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The Economic History of India 1857-1947

Author(s):Roy, Tirthankar
Reviewer(s):Hejeebu, Santhi

Published by EH.NET (March 2002)

Tirthankar Roy, The Economic History of India 1857-1947. Delhi: Oxford

University Press, 2000. xiv + 318pp. Rs. 595 or $24.95 (cloth), ISBN:


Reviewed for EH.NET by Santhi Hejeebu, Department of Economics and History,

University of Iowa.

Teachers of Indian economic history will welcome Tirthankar Roy’s Economic

History of India 1857-1957. Roy provides a chronological survey of the

colonial economy by economic sector — agriculture, small-scale industry,

large-scale industry, plantations, mines, banking, and the public sector. The

book also provides separate chapters on “the macroeconomy” and “population and

labour force.” In a heterodox field in which historical economists often find

themselves defensive about their methods and struggling with a paucity of

records, Roy offers a serious attempt to place the tools of economic analysis

in the service of Indian history. The goal of his Economic History of

India is to convey to budding historians and economists how this might be


Despite the fact that the survey covers the colonial period, Roy does not view

the government of British India as the prime mover of the economy. This is most

evident in his lucid discussion of the de-industrialization debate. He writes,

“De-industrialization means a decline in traditional small scale industry that

(a) derived from technological obsolescence against British goods, (b) was

sustained by colonial policies, and (c) remained uncompensated by new

enterprise. The term makes explicit contrast between Britain which experienced

industrialization, and her major colony India, which experienced

de-industrialization, at the same time and due to the same set of causes,

namely trade and technological change” (p. 124). The debate surrounding

de-industrialization is as central to Indian economic history as that of

slavery is to American economic history. Enormous intellectual effort was put

to the issue in the 1960s and 1970s and to a lesser extent in the 1980s. After

two major monographs on traditional industry during the colonial period, Roy is

well placed to provide an alternative perspective, which he calls

“commercialization.” Roy maintains that “products of British mechanized

industry replacing Indian hand-made goods [in India] was more exceptional than

the rule” (p. 128). Machine-made cloth was a poor substitute for handloom cloth

in important market segments of the textile industry. Market segmentation

implied that large and small-scale industry did not directly compete leaving

open the possibility of survival and expansion of the latter. His

commercialization thesis also provides evidence of mechanization and

organizational innovation in traditional industries. Thus if Roy does not see

the British government as the prime mover, it’s because he knows better. Roy’s

own contribution to the research literature has led him to fresh insights on

what happened in the bazaar.

Pedagogically Roy’s handling of de-industrialization offers a brilliant

illustration of the delights of Indian economic history. It offers students an

intellectual feast with all the elements for exciting classroom exchange: the

performance of the economy and nationalist discourse, Marxist vs. neo-classical

principles, complex social norms in a commercializing economy, implicit

theorizing, institutional change, alternative hypotheses and tests of evidence,

disputes over evidentiary standards. De-industrialization is certainly one of

the livelier segments in my course and I am grateful for a teaching tool that

organizes many strands of the debate.

Roy’s book is not without its drawbacks however. Money and banking are barely

touched upon. The banking sector illustrates well what Rajat Ray called the

imperial “division of economic space” and thus lends itself well to a full

discussion of how colonialism interacted with commercialization. Instead

banking is anachronistically placed in the same chapter with plantations and

mines, while monetary policy (i.e. exchange rate stabilization) is tucked

inside the chapter on macroeconomy. The index does not even contain entries for

either shroffs (moneychangers) or hundis (bills of exchange). What institutions

operated in the informal banking sector and how did they operate? How did

monetary policy affect the opportunities available to or choices made by

indigenous entrepreneurs? The book does not provide clear answers.

One might find other points worth taking issue with. Roy at times skims too

lightly over opposing views. For example, in chapter one he describes the

“world systems school” as the most famous school to have expounded views of

underdevelopment. Yet Roy does not cite Wallerstein’s work explicitly and

within a sentence or two, world systems theory becomes indistinguishable from

Marxist theory. For good reason Roy does not share many of the specific views

of what he calls the “left-nationalist paradigm.” His terse treatment of such

positions is however more than compensated by the focused and systematic

treatment his provides overall.

Indeed Roy’s clear and organized handling of complex issues (such as the

economics of common property rights in agriculture) surpasses the treatment

found in other textbooks. Dietmar Rothermund’s Economic History of India

from Pre-colonial Times to 1991 (Routledge, 1993) provides a drive-thru

version of Indian history. It is a competent chronological overview that does

not enter into any substantive historiographic or economic issues. However I

would discourage exposing the young to such gems of economic analysis as

“Compelled always to have an export surplus, India could not import too much”

(Rothermund, p. 37). A more refined alternative is B.R. Tomlinson’s Economy

of Modern India, 1860-1970 (Cambridge University Press, 1996). The three

core chapters of this work are masterpieces of synthesis but not easy to

disaggregate into a sequence of coherent class lectures and exercises. Roy’s

work by contrast is neither too diluted nor too condensed. He keeps the

narrative flowing and at the same time ably describes the economic issues at

stake, the possible counterfactuals, and the evidence supporting competing

positions. It should be noted that none of the available surveys of Indian

economic history contain the photo essays or graphical expositions typical in

textbooks on American economic history.

While the inner flap bills this as a textbook, the work will interest a wider

audience. Roy’s up-to-date overview of the historical research makes the field

accessible to anyone interested in the development of the global economy and

its national parts. It’s a pity it ends at 1947.

Santhi Hejeebu researches the East India Company in the eighteenth century.

She is currently writing an article called “Mechanism Design in the English

East India Company” (joint with Pablo Casas-Arce). She is also interested in

the organization of Indian merchant groups in the early modern period and is

working on an article called “South Asian Firms: Competing Theories in an

Emerging Field” (joint with Scott Levi). She teaches several courses in Asian

economic and business history.

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

An Economic History of Twentieth-Century Latin America

Author(s):Cárdenas, Enrique
Ocampo, José Antonio
Thorp, Rosemary
Reviewer(s):Beatty, Edward

Published by EH.NET (February 2002)


Enrique C?rdenas, Jos? Antonio Ocampo and Rosemary Thorp, editors, An Economic History of Twentieth-Century Latin America, three volumes. New York: Palgrave, 2000. Volume 1: The Export Age: The Latin American Economies in the Late Nineteenth and Early Twentieth Centuries , 344 pp. $75 or ?52.50 (hardback), ISBN:0-333-91304-3; Volume 2: Latin America in the 1930s. The Role of the Periphery in World Crisis, 320 pp. $69.96 or ?50.00, ISBN: 0-333-63341-5; Volume 3: Industrialization and the State in Latin America: The Postwar Years, 360 pp. $75 or ?52.50, ISBN: 0-333-63342-3.

Reviewed for EH.NET by Edward (Ted) Beatty, Department of History, University of Notre Dame.

The three densely packed volumes that constitute An Economic History of Latin America in the Twentieth Century mark the culmination of a long-term project to present the region’s economic history from the 1870s through the late twentieth century. Their publication is a landmark event, and these volumes should provide an essential reference on the economic history of the region for some time to come. Each volume stakes out one of three principal subperiods: volume one examines the “Export Age,” ca. 1870 to the 1920s; volume two probes the region during the 1930s; while volume three focuses on the era of “accelerated industrialization,” ca. 1940-1980. Each volume begins with one or more introductory and thematically oriented chapters that set out the central economic and historiographic issues for the period, followed by chapter-length studies of particular countries. Argentina, Brazil, Chile, Columbia, Mexico, and Central America get chapters in each volume, while Peru is covered twice and Bolivia, Cuba, and Venezuela each once. The authors of the country studies in each volume all occupy central positions in their fields, and most are Latin Americans themselves. One of the many attributes of this collection is to disseminate their work widely in Britain and North America. Each chapter builds on the authors’ previous scholarship and most synthesize the central historiographic debates and contributions of the extant literature. This review will concentrate primarily on volumes one and three. The second volume is a reprint of Latin America in the 1930s, edited by Rosemary Thorp and first published in 1984. This ambitious project also yielded an overview volume, Progress, Poverty and Exclusion: an Economic History of Latin America in the Twentieth Century, written by Rosemary Thorp and published in 1998 by the Inter-American Development Bank and Johns Hopkins Press. It has been reviewed for EH.NET by Alan Taylor.

Volume one, The Export Age, traces how the expansion of world trade and investment largely drove Latin America’s export growth and was itself a product of nineteenth century revolutions in technology, transportation, and institutions. The result was an extraordinary demand for raw materials and the opportunistic response of most Latin American nations. While geography, natural resource endowments, and domestic social and political features shaped the particular way in which each nation engaged the world economy and was in turn shaped by that engagement, the underlying factors convincingly justify the unity of a regional periodization. While our understanding of the overall contours of this story and its periodization have in many ways remained unchanged over the past half century, important aspects have changed remarkably, even over the past decade. Several merit particular mention.

First, recent monographs have increasingly examined the significance of early industrialization in countries like Brazil and Mexico over the period 1880-1914. In these cases and others, investment in domestic manufacturing came precisely when producers in the North Atlantic countries could place ever cheaper and better quality goods in Latin American markets. While export growth and export linkages help us understand the changing domestic markets that made large scale domestic manufacturing possible, they were nowhere sufficient. New investments to import foreign technologies and erect large factories made sense only with programs of government protection, both at state and national levels. While these efforts are not detailed in any of the chapters here, there is widespread recognition of the role of the state in shaping investment patterns in the export sector as well as in other activities. Several chapters incorporate this revisionist story, although it is notably ignored in the title and to a great extent in the introductory chapter of volume one. We are left with the implicit conclusion that it is debatably anachronistic — misleading at most and overly narrow at least — to continue labeling the 1870-1914 era simply as Latin America’s “export age.”

Second, several of the contributions here suggest that if Latin America fell further behind the industrialized North Atlantic in the late nineteenth century (or, seen another way, did not take full advantage of opportunities for growth), it is not because the region exported too much, but that it exported too little. Beginning in the 1940s one common view of the region’s economic history (most visibly expressed by ECLA economists) held that the opening of Latin American economies in the nineteenth century and the export booms that accompanied this opening led to growth but also to underdevelopment, due in large part to a secular decline in terms of trade (see E.V.K. Fitzgerald’s account of this in chapter 3 of volume 3). The pessimism, which colored much of the scholarship on the export age before the 1980s, has given way to a more complex and mixed account. The revisionist argument that late nineteenth century export growth provided a significant foundation for twentieth century development (including physical infrastructure, manufacturing capacity, state capacity, and human capital) is present in a number of the accounts here. The chapters on Colombia and Bolivia state this most clearly (see, for instance, p. 62), but the theme runs throughout the volume. What is missing, however, is a broader assessment of the way in which linkages, spillovers, and externalities of export sector growth were not narrowly economic in scope but shaped fundamental social and political transitions during the 1880-1920 period. The chapters of Alan Knight on Mexico and Roberto Cort?s Conde on Argentina provide partial exceptions to this tendency. In contrast to the generally pessimistic tone of many earlier accounts of nineteenth century development — its dependent nature, limited technology transfer, rising inequality — this volume offers a more positive account of substantial growth, of a new foundation for future development, and of the creation of a modern state.

Volume two, Latin America in the 1930s, compiles papers first written in 1981 and 1982 and subsequently published in 1984. The current volume is an exact reprint. I touch on it only briefly here as it was extensively reviewed fifteen years ago. Despite its age, these contributions still stand as authoritative assessments of the region during and immediately following the Great Depression, and this holds true both for the summary chapters by Carlos D?az Alejandro and Charles Kindleberger as well as for the individual country studies. Two issues strike me as I read the volume now, nearly two decades after it was first written. First, the moderately revisionist view of these contributions still holds up: the Great Depression may constitute a turning point in economic thought and certainly helped shape the region’s move towards state-led industrialization, but in many important ways the 1930s witnessed a continuation of tendencies already apparent in the 1920s. In particular, nearly every one of these country studies note that import substituting industrialization (ISI) was already underway, and most decisively so in the larger nations. If in the early 1980s these authors attributed the beginnings of ISI to the 1920s, more recent research has placed its origins exactly in the so-called “export-era” of the late nineteenth century, as I noted above. Second, this volume represents the last chance for an examination of Latin America’s twentieth century history as yet uncolored by the economic debacle of the 1980s and the subsequent movement towards neoliberal openings. Although in its particulars the story presented here of the region’s response to 1930s trade and finance shocks differs in relatively minor ways from what might be written today, its tone throughout lacks the pervasive pessimism and critique of state-led industrialization which has largely characterized writing in the post-debt crisis era. This is not to say, however, that the accounts presented here can be ignored because they are dated — quite the contrary. They continue to provide our most authoritative assessment of the macro-economic crisis and response during that crucial era, and it might be argued that their pre-crisis perspective provides us with an important corrective to the consistently critical assessments of recent years. Needless to say, the more recent work of Enrique C?rdenas, Alan Taylor, and others provides essential new perspectives.

Volume three, Industrialization and the State in Latin America, makes the issue of state intervention explicit. Over the past decade or so there has been if not a revolution, then a significant shift in conventional views of Latin America’s post-war economic history. Although state-led industrialization, import substituting industrialization (ISI), or desarrollo hacia afuera has had its critics since the 1950s, it has been roundly vilified over the past decade or so as responsible for many if not most of the current ills of the region. The lead chapter in this volume provides a revisionist view — the first synthesis of the region and era written over a decade after its final collapse in the early 1980s. On one hand, the authors generally do not question the now-common acceptance of the inefficiencies generated by the long duration of highly protective policies, although most prefer not to dwell there long. Their macroeconomic focus tends to see costs in terms of the region’s lost opportunity to exploit the benefits of expanding world trade between 1950 and 1970, instead of in microeconomic inefficiencies. On the other hand, the authors balance this pessimistic view with an appreciation for the development that occurred in most countries through the period. This included most importantly the linkages of industrial growth to technological capacity, the emergence of effective national states, and the development of social infrastructure, including human capital. This is most explicit in the overview chapters and the account of Argentina, but runs through each chapter in some form. Most of the contributions in this volume also prefer to view the policy foundations of ISI as a result not of domestic policy errors or a rent-seeking political economy, but of rational short-term responses to international and macroeconomic circumstances in a world where few alternatives appeared feasible. By the 1960s, recurring macroeconomic crises and growing social conflict made the aggressive pursuit of alternative paths even more difficult. Although many countries began a retreat from the more aggressive version of ISI in the 1960s and 1970s (or began to include some export incentives, as in Brazil), its final demise was driven only by the severe external shocks and domestic crises of the early 1980s. How the substantial if problematic industrial growth that occurred from 1940 to 1980 was accompanied by a significant improvement in human development (though also by the persistence of high inequality) is alluded to but not explored in detail.

The editors’ decision to include chapters on technology (by Jorge Katz and Bernardo Kosacoff) and on the role of international institutions like the World Bank and IADB (by Richard Webb) in volume three should be commended. Both provide uncommon and extremely useful perspectives on central actors and outcomes of the ISI era. These two chapters provide novel views of the era of accelerated industrialization, but the chapter by Katz and Kosacoff is weakened by a vagueness that runs through many of the country studies as well. Despite the central role attributed to “institutions” in this chapter and in many of the country chapters, we get relatively little discussion of the nature of institutions: of the relationship between formal structure and administrative practice, of the way in which they structured incentives to invest in productive or rent-seeking activities, and of their mutability in the face of economic and political crises. Author after author asserts the importance of institution building in the post-war era, but institutions remain rather opaque black boxes throughout. The extensive contributions of recent work on property rights institutions and positive political economy finds little reflection here.

Most of the country chapters in volume three emphasize the tremendous change in social welfare experienced by most countries. In the companion volume, Progress, Poverty and Exclusion, Rosemary Thorp summarizes the change between 1900 and 1995: average per capita income (in constant US dollars) rose from $185 to $990, life expectancy increased from 29 to 68 years, while illiteracy fell from 71 percent to 10 percent. Most chapters here also point out how economic growth and average welfare did not mean better income distribution — often quite the opposite. What is not generally explored, however, is the relationship between social welfare and each country’s economic history. Although the implicit suggestion is that social welfare and economic growth are somehow linked, largely ignored is the more direct and causal relationship between politics — a combination of populist politics and the maturation of the basic elements of modern welfare states — and social welfare. The chapters on Venezuela and Brazil present the best accounts of the social consequences of particular growth experiences, although these two present more discouraging accounts of social welfare development than most other countries in the region. The problem throughout is not so much the uneven inclusion of social welfare issues, but rather the lack of an explanation for the relationship among social welfare, inequality, and economic growth.

All three volumes approach Latin American economic history largely from a macroeconomic perspective and with a particular emphasis on the international context. The influence of a distinctly British-style development economics is clear throughout. While the role of the state is a central component of nearly all national stories told in these volumes, and while institutional approaches are touched on here and there, accounting for domestic political economy is absent from most, as is the broader social context. Furthermore, issues such as labor, technology, and consumers receive relatively little coverage, with a few notable exceptions. These contributions, in other words, represent an approach rather removed from recent tendencies by economic historians in the United States to privilege microeconomic topics and institutions, especially those related to property rights and policies which shaped firms’ behavior.

Despite the superb quality of all of these country studies, I will offer two complaints. The first may not be entirely fair. The country studies in all three volumes provide — as advertised — economic histories of national export sectors and their linkages. Most admit up front that the export economy embraced neither most of the national labor force nor (in most cases) most of the nations’ GDP. While the accounts here are impressive, this historian still awaits a more broadly conceived economic history of Latin America since the mid-nineteenth century, an account that would incorporate a broader synthesis of economic and social history within the narrative story. One exception in this first volume is the fine synthesis of export, agricultural, and manufacturing issues in Mexico by Alan Knight, notably further outside the field of economic history than most of the contributors. Secondly (and more frustratingly), there are distressingly few citations and references in these volumes to scholarship after 1990 or so. Antonio Santamar?a Garc?a’s chapter on Cuba is a notable exception, and in general this problem is greatest in volume two (remember, a reprint of the 1984 volume) and in volume one, and somewhat less so in volume three. Given the wealth of new insights that economic historians of the region have offered over the past ten years, this suggests a volume that teeters on the verge of outdatedness at publication. Certainly the tremendous time and logistics that went into the production of these volumes necessitate substantial lag between composition and publication, but the gap here is occasionally striking. Together, however, these contributions succeed in reflecting the sea change in our understanding of the economic history of the long twentieth century in Latin America.

In conclusion, these volumes provide a sorely needed single source on the economic history of modern Latin America. With the exception of Victor Bulmer-Thomas’s broad and indispensable overview of the region, nowhere else is this available. These volumes will prove an enduring and much used reference for present and future economic historians. No other source matches the comprehensive, concise, and sophisticated accounts presented here. As important as this contribution is, however, it speaks only to the converted. Do these volumes speak to non-economic historians? Do they help convince historians of other persuasions that the economic history of their nations-of-study is not only interesting but necessary in order to understand social and cultural history? Do these volumes make this argument — at least implicitly — in a way that is accessible and compelling to those skeptical of the accessibility and relevance of economic history? I think the answer is a tentative yes, although I wish that I could say so with less hesitation. Recently the chasm between economic history, on one hand, and social and cultural history, on the other has widened considerably. This has been nowhere more true than within Latin American history in the United States. I recently attended a seminar of Latin American historians (at an institution not too far from my own) where I was shocked not so much by the presence of antipathy and scorn for social science approaches, as by its vehemence. What the broader community of Latin American scholars need from economic historians are works that seek to bridge or reach across that gap. With the exception of several chapter contributions here (for instance, those by Alan Knight and Roberto Cort?s Conde in volume one), these volumes do not accomplish this — although the introductory chapters by the volumes’ editors stand out in their clear, relatively non-technical, and authoritative presentation of a complex history. (I should note that the summary volume Progress, Poverty and Exclusion by Rosemary Thorp does a better job of presenting a compelling economic history to non-economists, although it too falls short of this ideal.) Most of the country chapters present sophisticated treatments of the nations’ macroeconomic experience over the past century. In doing so they offer a landmark resource for those already interested in the region’s economic history, but will not likely be read closely by others, and that is a shame.

This review cannot do justice to the rich variety of the thirty-three separate chapters collected in these volumes. Suffice it to say that nowhere else will the economist or historian find such a useful collection of concise and authoritative accounts. The concerns I have expressed in this review touch more on what I would have liked to see than on the quality of what is presented, which is excellent throughout. The introductory and overview chapters of the three volumes are alone worth the price of purchase. These should be required reading for every graduate student in the field — and for the rest of us as well. Together these volumes will provide an indispensable reference for future efforts to evaluate and re-evaluate what will continue to be a much-debated era in Latin American economic history.

Edward (Ted) Beatty is Assistant Professor of History at the University of Notre Dame and Fellow at the Kellogg Institute of International Studies. He has recently published a book on industrial policy in Mexico, Institutions and Investment: The Political Basis of Industrialization in Mexico before 1911 (Stanford University Press, 2001), and is currently working on the history of technological change in Mexico during the same period.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: WWII and post-WWII

The Rise of the Western World: A New Economic History

Author(s):North, Douglass C.
Thomas, Robert Paul
Reviewer(s):Coelho, Philip R. P.

Project 2001: Significant Works in Economic History

North, Douglass C. and Robert Paul Thomas, The Rise of the Western World: A New Economic History. New York: Cambridge University Press, 1973. viii + 171 pp. ISBN: 0-521-29099-6.

Review Essay by Philip R. P. Coelho, Department of Economics, Ball State University. <>

New or Old Economic History? Incentives and Development

This is a landmark book on the impact of property rights on European economic development. Published over a quarter of a century ago, its stated goal is “… to suggest new paths for the study of European economic history rather than … either [a detailed and exhaustive study or a precise empirical test that are the] … standard formats” (p. vii). North and Thomas attempt to identify the elements that allowed the Western European economy to rise to affluence. Their argument is made transparent in Chapter One (Theory and Overview): the key to growth was and is an efficient economic system. Efficient in the sense that the system of property rights gives individuals incentives to innovate and produce, and, conversely inhibits those activities (rent-seeking, theft, arbitrary confiscation and/or excessive taxation) that reduce individual incentives. They argue that property rights are classic public goods because: (1) once a more efficient set of property rights is discovered the marginal cost of copying it is low (compared to the cost of discovering and developing it); (2) it is prohibitively expensive to prevent other political jurisdictions from emulating a more efficient set of property rights regardless of whether they contributed to their construction; (3) and finally, the idea of a set of property rights, like all ideas, is non-rival — we can all consume the same idea and the “stock” of the idea is not diminished. These public good aspects lead them to conclude that there may be under investment in the attempts to create more efficient sets of property rights because the jurisdiction that invests in the development of property rights pays the entire cost of their development but receives only benefits that accrue to its jurisdiction, while other jurisdictions can get the benefits without any of the developmental costs. Thus, the problems of public goods and the “free riders.”

Chapter Two (“An Overview”) sets the historical stage for their analysis. North and Thomas begin with tenth-century Europe and an examination of the classic feudal system. They contend that relatively low population densities and the absence of security (both economic and personal) led to a retreat from market exchange to one of self-sufficiency and to the development of feudalism. Protection was valuable and had to be paid for, but in the absence of markets it was paid for in kind rather than money. Since agricultural output could not be exchanged in the market (land) lords demanded labor services (dues) rather than output shares. Labor dues could be used to produce a more desirable set of consumables than output shares. Lacking market exchange, manorial labor was more fungible than agricultural output. The authors argue that from kings down to peasants, the absence of markets was the mid-wife to feudalism. The second prong of their thesis is that in feudalism, as in any societal arrangement, there existed a myriad of details, known as the custom of the manor that allowed the system to function. Once established, these customs became the set of property rights that molded the economic and personal relationships of feudalism.

As the centuries progressed populations grew and manorial economies replicated themselves. North and Thomas contend that land was available at the constant marginal cost (the cost of clearing land) up to the thirteenth century. At the end of this period diminishing returns to labor employed in agriculture manifested itself. The growth of population densities and the establishment of political order allowed markets to emerge. Diminishing returns and emergent markets gave feudal lords incentives to convert their serfs’ labor dues into fixed money payments. The lords were better off receiving a fixed payment rather than labor dues because the market price for labor was falling due to Malthusian diminishing returns to labor in agriculture. The commutation of labor services into money payments could not be reversed when labor became more valuable during the plagues of the fourteenth century. Amending the custom of the manor was subject to severe transactions costs, consequently by the sixteenth century servile labor in Western Europe was not viable.

Part Two (Chapters 3-7) presents evidence to buttress this thesis. Chapter 3 explores property rights in humans and land, Chapters 4 and 5 develop the frontier movement and the settling of land. Chapter 6 explores diminishing returns to agriculture in the thirteenth century, and Chapter 7 the devastation associated with the fourteenth century. Part Three of the book deals with the period 1500 to 1700 and covers the “unsuccessful” national economies of Spain and France and the successful ones of Holland and England. North and Thomas argue that inefficient sets of property rights hindered economic growth in Spain and France, while more efficient sets promoted the economic growth of England and Holland.

The paragraphs above are a rough sketch of the North-Thomas thesis on the growth of Western Europe. How well have the last 25 years of the twentieth century treated it, and how much consideration should it be given? The first question is relatively easy to answer. Texts and books in European economic development and history generally cite The Rise of the Western World, with the notable exceptions of David Landes and Rondo Cameron. In the academic literature it is frequently cited: The Social Science Citation Index for the years 1986-1990 gives the book about fifteen citations per year (68 total citations in the entire five year period), and for the last decade of the twentieth century (and subsequent to North winning the Nobel Prize in economics) citations rose to about twenty per year.1 But how big is that? It is larger than most, but not in the league of scholarship that alters the way a subject is considered. A relevant example is Ester Boserup’s The Conditions of Agricultural Growth that, for the same period (1986-90), was cited 158 times, or more than twice as frequently as North and Thomas. I believe the citation count assessment of the significance of this book is relatively accurate. The Rise of the Western World is an addition to the historiography of property rights, but it does not accomplish its stated goal: to explain the rise of the West. Furthermore there are significant gaps in its argument.

First, its reliance on Malthusian population theory may be misplaced. In 1966 the aforementioned Ester Boserup published her work The Conditions of Agricultural Growth (not cited in North and Thomas). From empirical evidence she argued that increasing populations led to the intensification of economic activities: From hunting and gathering, to a long-cycle agricultural rotation mixed in with hunting and gathering, to settled agriculture. In Boserup’s analysis output per man-year rises in agricultural societies relative to hunting and gathering societies, but output per hour devoted to the acquisition of food may have fallen. Boserup’s thesis is much more sophisticated than (and contradictory to) the simple Malthusian framework that North and Thomas rely upon. She points out that it is extraordinarily difficult to compare outputs in societies with different levels of production intensity. Population densities lead to different modes of production and entirely different societies. An increase in population density increases the range of productive activities that can be produced for market exchange, and as Adam Smith explains increased specialization leads to increased output and the size of the market limits specialization. North and Thomas recognize this interdependency explicitly. They state that increasing specialization due to increasing population densities may have partially offset Malthusian diminishing returns. How do they know it was a partial offset? The evidence they offer on diminishing returns and a Malthusian crisis in medieval England is primarily derived from the works of James E. Thorold Rogers, who investigated six centuries of wages and prices in England.2

As a source, Rogers is an excellent compilation of manorial roles and other data sources, however he is not a transparent writer and he is difficult to interpret. In volume one of A History of Agriculture and Prices in England (1866) he states, “… we may… conclude that the price of the service [wage labor], in so far as it was affected by competition, represents fully the economical conditions of supply and demand, and is interpreted by the evidence of prices” (p. 253). This may be interpreted to mean that wages are an accurate representation of the laborers’ incomes, but that does not seem to be what Rogers meant. Two pages later he writes that: “In many cases the labourer or artisan was fed. In this case, of course, he received lower wages. … At Southampton, the various artisans are almost invariably fed, … [In 1385] we read … of an allowance instead of food. As a rule, however, the wages paid are irrespective of any other arrangement. Sometimes, but very rarely, and only in the earlier part of the period, the labourer is paid in kind.” And in Six Centuries of Work and Wages (1884), Rogers indicates that feeding workers was considered routine (pp. 170, 328, 354-55, 510, 540-541, etc.).

I interpret Rogers to mean that in the early centuries of his study day laborers did not normally receive family food allowances, but that they were typically fed on the job. Given the nature of work (agricultural labor from shortly after sunrise to sunset) and medieval food preservation and preparation technology, not feeding workers would have forced them to devote significant amounts of time away from working to food preparation and to feeding themselves (just getting bread would be a formidable task given their work hours and the work hours of bakers). Besides being fed on the job laborers frequently had other perquisites such as gleaning, allotments of beer, and small amounts of land for individual agricultural activities (kitchen gardens). All these in-kind payments are mentioned in Rogers (1866) and are considered normal. North and Thomas base their work not only on the wage data from Rogers, but also on his price data for agricultural products.3 In order to determine real wages, money wages are divided by an index of agricultural prices.4 Notice that the numerator typically ignores payments in kind and the denominator is exclusively a food index. Medieval workers’ consumption bundles had a heavy food component, but if one is being partially paid in food and resources devoted to food (kitchen gardens), then real wage indexes that focus solely on the costs of food may be seriously distorted unless the income (both in money and in kind) elasticity for food is one and the overwhelming preponderance of the budget is devoted to food. Mildly put, the data that North and Thomas rely upon to show Malthusian diminishing returns are not entirely adequate to the task.

Other sources question the use of the Malthusian paradigm. James Z. Lee and Wang Feng unequivocally deny that Chinese agriculture from 1300 to 1800 experienced Malthusian crises. Similarly, Julian L. Simon disputed the empirical validity of the Malthusian model. Others question the North and Thomas view of medieval English agriculture. Gregory Clark questions the view of a primitive English agriculture running into diminishing returns in the early fourteenth century.5 Certainly the fourteenth-century plague was a disaster to the European economy, but it does not follow that the plagues that devastated it were direct consequences of Malthusian diminishing returns. More likely it was, as William McNeill hypothesized, a result of an integrated Old World economy that led to the introduction of a “new” pathogen to a dense, flea-ridden European population.6

So there are difficulties with North and Thomas’s belief that the diseases of the fourteenth and fifteenth centuries are a manifestation of declining living standards (Malthusianism). They do not consider that the plague may have been exogenous, that pathogens are subject to their own dynamics and evolution and not necessarily a result of human intervention.7 North and Thomas simply assert that the plague was a result of over population, diminishing returns, and declining living standards. But if that is so, why did the plague reoccur after population had declined and (according to the data they rely upon) wages had increased? And why did plague occur earlier — in the mid-sixth century? North and Thomas do not have answers.

There is a straightforward explanation to these questions that is grounded in epidemiology: It is that the plague was a “new” disease to fourteenth-century Europe and its relatively dense population resulted in high rates of infection and mortality. These rates decreased as immunities (both acquired and genetic) became more predominant in the populations of Europe. What has this to do with Malthus and diminishing returns? Nothing: The simple Malthusian doctrine correlating high death rates with low living standards is suspect. It assumes that diseases are a function of poverty while there is evidence that the causation runs from diseases to poverty, and it is contradicted by data which show areas with high money incomes (cities) having higher death rates than those areas with low money incomes (rural areas). Consequently any line of reasoning that relies upon the Malthusian doctrine, as does The Rise of the Western World, is suspect.

There are other flaws in their thesis, some minor, some major. A minor omission is that they do not specify why the servile labor force accepted the original commutation of labor services to money payments. According to their high transactions cost model, “the custom of the manor” would have made the initial negotiations prohibitively costly. A simple observation that personal freedom to the individual was worth more than the value of the money payments would correct this omission. And, such an observation would reinforce their claim that when the purchasing power of a unit of money fell (inflation) the lords were unable to switch back to servile labor.

A more significant difficulty with their thesis is their claim that while diminishing returns to labor existed in the countryside, urban areas had constant returns. These are inconsistent with declining real wages, because migration from village to town will prevent agricultural wages from falling.8 Another difficulty is their lack of knowledge of antiquity: They seem to believe that institutional innovations such as insurance and bills of exchange were medieval innovations, but these were known and used at least by the Hellenistic era, and the ancients developed many contractual forms that were resurrected and used again during the European Renaissance.9

So North and Thomas’s book is not without its flaws, but blemishes and all it still makes significant contributions in its emphasis on an efficient set of property rights as a necessary condition for economic development to take place. In this emphasis North and Thomas returned to the fundamentals of economics and its founding father, Adam Smith, who said: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice; all the rest being brought by the natural course of things.”

The Rise of the Western World is right to echo these sentiments. Since its publication in 1973 the modest increases in economic and personal freedom that the Chinese have experienced have led its population to a degree of affluence entirely unanticipated a quarter of a century ago. Similarly, the decline in law and order has bought economic and personal disasters to many in parts of Asia and Africa. The lesson seems a hard one to learn: the protection of the liberties of people to both their persons and properties is the most effective way to promote the general welfare in the long run. Short-run policies that restrict these liberties inevitably reduce welfare in both the short and long run. By focusing on this lesson in The Rise of the Western World, North and Thomas have done the profession and humanity a meritorious service.


1. Counting citations is a tricky business because a slight change in the citation can result in an entry separate from the main one. Thus D.C. North and R.P. Thomas may be counted differently from D. North and R. Thomas.

2. North and Thomas cite other evidence, but much of this is ultimately derived from Rogers’s work. For example E.H. Phelps Brown and Shelia Hopkins’s works on wages and prices are based on data gathered from Rogers.

3. North and Thomas rely on the Phelps Brown and Hopkins works (1955, 1956, 1957) on real wages whose data are derived from the wage and price data of Rogers.

4. “Index” may not be a completely accurate term because the index frequently contains only one commodity; then, to be specific, it is a wage series expressed in wheat units.

5. Clark (1991) using labor inputs in harvesting as a proxy for wheat yields finds little change in output per acre over the medieval era. He observes that: “Interestingly the labour input on reaping wheat from 1250 to 1450 seems to have risen little, implying a constancy of yields over this period. This is consistent with the work of Titow and of Farmer on the Winchester and Westminster estates over the medieval period. … Wheat yields were fairly constant over the medieval period, the population losses of the Black Death having little impact on yields” (p. 454, footnotes omitted).

In another article, Clark (1988) observes that relatively low yields per acre in medieval England could be attributed to the relatively high interest rates. Taken together these observations do not lend support to the thesis that medieval Europe was in a Malthusian crisis because, if it were so, we would expect to see declining mean output per unit of labor and increasing mean output per unit of land as diminishing returns makes labor relatively abundant and land relatively scarce. The opposite would occur if, as a result of the Black Death, labor became relatively scarce.

6. North and Thomas do not recognize that the plague may have been the result of increasing living standards. As incomes rose trade increased and disease pools in different regions became integrated. Mortal diseases newly introduced to an area frequently have a devastating impact on the native population. For more on this see McNeill.

7. Exogenous in the sense that the plague was not a disease endemic to fourteenth-century Europe, although, most likely, it had appeared in Europe in the first millennium CE; see J. C. Russell for further information.

8. For a complete specification of this model see Chambers and Gordon.

9. Edward F. Cohen argues and presents persuasive evidence that these institutional forms were abundant in fourth-century BC Athens.


Boserup, Ester. The Conditions of Agricultural Growth: The Economics of Agrarian Change under Population Pressure. Chicago: Aldine, 1965.

Cameron, Rondo. A Concise Economic History of the World. New York: Oxford University Press, 1989.

Clark, Gregory. “Yields per Acre in English Agriculture, 1250-1860: Evidence from Labour Inputs,” Economic History Review 44 (1991): 445-60.

Clark, Gregory. “The Costs of Capital and Medieval Agricultural Technique,” Explorations in Economic History 25 (1988): 265-94.

Chambers, Edward J. and Donald F. Gordon. “Primary Products and Economic Growth: An Empirical Measurement,” Journal of Political Economy 74 (1966): 315-32.

Cohen, Edward E. Athenian Economy and Society: A Banking Perspective. Princeton: Princeton University Press, 1992.

Lee, James Z. and Wang Feng. One Quarter of Humanity: Malthusian Mythology and Chinese Realities, 1700-2000. Cambridge, MA: Harvard University Press, 1999.

Landes, David S. The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor. New York: Norton, 1998.

McNeill, William H. Plagues and Peoples. New York: Anchor Books, 1976.

Phelps Brown, E. H. and Shelia V. Hopkins. “Seven Centuries of Building Wages,” Economica 22 (1955): 195-206.

Phelps Brown, E. H. and Shelia V. Hopkins. “Seven Centuries of the Prices of Consumables, Compared with Builders’ Wage-Rates,” Economica 23 (1956): 296-314.

Phelps Brown, E. H. and Shelia V. Hopkins. “Wage-Rates and Prices: Evidence for Population Pressure in the Sixteenth Century,” Economica 24 (1957): 289-306.

Rogers, James E. Thorold. Six Centuries of Work and Wages. New York: G.P. Putnam’s Sons, 1884.

Rogers, James E. Thorold. A History of Agriculture and Prices in England. Oxford: Clarendon Press, 1866.

Russell, Josiah C. “That Earlier Plague,” Demography 5 (1968): 174-84.

Simon, Julian L. The Economics of Population Growth. Princeton: Princeton University Press, 1977.

Simon, Julian L. Population and Development in Poor Countries: Selected Essays. Princeton: Princeton University Press, 1992.

Simon, Julian L. The Ultimate Resource 2. Princeton: Princeton University Press, 1998.

Simon, Julian L. and Herman Kahn (editors). The Resourceful Earth: A Response to Global 2000. New York: Oxford, 1984.

Philip R. P. Coelho has written on long-run economic growth (“An Examination into the Causes of Economic Growth,” Research in Law and Economics 1985) and is currently working on the impact of morbid diseases on economic history and growth (see: “Biology Disease and Economics: An Alternative History of Slavery in the American South,” with Robert A. McGuire, Journal of Bioeconomics Vol. 1, 1999; “Epidemiology and the Demographic Transition in the New World,” Health Transition Review, Vol. 7, 1997; and “African and European Bound Labor in the British New World: The Biological Consequences of Economic Choices” with Robert A. McGuire, The Journal of Economic History, Vol. 57, 1997.)


Subject(s):Servitude and Slavery
Geographic Area(s):Europe
Time Period(s):Medieval

The Origins of Commercial Banking in America, 1750-1800

Author(s):Wright, Robert E.
Reviewer(s):Perkins, Edwin J.

Published by EH.NET (November 2001)

Robert E. Wright, The Origins of Commercial Banking in America,

1750-1800. London and New York: Rowman & Littlefield Publishers, 2001. xii

+ 219 pp. $65 (cloth), ISBN: 0-7425-2086-2; $24.95 (paperback), ISBN:


Reviewed for EH.NET by Edwin J. Perkins, Professor of History, emeritus,

University of Southern California.

Robert Wright has written a highly original book that merits our attention.

First, he overlaps the late colonial period and the first decade of the early

national era — an uncommon periodization for financial historians. Previous

authors typically have covered either the colonial period or the national

period, not both. Second, Wright approaches the subject mainly from an

economic perspective rather than from a political angle. Earlier writers have

been mostly concerned with the public policy ramifications of legislative

debates over financial matters, and they have been less concerned with the

impact of financial legislation on the economy. Trained as a historian but

employed for several years in the economics department of the University of

Virginia, Wright has a unique academic profile. That interdisciplinary

background has enabled him to generate an analysis of critical financial

issues during this era that is unmatched by any of his predecessors. For

economists, in particular, this volume stands as the new starting point for

gaining an understanding of the evolution of U.S. commercial banking.

Wright focuses throughout on the perpetual demand for improved liquidity. The

colonial economy had no active private banks. Likewise, there was no uniform

currency since the British had forbidden the establishment of a colonial mint.

As a result, most of the coinage in circulation originated in Spain’s colonial

empire in the Western Hemisphere. The paper currency issues of the various

colonial legislatures supplemented these hard monies. Capital markets in the

colonies were non-existent or thin. Only Massachusetts had a public debt that

was privately held and occasionally traded. The whole financial system was

institutionally immature. A huge percentage of the outstanding colonial

mercantile debt could be traced back to the London money market. Colonial

merchants did make use of domestic and foreign bills of exchange, but it was

nearly impossible to convert these financial instruments into cash during

periods of stringency. While the financial system was sufficiently functional

to support steady increases in the size of the colonial economy (primarily due

to population growth), its overall performance was less than optimal.

Liquidity was sorely lacking. Merchants, family farmers, great planters, and

artisans all sought some form of institutional relief.

Parliamentary regulations and the negative attitudes of distant British

administrators who were responsible for colonial affairs discouraged private

initiatives. Colonial leaders from South Carolina to New England periodically

sought legislative permission to create banks of one variety or another, but

none of these attempts produced anything sustainable. Wright covers these

early efforts in a fair amount of detail. He views these abortive efforts as

legitimate antecedents of the private commercial banks that emerged after


After the achievement of independence, the new nation began to experiment with

modern commercial banking. Luckily, these experiments, which aroused much

public debate and legislative controversy at the state and federal levels,

almost immediately led to the creation of viable institutions. I say “luckily”

because the effort to create similar institutions in many other emerging

nations over the last two centuries has produced numerous tragic missteps.

The Bank of North America, the brainchild of Robert Morris, the famous

treasurer of the confederation government, became the prime model for all

subsequent commercial banks. It issued currency supported by adequate specie

reserves, accepted deposits, discounted mercantile notes, and turned a

respectable profit for investors. Other commercial banks operating under state

charters began to multiply. The problem of illiquidity in the U.S. economy was

steadily alleviated thereafter. The national government created the Bank of

the United States, which was the largest economic unit in the economy

throughout its twenty-year life span. Commercial banks were the pillars and

catalysts for the expansion of the U.S. economy from 1790 forward. We are

finally coming to the realization, thanks largely to the contributions of

Richard Sylla and his collaborators, that improvements in financial services

preceded advancements in agriculture, transportation, and industry.

For his discussion of events after 1780, Wright draws most of his information

from a careful analysis of banking in Pennsylvania and New York. His

conclusions contrast at many points with Naomi Lamoreaux’s study of New

England banking during the same period. In her research, Lamoreaux found that

commercial banks were typically closely held; the major investors dominated

the board of directors and made numerous insider loans to themselves. Wright

has found a different pattern in the middle Atlantic region. These banks had a

larger capitalization and a broader ownership. They made loans mainly to

depositors, not owners, and the occupations of borrowers varied — from

merchants to farmers to artisans. As much as I admire Wright’s detailed

discussion of the development of the commercial banking system, I would have

gone about this project in a different manner — not necessarily better, but

different and complementary. Since I have been working in this subfield for

decades, I offer my own admittedly biased opinions without apology.

Whereas Wright concentrates on the demand for liquidity, I would have

celebrated the supply side of the equation. I am not convinced that the

colonial demand for liquidity was any different than the persistent demands of

thousands of urban merchants in past civilizations. I take the demand for

superior financial services as a given — a truism. What was astonishingly

different in the eighteenth century was the institutional response in the new

United States. Borrowing piecemeal from the example of a handful of British

private bankers and the singular Bank of England, the first generation of

independent Americans were imaginative and prudent institutional innovators.

Despite their strategic differences, Hamiltonians and Jeffersonians both

wanted a successful financial system — if only to prove to a skeptical world

that a republican form of government could survive and indeed thrive

financially as well as politically.

I also wish Wright had cited the public loan offices created by the colonial

legislatures as the prime forerunners of the modern commercial bank. Across

the Atlantic Ocean, advocates of land banks had tried for centuries to gain

the attention and approval of the ruling classes. Their proposed land banks

were designed to offer loans to citizens with real estate as collateral. None

of these European schemes proved viable. But in English North America, land

banks in the middle colonies (but not in New England) operated successfully

for decades. They made loans to a wide swath of landholders; they experienced

few losses; and they generated substantial interest revenue for their

provincial legislatures. Their issues of paper currency were retired at their

original purchasing-power values; depreciation was not a serious problem. The

Pennsylvania legislature imposed no new taxes for decades because interest

income from the loan office covered its modest annual expenses. True, the loan

offices did not accept deposits and did not discount mercantile paper, but

they succeeded over a long period of time, whereas similar efforts in all

other contemporary societies had failed. The colonial land offices were

remarkable enterprises for their era and deserve more recognition as emulative

institutional models.

My third friendly amendment relates to the coverage of the Bank of the United

States. Wright just does not devote sufficient space to this novel

institution. It too was highly innovative. Unlike the Bank of England, its

main customers after 1795 were private citizens, not governments. It possessed

branch offices in major port cities. As David Cowen has recently argued, the

BUS in tandem with the U.S. Treasury Department acted very much like a modern

central bank. Fourthly, Wright might have cited the recent work of Glenn

Crothers on commercial banking in northern Virginia in the 1790s. I had better

stop here with my recommended additions or I might be roundly accused of

criticizing the author for not writing the book I had envisioned rather than

the book he chose to write. By revising the analytical model for all subsequent

historians who embark on an examination of the origins of U.S. commercial

banking, Robert Wright has made a major scholarly contribution. The supply

side innovations did not occur in a vacuum, Wright reminds us; they came about

because thousands of participants in the eighteenth-century economy desired

increased levels of liquidity. If the author has gone slightly overboard to

prove a valid point, he has done so in a noble cause.

Edwin J. Perkins has written extensively about financial history. His books

include American Public Finance and Financial Services, 1700-1815 (Ohio

State University Press, 1994). His most recent publication is Wall Street

to Main Street: Charles Merrill and Middle Class Investors (Cambridge

University Press, 1999).

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):18th Century

New Spain’s Century of Depression

Author(s):Borah, Woodrow Wilson
Reviewer(s):Salvucci, Richard

Project 2001: Significant Works in Economic History
Woodrow Wilson Borah, New Spain’s Century of Depression. Berkeley: University of California Press, 1951. 58 pp.
Review Essay by Richard Salvucci, Department of Economics, Trinity University.

An Obscure Century in a Backward Country: Woodrow Borah and New Spain’s Century of Depression

In 1938, the English novelist Graham Greene traveled to Mexico to investigate the condition of the Catholic Church under the regime of President Plutarco El?as Calles. While there, Greene interviewed the strongman of San Luis Potos?, General Saturnino Cedillo. In the most memorable terms, Greene called Cedillo “an Indian general in an obscure state of a backward country.” So my title, I fear, is a plagiarism, but an appropriate one. For certainly some who read this essay will wonder why a brief (58 pages) book about seventeenth?century New Spain (as Mexico was then known) counts as influential at all, let alone very influential? After all, Lesley Simpson, an authority on Mexico, famously labeled the seventeenth as Mexico’s “forgotten” century, and everyone from Adam Smith to Thomas Jefferson thought the Spanish empire both backward and obscure.

Influence, of course, is a matter of audience. There must be few economic historians of Latin America and fewer still of Mexico who are unfamiliar with the work of Woodrow Borah and the so-called “Berkeley School” of historical demography. Even with prevailing intellectual fashions, it is hard to believe that most English?speaking historians of Latin America have not heard of Borah, although whether or not they read his work in graduate school or after is much less certain. So I might best define my task as to explain why New Spain’s Century of Depression, published in 1951 as number 35 of the University of California Press’s celebrated Ibero?Americana series, should be counted one of the truly important works of twentieth?century economic history, especially for those who have yet to make its acquaintance. I take it for granted that colleagues in my field would agree. But it is a small field, and I am under no illusion that even its best work is widely known, much less regarded as a crucial contribution to economic historiography.

Woodrow Borah, who died in 1999, was one of the outstanding members of the postwar generation of Latin Americanists that included Howard Cline, Charles Gibson, John Lynch and Stanley Stein. At Berkeley, Borah, who was Abraham D. Shepard Professor of History, was one of a stellar cast of scholars drawn from a wide range of disciplines — Sherburne Cook, George Foster, James Parsons, John Rowe, Carl Sauer, and Lesley Simpson come immediately to mind. They exercised a profound influence on each other, sometimes as collaborators, but more often as valuable colleagues. What emerged from their work was a distinctive scholarship that brought together striking research and insights drawn from the natural and social sciences, precocious social science history, you might say. And Borah, his prodigious reading, meticulous scholarship and personal austerity notwithstanding, was one of this group’s more daring and imaginative members. Indeed, in a rueful aside, Borah once told me that his critics (there were a few) had accused him of “inventing Indians,” and this he meant quite literally, not in the now prosaic historicist sense of the term.

The burden of New Spain’s Century of Depression was to suggest the impact of the massive decline of the aboriginal population of Central Mexico (whom we can simply, if incorrectly, call Indians) on the material prospects of the Iberian conquerors (whom we can simply, and equally incorrectly, call Spaniards) and their descendants. As Borah understood it, the intent of the Spaniards was to live off the labor of the dense Indian population they had encountered in Central Mexico, a population accustomed to the rule of a privileged upper stratum by generations of Mesoamerican conquerors of whom the Aztec were simply the most recent. The Spaniards’ intention was no mystery. They announced they had come to the “Indies” (wrong again, but who’s counting?) to get rich, and that they had no intention of tilling the soil “like peasants” in order to do so. To accomplish their goal, the Spaniards, victorious in the wake of Cort?s’ historic expedition, rewarded themselves with the famous encomienda, the right to extract labor from the Indians. For some, like Cort?s himself, the encomienda was the source of great personal wealth and social prestige, although others, including some of Cort?s’ outspoken critics, were less richly rewarded.

For the encomienda to function as an avenue of accumulation, evidently, there had to be Indians to be distributed. At the time of the arrival of the Spaniards, Central Mexico perhaps supported an Indian population as large as 25 million. Within a century, shockingly, the same Indian population had fallen to less than a million, the victims of European disease, massive economic disruption, and the destruction of a coherent civilization that the Spaniards willingly exploited but never really understood. It was one thing for the encomienda to yield a comfortable existence for the Spaniards when Indian labor was abundant. But, obviously, such a system could hardly be expected to function when the people who supported it had disappeared. And here, then, is the gist of the argument of New Spain’s Century of Depression. What happens to a system of colonial expropriation when the society on to which it is fixed essentially disappears?

A bald summary can hardly begin to capture the twists and turns of the research agenda that New Spain’s Century of Depression ultimately entailed. When Borah published it in 1951, Sherburne Cook and Lesley Simpson had produced the population figures for New Spain on which he relied. It would require fully another quarter century, down to 1976, for what are now the standard estimates of early colonial population to emerge. There was considerable controversy along the way, and to an extent, there still is. Yet it is important to keep several things in mind. Much of the controversy regarding the population of New Spain involves the pre?contact population. About the course of events after the Spanish invasion there is far less doubt. The Indian population fell, and it fell sharply within a century, on the order of 90 percent. From an economic standpoint, only one thing really matters: factor endowments. Before the Conquest, labor was the abundant factor in Mexico. By 1620, land had become the abundant factor. No amount of scholastic contention about how many Indians there “really” were can alter that.

The other point is that even if Borah used imperfect population figures or made arbitrary assumptions, his scholarship was sound. He knew the sources and was particularly well versed in the documents associated with the relaciones geogr?ficas, the reports prepared to give Philip II of Spain an idea of what his Mexican dominions contained. While these documents are widely available today due to the efforts of the Instituto de Investigaciones Antropol?gicas in Mexico, it must have required considerably greater difficulty to master them fifty years ago. The impression from reading Borah’s notes is of a reasonably extensive investigation of the archival and printed materials available in the 1940s. In other words, you need to know something about the history of colonial scholarship to appreciate what Borah and his colleagues at Berkeley accomplished and some of the critics simply did not.

The conclusion to which Borah came was straightforward. Beginning sometime in the 1570s, an “economic depression besetting the Spanish cities because of the shrinkage of the Indian base [would last] more than a century,” and a “large number of white families must have found themselves reduced from comparative wealth to straitened circumstances as the drag in the Indian population forced a downward spiral in the economy of the European stratum”(p. 27). Although Borah presented his findings as a “hypothesis of a century?long depression” or “a hypothesis which needs much additional investigation,” the hypothesis is generally accepted as settled fact. It was not until the early 1970s that the work of the English historian Peter Bakewell raised questions about the impact of population decline on the fortunes of silver mining, but Borah’s view of the economic circumstances of the settlers went largely unchallenged. Even John Lynch, whose brilliant synthesis, Spain under the Hapsburgs (1981), called into question the entire notion of a Mexican depression in the seventeenth century, did not address the crucial issue that Borah raised. How did the elite of Mexican society — in effect the advocates, bearers, beneficiaries and putative defenders of colonialism — adjust when deprived of the Indian population on which it depended? My suspicion is that New Spain’s Century of Depression seemed logically unassailable. Borah’s citation (p. 23) of Viceroy Velasco the Younger’s report to Philip II in 1595 was especially acute: “those who consume are many and the Indians who produce are few.” What more could be said?

If you have persisted this far, you may, perhaps, think otherwise or wonder at the peculiar way in which Borah shaped his investigation. Borah did not discuss the fate of the Indians, other than to note that they “seemed doomed to relentless extinction” (p. 28). And even so, life did not come to an end in Mexico in 1576, or 1626, or 1676. Emigration from Spain continued, a fact of which Borah was quite aware. Moreover, if Cook and Borah’s later research indicated that the Indian population reached its nadir around 1620 — Borah puts its size at 750,000 — it began to recover thereafter and probably continued to do so until the 1730s, when severe epidemic disease made is reappearance. A century of population growth in a preindustrial society, however slow, does not square easily with falling living standards. And other developments, particularly the growth of colonial textile production in the middle decades of the seventeenth century, give pause as well. If a “depression” had taken hold, and more people were producing more goods, what sort of a depression was it?

To the extent that there was much data available to answer the question — and by and large, there was not — Borah made some attempt to address the objections, postulating, for instance, the existence of not one, but two economies, one Spanish, the other Indian. But there was not much he could make of the distinction, although there was a hint as to where research might lead. A dramatic change in the land-labor ratio, with the Indian population falling by 90 percent, surely affected the marginal productivity of Indian labor.

However, as Borah pointed out (p. 21), it was inconceivable that rising productivity could have offset the sheer decline in the Indians’ numbers, but the upward drift in real wages of Indian workers in cloth manufactories toward the end of the sixteenth century suggests the horrible irony of a decimated Indian population now better able to sustain itself in the face of Spanish demands. Here was one reason for the subsequent recovery in the Indians’ numbers, along with greater resistance to European disease, more aggressive defense of the Indians’ interests by the Spanish Crown, and even changes in diet — the Spaniards brought chickens with them, which came to be a ubiquitous presence in rural villages. While Borah never said as much in New Spain’s Century of Depression, Borah and Sherburne Cook would go on to argue years later that the material conditions of a reconstituted Indian society may well have been higher than they were before the Conquest. So, in a sense, Borah’s argument about “depression” was potentially revolutionary even if, in some sense, it proved a trap to the unwary who did not think its implications through. The historical intuition was of a very high order, but it was exercised by a scholar who turned twenty in 1932; who hailed from Utica, Mississippi; and for whom the term “depression” was less a technical one than a shorthand for widespread impoverishment.

Another feature of New Spain’s Century of Depression should be attractive to economic historians. It concerns the nature of institutional change that occurred under the pressure of population decline in the sixteenth century. One is sometimes struck by the fact that much (but by no means, all) of the economic historiography that relies on institutions for explanation often does a poor job of explaining why a country has a given set of institutions to begin with. In Latin America, some mix of Divine Providence, Indians, bizarre political culture, difficult geography and dumb luck often seem to be the reasons for the existence of Mexican institutions. This, for all practical purposes, means that institutions are treated as exogenously given. Well, they aren’t, or at least, not always. While Borah, of course, never wrote in these terms, he carefully links the emergence of a Mexican regime of labor and land institutions to the shifting factor endowments with which the colonists had to work. For Borah, the ultimate significance of the dramatic decline of the Indian population was the emergence of the hacienda (which reflected increasingly abundant land) and debt peonage (which reflected increasingly scarce labor). Indeed, this was another central message of New Spain’s Century of Depression. The institutions that had given rise to the Mexican Revolution of 1910 — the hacienda and debt peonage — were a product of the seventeenth century and of the demographic disaster that had destroyed the Indians. This was a remarkably clear statement of what had long been the liberal view of the causes of the Mexican Revolution. Anyone who doubts its durability need do little more than read Alan Knight’s monumental history of the Revolution (The Mexican Revolution, 1986), which largely restates the old verities.

For an historian from Mississippi, an account of “debt peonage” as the defining characteristic of rural labor may not have been untoward. But what exactly one means by “debt peonage” is another matter. Borah’s position was a moderate one. This was not slavery, open or disguised (the enslavement of Indians was forbidden under most circumstances), but an Indian peon who owed a landlord, or, indeed, any employer money was legally required to work for that employer (and for him or her alone) until the debt was discharged. The notion that debt created a form of chattel slavery in rural Mexico does not seem to have entered the vocabulary until well into the regime of President Porfirio D?az (1876-1880, 1884-1910) and provided one explanation for the Revolution in a place like Yucat?n. For a time, colonial historians went to another extreme, intent on showing the agency of free peasants as makers of their own world. They forgot that seventeenth-century Mexico was an unlikely venue for the emergence of a smoothly functioning labor market in which buyers and sellers of labor had no recourse to force or fraud. Indeed, conquest is precisely about force and fraud, depriving the conquered of their possessions, and making them do things they otherwise would never do.

A more fruitful way of viewing the phenomenon of debt peonage — or simply workers’ indebtedness, for debt did not invariably impede their mobility — is to understand how it allowed employers to determine the rate of discount at which workers in a shifting, unstable, and terribly uncertain world valued future income. There is no point in beating around the bush. Life expectancy at birth for a Mexican in the colonial period was about twenty years, and in view of the catastrophic changes that had visited the Indian world since 1519, we can only conclude that Hobbes was right, and that Mexicans knew it. Their lives were short enough, and nasty and brutish as well. In a world in which only God (and whose God was up for grabs too) knew what the future would bring, it made sense for ordinary people to get as much as they could up front, which, after all, is all the “debt” part of debt peonage meant. This was just an extreme form of live for today, for tomorrow, literally, who knew? Workers bargained for better advances and often sought to enlarge them and employers understood this. The wide variance of debts reported by farms and factories for which we have records shows that their owners struck quite different bargains with different workers, a form of price discrimination that allowed them to “pay” no more than they had to, certainly less than raising wages to market-clearing levels. In fact, in the disorganized and fluid circumstances of the late sixteenth and early seventeenth centuries, when Indian villages were forming and reforming under the pressure of Castillian administration, it would have been impossible to gauge the overall willingness of Indians to leave their communities to work for wages, or even the willingness of their communities to allow individuals to leave, a point to which Borah was quite sensitive (pp. 41-42).

Besides, the point of indebtedness was not necessarily to reduce mobility. The Spaniards had other ways of doing so, which is another aspect of the system of land tenure they devised. As Evsey Domar once wrote, it is impossible to have free labor, free land and a nonworking landlord class simultaneously. One of the three must disappear. In Mexico, the Church prevailed in the 1540s in the struggle against the frank coercion of Indian labor. For most purposes, the labor of enslaved Africans was simply too expensive, even though there was a sizeable black population in seventeenth?century Mexico. No, the Spaniards made another choice, to deprive the Indians of access to free land, for free land they very well may have had. The dramatic decline in the Indian population left vast expanses of Central Mexico essentially empty, so what was to prevent the Indians from moving on to the land as a subsistence peasantry, to the lasting dismay of the Spaniards? The answer is that the Spaniards consciously set about driving the Indians into villages over which they could exercise some level of control, as Bernardo Garc?a Mart?nez demonstrated in Los pueblos de la Sierra (1987). At the same time, they sanctioned land?grabbing by the settlers, usually in amounts far in excess of anything the settlers could reasonably cultivate. At a stroke, the Spaniards accomplished two things. First, they shifted to a system of agriculture that reflected the abundance of land, a regime vastly different from the preconquest one based on the intensive use of labor, of which the famous raised?ridged fields (chinampas) of the Valley of Mexico were but one example. Second, they regularized the settlers’ land titles at the beginning of the seventeenth century, effectively transferring much land to Spanish control, whether or not it was cultivated. The hacienda thus circumscribed the ability of the Indian communities to survive independently of the Spanish economy, and in so doing, obviated the need for a draconian regime of forced labor, at least in Mexico.

This dramatic transition, from an economy based on intensive agriculture and the exploitation of a dense indigenous population, to one that relied on extensive agriculture and scarce Indian labor could not be accomplished rapidly. Moreover, the shift from an economy with relatively high levels of personal wealth in the form of Indians held in encomienda to a poorer one with fewer Indians and no encomiendas reduced New Spain’s capacity to import. It was now necessary to produce at home many goods that were, in the early years of the colony, imported through Spain. A reduction in consumption and a reorientation of expenditure toward investment was required to accommodate such a change. Borah, for instance, noted that the construction of churches tended to slow dramatically in the 1570s (p. 31), attributing this primarily to a redeployment of scarcer labor. (The demand for churches sadly fell as well, for there were far fewer souls to fill them.) For Borah, presumably, all this was a depression. To a later generation of historians, however, notably the British school headed by John Lynch, Borah’s “depression” was more a case of deferred consumption, the redirection of productive effort toward mining, manufacturing and farming that a colony living on its own required. None of this could have come easily or cheaply — the mining and irrigation works, the granaries, fences, sugar mills, ranches and textile manufactories absorbed resources. Hence, for Lynch and his followers, the apparent stagnation of the Mexican economy in the seventeenth century was just that, an apparent stagnation that marked the reorientation underway, one that would result in the visible renewal of economic growth under the Bourbon monarchs of the eighteenth century. It was not so much that Borah was wrong about what he had seen, but that he had, instead, seen wrongly.

Viewed fifty years after its publication, New Spain’s Century of Depression reads much like the pioneering work it was, full of insight, largely intuitive, sometimes wrong in detail and premature in judgment, but, all the same, arresting and audacious. It was, above all, a great work of history, for it sought to explain the present through the past, and to explain in simple but persuasive terms how what was distinctively Mexican, the play of institutions, political economy and an emerging social structure, came together out of the shock of the Conquest in the sixteenth and seventeenth centuries. If there is anything disappointing about New Spain’s Century of Depression, it is that the response to it has been admiration or assent from most students of Latin American history, but few studies in which appropriately trained scholars have undertaken the work necessary to establish Borah’s hypothesis fully, or to revise and extend it in ways consistent with contemporary population studies. That is the problem with writing a classic about an obscure century in a backward country: it is hard to get people to notice. Those of us who spend our time studying the history of Mexico know full well how important Borah’s elegant “hypothesis” was. It is time for mainstream economic historians, and, one hopes, their students, to develop an interest in replying to Woodrow Borah’s pioneering work as well.

Richard Salvucci teaches economics at Trinity University in San Antonio, Texas. He was a colleague of Woodrow Borah’s at the University of California, Berkeley, from 1980 through 1989. He works on the economic and financial history of Mexico between 1823 and 1884.


Subject(s):Historical Demography, including Migration
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):17th Century

Debt’s Dominion: A History of Bankruptcy Law in America

Author(s):Skeel, David A.
Reviewer(s):Hansen, Bradley A.

Published by EH.NET (April 2002)

David A. Skeel, Debt’s Dominion: A History of Bankruptcy Law in America.

Princeton, NJ: Princeton University Press, 2001. xi + 281 pp. $35 (hardback),

ISBN: 0-691-08810-1.

Reviewed for EH.NET by Bradley A. Hansen, Department of Economics, Mary

Washington College.

Since 1996, over one million people a year have voluntarily filed for

bankruptcy protection in the United States. Bankruptcies of giant corporations

and wealthy celebrities regularly appear in the news. Current bankruptcy law in

the U.S. is widely regarded as being more pro-debtor than the laws of other

developed countries. U.S. law provides individuals generous exemptions and

relatively easy discharge of debts. It also leaves the managers of bankrupt

businesses in control of their firms and gives them the first chance to form a

reorganization plan. In Debt’s Dominion, David Skeel sets out to explain

why the United States has a bankruptcy law and why that law has the particular

features that it does. He is aware that his book will inevitably be compared to

Charles Warren’s Bankruptcy in United States History (Harvard University

Press, 1935), which has been the standard reference on the history of

bankruptcy law for over sixty years. Warren’s book will remain useful for its

detailed descriptions of nineteenth century legislative debates, but those

interested in bankruptcy law will now turn first to Debt’s Dominion.

Skeel not only brings the history of bankruptcy law up to date, but also

provides an analysis of bankruptcy law in the nineteenth century that differs

substantially from Warren’s.

Because this review is directed primarily at economic historians, I should

begin by pointing out that this is probably not the history of bankruptcy that

an economic historian would write. It is, however, one that economic historians

concerned with institutional change should read. David Skeel is Professor of

Law at the University of Pennsylvania and his primary concern is explaining how

the law evolved. Skeel aims for a wide audience, and jargon and mathematics are

kept to a minimum. There are some tables showing trends in bankruptcy over

time, but there is not extensive quantitative analysis. There are no attempts

to measure the effects of changes in the bankruptcy law. Likewise, in the

political analysis there are none of the formal models or empirical analyses of

roll call votes that one typically sees in rational choice studies of politics.

Although he does not utilize formal models, Skeel’s analysis of the history of

bankruptcy law has been strongly influenced by the public choice literature

produced by economists and political scientists. Debt’s Dominion

provides an analysis of the development of bankruptcy law with important

lessons for anyone concerned with the study of institutional change.

Bankruptcy law in the United States has a peculiar history. For most of the

nineteenth century the United States did not have a bankruptcy law, but by the

end of the twentieth century bankruptcy had become a prominent feature of

American society. Four bankruptcy laws were passed in the nineteenth century —

in 1800, 1841, 1867 and 1898. The first three were each repealed within a few

years. The 1898 Bankruptcy Act was extensively amended in the 1930s and

replaced by the Bankruptcy Reform Act in 1978. Skeel argues that the general

pattern of bankruptcy law in the United States has been shaped by the conflict

between organized creditor interest groups and a countervailing pro-debtor

Populist ideology, but that within this conflict legal professionals have

played a leading role in shaping the features of U.S. bankruptcy law. The devil

is in the details. Even in the nineteenth century, debates were not just about

whether to have a bankruptcy law, but about what type of bankruptcy law to

have. Skeel clearly explains the features of bankruptcy law and how they have

changed over time. He explains such issues as means testing, venue choice,

exemptions, and absolute priority in a manner that non-lawyers can understand.

Although the conflict of debtor and creditor interests provides the basic

framework of analysis, the greatest strength of the book lies in its

descriptions of the ways in which legal professionals have acted within this

framework to shape the path of institutional change. Associations such as the

Commercial Law League and the National Bankruptcy Conference have played a

leading role in the development of bankruptcy law. The most distinctive feature

of Skeel’s analysis is that he integrates a traditional public choice attention

to interest groups with an emphasis on the role of individuals, such as, Jay

Torrey, Robert Swaine and William O. Douglas.

Skeel argues that the enactment and repeal of the first three bankruptcy acts

is an example of legislative cycling. There were three divisions regarding

bankruptcy law in the United States in the nineteenth century. The pro-debtor

group favored a purely voluntary law, and the pro-creditor group generally

supported a law with both voluntary and involuntary bankruptcy. The issue was

complicated by the existence of a group that opposed any federal bankruptcy law

on states’ rights grounds. The existence of three different groups made it

possible to form a successful coalition for bankruptcy law and then relatively

quickly thereafter to form a successful coalition against bankruptcy law.

Following a crisis, such as the Panic of 1839, pro-debtor and pro-creditor

forces would compromise to pass a bankruptcy law. When the crisis passed, those

who were dissatisfied with the law would join with states’ rights advocates to

repeal the law. This cycling ended in1898, Skeel argues, because of Republican

(pro-creditor) dominance of national politics and because the law itself

created a powerful vested interest — bankruptcy law professionals.

Beginning in the late nineteenth century, legal professionals (lawyers and

judges) came to play an increasingly important role in shaping bankruptcy law.

Although commercial creditors organized the national association that lobbied

for bankruptcy law in the late nineteenth century, its president was a

commercial lawyer, Jay Torrey. Torrey drafted what was to become the 1898

Bankruptcy Act and lobbied for its passage for nearly ten years. Unlike

previous bankruptcy laws, Torrey’s bill paid particular attention to

administration, with a mind toward reducing expenses. In the early twentieth

century, associations of lawyers such as the Commercial Law League and later

the National Bankruptcy Conference lobbied to retain bankruptcy law and to

amend it in ways that supported their interests. A government study of

bankruptcy in the late 1920s recommended a move toward a British-style

bankruptcy system that would have taken bankruptcy out of the hands of lawyers

and put it into the hands of government administrators. In 1932, a bill was

introduced to amend bankruptcy law that included a move to an administered

system. Bankruptcy lawyers successfully lobbied against the administrative

changes, and they were stricken from the bill before it was passed. William O.

Douglas, first as head of the Securities and Exchange Commission (SEC) and

later as a Supreme Court Justice almost single-handedly shaped corporate

reorganization from the late thirties until the Bankruptcy Reform Act of 1978.

Douglas saw to it that the Chandler Act of 1938 would include SEC oversight of

Chapter XI corporate reorganizations, and that managers of firms in Chapter XI

would lose control to a trustee. As a Supreme Court justice he wrote the

opinion which established that senior creditors had a right to be paid in full

before junior creditors could obtain anything. Douglas’s actions drove

corporations away from Chapter XI but ultimately led to the formation of

interest groups that would transform corporate reorganization with the

bankruptcy Reform Act of 1978. Legal professionals continue to play a leading

role in the evolution of bankruptcy law.

David Skeel has produced an excellent history of bankruptcy law. He emphasizes

the institutional entrepreneurship that often seems to get lost in formal

analysis of institutional change. While many questions about the history of

bankruptcy remain to be answered, the starting point for answering those

questions has changed.

Bradley A. Hansen is assistant professor of economics at Mary Washington

College. His publications on bankruptcy and insolvency include “The People’s

Welfare and the Origins of Corporate Reorganization: The Wabash Receivership

Reconsidered,” Business History Review (Autumn 2000); and “Commercial

Associations and the Creation of a National Economy: The Demand For A Federal

Bankruptcy Law,” Business History Review (Spring 1998).

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

The Cambridge Economic History of the United States, Volume III: The Twentieth Century

Author(s):Engerman, Stanley L.
Gallman, Robert E.
Reviewer(s):Libecap, Gary

Published by EH.NET (March 2001)


Stanley L. Engerman and Robert E. Gallman, editors, The Cambridge Economic History of the United States, Volume III: The Twentieth Century. New York: Cambridge University Press, 2000. vii + 1190 pp. $99.95 (cloth), ISBN: 0-521-55308-3.

Reviewed for EH.NET by Gary Libecap, Department of Economics, University of Arizona.

This is, of course, a volume about an extraordinarily successful economy in the twentieth century. Surely, in terms of individual welfare and economic advancement, there has been no parallel in human history. We not only are extremely lucky to be part of it, but are challenged to understand its origins and progress across the century. This volume is indispensable for such an undertaking. The chapters address key aspects of the American economy and are written by leading scholars in the field. In this review, I summarize some of the highlights from each of the seventeen chapters. There is a very useful bibliographic essay at the end of the volume for more details on the broad patterns described in each chapter. This is the third volume in the Cambridge series on the development of the American economy, and one that serious economic historians will want to have readily available for reference in research and for use in the classroom.

The volume appropriately begins with an overview of the macro economy, “American Macroeconomic Growth in an Era of Knowledge-based Progress: The Long Run Perspective,” by Moses Abramovitz and Paul David. The introduction provides an excellent summary of the recent history of the American economy. Abramovitz and David point out that in the twentieth century there was a shift from extensive productivity growth that characterized the nineteenth century to intensive growth that relied more on technological and organizational change. This is sensible since the American economy moved from a frontier, natural-resource-based economy to a more mature, technology, energy-based economy. While late nineteenth-century technological change tended to be capital using and labor saving, twentieth-century technological change was more intangible capital using and tangible capital and labor saving. Data are provided detailing changes in total factor productivity growth in the transitional decades of 1879 to 1909. Beginning at this time, there was a shift to a greater role for intangible assets — education and training and organized investment in R&D — that would define the twentieth century. Key areas in the new economy were electricity, telecommunications, petroleum, the internal combustion engine, and later, the digital computer. Abramovitz and David outline the rising global position of the American economy over the century. They begin with a statistical profile of American growth since 1800, noting measurement problems, in the early period due to a lack of basic data and in the later period due to problems of comparability and definition of inputs and outputs. Interpretation of production during wars also presents challenges. Many of these issues are familiar to economic historians and were raised in Volume II of the Cambridge series. The authors examine what measured growth fails to capture in reflecting well-being, chiefly improvements in product quality and introduction of new goods and services for consumers whose qualities are not well represented in standard consumption bundles.

Over the twentieth century, the American population became more urban, more western, and more geographically mobile. In Chapter 2, “Structural Changes: Regional and Urban,” Carol Heim outlines the broad regional and urban/rural shifts that have taken place. Cities have grown and regionally, the West and South have gained, especially in the post-WWII period in terms of population and income per capita. There has been general convergence in population and income per capita across the country over the century. Heim emphasizes market and non-market forces, and what she calls hypermarket factors, resource decisions within large firms, in explaining these trends. As part of urban/regional changes, there has been a shift from manufacturing to service, an issue addressed later by Claudia Goldin in her chapter on labor markets. The chapter includes useful data by region on the breakdown of gainful employment by major sector in geographic divisions that reflect the major trends of the century.

The U.S. experience in the twentieth century was really a North American experience, and the growth of the Canadian economy is described in Chapter 3, “Twentieth Century Canadian Economic History,” by Alan Green. He has a particularly heavy load to carry, describing one hundred years of Canadian development in a single chapter. The patterns are similar to those observed for the United States with increased urbanization and industrialization and a movement away from the older wheat and timber-based economy. He points out, however, that the Canadian economy in the 1970s shifted to new natural resources — oil and iron ore production. All in all, Green outlines a record of economic and population growth that for many periods exceeded that of the United States. He briefly examines the sources of economic growth — increases in factor inputs and the growth of total factor productivity. Most interesting is his overview of the wheat economy from 1896-1929, which includes a description of the wheat boom and the staple theory of growth. Green summarizes Canada’s experience with the Great Depression, and although the Canadian economy suffered a sharp drop between 1929 and 1933, as did the U.S., there was a noticeable rebound thereafter that exceeded that of the U.S. The Canadian economy continued to grow, until a slowdown after 1973, where it performed less well than its southern neighbor.

Chapter 4 returns to the American economy with “The Twentieth-Century Record of Inequality and Poverty in the United States” by Robert Plotnick, Eugene Smolensky, Eirik Evenhouse, and Siobhan Reilly. Many of the chapters in the volume address the growth of the economy. This one examines distribution. The authors define inequality and poverty, with the poverty rate equaling the proportion of the population with income below a particular income level fixed in real terms. Inequality was at its highest levels in the century during the period from 1900 to World War I. It then declined during the war, but rose once again through 1929. Inequality fell during the Great Depression and WWII and continued to fall until 1967. It was flat and then trended upward after 1979. The authors claim that there is no single factor that underlies the record of income inequality. In the latter part of the century, where the data are the best, labor supply and demand factors play key roles. After 1979, increases in the demand for skilled labor and technological change bias toward skilled labor led to a premium for those workers. Additionally, there have been changes in the composition of industry, with a shift away from manufacturing toward services, that have increased the earnings of skilled labor and reduced the relative position of the less skilled. The end of the chapter contains an assessment of the public policy effects of tax and expenditures on inequality. The authors find that despite substantial changes in the level and composition of government spending programs in the post-WWII period, there has not been a detectable impact on the trend of inequality. Turning from inequality to the issue of poverty, there has been a clear, generally persistent downward trend through the century. The elderly have experienced a marked decline in poverty, but single-parent households have done less well. In assessing the effects of government programs on poverty, the authors conclude that policies have tended to reinforce, not offset, market factors. The chapter ends with very useful data appendices.

Certainly, one of the major events of the American economy during the twentieth century was the Great Depression, and Chapter 5, “The Great Depression,” is by a leading scholar of the issue, Peter Temin. Temin argues that credit tightness explains most of the fall in production and prices during the first phase of the depression. He discusses the confounding effects of five events that have been cited in the literature as contributing to the start of the depression — the stock market crash, Smoot-Hawley tariff, the first banking crisis, the world-wide decline in commodity prices, and a decline in consumption. He examines the role of the Fed and its adherence to the Gold Standard. Temin argues that a serious macroeconomic downturn due to these factors was turned into the Great Depression by the Federal Reserve’s actions in late 1931 to preserve the Gold Standard. The devaluation that followed the movement off the Gold Standard by the Roosevelt Administration was not followed by aggressive fiscal policy so that the economy deteriorated sharply through 1933. There was recovery between 1933 and 1937, before another downturn. Temin discusses the first New Deal and the actions of the NIRA and AAA and then briefly turns to the second New Deal. Gold inflows from an increasingly unstable Europe increased the money supply, and this helped fuel the recovery through 1937. But government policy brought about an end to that recovery with the recession of 1937. Recovery followed in 1939, largely stimulated by new gold inflows and then the build up for World War II.

Besides the Depression, the other major events of the twentieth century were wars, and in Chapter 6, “War and the American Economy in the Twentieth Century” Michael Edelstein, attempts to gauge the costs of war. This is a very interesting and ambitious chapter. During the twentieth century, there were four major military conflicts — World War I, World War II, the Korean War, and the Vietnam War — along with the Cold War. These conflicts demanded considerable change in the amount of resources devoted by the United States to military activities, which were quite small in the late nineteenth century. Edelstein gauges the direct and indirect costs of these wars, with the direct costs being expenditures for labor, capital, and goods, and the indirect costs including the lost lives, injuries, and destruction of capital and land. Estimates are provided for each as a share of GNP in Table 6.1. The Cold War was the most costly conflict in terms of direct expenditures. Edelstein then turns to the financing of these military conflicts, examining total expenditures and their funding through taxes, borrowing and inflation. Financing approaches are outlined in Table 6.2-6.9. One long-term effect was the apparent permanent increase in the income tax, which was raised by the Revenue Acts of 1941 and 1942. WWII and Korea were financed more by taxation, while Vietnam more by inflation. Finally, Edelstein examines the opportunity costs of the wars by examining the lost capital and investment in public and private enterprises, as described in tables 6.10-6.12. WWI’s opportunity costs included a reduction in nondurable goods consumption and investment in residential and business structures. WWII, held back any growth in consumption, and reduced investment, and the Cold War, Korea, and Vietnam reduced non-durable consumption and relied on deficit financing.

Another broad trend of the twentieth century was the growth of international trade. Peter Lindert, in Chapter 7, “U.S. Foreign Trade and Trade Policy in the Twentieth Century,” examines changes in America’s competitive advantage, the goals of government policy, and their impact on trade. Over the century, he finds a steady increase in the advantage of American skill-intensive goods, with exports increasing. This was not the case for natural resource-based exports. Lindert notes that some industries lost competitive advantage over time, particularly, steel and autos. Although protectionism rose and fell, efforts to promote infant industries never dominated U.S. trade policy. Lindert concludes that U.S. government intervention played no major role in determining which sectors increased or lost competitiveness. Market forces were dominant.

Chapter 8, “U.S. Foreign Financial Relations in the Twentieth Century” by Barry Eichengreen, continues the examination of international trade and monetary patterns. This is one of the best summaries of the financial history of the twentieth century I have seen. It is so complete that students should find it especially useful. The theme of the chapter is that international financial transactions and the institutions that governed them significantly influenced the growth and formation of the American economy. More narrowly, foreign investment led to railroad construction, and more broadly, the business cycle and responses to it were shaped by international capital flows. A related theme is that U.S. financial flows have affected other economies. U.S. capital contributed to European reconstruction following WWI and less positively, transmitted the American depression in the 1930s to other economies. American capital flows had an even greater impact after WWII. Eichengreen examines the gold standard and international financial management during WWI and the associated transformation of U.S. foreign finance. He notes that the United States became more of a creditor at that time, raising policy tensions for balancing internal and external financial markets. This tension was very apparent during the start of the depression, when the U.S. retreated from its international financial position with devaluation and the move off the gold standard. World War II and post-war reconstruction once again increased the role of the United States in the international monetary system. Eichengreen cites Lend Lease, other foreign aid through the Marshall Plan, international borrowing for reconstruction, the Bretton Woods Conference, and the IMF as examples of the key contribution provided by the U.S. in the latter part of the century.

Chapter 9, “Twentieth Century American Population Growth,” by Richard Easterlin shifts attention from financial flows to demographic patterns. This chapter by another leading scholar in the field provides valuable demographic data and charts that outline key trends. Easterlin summarizes patterns that emerged during the century — fertility and mortality continued to decline — and discusses contributing factors. Internal migration to the West, noted earlier in the volume by Carol Heim, is examined in more detail. During the twentieth century, international migration ebbed and flowed, and by the end of the period became a major contributor to population growth. Easterlin concludes with discussion of the implications of the general aging of the population, a pattern offset somewhat by immigration.

Another very complete and useful chapter is by Claudia Goldin, “Labor Markets in the Twentieth Century,” Chapter 10. Goldin summarizes major trends in American labor markets and provides valuable data to demonstrate those trends. Labor gained enormously over the century in terms of increases in real hourly earnings, enhanced worker benefits, reduced hours per week, a reduction in years of work over lifetime, and greater security in the face of unemployment, old age, sickness, and job injury. Goldin argues that these improvements were not really due to union activity or to legislation. They mostly followed from market conditions. Over the century, the face of labor changed. There was a decline in child labor and work by the elderly. The labor force participation of women, however, rose sharply from around 18 percent at the turn of the century to close to 50 percent of the labor force by the end. There were other changes in the labor market, including a shift from manufacturing to service with greater emphasis on skill. The distributional implications of this change in labor markets were noted earlier in Chapter 4. Goldin also points out that workers gained more protection from unemployment, acquired more formal education, and developed increased long-term relationships with firms over the century. At the same time, less discretion was given to supervisors and foremen in hiring and firing and more labor decisions were determined by formal workplace rules. There were fewer strikes and greater reliance on rewards than on punishment by managers. The observed evolution of modern labor markets in the U.S. has affected both individual well being and the performance of the macro economy. Still, Goldin points out that there are differences across region, among immigrants, and across skill levels. She summarizes major twentieth century intervention in the job market, including the enactment of Social Security legislation, OSHA, and the passage of the Wagner Act. Even so, Goldin argues that these actions did not fundamentally change labor markets. Rather, they reinforced market trends. Among the useful data provided are labor force participation; the industrial distribution of the labor force; occupational distribution; self employment figures; productivity measures; data on earnings, benefits, and hours; union membership; unemployment; wage inequality; black/white differences; and the contribution of education.

The discussion of labor markets continues in Chapter 11, “Labor Law” by Christopher Tomlins. Tomlins provides institutional background for the experiences described by Goldin. He traces the beginning of labor law in England and its transfer to the United States in the eighteenth century. He examines the roles of the judicial and legislative bodies in the U.S. in framing labor markets. Unionization, the adoption of workers’ compensation, the granting of anti-trust exemption to unions, the labor provisions of the NIRA and the Wagner Act, as well as Taft Hartley legislation are described.

Chapter 12 turns to agriculture, “The Transformation of Northern Agriculture, 1910-1990,” by Alan Olmstead and Paul Rhode. The well-written introduction summarizes changes in American agriculture in the north during the century, including the decline in the number of farms and farmers and increases in productivity. Improvements in transportation and communication better linked agriculture with the rest of the economy. Olmstead and Rhode examine three themes: sources of technological change, the farm crisis, and government intervention. They begin with discussion of regional contrasts in farm size and number of farms between 1910 and 1990. They emphasize the importance of technological change in explaining these trends. Most productivity change occurred after 1940. There was a labor-saving bias, and a machinery and fertilizer-using bias in technological change. Mechanization was spurred by the internal combustion engine and improved tractor design. The chemical and biological revolutions brought hybrid seeds. Olmstead and Rhode describe the roles of the federal government in providing telephone and electricity to rural areas, in promoting research through the Hatch Act and the agricultural experiment stations, and in subsidizing agriculture. Declining commodity prices, worsening terms of trade, and falling farm populations led to greater federal support of agriculture, beginning in the 1920s, expanding during the New Deal, and continuing through the rest of the century.

While international financial flows were described in Chapter 8 by Barry Eichengreen, Eugene White completes the discussion with focus on internal developments in Chapter 13, “Banking and Finance in the Twentieth Century.” White argues that twentieth century American economic growth was financed by a expanded flow of funds, channeled by alternating waves of financial institutional innovation and government regulation. Government regulation was expanded through adoption of the Federal Reserve System and through various pieces of New Deal legislation, such as the Glass-Steagall Act. White describes the tension that subsequently emerged later in the century between market forces and the regulatory structure that ultimately resulted in political pressure for deregulation. He describes the actions of the Federal Reserve Bank between1913 and 1929 and its relative ineffectiveness in the late 1920s and early 1930s in response to bank failures. This discussion effectively supplements that provided by Eichengreen and Temin. He outlines the consequences of the New Deal and its legacy for financial markets in the last part of the century.

The role of technological change in twentieth century American economic development was emphasized by Abramovitz and David in Chapter 1 and by Goldin in Chapter 10. David Mowery and Nathan Rosenberg examine technology in more detail in Chapter 14, “Twentieth-Century Technological Change.” The distinctive feature of the twentieth century, according to Mowery and Rosenberg, was the institutionalization of the inventive process within firms, universities, and government laboratories. There was emphasis on the use of the scientific method to promote invention and practical use of technology. The authors describe the organization of research and development and the incremental adoption of new technology to improve products and processes. They link the contribution of technology to the pattern of American economic growth. Mowery and Rosenberg note, as well, that as the century progressed, international flows of technology increased through reductions in trade barriers. They show that early technological change tended to be linked with resource endowments and occurred within the chemical and petroleum industries. But there were other examples and the chapter includes short case studies of the internal combustion engine, the automobile and airplane industries, plastics, synthetic fibers, pharmaceuticals, electric power and electronics in production and in consumer products, semi conductors, and of course, computer hardware and software. They provide measures of the growth of industrial R&D and its ties to university research and government investment.

Much R&D occurred within modern corporations, and Louis Galambos describes the development of the corporation in Chapter 15, “The U.S. Corporate Economy in the Twentieth Century.” He outlines the U.S. business system, and argues that there were three major changes: a shift to the corporate form of organization and the development of a high degree of concentration at the beginning of the century; the movement toward the multi-division firm in the 1940s and 1950s, as illustrated by Ford and AT&T; and most significantly, the development of global organizations in the latter part of the century.

Big business and big government collided, as described in Chapter 16, “Government Regulation of Business,” by Richard Vietor. Vietor argues that the growth of regulation over the century in part was due to market failure and in part due to the strategic use of government by firms to enhance their competitive position. He usefully summaries theories of regulation, including the public interest and capture views. Vietor also describes the role of regulatory bodies, which were increasingly influential across the century. He highlights early anti-trust policy, New Deal regulation, and social and environmental regulation in the latter part of the century. He also discusses the deregulation that took place in some industries, notably, in airlines, telecommunications, petroleum and natural gas, and utilities.

The final chapter, “The Public Sector,” by Elliott Brownlee completes the discussion introduced by Vietor. Brownlee describes the growth of government in the twentieth century with data on the relative sizes of the federal, state, and local sectors. He emphasizes Robert Higgs’ crisis argument in explaining the expansion of the public sector. The importance of WWI, the Great Depression, and WWII are noted. Deregulation, however, remains more difficult to understand.

As I indicated in the beginning of this review, Volume III of the Cambridge Economic History of the United States is a superb companion to the earlier two volumes and is an essential addition to the libraries of all serious students of the American economy.

Gary D. Libecap is former editor of the Journal of Economic History. His books include Titles, Conflict and Land Use: The Development of Property Rights and Land Reform on the Brazilian Amazon Frontier (with Lee Alston and Bernardo Mueller) University of Michigan Press, 1999; The Federal Civil Service and the Problem of Bureaucracy: The Economics and Politics of Institutional Change, (with Ronald Johnson), University of Chicago Press and NBER, 1994, The Political Economy of Regulation: An Historical Analysis of Government and the Economy (co-editor with Claudia Goldin), University of Chicago Press and NBER, 1994, and Contracting for Property Rights, New York: Cambridge University Press, 1989.


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

Essays on the Great Depression

Author(s):Bernanke, Ben S.
Reviewer(s):Margo, Robert A.

Published by EH.NET (July 1, 2000)

Ben S. Bernanke, Essays on the Great Depression Princeton: Princeton

University Press, 2000. vii + 310 pp. $35.00 (cloth), ISBN 0-691-01698-4.

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


For many years, economic research on the origins and persistence of the Great

Depression bore a striking resemblance to historical research on the causes of

the American Civil War. Both sides to the respective debates talked past one

another, and little, if any, intellectual progress was made. Beginning in the

1980s, the situation began to change, at least in case of the 1930s, because of

a simple methodological innovation. That innovation was to look beyond time

series aggregates for a single country, either at dis-aggregated evidence

within countries or at aggregate outcomes across countries. Both types of

evidence are examined in Ben Bernanke’s new book, a collection of (mostly)

previously published articles. (Currently, Bernanke is the Howard Harrison and

Gabrielle Snyder Beck Professor of Economics, Professor of Economics and Public

Affairs, and Chair of the Economics Department, at Princeton University.)

Essays on the Great Depression is divided into three parts, made up of

nine substantive chapters in total, plus an index. Following a very brief

preface, Chapter 1 (“The Macroeconomics of the Great Depression”) presents the

basic themes of the book. Using a cross-country panel data set, Bernanke argues

that monetary factors, along with the Gold Standard, should be according

primary responsibility for the Depression. Adherence to the Gold Standard

resulted in monetary “meltdown” — the declines in the money stock,

accordingly, were non-neutral, because of negative effects of financial crisis

and sticky nominal wages on output growth. Countries that remained on the Gold

Standard did far worse than countries that abandoned it, and a case can be made

that staying on the Gold Standard was more or less an exogenous event – that

is, a “natural experiment.”

Part Two is made up of three chapters. Chapter 2 (“Nonmonetary Effects of the

Financial Crisis in the Propagation of the Great Depression”) is justly famous.

The paper argues that the US financial crises of the early 1930s had (negative)

effects on the real economy, essentially by driving up what Bernanke calls the

“cost of credit intermediation.” One of two chapters in the book to rely on

aggregate time series data for a single country, Bernanke shows (p. 58) that

including deposits of failed banks and liabilities of failed business in an

otherwise standard time-series regression helps to (negatively) predict output

growth. Chapter 3 (“The Gold Standard, Deflation, and Financial Crisis: An

International Comparison,” written with Harold James) reports a similar finding

using the international panel, while Chapter 4 (“Deflation and Monetary

Contraction in the Great Depression: An Analysis by Simple Ratios,” written

with Ilian Mihov) uses very simple methods (an identity linking the price level

to the nominal money supply, the monetary base, international reserves, and the

quantity and price of gold reserves) to decompose the sources of world-wide

deflation before and after 1931

Part Three, on labor markets, is made up of five chapters. Chapter 5 (“The

Cyclical Behavior of Industrial Labor Markets: A Comparison of the Prewar and

Postwar Eras,” written with James Powell) introduces the second major data set

examined in the book, pre-war monthly data on output, employment, hours, and

average hourly earnings for eight US manufacturing industries. Among its many

findings is the striking observation (p. 175) that prewar employers used

shorter hours to reduce labor during a business cycle downturn, while postwar

employers have relied on layoffs. Chapter 6 (“Employment, Hours, and Earnings

in the Depression: An Analyses of Eight Manufacturing Industries”), perhaps the

most influential of the lot, argues that nominal average hourly earnings did

not decline as much as one might expect during the downturn (that is, nominal

wages were sticky) because average weekly hours fell as well, and workers were

unwilling to accept drastic declines in the former given the declines in the

latter. Chapter 7 (“Unemployment, Inflation, and Wages in the American

Depression: Are There Lessons for Europe?” written with Martin Parkinson), the

shortest in the book at eight pages, examines whether the experience of the US

in the 1930s can shed light on certain features of recent European

macroeconomic behavior; namely, the persistence of high unemployment, and the

apparent lack of any influence of high unemployment on either the rate of

inflation or real wage growth. Bernanke concludes that, while there are some

useful lessons, “there are also large enough differences to make inferences

about policy treacherous” (p. 253). Chapter 8 (“Procyclical Labor Productivity

and Competing Theories of the Business Cycle: Some Evidence from Interwar

Manufacturing Industries,” also written with Martin Parkinson) uses the US

industry data to investigate “short run increasing returns to labor” (SRIRL)

during the interwar period. The key finding is that the degree of SRIRL appears

to have been similar in magnitude to the postwar period, which Bernanke claims

is “troubling for the technology shocks explanation of procyclical productivity

(and thus for the real business cycle hypothesis).” Chapter 9 (“Nominal Wage

Stickiness and Aggregate Supply in the Great Depression” written with Kevin

Carey) considers several econometric refinements to Eichengreen and Sach’s

well-known 1985 Journal of Economic History article on the gold standard

and the Great Depression. It concludes that the refinements do little to alter

Eichengreen and Sach’s findings, and concurs with Eichengreen and Sachs that

nominal wage stickiness was an important mechanism for propagating monetary

declines in the early 1930s.

Overall, Essays on the Great Depression is a mixed bag. Two of the

papers — “Non-Monetary Effects” and “Employment, Hours, and Earnings” — are

certifiable classics, and all the chapters are worth reading (or re-reading, as

the case may be). The quality of the prose is several notches better than the

usual fare in professional economics journals. The empirical analysis

demonstrates a practiced eye for what is important and what is not, attention

to historical and institutional detail, and a willingness to explore

alternative explanations. Conditional on when they were written, the

statistical analyses are state-of-the-art, an order of magnitude beyond what

passed for econometric sophistication in economic history journals at the time.

On the other hand, the value-per-dollar ratio is not particularly high. Eight

of the nine chapters are essentially copied (the type-setting is new and

consistent throughout) from their original sources, and six of these, being

from the American Economic Review, Journal of Political Economy,

and the like, are easily available (indeed, I bet most economists who

considering buying this book will have the originals, or most of them, on their

shelves already). The other two chapters were originally published in NBER

volumes, hardly less accessible except to the most library-challenged. That

leaves the three-page preface, the previously unpublished Chapter 4, and an

index as the new material — not much for the reader’s $35.00. I’m not

questioning Bernanke’s right to reprint his admittedly influential articles,

nor Princeton University Press’s decision to package them in a handsome volume

complete with a striking period photograph on the cover and laudatory blurbs

from Peter Temin, Barry Eichengreen, and Randall Kroszner on the back cover.

However, in the long run, scholarship on the Great Depression, along with

readers’ pocketbooks, would have been better served had these essays been

re-written into real chapters; with a real introduction and conclusion;

regressions re-estimated taking into account new data and new econometric

techniques; and new textual material interwoven throughout — in brief, if

Bernanke had written a real monograph. Even with a proper introduction and

conclusion, such a book, I suspect, would be a good deal shorter than this

volume’s 301 pages of rather small print — there is much unnecessary

repetition, indeed confusion, across the various chapters.

As a case in point, consider the treatment of wage stickiness throughout. In

Chapter 2, using his international panel, Bernanke (p. 31) concludes that

“countries in which nominal wages adjusted relatively slowly toward changing

price levels experienced the sharpest declines in manufacturing output.” Table

9 of Chapter 3 reports first-difference regressions of industrial production

(in logs) using evidently the same data set, noting that (p. 101) “only when

the PANIC variable [the dummy variable for financial distress] is included does

nominal wage growth have the correct (negative) sign … but it is not

statistically significant.” In Chapter 6, Bernanke (p. 236) simulates his US

industry model assuming “perfect wage adjustment to the cost of living.”

Remarkably, this assumption “had virtually no effect on the ability to track”

employment and hours, suggesting that “the importance of lagged adjustment for

explaining observed real wage behavior” during the Depression “may not have had

great allocative significance.” Then, drawing again on the international

evidence, Chapter 9 notes (p. 300) that “the correlation across countries of

high nominal wages and low output is interpretable as an allocational effect of

sticky wages.” Exactly what is going on here? Bernanke clearly views wage

stickiness in the 1930s as an economic puzzle, since few of the standard

post-WW2 institutional stories (e.g., unions, efficiency wages, and the like)

seem to have explanatory power. While I don’t disagree with Bernanke on this

point, greater familiarity with the economic history literature would have

alerted him to the stylized fact that wage stickiness long-predated the 1930s,

in the United States and other countries.

While I applaud Bernanke’s willingness to move beyond the standard US time

series, readers should keep in mind that all of the US data come from

conventional, if somewhat neglected sources, as do the international data.

Other than occasional asides, not much attention is paid to data quality, and

only rarely do readers get any sense of the sort of archival work that might

improve matters for future research. Some of the regressions (for example, in

Chapter 7) were estimated prior to Christina Romer’s revisions to the standard

(that is, Lebergott) labor force series, and thus invite re-estimation.

Finally, in a book of essays about the Great Depression, one might have

expected more attention paid to unemployment, particularly its uneven incidence

across the workforce, and the strikingly high levels of long-term unemployment

prevailing in the US and elsewhere.

Criticisms aside, Essays on the Great Depression displays one of the

great contemporary masters of applied macro-econometrics at work. In the grand

scheme of things, I am glad that Ben Bernanke is fascinated by the Great

Depression. Hopefully his personal obsession will translate in an expanded

audience for the work of economic historians. In any case, his book will more

than do as a fine and ready example of why the past continues to have useful


Robert A. Margo is Professor of Economics and of History at Vanderbilt

University, Nashville, TN, and a Research Associate of the National Bureau of

Economic Research. He will be on leave during the 2000-01 academic year as

Visiting Senior Scholar and Visiting Research Professor of Economics at Bard

College in Annandale-on-Hudson, NY. His most recent books are Wages and

Labor Markets in the United States, 1820-1860 (University of Chicago Press,

2000) and Women’s Work? American Schoolteachers, 1650-1920 (with Joel

Perlmann, forthcoming, University of Chicago Press, 2001).

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

Designing a New America: The Origins of New Deal Planning, 1890 – 1943

Author(s):Reagan, Patrick D.
Reviewer(s):Cuff, Robert

Published by EH.NET (July 1, 2000)

Patrick D. Reagan, Designing a New America: The Origins of New Deal

Planning, 1890-1943. Amherst, MA: University of Massachusetts Press, 2000.

xii + 362 pp. $40 (cloth), ISBN: 1-55849-230-5.

Reviewed for EH.NET by Robert Cuff, Department of History, York University


Patrick Reagan, an historian at Tennessee Technological University, has

written a first-rate study of executive-level attempts at economic and social

planning during the 1930s and early 1940s. The National Resources Planning

Board (1939-1943) and its bureaucratic predecessors, the civilian agencies most

central to the story, have received varying degrees of attention in New Deal

historiography. In V Was For Victory: Politics and American Culture During

World War II (1976), for example, John Morton Blum made conservative

congressional attacks on NRPB after Pearl Harbor symbolic of a general wartime

backlash against New Deal liberalism, a theme now common in accounts of the

wartime domestic scene. Taking a broader perspective, Otis Graham in Toward

A Planned Society: From Roosevelt to Nixon (1976) interpreted New Deal

efforts at policy planning as part of a useable past for erstwhile planners in

the late 1970s. More recently, Alan Brinkley in The End of Reform: New Deal

Liberalism in Recession and War (1995) has traced NRPB’s role in policy

struggles over the meaning of liberalism for the postwar social order.

Reagan takes these and other studies into account but also makes his own

distinctive contribution. On the interpretative level, no one has so firmly

linked the national planning impulse of the 1930s to the intellectual and

organizational history of the pre-New Deal era. In this sense, Designing a

New America may be read as an archaeological excavation of New Deal

managerial ideals. In making the case for continuity, or for a broader

historical context, Reagan provides an impressive synthesis of recent

historiography (and an excellent primer for graduate students) on an array of

issues related to the planning impulse, including progressive-era urban reform;

mobilization during World War I; welfare capitalism; social science

policy-making; and inter-war attempts at voluntary economic stabilization.

Biographical studies of key Board members comprise five of the book’s eight

chapters, an approach, of course, that reinforces the sense of linkage between

the 1930s and networks of policy advocates in prior decades. Included are

detailed portraits of Franklin Roosevelt’s uncle Frederic A. Delano, a former

railroad executive whom Reagan regards as the father of New Deal planning;

University of Chicago political scientist Charles Merriam; institutional

economist Wesley Clair Mitchell; Massachusetts business executive Henry S.

Dennison; and Rockefeller foundation manager Beardsley Ruml. While all five

chapters draw on primary as well as secondary sources, and all are worth

reading, those on the lesser-known Delano and Ruml contain the freshest

material. Ruml’s career trajectory from philanthropy manager to a member in

1935 of Roosevelt’s planning board is particularly intriguing.

In a certain respect, the biographical material is so strong that the reader

comes away a bit uncertain about the story’s administrative dimension–of how

and why the National Planning Board of 1933 evolved into the NRPB of 1939, and

what exactly those agencies did during their ten-year existence. I also think

the author repeats the description of a seamless historical web a bit too often

when he might better have added a page or two on what exactly had changed in

approaches to nation-wide planning in the period he covers. But these are

simply quibbles about a piece of work that’s impressive as both interpretative

scholarship and original research.

Robert Cuff teaches at York University. He has written on economic planning

during World Wars I and II.

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

A Monetary History of the United States, 1867-1960

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

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

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

On Monetarist Economics and the Economics of a Monetary History

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Annotated References:

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

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

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

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

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

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

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

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

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

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

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