1952. Cambridge: Cambridge University Press.

Alan Milward (1984), The Reconstruction of Western Europe, 1945-1951. London: Methuen.

Albrecht Ritschl has worked on inter-war Germany and post-war reconstruction. Recent publications include “Deficit Spending in the Nazi Recovery: A Critical Reassessment,” Journal of the Japanese and International Economy 16 (2002), 559-582; “Nazi Economic Imperialism and the Exploitation of the Small: Evidence from Germany’s Secret Foreign Exchange Balances, 1938-40,” Economic History Review 54 (2001), 324-345; and (with Helge Berger) “Germany and the Political Economy of the Marshall Plan, 1947-52,” in Barry Eichengreen, editor, Europe’s Postwar Growth Cambridge University Press, 1995.

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

Economic Backwardness in Historical Perspective: A Book of Essays

Author(s):Gerschenkron, Alexander
Reviewer(s):Fishlow, Albert

Project 2001: Significant Works in Economic History

Alexander Gerschenkron, Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge, MA: Belknap Press of Harvard University Press, 1962. 456 pp.

Review Essay by Albert Fishlow, International Affairs, Columbia University.

Alexander Gerschenkron: A Latecomer Who Emerged Victorious

Alexander Gerschenkron and his ideas have had, like excellent wine, a remarkable maturing in recent years. Rare is the sophisticated course in political economy that does not assign his model of relative backwardness as a required reading. Rarer still is the doctoral student in economic history who remains uninfluenced by his beguiling hypotheses about the process of historical change within Europe since the Industrial Revolution.

Gerschenkron’s Background and Early Career

Fortunately, as a consequence of a wonderful biography, The Fly Swatter, by Nicholas Dawidoff, (New York: Pantheon, 2002) his grandson, we know much more about his life than we had previously. Born in Odessa in 1904, he died in Cambridge, Massachusetts in 1978. His early life was eventful. He fled the Bolshevik Revolution with his father in 1920, apparently bound for Paris, but wound up in Vienna instead. The reason was his father’s immediate success in finding a position running a turbine factory. There he rapidly learned German, as well as Latin, enabling him to attempt to pass the entrance examination for secondary school within seven months. His failure, only in Latin and geometry, meant he was rejected. That challenge was overcome, months later when he easily gained admission. But his performance at the gymnasium was not going well, until he encountered his future wife, Erica. Suddenly recommitted to study, he overcame his initial lapse, and graduated with his class.

Thereafter he enrolled in the University of Vienna’s school of Nationalokonomie in 1924. His early professional career is not recorded in autobiography as was his first 20 years. Indeed, as Dawidoff summarizes it, “he didn’t much talk about the period from 1924 to 1938 because that was for him a period of growing frustration and disappointment that culminated in catastrophe.”

The University experience was the first of these disappointments. Whatever the strength in economics had been with Bohm-Bawerk, Menger and others who had pioneered in the Austrian school, it was not there in the 1920s. Gerschenkron graduated in 1928, his thesis focusing on Austria’s happy future as a Marxist democracy. He married, had a child and took a position representing a Belgian motorcycle firm in Vienna. That was successful, but inadequate. Three years later, he committed himself to politics and the Social Democrats. That ended in 1934 with the virtual civil war that terminated the party’s existence, and began the process of decline into Anschluss.

Gerschenkron’s parents left for England at that time. Four years later, he and his family would exit and join them, and hardly in easy circumstances. But the important novelty, and a decisive point in his career, was the invitation from Charles Gulick, a Berkeley professor whom he had earlier helped in his research in Austria, to come to the United States. His acceptance marked the real beginning of his academic career that subsequently was to flourish over the rest of his life.

But it began equivocally. The finished Gulick book, Austria from Habsburg to Hitler, a two-volume work, published in 1948 (Berkeley: University of California Press), was brilliant. There is good reason to credit Gerschenkron’s twelve months of continuous research and writing for that outcome. At least Berkeley provided a place for him to return, as he did in September 1939. There he was to stay for only five years before moving on to the Federal Reserve Board. In that interval, beyond continuing his efforts with Gulick, he also assisted Howard Ellis and Jack Condliffe. And he wrote, in long nights of private work, what proved to be his single piece of greatest length, Bread and Democracy in Germany, published in 1943 (Berkeley: University of California Press). That book attacked the Junkers for their exploitation of the rest of the German population, and earned him promotion to the rank of Instructor with the opportunity to teach courses. It did not earn him any greater special recognition at Berkeley — any more than Albert Hirschman’s simultaneous efforts there did — and he moved on to Washington in late 1944.

At the Federal Reserve, he established himself as an expert on the Soviet economy. This was a period when relationships with the Soviet Union became central to the United States, and when there were few others with his knowledge, interest and immense capacity to immerse himself in any and all information. He did well, advancing to head of the International Section, until the decisive moment came in 1948: Harvard offered him a position as a tenured professor, the successor to Abbot Payson Usher. He accepted, and his university career really began.

There were four parts of that career that are relevant. It all began, appropriately enough, with the Soviet Union. At Harvard, Gerschenkron established himself at the new Russian Research Center. In a notable Rand study in 1951, A Dollar Index of Soviet Machinery Output, 1927-28 to 1937, he showed that the remarkably high rates of growth of Soviet industrial production owed itself to the index number bias: a Laspeyres index calculated on the basis of 1926-27 weights significantly overstated real expansion. Rapid Soviet growth was not constructed on the basis of false statistics, but rather, inappropriate technique. The “Gerschenkron effect,” the difference between calculated Paasche and Laspeyres volume indexes, commemorates his contribution. Important as the work was at the time, deflating vastly superior Soviet growth, it was not to be the basis of his subsequent fame.

Gerschenkron’s Economic History: Understanding Economic Backwardness

His present reputation comes instead from his dedication to European economic history. He flourished as the doyen of economic history in the United States. He influenced a generation of Harvard economists through his required graduate course in economic history. His erudition and breadth of knowledge became legendary in its time. Gerschenkron defined an indelible, if unattainable, standard of scholarship for colleagues and students alike.

Backwardness was at the root of his model of late-comer economic development. His hypothesis first took form in a 1951 essay entitled “Economic Backwardness in Historical Perspective.” From that brief 25-page contribution to a conference held at Chicago, and later published in Economic Development and Cultural Change, were to emerge the central ideas that characterized his subsequent academic career. The essay gave its name to his volume of essays published by Harvard University Press in 1962. It is the opening chapter of that volume, and a significant reason that it was recently selected as one of the most influential works of economic history ever published.

The central notion is the positive role of relative economic backwardness in inducing systematic substitution for supposed prerequisites for industrial growth. State intervention could, and did, compensate for the inadequate supplies of capital, skilled labor, entrepreneurship and technological capacity encountered in follower countries seeking to modernize. England, the locus of the Industrial Revolution, could advance with free market guidance along the lines of Adam Smith. France, beginning later, would need greater intervention to compensate for its limitations. In Germany, the key innovation would be the formation of large banks to provide access to needed capital for industrialization, even as greater Russian backwardness required a larger and more direct state compensatory role.

Gerschenkron’s analysis is conspicuously anti-Marxian. It rejected the English Industrial Revolution as the normal pattern of industrial development and deprived the original accumulation of capital of its central force in determining subsequent expansion. It is likewise anti-Rostovian. There were no equivalent stages of economic growth in all participants. Elements of modernity and backwardness could survive side by side, and did, in a systematic fashion. Apparently disadvantageous initial conditions of access to capital could be overcome through new institutional arrangements. Success was indicated by proportionally more rapid growth in later developers, signaled by a decisive spurt in industrial expansion.

This model underlay Gerschenkron’s extraordinary research into the specific developmental experiences of Russia, Germany, France, Italy, Austria and Bulgaria. Those specific cases, in turn, bolstered his advocacy of a comparative, all-encompassing European structure. “In this fashion,” as he wrote in 1962, “the industrial history of Europe is conceived as a unified, and yet graduated pattern.”

Over time, and as he read prodigiously and modestly altered the theoretical foundation, the structure of his approach became ever more specific. I summarize it here in four hypotheses:

(1) Relative backwardness creates a tension between the promise of economic development, as achieved elsewhere, and the continuity of stagnation. Such a tension takes political form and motivates institutional innovation, whose product becomes appropriate substitution for the absent preconditions for growth.

(2) The greater the degree of backwardness, the more intervention is required in the market economy to channel capital and entrepreneurial leadership to nascent industries. Also, the more coercive and comprehensive were the measures required to reduce domestic consumption and allow national saving.

(3) The more backward the economy, the more likely were a series of additional characteristics: an emphasis upon domestic production of producers’ goods rather than consumers’ goods; the use of capital intensive rather than labor intensive methods of production; emergence of larger scale production units at the level both of the firm as well as the individual plant; and dependence upon borrowed, advanced technology rather than use of indigenous techniques.

(4) The more backward the country, the less likely was the agricultural sector to provide a growing market to industry, and the more dependent was industry upon growing productivity and inter-industrial sales, for its expansion. Such unbalanced growth was frequently made feasible through state participation.

The considerable appeal of the Gerschenkron model derives not only from its logical and consistent ordering of the nineteenth- and early-twentieth-century European experience. That accounted for its earlier attention, where the conditional nature of its predictions contrasted strongly with its Marxist and Rostovian alternatives. What has given it greater recent notice has been its broad scale generalization to the experience of the many late late-comers of the present Third World. His formulation dominates the stages of growth approach because of its emphasis upon differential development in response to different initial conditions. There is thus the irony of Walt Rostow’s demise at the hands of Gerschenkron – does anyone now assign The Stages of Economic Growth? — when Rostow had been the first choice of Harvard to succeed Usher in 1948.

In Gerschenkron’s own hands, his propositions afforded an opportunity to blend ideology, institutions and the historical experience of industrialization, especially in the case of his native Russia, in a dazzling fashion. For others, his approach has often proved a useful starting point for the historical discussion of other parts of the world, such as Henry Rosovsky did with Japan, and others, elsewhere. Always, application of the backwardness approach requires close attention to detail, as well as a quantitative emphasis.

Responses to Gerschenkron’s Thesis

The model is, of course, not without its limitations and its critics. History, even of Europe alone, does not in every detail bear easily the weight of such a grand design. In other parts of the world, and in a later time period, larger amendments are frequently required, and sometimes forgotten by current advocates. And somewhat surprisingly, in view of Gerschenkron’s own path-breaking essay in political economy, Bread and Democracy in Germany, there is too little special attention to the domestic classes and interests seeking to control the interventionist state. Backwardness can too easily become an alternative, technologically rooted explanation that distracts attention from the state and the politics surrounding it, rather than focusing upon its opportunities and constraints. Ultimately, as well, there are the many developmental failures — rather than only the successes — that now loom larger and attract attention. While he did explicitly treat Austria as a failed case, it was not a central part of his theoretical structure. Moreover, important current issues like globalization, the central role of international trade, and education are less significant through much of the nineteenth century in Europe.

Still, the concept of relative backwardness, and Gerschenkron’s always insightful and rich elaborations in so many national contexts, represent a brilliant and original approach to economic history that has been perhaps unequalled in the twentieth century. And more recently, with the rise of political economy as a field, his work is widely assigned as required reading. A quick measure of his current influence is the almost 2000 Google references that turn up with the entry of his name.

Gerschenkron’s Enduring Influence

His third great contribution came through his students. Dawidoff’s The Fly Swatter, provides a whole chapter, and more, focused on his role. First, in the 1950s came the students who worked upon the Soviet Union. Then, as his interests concentrated upon economic history, came his direction of the Ford Foundation supported Economic History Workshop at Harvard in the late 1950’s and 1960s. His seminar then, and the availability of fellowship support, attracted several Harvard students, and even some from neighboring MIT, to work in the field. Always, too, there were an impressive group of visitors to Cambridge who were invited to speak to the seminar, but never had permanence in its regular activities.

His recruitment techniques were subtle but effective. Economics 233, the course in economic history required of all graduate students, assigned a paper as well as a final examination. That provided a chance for him to assess each student early on through a brief visit to his office. Entry therein was a special occasion: filled as it was with books, journals, documents, maps, etc., it embodied scholarship with a capital S. Few who were recruited could desist, regardless of initial inclinations that were not directed to economic history.

The course was just the introduction. For those who went on in the field more seriously, the regular evening seminar became the focus. There ideas for dissertations were discussed and quantitative techniques evaluated. It was just as the computer was evolving and econometrics was undergoing rapid advance. Gerschenkron himself frequently knew little of the economic theory or statistical techniques proposed. He usually limited himself to a final evaluative comment, and one that either justified further research or implicitly suggested that another topic might be a better eventual choice. That judgment was informed by the previous discussion as well as his sense of the student’s intellectual capacity.

Gerschenkron had extremely good judgment or very good luck, or perhaps a combination of both. For the small crop of students who wrote with him over more than a decade went on to leadership as the field of economic history was just changing back from an historical emphasis to an economic one. Cliometrics was the new terminology. Leading universities absorbed his students, who almost always have had productive subsequent careers. Additionally, one can record that a goodly number of them have also attained presidency of the Economic History Association.

It was not his direct dissertation supervision that was responsible. He provided no topic, no suggestion of sources, no regular guidance, no timetable for conclusion. Most of the students chose subject matter far from continental Europe. What these persons gained was proximity to a stellar intellect, and close association with each other as they pursued their research. They also obtained a father figure whom they desperately sought to imitate in their own scholarship and subsequent teaching. Those who survived that complex relationship almost always emerged with deep affection and fond memories, even if the process was far from linear and continuous.

By the mid-1960s, ten of his students, both in Soviet economics and economic history, prepared a Festschrift in his honor. The book, Industrialization in Two Systems, was organized and edited by Henry Rosovsky, and published in 1966 (New York: Wiley). Many of the essays are still worth reading. But the dedication, from the Pirke Avot, states their strong feelings perhaps best of all: “The day is short, and the work is great, and the laborers are sluggish, and the reward is much, and the Master is urgent.”

A fourth and last relevant observation relates to his general intellect. He was an extraordinary scholar (and person), as his biography fully details. He was an exceptional reader, of good books and bad. In his own writings, his references were varied, and consciously intended to impress: “There was almost always a little Latin, unless there was a little Greek or a little German or a little Russian or a little French or a little Italian; …” Nor did he exclusively write on economic history. There were his book reviews and other essays, including the one joint work — with his wife — on the adequacy of the diverse translations of Hamlet’s quatrain to Ophelia in sixteen different languages. There were his regular lunchtime performances at the Faculty Club and Eliot House and his interactions with other Harvard scholars. His talents were notable and appreciated: what other economist would have been offered chairs in Italian literature and Slavic studies?

Not surprisingly, upon reaching the mandatory retirement age of 65 in 1969, he was offered a further five years. But those years were not a happy terminus to his long stay at Harvard. The war in Vietnam, and the student reaction, imposed a large cost, as it did to many others who had fled Europe in the 1930s. Long-standing friendships were broken, as with John Kenneth Galbraith. The end of the economic history requirement in 1973 was another major disappointment. Perhaps the greatest one, however, was his inability to publish the great work, the big book that would summarize his brilliant insights into the process of European industrial change, the book that could and would influence political scientists and economists for generations to come. Despite this lapse, Gerschenkron’s influence has subsequently blossomed. The collection of essays under review, which opens with the backwardness thesis and closes with appendices on industrial development in Italy and Bulgaria (with reflections on Soviet literature along the way) — has achieved a hallowed acceptance.

Recent Developments and Gerschenkron’s Ideas

The current surge of interest in political economy has brought a second wave of increasing interest in Gerschenkron’s insights. As the contemporary world continues to confront the problem of inadequate development, particularly over the last twenty years in Latin America and Africa, that special magic of nineteenth century backwardness stimulates greater appeal, and greater hope. So does the case of success in Asia.

The rapid pace of development in East Asia, for example, has inspired a whole set of major works over the last fifteen years, seeking to ascertain how a region, apparently condemned to continuing stagnation by religion, language and tradition, could spurt ahead in the 1970s and subsequent periods. Even the recent pause, requiring massive assistance from the IMF and extensive domestic restructuring, has come off with barely a temporary decline.

After all the discussion of major changes supposedly required in the system of international financial flows in the past few years, little has, in fact, happened. The market has continued to distribute something like $1 trillion, in both capital flows as well as foreign investment, throughout the world. Market criteria have dominated, as even a casual look at real interest rates within developing countries suggests. This has not much altered the pattern of development. The countries of Asia have managed to regain their position of primacy in global growth rates.

With AIDS spreading rapidly throughout Africa, with malaria and other diseases recurring, with environmental degradation threatening, with a demographic transition that will begin to exert the pressure of an aging population, there is no lack of additional new problems that are pressing. On the other side is the reality of declining international assistance from the already developed North.

Failure of economic development to become a global process, as it appeared to do in the 1960s, and for broad convergence in per capita income levels to occur, now constitutes a major intellectual and practical challenge. Should one opt against the pressures of increasing globalization, and return to the industrial protection and import substitution of the past? Should one seek to enhance the role of central direction and decision at the expense of decentralization and private determination? Should one attack the inequality of income and poverty by imposing greater burdens upon the domestic rich and foreign investors? Should one engage in significant land reform? Should one renationalize after the extraordinary privatization that has occurred over the last decade or so?

These new issues are not ones that Gerschenkron explicitly raised. But they are implicit in his efforts to pose the advantages of backwardness. What was an advantage in one historical setting can readily become a disadvantage in another. But the very effort to construct an explicit, and testable, model is what differentiates him from his contemporaries. Shura, as he was better known by those very close to him, is guaranteed a place in the pantheon of economic history.

Albert Fishlow is Professor of International Affairs and Director, Institute of Latin American Studies at Columbia University. He has served as Deputy Assistant Secretary of State for Inter-American Affairs; Dean of International and Area Studies at UC-Berkeley; Paul A. Volcker Senior Fellow for International Economics at the Council of Foreign Affairs; and coeditor of Journal of Development Economics, among numerous other positions.

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

The Peasants of Languedoc

Author(s):Ladurie, Emmanuel Le Roy
Reviewer(s):McCants, Anne E.C.

Project 2001: Significant Works in Economic History

Emmanuel Le Roy Ladurie, The Peasants of Languedoc.

Review Essay by Anne E.C. McCants, Department of History, Massachusetts Institute of Technology.

There and Back Again: The Great Agrarian Cycle Revisited

It has been thirty-six years since the original publication of Le Roy Ladurie’s now classic Les Paysans de Languedoc, whose English translation appeared only eight years later. This work of “total” regional history (p. 8), grounded in the climate and topography of its fixed place, narrated around a loving reconstruction of time series data drawn from land tax registers, grain (and other commodity) prices, population registers and communicant lists, and ultimately nuanced by an anthropologist’s sensitivity to the social impact of even small changes in literacy and spiritual affiliation, is in many respects the crowning achievement of the Annales school for the post-Braudelian generation.1 It takes for its subject a place close to the heart of Braudel himself, the Mediterranean French province of Languedoc, and the people who tilled its fields and nurtured its vines, mostly in the small family holdings which so captured the historical imagination of French scholars of the inter- and post-war periods. It also takes as its time period those in-between centuries so favored by Braudel, following the dramatic collapse of the fourteenth century, but well before the acceleration of change brought on by industrialization in the late eighteenth century and thereafter. Despite the poverty and hardship, not to mention the periodic bouts of starvation and insanity, which cross the pages of this book, it retains nonetheless a bucolic vision of the French countryside, only superficially touched by the affairs of men, at least in anything but the very long run. Finally, it attends most fully to the natural and human processes characterized best by an ebb and flow of cyclical change: climate, the productivity of the soil, and population. In all of these respects the intellectual debts to Marc Bloch, Fran?ois Simiand, and of course Fernand Braudel are immediately obvious.

Yet in important ways Le Roy Ladurie also deviates from what had by the time of this publication become the normative format for a major work of Annales history. Instead of dividing his subject into the classic, and fundamentally non-sequential, tri-part formula of structure, conjuncture, et ?v?nement, Le Roy Ladurie instead follows the older norm of telling his story in time. He begins with the tailings of the fourteenth century crisis, what he calls “the low-water mark of a society.” He then traces the effects of the so-called “wage and price scissors” of the long sixteenth century, culminating once again with population collapse and economic depression in the seventeenth century. The self-proclaimed “protagonist” of this book is “a great agrarian cycle, lasting from the end of the fifteenth century to the beginning of the eighteenth, studied in its entirety” (p. 289). While as heroes go this is still a far cry from the kings and generals of old-fashioned history, it is clearly less fixed in time and space than Braudel’s mountains and seas with their capacity for geologic movement only. The Peasants of Languedoc is thus a narrative, and like all good narratives it is susceptible to accidental interventions in the plot and to their concomitant unanticipated outcomes. And so Le Roy Ladurie’s ‘great agrarian cycle’ turns out to have embedded in it a hint of something more linear, a harbinger of the demise of his otherwise so carefully crafted longue dur?e, and what he himself calls “the seeds of true growth” (p. 302). Yet his own lingering ambivalence about what others have been tempted to call progress is underscored by his choice of metaphor to describe it. In the same breath in which he invokes “incandescent particles in the darkest hours” he also speaks of the “contagion of true growth” (p. 303). Is economic growth (that is the “increase of individual wealth” (p. 303) in his definition) good or bad, or both simultaneously? This question, which seems so easily answered by anyone trained in neo-classical economics, lingers unresolved by La Roy Ladurie. Indeed, it perhaps remains to the present unanswered by those who have followed him in the French historical school, particularly as it has turned increasingly back towards the study of culture and in the process adopted many of the methodologies and proclivities of the anthropologist.2

What then are these (insidious?) interventions that push the great agrarian (read Malthusian) cycle off course? Perhaps somewhat surprisingly they are phenomena which Max Weber would have recognized even if their shading is not exactly that of a Protestant ethic. They include the spread of viticulture and sericulture to the detriment of the subsistence grain; the gradual appearance of an “industrial mentality,” admittedly never well defined but seemingly linked with the increase in production of exportable commodities; the spread of remedial education and its powerful accompaniment literacy; and finally, the most nebulous of all, “a certain psychological transfiguration and a general improvement in behavior,” that is best characterized by the “virtue of self-control” (p. 307). Le Roy Ladurie cites the decline of dueling, spontaneous knife fights, and religious fanaticism as just the most obvious evidence of the shift towards a more “intellectual” and “composed” life (p. 309). The link from this reform of manners to real (that is sustainable) economic growth is only inferred, but presumably those who can refrain from emotional outbursts of violence will also be better able to defer consumption gratification in order to invest for the future. Without these (overwhelmingly cultural) interventions the peasant smallholder might have been doomed to an endless Malthusian repetition of the great agrarian cycle of expansion — characterized by population growth, downward pressure on family farm size, the cultivation of marginal lands, the impoverishment of heirs, and rising subsistence prices — and retreat, in which all of the above signs would reverse. As long as subsistence agriculture remained the dominant activity of the agrarian economy population won the race over bread every time (p. 73). Malthus would have been right, if he had not been born too late. Certainly for La Roy Ladurie Malthus was the true prophet of the age that just preceded his own (p. 311)

Yet not many scholars remain unabashed Malthusians or even slightly watered-down neo-Malthusians these days. We have learned well from Ester Boserup that population pressure could and did drive human societies to greater intensity of work effort and the concomitant technological modifications suited to natural resource scarcity and labor abundance. We have learned from Adam Smith and his many followers the productivity advantages of specialization, encouraged as it was by the rise of urban places and the increasingly dense networks of trade among them. We have learned as well from the Marxists of Robert Brenner=s tribe that power relationships between and among individuals and social groups (dare I call them classes?) could powerfully impact the nature of economic response to demographic catastrophe, both on the individual level and for societies as a whole. And of course, we also know from the body of theory built up over the last century in mainstream economics departments that markets are capable of clearing an amazing range of commodities, and that they often did so even in the somewhat murky pre-industrial past. Finally, the “New” Institutional Economics has taught us that social and political institutions had a lot to do with how well markets were actually able to perform their pure function. What then is there for the Anglo-speaking economic historian (most likely trained in the neo-classical tradition) to take from this book and its larger research agenda nearly four decades out?

Fortunately lots. To begin with there is the terrific data series reconstructed over a substantially long period of time to allow for serious study of the macro-dynamics of a pre-industrial economy. For even if Le Roy Ladurie “confuses rent with profits” as Douglas North pointed out long ago, we do not have to follow in that confusion.3 We can read the rent series for what it really is, using it in tandem with price and wage series as a base for understanding the changing profitability of subsistence agriculture, particularly as it varied by the scale of the farm operation. For as La Roy Ladurie rightly emphasizes throughout his exposition, it is far too simplistic to speak only of booms and depressions in the agrarian economy overall. If you had a surplus to sell, falling grain prices induced hardship; but the story was very different for those forced onto the market to ensure sufficient quantities of bread for survival. For them agrarian depressions could be a time of relative plenty. Thus the macro-dynamics that inhere in his great agrarian cycle could produce both winners and losers simultaneously, depending on the distribution of property, and the larger social structure in which farming took place. It is always good for us to be reminded of this complication.

The Peasants of Languedoc also provides a model for the integration of cultural history into economic history which is still relevant today. Despite La Roy Ladurie’s now outdated reliance on Malthus for the structure within which his narrative operates, he nonetheless discerns the cultural forces which were at work in eighteenth-century Languedoc (and in nascent form even earlier) to disrupt the Malthusian paradigm. To the claim on this side of the Atlantic that ‘institutions matter’ a fresh reading of Le Roy Ladurie offers the reminder that mentalit? matters too. Adequate labor and capital resources may have been necessary conditions for economic growth of the modern variety, but they were hardly sufficient. Their application in new ways required whole new modes of thought and behavior. Thus, as any Frenchman would surely understand in the widest possible sense that we are what we eat, La Roy Ladurie would also have us understand that we produce what we think.

Finally this book remains the most accessible to the American student (of all ages) of all the major works to come out of the Annales school. It is neither geologic in its movement, nor overwhelming in its scope. Yet it achieves its stated goal to be “total” in its comprehension of its own subject. The barren mountain reaches, rolling fields of grain and vine, and scrub filled blessedly with chestnut trees; the long cycles of climate change, and the violent bursts of climatic extremes; the struggling peasant with too many children, the upstart coqs de village, and the emerging bourgeois of Montpellier; “Huguenot carders and Papist peasants” (p. 158); all of these characters come alive on the pages of this book. Their multiple, often conflicting, stories are woven together seamlessly by La Roy Ladurie into a complicated whole that looks remarkably like real human experience. If the master economic narrative sometimes goes astray or suffers from lapses of logical explanation, this seems a forgivable fault to this enthusiastic reader. There is much indeed for us to learn, not only about the agrarian economy of a Mediterranean province before industrialization, but about historical storytelling as well.


1. All quotes from the text are taken from the English translation by John Day, published in paperback by the University of Illinois Press in 1976.

2. See Peter Burke, The French Historical Revolution: The Annales School 1929-89, Stanford, 1990, especially pp. 79-93.

3. Douglass North, AComment@ in Journal of Economic History, Vol. 31, no. 1, 1978, p. 80.

Anne McCants is the author of Civic Charity in a Golden Age: Orphan Care in Early Modern Amsterdam, University of Illinois Press, 1997, and numerous articles on living standards, migration, and marriage patterns in northern Europe. She teaches in history, economics and women’s studies at MIT.

Subject(s):Historical Demography, including Migration
Geographic Area(s):Europe
Time Period(s):Medieval

The Future of U.S. Capitalism

Author(s):Pryor, Frederic L.
Reviewer(s):Higgs, Robert

Published by EH.NET (October 2002)

Frederic L. Pryor, The Future of U.S. Capitalism. New York: Cambridge

University Press, 2002. xiii + 447 pp. $35 (hardback), ISBN: 0-521-81358-1.

Reviewed for EH.NET by Robert Higgs, The Independent Institute.

The Future of U.S. Capitalism, by Frederic L. Pryor, is an odd book,

and I doubt that many economic historians will find it useful, either in

research or in teaching. Pryor’s objective in the book is to forecast the

future development of various economic, social, and political aspects of U.S.

“capitalism.” (His choice of terms would not be mine. In my view, anything

properly described as capitalism in the United States came to an end no later

than 1933. To retain the term “capitalism” contributes to misunderstandings of

how a predominantly market-oriented system works, and thereby fosters further

inroads into what little remains of the market system.) In Pryor’s own words,

he intends to consider: “What have been the key trends in the U.S. economic

system in the second half of the twentieth century and what causes underlay

them? If current trends will not continue, what will replace them, and why? At

what points do we lack sufficient knowledge, either theoretical or factual, to

make responsible predictions about the future?” (p. 1).

After an introductory chapter, the author considers “internal influences on the

economic system,” with chapters on saving and economic growth, economic

fluctuations and financial crises, economic inequality, and globalization. Next

he takes up “external influences on the economic system,” with chapters on

natural resources and the environment, social factors, and political factors. A

final set of chapters deals with “changes in crucial economic institutions and

organizations,” giving attention to the evolution of business enterprises,

market competition, government regulation and ownership, and government

spending. The conclusion considers, “Whither U.S. Capitalism?” Besides

including more than thirty pages of appendices on data and statistical

relationships, the author directs the interested reader to an extensive

collection of “external appendices and accompanying tables and charts” that can

be viewed at his web site.

Pryor declares that the book “is not about the economy per se” (p. 2) but

“about the institutions and organizations through which economic activity is

channeled. [I]t is an exercise in positive, not normative, economics” (p. 3). A

reader who expects to find an analysis deeply informed by the new institutional

economics, however, will be disappointed. No coherent overarching theory or

model guides the analysis. Instead, Pryor calls on various theoretical

rationales in an ad hoc manner as he proceeds from one topic to another. A

great deal of the econometric analysis amounts to little more than data mining.

On the spectrum from optimism to pessimism, Pryor definitely stands closer to

the darker terminus, concluding that “the U.S. economic system faces some very

serious problems in the coming decades” (p. 23).

No brief review can even list all the specific issues Pryor considers in this

book. Suffice to say, he takes up hundreds of separate matters large and small,

spends considerable time assessing data problems, and presents countless

regression equations as well as many tables, graphs, and charts. His analysis

is, if anything, data-intensive, a reflection no doubt of his seeming faith

that if we crunch enough numbers, we will put ourselves in a position to

forecast future developments accurately. Time and again, however, he finds

himself immersed in a “welter of conflicting results” (p. 96), or confronting

an empirical association for which “the nature of [the causal] mechanism

remains unclear” (p. 97), or up against empirical findings that “raise some

serious problems of interpretation,” and because “the evidence is fragile,”

“robust conclusions cannot be drawn” (p. 107), or confessing that “this kind of

calculation is fraught with uncertainty” (p. 170). To resolve conflicting

theoretical and empirical considerations, Pryor often simply judges on the

basis of his “subjective impression” (p. 359). At one point, he writes that

“the rate of technology advance is the key, and this is difficult to predict”

(p. 171). In fact, it is impossible to predict, as past prognosticators have

demonstrated repeatedly. What Pryor says in a particular context might well

have been said of the entire enterprise: “Given the nature of the data, the

results of the statistical experiments … should be considered only as

suggestive” (p. 188). What he observes about cultural trends might have been

observed equally about nearly everything discussed in the book: “the analysis

of current culture and values may tell us little about the future” (p. 199).

Looming over the hodge-podge of micro-level examinations Pryor makes, one great

problem threatens to demolish any value the analyses might have. The author

himself acknowledges this threat, but he forges ahead anyhow. The great

difficulty arises because “the impact on the U.S. economic system of a severe

financial crisis or an adverse production shock would be great. Like a major

war, however, such events cannot be easily predicted” (p. 81). (Translation:

cannot be predicted.) “If such a depression occurs, its impact would probably

outweigh most of the other factors discussed in this book.” Yet, “in order to

analyze systematically these other factors impinging on the future of U.S.

capitalism, I assume … that an extremely serious downturn will not occur. …

that the U.S. will really have such a lucky break” (p. 81). Has the system

avoided big shocks such as major wars and financial collapses in the past?

Certainly not for any extended period. We would be hoping against hope to

suppose that whereas in the past the system has always been troubled

episodically by big crises, in the future it will be free of them. Yet when

they occur, all bets are off. This fact of historical life is just one of

several reasons why no science of history is possible, and therefore why no

long-range predictions deserve to be taken seriously. Trends exist, to be sure,

but the long-term development of any socio-economic system consists more

decisively in a series of contingencies laid end to end, with the realization

of each major contingency setting in train a new path-dependent process.

At the end, Pryor pulls together his expectations about the nature of U.S.

capitalism in 2050 — a sort of semi-fascist distopia, or “a capitalism with an

inhuman face” (p. 367) — as follows:

Along the political dimension, the overall level of governmental intervention

will be roughly the same, but with a different composition: public expenditures

will be higher, regulation of industry will be lower, government intervention

into the economy will be less effective, and repression of the population will

be harsher. Along the economic dimension, markets will be less competitive. And

along the social dimension, solidarity will probably be less, and, despite

increased affluence, the quality of our lives will deteriorate and economic

life will be more pitiless.

These results, combined with the ever-larger size of enterprises, point toward

a greater oligarchical control of both the state and the economy. That is,

economic and political elites will continue to fuse, government intervention in

the economy will be less aimed at raising the general welfare of the population

than at ameliorating certain economic problems faced by particular segments of

the elite. The decreasing progressivity of the tax structure and rising income

inequalities will be telling indicators of these developments. These trends

will be reinforced by declining political participation and mounting distrust

toward the government, in major part because more people will feel powerless to

influence policies and events. Expenditures on internal security, pensions, and

health will increase, primarily to palliate political discontent that might

erupt into serious domestic strife (p. 364).

The good news is that one can place hardly any weight at all on these forlorn


Having plowed through Pryor’s big, dense book, the reader who has retained his

sympathy for the author may wish that the labor theory of value were valid. If

it were, then one could be sure that Pryor, who must have labored long and hard

over this project, had created a work of considerable value. Alas, the labor

theory of value is bunk; and, sad to say, the product of Pryor’s labors is not

likely to find a high place in anyone’s subjective value ranking.

Robert Higgs is senior fellow in political economy at the Independent

Institute, editor of The Independent Review, and author of many articles

and books, including Crisis and Leviathan: Critical Episodes in the Growth

of American Government (New York: Oxford University Press, 1987). His

current research includes further investigations in the political economy of


Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Triumph of the Optimists: 101 Years of Global Investment Returns

Author(s):Dimson, Elroy
Marsh, Paul
Staunton, Mike
Reviewer(s):James, John A.

Published by EH.NET (August 2002)

Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists: 101

Years of Global Investment Returns. Princeton, NJ: Princeton University

Press, 2002. xii + 339 pp. $99.50 (cloth), ISBN: 0-691-09194-3.

Reviewed for EH.NET by John A. James, Department of Economics, University of


First of all, I still don’t get the title. It is alluded to only at the very

end of the book. Things had not gone so great in the first half of the

twentieth century — two world wars, the Great Depression, hyperinflations,

etc. At mid-century “who but the most rampant optimist would then have dreamt

that over the next half-century the annualized real return on equities would be

9 percent…” (p. 224)? How can a book then that offers less optimistic

estimates of long-run returns, filling in the historical record, extending rate

of return series backward, to a period when equity returns were generally lower

than those following World War II, be called “The Triumph of the Optimists”?

Now that I’ve vented for a bit about the title (but I shall come back to it

again later), let me describe what the book involves. The authors, all

affiliated with the London Business School, argue that the best-known long-term

series on returns to equities, those based on US stocks from the Center for

Research in Security Prices (CRSP) database beginning in 1926, might be

potentially misleading. After all, the United States and US industry in

particular had generally done pretty well over this period, so the picture one

would get of the long-term return to equity based on such evidence might be too

high. What we need are more data, extending farther back in time and covering

more countries.

The authors have done an extraordinary job in assembling such a dataset. It

encompasses annual real and nominal returns on equities, bonds, and bills, as

well as GDP, inflation, and exchange rate data, over 101 years (1900-2000) for

sixteen countries (Australia, Belgium, Canada, Denmark, France, Germany,

Ireland, Italy, Japan, Netherlands, South Africa, Spain, Sweden, Switzerland,

United Kingdom, and United States). It is assembled carefully with an eye to

consistency over time and across countries. In constructing the equity indexes

care is taken to avoid survivor bias, overweighting companies that last and/or

become more important over time. Broader indexes are preferred to narrower

ones. Where no satisfactory index existed, one was constructed, as for the UK

between 1900 and 1954 (no mention is made, curiously, of Richard Grossman’s

index (2002) which overlaps part of this period). Long-term performance is

measured based on total returns, dividends as well as capital gains. For almost

all countries component return series are weighted by company market

capitalization. Arithmetic rather than geometric averaging is used.

The countries selected are those for which a century run of financial data

exists. The authors make a point of taking care to avoid easy data bias, that

is a preference for data which is easy to obtain, steering clear of difficult

periods such as wars and their aftermath or periods for which numbers are hard

to get, usually earlier ones. Omitting such periods could bias average returns

upward significantly. So there really is a bit more than a century of

as-consistent-as-they-can-make-it data for most variables here (that said, in

most of the book the experience of the German hyperinflation is almost always

excluded since it would otherwise dominate the means and standard deviations of

the variable in question). The focus on the long run, a century of data,

however means that countries in which financial markets disappeared for a while

— Russia, China, etc. — are excluded. Emerging markets and developing

countries are similarly excluded. So we have North American and European

countries plus Australia, South Africa, and Japan. The inclusion of other

countries would have been interesting, but given the magnitude of the endeavor

already, it would be querulous to ask for more. And the countries in the sample

did account for 88 percent of world stock market value in 2000, perhaps more in


The most common time unit used for reporting summary statistics of variables is

the century, although it is sometimes broken down into half-century periods.

There is certainly something to be said for surveying the full historical

record, encompassing the impacts of extraordinary shocks like wars and other

disasters. Ignoring the tails of the distribution has had serious consequences

for some hedge funds, for example, in recent years. While such a wholistic

emphasis on long-run annual average means and standard deviations has the

advantage that it captures the influence of lots of different institutions and

events, it also obscures potentially interesting relationships. I, for one,

would have liked to see more information broken by exchange rate regime, which

is done to some degree in one chapter, but not generally.

We learn here that equity holders did better than bond holders over the

twentieth century (one important word here — inflation). Value stocks (those

with higher dividend yields and/or higher ratios of book value to market value

of equity) yielded higher returns in the long run than did growth stocks

(Chapter 10). Generalizing from historical equity returns in the United States

turned out to be not that misleading after all. While average returns in the US

were higher than the sample average, they weren’t extraordinarily higher. The

authors spend substantial time (Chapters 13 and 14) on the equity-risk premium,

the difference between the long-term average annual return on equities and that

on default-free government bonds or bills, the additional compensation

necessary for holding a risky asset. The average annual 1900-2000 equity-risk

premium relative to bills in the US was 5.8 percent; for the weighted whole

sample, 4.9 percent. Relative to long bonds it was 5.0 percent for the US, 4.6

percent for the world index. These figures run about 1.5 percentage points

lower than previous estimates for the US and UK (pp. 174-175). (So is this the

Triumph of the Optimists — after we measure the equity premium more carefully,

it’s still a good bit larger than zero?)

While results such as the above will be the focus of many general readers,

economic and financial historians will find that this volume has myriad charms.

Perusing the multitudinous tables, graphs, and charts is really endlessly

fascinating. How much effect would international diversification have had on

average returns? How much effect has currency risk had on the returns to

international investment? We see, among other things, that German and American

equity returns were sizably negatively correlated during World War II

(interestingly, while French and German returns were negatively correlated

during World War I, they were positively correlated during World War II) (p.

116). And there’s much, much more. Those seeking a respite from formal modeling

and econometric tests will find a safe haven here. The principal instrument of

assessment is the eyeball. There are lots and lots of colored figures to be

studied, but very few formal statistical tests are reported. The graphs (pp.

96-97) certainly suggest that purchasing power parity holds in the long run,

for example. But for a formal test of the proposition as well as an analysis of

factors underlying deviations from PPP one must go to Taylor (2002) — who is

cited in the text. Another thing missing in addition to formal tests is any

significant amount of historical or institutional detail. It would have been

nice to have a bit of a story or some context as to why the graphs and charts

look as they do. Why was the equity premium in France for instance

three-and-a-half times that in Denmark? Is it the lingering influence of John


Curiously, this volume has the look and feel of a textbook — wide margins;

glossy paper; bright, multicolor figures; excruciatingly detailed introductions

to each chapter describing precisely what will be covered and long

recapitulations at the end of each. But if it is a textbook, for what course or

audience is it aimed? In an assessment of prospects for the future, for

example, the fact that readers are told “if equities remain risky, as must

certainly be the case, equity investors should continue to expect a positive

risk premium” (p. 210) might seem to indicate not a very advanced one. The

repetitive style makes reading it through from cover to cover, as I did, a

bittersweet experience. Rather, it would seem much more felicitous to use it as

a reference book (as the dust jacket itself notes), to be dipped into or

browsed again and again.

Finally, the lessons of history. Now that the long-term equity premium has been

properly measured, is this then a guide to future returns? Well, no. The

authors argue (Chapter 13) that the future equity premium is going to be lower

than it used to be. Watch for the sequel, “The Triumph of the Pessimists.”


Grossman, Richard S. (2002), “New Indices of British Equity Prices, 1870-1913,”

Journal of Economic History, 62, 121-146.

Taylor, Alan M. (2002), “A Century of Purchasing-Power Parity,” Review of

Economics and Statistics, 84, 139-150.

John A. James is a professor of economics at the University of Virginia. He

continues to work on the operation of the interregional payments system before

the Federal Reserve.

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 Ordinary Business of Life: A History of Economics from the Ancient World to the Twenty-First Century

Author(s):Backhouse, Roger E.
Reviewer(s):Samuels, Warren J.

Published by EH.NET (August 2002)

Roger E. Backhouse, The Ordinary Business of Life: A History of Economics

from the Ancient World to the Twenty-First Century. Princeton, NJ:

Princeton University Press, 2002. x + 369 pp. $35.00 (hardcover), ISBN:


Reviewed for EH.NET by Warren J. Samuels, Department of Economics, Michigan

State University.

Roger Backhouse, who holds a chair in the History and Philosophy of Economics

at the University of Birmingham, is a leading, indeed virtuoso, historian of

economic thought. He has written three different histories of economic thought.

His A History of Modern Economic Analysis (New York: Basil Blackwell,

1985) focused on the history of economic theory, centering on the theories of

value and price. Theory exists somewhat in its own ethereal world. Backhouse’s

Economists and the Economy: The Evolution of Economic Ideas, 1600 to the

Present Day (New York: Basil Blackwell, 1988) presented the context in

which economic theory developed along with the development of theory itself.

The context consisted of economic history, political economy and the history of

economic ideas. Theory, while not necessarily directly generated by context,

was closely related. Backhouse’s The Ordinary Business of Life has a

differently designed combination: the economic-history context, so long as it

was important, then increasingly the development of economic theory as a

separate discipline. The title conveys the message, using Alfred Marshall’s

definition of economics rather than Lionel Robbins’s definition ostensibly

limiting economics to the analytics of pure resource allocation. (I say

“ostensibly” because it is the rare historian of economic thought who can

remain so narrow.) The intended reader is not the doctoral candidate seeking

deeper mastery of economic theory — who has the textbooks of Mark Blaug or

Ingrid Rima, for example, for such purpose — but the advanced undergraduate

and lay reader. The book also appears in the Penguin series.

Such a trio comports with a variety of conceptions of the discipline and its

history. It also gives effect to the Post Modernist view that different stories

can be told about the same putative subject — though, of course, the subject

changes with the story (even this point Backhouse holds at arm’s length; see p.

328). That Backhouse can author three such different accounts attests to his

skill and versatility, his non-dogmatic view of the history of economic

thought, and that while he is not wedded to Post Modernism he does go part way

with it. Not many historians of economic thought have the combined knowledge of

economic history, intellectual history and economic theory that Backhouse

offers to the world.

The historical coverage by chapter reflects the design strategy. The sequence

is as follows, after a Prologue: The Ancient World, The Middle Ages, The

Emergence of the Modern World View — the Sixteenth Century; Science, Politics

and Trade in Seventeenth-Century England; Absolutism and Enlightenment in

Eighteenth-Century France; and The Scottish Enlightenment of the Eighteenth

Century. Through chapter 6 on the Scottish Enlightenment (including Adam

Smith), the emphasis is clearly on political, social, and broad intellectual

developments. Thereafter, the focus is on the development of economic theory,

almost as if the foregoing types of development were suspended, though the

message may instead be that modern economics is an emanation of the modern

(Western) economy and not the pure, a-institutional science its practitioners

tend to claim: Classical Political Economy, 1790-1870; The Split between

History and Theory in Europe, 1879-1914; The Rise of American Economics,

1870-1939; Money and the Business Cycle, 1898-1939; Econometrics and

Mathematical Economics, 1930 to the Present; Welfare Economics and Socialism,

1870 to the Present; Economists and Policy, 1939 to the Present; and Expanding

the Discipline, 1960 to the Present; concluding with an unnumbered epilogue,

“Economists and Their History.”

Readers of this review may be particularly interested in Backhouse’s treatment,

in Chapter 3, of the emergence of the modern worldview; and the split between

history and theory (Chapter 8). They may fault Backhouse for neglecting

economic thought in other cultures (if only to explore how culture-laden is

Western economics, just as one might study how theory-laden are facts); for not

being more critical; for neglecting American economic thought before 1870; and

so on.

Backhouse, to his credit, however, emphasizes the inevitable selectivity and

thereby limited coverage of his or anyone’s story of the history of economic

thought. He also warns the reader of the danger of presentism, of treating

“past writers as though they were modern academic economists” (p. 3), while

insisting that we inevitably view the past through the lens of the present and

proposing that we identify and state our “preconceptions as explicitly as

possible” (p. 7). He emphasizes that different generations ask different

questions, “perhaps even questions we find it hard to understand,” such that

the question of “progress” in economics is problematic (p. 8).

Notwithstanding these and perhaps other Post Modernist ideas, the domain

treated in this and Backhouse’s other books is rather conventional. Not

surprisingly, the story turns from externalist to internalist: “As economics

developed … into an academic subject, the problems economists tackled were

increasingly ones that arose within the discipline.” Thus, “Given that my main

aim is to explain how the discipline reached its present state, developments

within its theoretical ‘core’ are clearly prominent” (p. 9). A critic might ask

how economic thought reached its (parlous) present state.

Backhouse thus increasingly narrows his domain as academic economists did

likewise; academic practice thus eclipses the other elements of the story.

Actually, therefore, Backhouse, like many other historians of economic thought,

tells two stories: the story of economic thought broadly considered and the

story of the technical ideas of a narrowly focused academic discipline. But he

alerts the reader that those “developments within its theoretical core … are

not the whole story” (p. 9). If Backhouse had included something of the broader

work of, say, Vilfredo Pareto and Friedrich von Hayek, or Kenneth Boulding and

Herbert Simon, as he does with Smith, a different story might have been told.

Perhaps that is the design for a fourth book!

Part of the story Backhouse tells as follows: Histories that glowingly tell of

the technical progress of economics “conceal as much as they reveal. Behind the

fa?ade of increased mathematical rigour and precision lie fundamental changes

in the meanings that have been attached to central conceptions and in the ways

in which economists have understood what they were doing” (p. 327). If

Backhouse can successfully convey to his reader an appreciation of some of the

linguistic problems in economics (and elsewhere), he will have raised the level

of historiographical understanding in practice. (See Warren J. Samuels, “Some

Problems in the Use of Language in Economics,” Review of Political

Economy, Vol. 13, no. 1 (2001), pp. 91-100.) His other field is

methodology, and he is very good at it, too.

Warren Samuels is the author of numerous books and articles in the history of

economic thought and was named Distinguished Fellow of the History of Economics

Society in 1997. Among his recent books is Historians of Economics and

Economic Thought: The Construction of Disciplinary Memory, edited with

Steven Medema (Routledge, 2001).

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

Capitalist Development in the Twentieth Century: An Evolutionary-Keynesian Approach

Author(s):Cornwall, John
Cornwall, Wendy
Reviewer(s):Vedder, Richard K.

Published by EH.NET (August 2002)

John Cornwall and Wendy Cornwall, Capitalist Development in the Twentieth

Century: An Evolutionary-Keynesian Approach. Cambridge and New York:

Cambridge University Press, 2001. xv + 286 pp. $60 (hardback), ISBN:


Reviewed for EH.Net by Richard Vedder, Department of Economics and College of

Business, Ohio University.

As David Colander accurately states in his forward to Capitalist

Development in the Twentieth Century, John and Wendy Cornwall “are true,

unrepentant Keynesians.” In this tour de horizon of modern macroeconomic

history, aggregate demand is the leading actor — cycles in economic

performance are determined by the robustness of aggregate demand. The Cornwalls

more or less believe in the reverse of Say’s Law: Demand creates its own


The authors believe that the best single indicator of an economy’s

macroeconomic performance is the rate of unemployment. Unemployment was

relatively low or “full” in many Westernized nations in the 1920s, and

especially in the “golden age” of the 1950s and 1960s. The reason, they

believe, is that aggregate demand was growing by healthy amounts in those eras.

By contrast, the period since 1973 has been one of sluggish economic

performance, explainable in large part by institutional (often

government-imposed) restraints in the growth in aggregate demand. The slow

growth in aggregate demand, the authors opine, has led to reduced savings,

investment, and productivity growth. Of particular importance, nations where

labor, business and government reached “social bargains” (incomes policies)

were able to stimulate aggregate demand through government policy, but most of

these social bargains fell by the wayside after 1973.

While my overall impression of the book is not favorable, it nonetheless has

several strengths. Let me mention four. First, it is reasonably well written,

using enough symbols, jargon and econometrics to keep professional economists

satisfied, yet at the same time it is clear enough for the intelligent

layperson to understand the rudiments of the main points. In an era and

profession where writing incomprehensibly is considered to be a sign of virtue

and erudition, this is no small accomplishment. To be sure, the discussion of

such things as “hysteretic processes with exogenous origins” (p.102) is filled

with typical academic pretentious jargon that would put the most diehard

Keynesian to sleep, but on the whole this book is above average in clarity for

economist-written works.

Second, the book makes an important point, that many economic model builders

ignore, specifically that institutional arrangements and the structure of the

economy matter, and often matter a great deal. Moreover, as the Cornwalls

observe, institutional arrangements change over time with economic changes, and

this can impact economic performance.

Third, while the authors are truly militant Keynesians, they realize that a

1950-style old Keynesian story simply will not cut it in today’s world. In

particular, they eschew Keynes’s emphasis on the short run, and try to evaluate

the impact that aggregate demand has on intermediate to longer run economic

growth. With the decline in the importance of the business cycle, this is a

necessary adjustment. The Cornwalls also reject or downplay much of the New

Keynesian emphasis on microanalysis of wage and price rigidities (e.g.,

efficiency wages, menu costs, and so forth). Borrowing some from ideas of the

New Institutional Economics, the Cornwalls believe that evolutionary changes in

institutions and economic structure have an important role to play in

explaining changing economic performance.

Lastly, as EH.NET readers will applaud, the Cornwalls appreciate the importance

of history, and its usefulness in assessing economic phenomena. While not

economic historians, they have written what is a somewhat less than

comprehensive but still interesting macroeconomic history of the twentieth

century within the context of trying to explain what makes the macroeconomic

world work. Yet, despite all of these virtues, this is in my judgment a badly

flawed book for a simple reason: I think the authors are just plain wrong in

their assessments. Moreover, they are not merely sporadically wrong, but

persistently and unrelentingly mistaken. To borrow a favorite Cornwallian term,

this book suffers a bad case of misguided intellectual hysteresis. To be fair,

I am not a Keynesian (although I started out as one), so a priori one would not

expect a particularly positive assessment of this work from me. But I suspect

that more neutral observers on the Keynesian/non-Keynesian continuum would find

many of the same objections.

Before enumerating some problems with the Cornwalls’ analysis, I would make an

obvious point that the issue of whether economic progress is supply or

demand-induced is not a new one. For example, many trees have been destroyed

making books on the question of whether the Industrial Revolution is best

explained by emphasizing supply or demand. In an era where demand is

increasingly taken for granted, the Cornwalls’ book does make us at least

consider the possibility that the new (post-Keynes) conventional wisdom might

be wrong.

I would also note that in some respects Cornwall and Cornwall show deference to

an early, classical tradition that in some ways is the antithesis of Keynesian

economics as practiced in the original by Keynes himself. For example, the

authors stress the importance of capital formation in long-term growth, a view

far more akin to Adam Smith than to Keynes. Original Keynesian analysis

vilified savings, the funding source for capital formation, yet Cornwall and

Cornwall believe that investment is critical to the dynamic process of long-run

economic transformation. There is a bit of Adam Smith, and also a lot of Joseph

Schumpeter, in the Cornwall and Cornwall interpretation of history.

Turning to the objections, it is argued that there are swings in economic

performance explainable by changes in the robustness of aggregate demand

influenced by institutional changes. In particular, the 1950s and 1960s were

the “golden age” of modern economies, and the era since 1973 has been something

of a disaster because of declining growth in aggregate demand.

Virtually the sole criterion used to evaluate economic performance is the

unemployment rate. Unemployment is higher in the last three decades, so

economic performance has worsened. I would suggest this is a highly

questionable basic premise as it pertains to the U.S., although it is certainly

more defensible for Europe. While average unemployment rates in the 1980s and

1990s were higher than in the 1950s and 1960s in the U.S., by most other

measures the economy in the latter period either approximately equaled or

surpassed the earlier record. Real per capita GDP grew 57 percent from 1950 to

1970 – and 55 percent from 1980 to 2000 – hardly an important distinction. Real

household wealth rose faster in the latter period, and real per capita

consumption rose by almost the same amount in both periods. Job creation was

actually greater in the latter period — the number of new jobs per 100

incremental population over 16 was 64 in the 1950-70 period, compared with 81

in the 1980-2000 era.

The authors assert that increased unemployment was involuntary in nature,

citing the rising duration of unemployment as evidence. I would argue that most

the rise in unemployment, especially in Europe, reflected onerous new labor

regulations and the impact that increasingly generous welfare state benefits

had on the desire to work. Reservation wages rose sharply as the alternative to

work — long-lived generous welfare benefits — became a viable option. Why is

the duration of unemployment more than twice as high in Germany as in the U.S.?

Germans can collect generous unemployment benefits for three to four times as

long as Americans without any adverse consequences. These unemployed are hardly

“involuntarily” out of work. A secondary factor in the unemployment rise in the

1970s and 1980s was demographic: an increase in the proportion of workers in

young age cohorts that are typically more unemployment-prone.

The Cornwalls assert that governmental macro fiscal and monetary

policies can reduce unemployment through heightened aggregate demand. It is

argued that political constraints limited the use of demand stimulus after

1973. The evidence shows otherwise. In the U.S. the federal government ran far

greater fiscal deficits on average in the two decades after 1973 than in the

two decades before. For example, in the midst of the “golden age” of the 1960s,

the federal deficit was less than one percent of GDP in eight of ten years,

while the smallest deficit in the 1980s was nearly three times that amount.

Monetary growth on average was greater in the latter era as well (the median

annual growth rate of M1 in the 1960s was 3.5 percent; in the 1980s, it was 7.0

percent). The same pattern generally is true in Europe. The Cornwalls simply

refuse to admit the problem may have been the impotency of macro stimulus, and

they claim fiscal/monetary constraint in the latter period prevented full

employment, despite the evidence that such constraint was simply not present.

The discussion of the Great Depression is also wanting. Other than the

Friedman-Schwartz monetary explanation, there is no mention of other

non-Keynesian explanations of the Depression, including ones stressing

international monetary disturbances (e.g., Barry Eichengreen), Austrian

business cycles, or the Hoover high wage policy. The Keynesian argument

explaining the Depression was made better, in this author’s judgment, by

earlier writers such as E. Cary Brown.

Moreover, there is not a scintilla of hard evidence relating to the “social

bargains” (incomes policy) allegedly common in the 1950s and 1960s compared

with later years. There is no description of how these policies worked in

specific countries, for example. We are supposed to take on blind faith the

repeated assertion that income policies worked in producing the golden age of

the 1950s and 1960s, but broke down somehow after 1973. Somehow a single

regression equation (p. 91) with no social bargain variables is construed to

support the Cornwalls’ incredibly weak argument.

The book is full of absolutely wild assertions. A few samples: “The view that

an increase in aggregate demand will not reduce involuntary unemployment

because it is unable to reduce the real wage contains the implicit assumption

that the real wage is determined in the labor market. This assumption has been

shown to be unrealistic…” (p. 46) A single unpublished paper from 1990 is

used to back up this assertion. Better yet, “Over two decades of neoliberalism

have revealed its similarities to the laissez-faire regimes of earlier times —

prosperity for the few and insecurity for many” (p. 268). To argue that in,

say, the 1990s, few had prosperity but many were economically insecure in the

U.S. or Europe is simply fiction. Speaking of the era after the golden age, the

authors claim that “the role of government in domestic and international

economic affairs has been greatly reduced, social bargains no longer dominate

labor market outcomes and price stability has become an overriding economic

goal” (p. 242). It is a fact that government spending as a percent of GDP has

risen, not fallen, in nearly every major western industrialized country in the

era since the so-called golden age, and regulatory activity has increased as

well. To say that government’s role has been “greatly reduced” simply defies

the factual evidence.

The possibility that rising unemployment and sluggish growth in Europe reflects

the debilitating effects of high taxation, regulatory rigidities, and the

disincentive effects of the welfare state is virtually ignored. There are a

variety of plausible explanations for economic changes that have occurred in

the past several decades, but the Cornwalls have not presented them. Save your

money: don’t buy this book.

Richard Vedder is co-author of Out of Work: Unemployment and Government in

Twentieth-Century America (New York: New York University Press, 1997).

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

A Financial History of the United States

Author(s):Markham, Jerry W.
Reviewer(s):Wright, Robert E.

Published by EH.NET (June 2002)


Jerry W. Markham, A Financial History of the United States. Armonk, NY: M.E. Sharpe, 2002. Volume 1: xxii + 437 pp.; Volume 2: xx + 412 pp.; Volume 3: xx + 449 pp. $349.00 (cloth), ISBN: 0-7656-0730-1.

Reviewed for EH.NET by Robert E. Wright.

Former SEC attorney Jerry W. Markham currently teaches corporate and international law at the University of North Carolina at Chapel Hill. Heretofore, he has written extensively on the history of the regulation of commodity futures trading. The work under review is his first significant foray into the broad study of financial history and, quite frankly, it shows. Given the high costs of purchasing and reading these three volumes, the reviewer feels an obligation to the academic community not to mince words: the thesis of this review is that Markham’s opus is seriously flawed.

Markham clearly wanted his book to be a Narrative in the Grand Olde Style, not an academic monograph seeking to prove a point, so not a single table or equation graces the volume. Moreover, the book does not present a thesis so much as an attitude. Like many Americans, Markham views the financial sector with suspicion. He fails, therefore, to give full credit to the crucial role of finance in U.S. economic development. For instance, he claims that banks issued notes “without limits” (1:132; 1:133), that “speculators” made “vast fortunes” (1:109), and that investors fell easy prey to any old “speculative frenzy” (1:98) that happened to form. “Every advance in finance,” Markham opines, “was accompanied by fraud and over-reaching by the unscrupulous” (1:380). Busy with such hyperbole, he fails to explicate how intermediaries, speculators, and investors interacted to finance the mightiest economy on Earth.

Markham ignores too many important secondary works to be taken seriously as an authority in financial history. For instance in Volume 1, which covers the colonial period to 1900, he fails to cite any of the following economic historians: Howard Bodenhorn, Stuart Bruchey, David Cowen, Thomas Doerflinger, E. James Ferguson, Gary Gorton, Gregory Hunter, Naomi Lamoreaux, Diane Lindstrom, John Majewski, Cathy Matson, John J. McCusker, Ranald Michie, George Rappaport, Winifred Rothenberg, Mary Schweitzer, or Richard Sylla. Moreover, he pays scant attention to the important contributions of Stuart Banner, Edwin Perkins, and Hugh Rockoff, among others. In short, the book is not based on anything approaching a comprehensive review of the extant literature.

Markham also fails to survey significant primary source material. He cites a few court cases, an occasional old legal treatise, some congressional reports, a handful of newspaper articles, and Joseph Martin’s descriptions of the Boston stock market. More maddening still, Markham cites recent articles from the Wall Street Journal, the Washington Post, the New York Times, and the Raleigh News & Observer as authorities on historical subjects! Journalists often rely on the same outdated, often nineteenth-century, secondary sources that Markham also leans upon, including William Gouge’s infamous book on antebellum banks and an array of late nineteenth-century hard money polemicists. Worst of all, many of Markham’s assertions are completely undocumented, allowing him to breathe life into a series of apocryphal stories of questionable origins and unlikely authenticity (see, for example, 1:50, 68).

Historians do not have to uncover new archival sources or re-examine known sources in a fresh manner in order to make a contribution. A good story well told will always be appreciated. Due to the inadequacies of Markham’s prose, however, few readers will come to appreciate financial history’s many good stories. The book reads like a rough draft, not a polished book. Numerous simple declarative sentences, at times virtually unconnected conceptually, and rampant use of the passive voice make the book difficult to read. Consider, for example, the following excerpt, which is all-too-typical of the author’s style: “Wheat farm bonds on Canadian lands were sold in Chicago. Those bonds paid 7 per cent per annum. Spitzer, Rorick & Co. offered municipal bonds that netted from 4.25 to 5.75 percent. Seney, Rogers & Co. sold real estate gold bonds and mortgages on Chicago property. Investments from $100 to $50,000 were sought” (2:62).

Markham regularly incorporates quotations of secondary authors into his own sentence structure, as if the words emanated from an historical figure instead of an historian. Only when the reader turns to the endnote, at the end of the volume and difficult to find because of the book’s odd numbering scheme does it become clear that the ‘great quotation’ is that of Bray Hammond, Paul Studenski, or Margaret Myers, not that of Robert Morris, Alexander Hamilton, or Jay Gould.

Indeed, Markham displays precious little historical sense. He notes that “colonial governments eventually found themselves issuing the paper currency advocated by Franklin and others,” then goes on to describe paper money emissions made decades before Franklin’s birth (1:50). He describes a retail purchase that George Washington made in Maryland in 1770 and bolsters it with Madame Knight’s famous discussion of prices in New England in 1704 (1:53-54). I wonder what a judge would say to the following reasoning: “The worldwide depression in 1765 added to the economic problems encountered by the American colonies. A creditor of Paul Revere sought to attach his property for a debt of ten pounds. Nevertheless, some consumer protection was appearing. A law against usurious loans was adopted in New York in 1661” (1:56)? Similar examples abound (1:63, 70, 83, 126).

Outright errors also abound. Some of the more technical errors, like confusing “bottomry” loans (on ships) with “respondentia” loans (on cargo), would perhaps be partially understandable were not the author a legal scholar (1:6). Other errors, like calling a tontine “a form of lottery scheme” (1:81), referring to bills of exchange as “currency” (1:48), and confusing banknotes and bills of credit (1:72) suggest that Markham is not conversant with the financial terminology of the era. Other errors probably stem from the volume’s impoverished editing. Consider, for example, his “definition” of a put option: “A put option entitled the option holder to sell stock to the writer of the stock [sic] at a specified price.”

Markham makes little use of financial theory. In numerous places, for instance, he could have explained his anecdotes using basic financial concepts like adverse selection and moral hazard (1:38-39, 55). In other places, Markham makes wild comparisons between past and present practices. For instance, he somehow concludes that the “exchange of flour in one state for flour in another in order to save transportation expenses” is “an early form of a swap transaction” (1:70). He describes U.S. Deferred bonds as “when issued” securities instead of discount (zero coupon) bonds (1:119). Similarly, he fails to see that the market correctly priced convertible bank notes as discount bonds (1:132).

The very subtitle of Volume 2, From J.P. Morgan to the Institutional Investor (1900-1970), is misleading because it implies that Morgan predated institutional investors. In fact, institutional investors, particularly life insurance companies and mutual savings banks, were important players in the nation’s financial markets by the 1860s, not the 1960s. True, institutional investors largely eschewed common stocks until the 1960s, but it is well known that equity investment represents a small percentage of external finance flows. Markham’s assertion that “the first seven decades of the twentieth century witnessed more challenges to American finance than all the years before” seems at best a matter of opinion and, at worst, another example of the author’s lack of historical perspective (2:369).

Outright errors and misleading statements again abound in Volume 2. For instance, Markham claims that the Blue Sky Laws were passed “to stop the sale of worthless securities” (2:370). Law professor Paul Mahoney, however, has shown that commercial banks fought for the passage of those securities regulations in order to disembowel their major competitor, the commercial paper market. Markham also asserts that “the Federal Reserve legislation [of 1913] adopted the concept of ‘open market’ operations in which the Federal Reserve banks bought and sold government securities and eligible private debt issues in order to influence the money supply” (2:46). In fact, the Fed discovered the monetary policy uses of open market operations some years after its establishment ( and at first favored private paper and municipal warrants over Treasuries (David Marshall, “Origins of the Use of Treasury Debt in Open Market Operations: Lessons for the Present,” Federal Reserve Bank of Chicago Economic Perspectives, 2002 1Q: 45-54).

Time and space limitations prevent a fuller discussion of the shortcomings of Markham’s mammoth book. Volume 3, From the Age of Derivatives into the New Millennium, appears to contain fewer outright errors than the first two volumes, but it too suffers from a lack of focus, editing, evidence, and documentation. Indeed, only six pages of notes support 357 pages of text. The conclusion to the third volume confidently predicts the demise of paper money, paper correspondence, brick-and-mortar stores, and specialized financial services firms. “Undoubtedly, Wal-Mart and its like,” Markham claims, will supply consumers with mortgages, mutual funds, insurance policies, and “a host of other financial services” (3:365). Markham does not make clear, however, why Wal-Mart will fare any better than Sears did.

To conclude, I do not suggest that you use this opus, but if you do, use it with great care. The historical development of U.S. financial markets and institutions is an enormously important and complex topic. A quality, scholarly synthetic overview is still desperately needed.

Robert E. Wright is the author of The Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets, 1780-1850 (Cambridge, 2002), Hamilton Unbound: Finance and the Creation of the American Republic (Greenwood, 2002), History of Corporate Finance: Development of Anglo-American Securities Markets, Laws, and Financial Practices and Theories (Pickering & Chatto, 2002), Origins of Commercial Banking in America, 1750-1800 (Rowman & Littlefield, 2001), and three forthcoming works tentatively titled Corporate Governance in Historical Perspective: The Importance of Stakeholder Activism (Pickering & Chatto), Mutually Beneficial: The Guardian and Life Insurance in America (New York University Press), and Financing American Economic Growth: The Philadelphia Story (New York University Press).

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