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The Oxford Handbook of Banking and Financial History

Editor(s):Cassis, Youssef
Grossman, Richard S.
Schenk, Catherine R.
Reviewer(s):Neal, Larry

Published by EH.Net (July 2017)

Youssef Cassis, Richard S. Grossman, and Catherine R. Schenk, editors, The Oxford Handbook of Banking and Financial History. Oxford: Oxford University Press, 2016. xviii + 537 pp., $160 (hardcover), ISBN: 978-0-19-965862-6.

Reviewed for EH.Net by Larry Neal, Department of Economics, University of Illinois at Urbana-Champaign (emeritus).

The global financial crisis that began in 2007-08 and continued to rattle the Eurozone countries after 2010 has certainly been good for the market for financial history.  The Oxford Handbook of Banking and Financial History is clearly a response to these events.  In their introductory chapter, the editors set out their ambitious agenda, which is to deal with the individual parts of our modern complex financial system and trace how each has evolved over time.  Each chapter ends with some insight into how the current turmoil in global banking and finance might affect part of the global financial system. This broad-ranging approach is very much in keeping with current analysis by policy economists, who have become very sensitive to how our financial system intertwines banks, which specialize in particular niches of the economy; shadow banks, which innovate to find new niches; money markets, which deal with short-term finance; capital markets, which provide long-term finance; and regulators, who attempt to oversee the operation of the financial system for the interest of the public (or the government).  The editors’ goal is to provide anyone concerned with a particular aspect of the financial system an authoritative treatment by an acknowledged expert that is clearly written for the non-specialist combined with a useful bibliography to follow up particular aspects.

The Oxford Handbook is organized into four parts: Part I, Thematic Issues, deals explicitly with the problems that the editors confronted at the outset: how have historians approached the issues in financial history (Youssef Cassis); how have economists dealt with the issues that interest them (John D. Turner); and how have policy makers tried to apply lessons from history for promoting economic development (Gerard Caprio, Jr.).  To pay due attention to historical contingency, economic analysis, and policy relevance in each of the following chapters is, indeed, a daunting task for each author.

Part II, Financial Institutions, takes up these challenges by separating out several categories of distinctly different institutions, a useful distinction too often overlooked in practice and one that illustrates nicely the complexity of any financial system.  Youssef Cassis’s “Private Banks and Private Banking” begins with the initial role models for banks, from their origins in kinship networks in Renaissance Italy to today’s Swiss managers of private wealth.  Gararda Westerhuis’s “Commercial Banking: Changing Interactions between Banks, Markets, Industry, and State” follows by dealing with the nineteenth-century spread of industrialization globally, which led to the rise of universal banks.  By the end of the twentieth century, however, it appeared that commercial banks might be in “a state of terminal decline.” (See Raghuram Rajan, 1998, “The Past and Future of Commercial Banking Viewed through an Incomplete Contracts Lens,” Journal of Money, Credit, and Banking. 30(3), 524.)  The financial crisis of 2008 led many observers to push for a separation of investment and commercial banking once again in the interest of financial stability.  Westerhuis goes on to distinguish the motives for establishing market-based systems (U.S. and England) versus bank-based systems (Germany and Japan).  She posits that the two paths diverged early on due to the differences in government control over banks and then the role played by banks in financing industrialization for follower countries, such as Germany and Japan.  Oddly missing from her overview is any consideration of the experience of Scottish banking, which developed joint-stock banks with national branches early in the eighteenth century.  Only after the financial crisis of 1825 did the English care to look seriously at the Scottish example for improving their commercial banking system!  Further, joint-stock banks did not disappear in the U.S. during the “free banking” period as she asserts. While they were confined within state boundaries, limitations on branching within a state varied considerably.  The wide range of experiments undertaken by various states has stimulated a growing and interesting literature among U.S. scholars, largely omitted from her bibliography.

Caroline Fohlin’s “A Brief History of Investment Banking from Medieval Times to the Present” takes up the most challenging role of banks, how to transform short-term liabilities into long-term assets.  Rather than taking specific organizational forms, she prefers to analyze investment banks as a set of services that help finance the long-term capital needs of business and governments. After briefly looking at merchant banks from medieval times to the early nineteenth century, this loose definition requires her to take up individual countries one by one during the nineteenth century.  Sections follow that deal with England, the European continent, Belgium and the Netherlands, France, Germany, Austria and Switzerland, Italy, Japan, and the United States. Each section highlights the differences in organizational structures created to accomplish basically the same goals, helping governments promote industrialization.  The twentieth century presents more interesting differences, essentially due to the ways various governments regulated, deregulated, and then re-regulated from the 1920s to the present.  She concludes, “even well-known investment banking names that have endured over the centuries bear little resemblance to their ancestors” (p. 159).

Christopher Kobrak’s “From Multinational to Transnational Banking” takes up the complex transformations of the world’s leading banks by size as they successively internalized their international operations.  The availability of huge advances in information technology combined with increasing opportunities for re-allocating domestic savings across foreign investments provided the basis for the growth of today’s megabanks.  Oddly, however, Kobrak takes as archetypes of the new transnational bank two of the worst performers after 2008 — Deutsche Bank and Citibank.  Relying on their respective annual reports in 2007-2010, he touts each of them as “market players” rather than staid fiduciary agents, lauding their scale and scope of activities that are only vaguely related to financial intermediation associated with banks “lending long, while borrowing short.” He dispassionately notes that three-quarters of Deutsche Bank’s two trillion euros in assets in 2007 were securities held for trading, and 40 percent were financial derivatives (p. 183), without disparaging the obvious omission of fiduciary responsibility. Citibank, similarly, by 2007 had “invested huge resources in creating an internal market, in essence warehousing securities and derivatives to build hedged positions and for future sale” (p. 182). All these intra-bank holdings of assets and liabilities enabled such banks to make a lot of money by proprietary trading that remained unobserved by regulators or by publicly accessible financial markets.  He refrains from criticizing the model developed by these two megabanks, each of which has suffered huge losses and justified public acrimony since 2008, confining himself to the anodyne remark that “megabanks may be forced, as they have many times in the past, to find an intertwined institutional and organizational adaptation more sustainable in the modern social order” (p. 185)!

R. Daniel Wadhwani’s “Small-Scale Credit Institutions: Historical Perspectives on Diversity in Financial Intermediation” concludes Part II by lumping together a motley assortment of credit cooperatives, savings banks, industrial banks, pawn shops, and savings and loans associations.  Wadhwani argues their cumulative size makes their impact on their respective economics arguably as great or greater than that made by the commercial, investment, and public banks dealt with in the previous chapters.  Their common origin across many cultures and through past millennia he finds in the ubiquitous presence of ROSCAs (rotating savings and credit associations).  Beginning with small kinship groups desiring to pool their limited resources to enable individual members to acquire a desired goal, perhaps a piece of land, a dwelling, livestock, or even the means to migrate somewhere else for employment, ROSCAs often provide a basis for transition to the more modern forms of intermediation.  These include savings banks, credit cooperatives, and savings and loans, with each evolving quite differently depending on local circumstances.  Critical to their evolution historically is the role of government, whether as regulator (restricting competition), competitor (postal savings banks), or customer (providing sovereign debt as risk-free asset).  The theoretical economic bases for their evolution and persistence are robust, both for their monitoring capability and for their local knowledge of investment possibilities.  Nevertheless, Wadhwani calls attention to more post-modern “theories” that favor the creation of supportive narratives when cultures confront changes in economic regimes.

Part III, Financial Markets, begins with Stefano Battilossi’s “Money Markets,” which emphasizes the importance of access to outside liquidity for banks when they face unanticipated shocks either for increased loans or increased withdrawals of deposits.  Further, Battilossi argues that a key lesson learned by banking theorists and practitioners in the nineteenth century, namely that money markets are essential for a smooth working of the economy but are inherently unstable, was lost over the course of the twentieth century.  The success of the Bank of England in stabilizing the money market at the center of the global economy of the nineteenth century, he argues, was due to a complex combination of close monitoring by the Bank of England and cartel complicity by the major joint-stock banks, each with extensive branching networks domestically and overseas.  U.S. efforts to imitate the British example after creation of the Federal Reserve System in 1913 failed due to irreconcilable differences in institutional structures between the two banking systems and their respective central banks.  It took over a century and a half for the Bank of England to learn how to avoid being a dealer of last resort, a role that the Federal Reserve System in the U.S. had to undertake in the 2008 crisis, and which it has not yet been able to relinquish.  Readers are left to draw the implications for the future of the global financial system for themselves!

Ranald C. Michie’s “Securities Markets” lays out convincingly and clearly the importance of securities markets for a successful financial system.  Divisibility and transferability of a security expands greatly the potential customer base, adding the virtue of diversity in demands for liquidity among the creditors as well.   He distinguishes clearly between “Primary Securities Markets” and “Secondary Securities Markets,” showing their interdependence in layman’s terms.  “Stock Exchanges” provide the effective linkage between the two levels of markets, but fall prey in turn to problems either of monopoly pricing or government repression. His exposition of the underlying theory of securities markets provides the structure for his narrative that follows. From “Early Developments in Securities Markets,” which only mentions briefly the roles of informal markets in the speculative booms of 1720, Michie insists on focusing on the nineteenth century, starting with the London Stock Exchange in 1801.  It’s unfortunate that he ignores recent work on the Amsterdam stock market, (e.g., Lodewijk Petram, The World’s First Stock Exchange, New York: Columbia University Press, 2014), or early work by this reviewer on the precedents for the London Stock Exchange (Larry Neal, The Rise of Financial Capitalism, New York: Cambridge University Press, 1990).  Committed to the importance of formal structures for modern stock exchanges, however, Michie takes up their rise in the advanced capitalist economies of the nineteenth century and then their eclipse from 1914 to 1975.  Thanks to the exigencies of war finance from World War I through the Cold War, stock markets seemed to “appear somewhat irrelevant in a world dominated by governments and banks” (p. 253)  “The Era of Global Banks” did not come to an end in 2008, however, but what had ended was the “self-regulation that had contributed so much to the attractions of stocks and bonds to governments, businesses, and investors through the reduction or elimination of counterparty risk and price manipulation and the certainty that sales and purchases could be made as and when required” (p. 258).  Big banks are bad once again!

Moritz Schularick’s “International Capital Flows” is the most quantitative and instructive of the chapters, as he summarizes succinctly in nine brief tables and one graph, the levels of international capital flows over the nineteenth and twentieth centuries, their size relative to Gross Domestic Product, and the main sending countries and main receiving countries over time.  In sum, rich countries invested in poor countries in the nineteenth century, when international capital flows were highest relative to GDP, and the rich continued to invest in poor countries even when capital flows were severely constrained during the period 1914-1975.  But after the collapse of Bretton Woods, when international capital flows rose sharply once again, the result has been for poor countries to invest in rich countries.  Further, when capital does flow suddenly to emerging economies, financial crises often follow when the flow tapers off, undoing whatever economic advance may have occurred.

Youssef Cassis’s “International Financial Centres” concludes the coverage of financial markets by analyzing the recurring features of international financial centers that lead to their persistence over time.  The physical layout of the dominant cities, the combination of functions they perform (government, communications, education, as well as trade and finance), and their organization may change as the technology of transport, communications, and information change, but, Cassis argues, the network externalities created by the concentration of so much expertise in one location make the existing centers hard to replace.

Part IV, Financial Regulation, takes up the most vexing questions for policy makers, starting with Angela Redish’s “Monetary Systems.”  Redish begins with the complexity of metallic currencies with coins minted in varying combinations of copper, silver, and gold in early modern Europe, and deftly reviews the causes that concerned European policy makers as they sought to maintain coins with fixed legal tender values, whether minted in any or a combination of the three precious metals.  Basically, their concerns were the same as today, “whether nominal change can have real consequence for the balance of trade or level of economic activity?” (p. 327).  Redish goes on to trace out the academic literature that has dealt with the Emergence of the Gold Standard, the Latin Monetary Union, the Cross of Gold, the Classical Gold Standard, and the Good Housekeeping Seal of Approval, highlighting the controversies that have arisen under each rubric.  Next, she divides the End of the Gold Standard into the First World War and the Interwar Period, Bretton Woods and European Monetary Arrangements, and the End of Bretton Woods and the Rise of the Euro.  Reproducing faithfully the graph produced by Eichengreen and Sachs to show that countries that stayed committed to the gold standard after 1929 suffered in terms of industrial production relative to those that devalued, she doesn’t point out that the outliers of Germany and Belgium are readily explained by mistaking their formal exchange rate regimes with the ones they followed in practice (Germany using bilateral trade agreements to increase industrial exports while keeping the nominal exchange rate fixed, and Belgium reducing its nominal exchange rate while being forced to maintain existing trade agreements with France).  She concludes with a brief discussion of both inflation targeting under fiat currency regimes and the rise of crypto currencies such as Bitcoin, Her conclusion is merely that “money is information, a method to enable multilateral clearing of myriad transactions.  It would be surprising if the digital revolution did not lead to a revolution in how this information is managed” (p. 339).

Forrest Capie’s “Central Banking” takes up the baton passed on by Redish to provide a brief synopsis of the issues confronting central banks as they have increasingly taken control of the supply of money over the past two or more centuries.  Monetary stability, their prime responsibility, can be assessed in terms of price stability, but financial stability, which has become a major concern, he notes is more difficult to assess, much less to sustain.  Central bank independence, however defined, does seem to correlate with monetary and price stability, which shows that policy lessons have been learned successfully on that score.  Continued independence of central banks, however, hinges very much on attaining and then sustaining financial stability.  This task, very much underway now among the world’s central banks, 174 at last count, may require expanding their role to include financial regulation as well as oversight of the banking system.

Harold James’s “International Cooperation and Central Banks” makes an interesting argument that central banks in their pursuit of the goal of monetary stability naturally tend to cooperate with other central banks internationally, but without need for formal mechanisms.  Cooperation can then be merely discursive, as it was during the classical gold standard.  Financial crises, however, often do call for international cooperation, but cooperation is difficult, perhaps impossible, to sustain given the priority of strictly national policy concerns.  Large countries, needed to make cooperative efforts successful, are the most reluctant to join in cooperative efforts.  His examples cover episodes during the classical gold standard, the interwar period, the brief Bretton Woods period, and the ongoing travail of the euro-system, which he concludes is “the global test case for both the possibilities and the limits of central bank action” (p. 391). In an interesting aside, he explains why the Bank for International Settlements was resuscitated to manage the European Payments Union in the 1950s.  Top U.S. officials were wary of using the newly-established International Monetary Fund because its staff were largely protégés of Harry Dexter White, then under suspicion as a possible Russian agent!

Catherine Schenk and Emmanuel Mourlon-Droul’s “Bank Regulation and Supervision” develops a sub-theme to the arguments presented by Harold James, namely the recurring problems of regulatory competition, moral hazard, and regulatory capture.   Essentially, “[r]eputation and private information are key bank assets in a market with information asymmetry, but this complicates the ability to engage in transparent prudential supervision” (p. 396).  The U.S. stands out for having the most complicated and unwieldy array of conflicted regulatory agencies, summarized in Table 17.1.  The authors conclude, as do Charles Calomiris and Stephen Haber (Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, Princeton, NJ: 2014), that it is no accident that Canada and the UK, with more coherent approaches to bank regulation have had fewer banking crises.  Much of the remaining chapter focuses on China and the successive efforts of China’s rulers to establish, then regulate, a banking system to enable industrialization and modernization, concluding, perhaps prematurely, that China managed to reduce the problem of non-performing loans after their peak in 2000.  The difficulties of deciding where to locate the regulator of the banking system are highlighted by tracing the successive efforts of the U.S., then the UK to find an ex post regulatory solution to the problems of recurring financial crises.  The efforts of the Basel Committee, established after the collapse of the Bretton Woods System, are described in the context of the European Union’s efforts to move toward regulatory cooperation within a more limited scope of international cooperation.  Prospects for success on that score are still very much in doubt.

Laure Quennouelle-Corre’s “State and Finance” takes a step back to look at the origins of the ongoing dilemma for the Eurozone of the interaction between governments’ sovereign debt and financial fragility of their banks.  The recurring differences between France and the other members of the European Union form the backdrop for his rambling notes on the interactions of private and public financial institutions, ending with the observation that France alone has had to deal with the European Union’s pro-market ideology versus the French tradition of state intervention.

Part V, Financial Crises, opens with Richard Grossman’s “Banking Crises,” which reprises the standard story of boom-bust cycles, exacerbated when new opportunities for speculative investments open up (first globalization after 1848; second globalization after 1979; post-war adjustments after WWI) but then moderated under strict regulation (capital controls, interest rate restrictions from 1945-71).  In his perspective, the Eurozone crisis fits the boom-bust pattern first described by D. Morier Evans in 1859 (The History of the Commercial Crisis, 1857-58, and the Stock Exchange Panic of 1859, New York: Augustus M. Kelley, 1969).

Peter Temin’s “Currency Crises: From Andrew Jackson to Angela Merkel” takes up the international aspect of the boom-bust paradigm by extending it into national decisions about setting the exchange rate with foreign trading partners and possible investors. To bolster his long-standing conviction that most, if not all, banking crises are really currency crises at heart, he lays out in detail the open macro-economy model developed by Trevor Swan. Swan’s diagram relates a country’s domestic level of production to its real exchange rate.  Internal balance is maintained if production rises with the real exchange rate, while external balance requires the real exchange rate to fall when production increases. The model leads to dire consequences for a country if it does not succeed in maintaining both internal balance (matching domestic investment with domestic supplies of savings) and external balance (matching capital account flows with offsetting trade balances) simultaneously.  Either excessive inflation or long-term unemployment occurs whenever imbalances are sustained due to misguided government policy.  Banking crises then arise as the necessary outcome of such policy failures by governments. The historical evidence to support Temin’s argument starts with Andrew Jackson and the crisis of 1837 in the U.S., continues through the Great Depression in the U.S. in the 1930s, not to mention the concurrent crisis in Germany, and concludes with the ongoing Eurozone crisis, all basically due to misguided political leaders, as named in his sub-title.

Juan H. Flores Zendejas’s “Capital Markets and Sovereign Defaults: A Historical Perspective” concludes the Oxford Handbook.  The first global financial market, arising with the collapse of the Spanish Empire in Latin America after the Napoleonic Wars, saw various devices to cope with the recurring problem of governments defaulting on the sovereign bonds they issued for whatever reason, usually to fight a war or quell a revolution.  Flores recounts the success of the London Stock Exchange in bringing governments to heel if they wanted access to British savers. The monitoring capabilities of the leading merchant bankers, especially the Barings and Rothschilds, put their imprimatur on bonds issued through their firms.  Twentieth century regulatory restrictions on these leading investment banks by their host governments, however, have limited the effectiveness of their “branding” and their intrusive follow-up in monitoring the finances of their customer governments.  Flores casts some doubt as well on the effectiveness of the Council of Foreign Bondholders in the nineteenth century.  He could also have challenged the effectiveness of international financial control committees that served as the model for the League of Nations Financial Commission after World War I if he had cited the recent work of Coskun Tuncer (Sovereign Debt and International Financial Control, The Middle East and the Balkans, 1870-1914, London: Palgrave Macmillan, 2015).  Flores concludes in general that governments that avoided defaulting in times of general crisis did so because they had been excluded from the earlier expansion of international credit.

All in all, the editors did get the compilation in print still in time to be useful for anyone concerned with how the ongoing financial crisis of the early twenty-first century will play out.  Specialists in each topic, however, may be disappointed in the necessary brevity of treatment, not to mention absence of references to their own work, particularly if they worry most about the future of the U.S. financial system.

Larry Neal is the author of A Concise History of International Finance: From Babylon to Bernanke, Cambridge: Cambridge University Press, 2015

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

A Few Hares to Chase: The Economic Life and Times of Bill Phillips

Author(s):Bollard, Alan
Reviewer(s):Hoover, Kevin D.

Published by EH.Net (January 2017)

Alan Bollard, A Few Hares to Chase: The Economic Life and Times of Bill Phillips.  Oxford:  Oxford University Press, 2016.  xi + 263 pp. $35 (cloth), ISBN: 978-0-19-874754-3.

Reviewed for EH.Net by Kevin D. Hoover, Department of Economics, Duke University.

To most economists “Phillips” is just the name of a particular, much discussed, and much controverted curve relating inflation to unemployment.  Who Phillips the man actually was is a matter of little interest and much ignorance.  A few of the better informed may have heard something of the Phillips machine — a piece of idiosyncratic plumbing, thought to be no more important to economics, perhaps, than  a child’s vinegar-and-soda model of a volcano is to volcanology.  Alan Bollard’s biography of Alban William Housego (“Bill”) Phillips finally gives us a fascinating picture of just who Phillips was.  The book is short.  Primary source materials on Phillips are limited and his professional career was short, but the book would probably be only half the length had Bollard not taken his subtitle seriously and written extensively about Phillips’ times and context, as well as about his life.  Much of the history is written in a subjunctive mood, with Bollard noting what Phillips would have experienced or known based on where he was when.  On the whole, Bollard’s strategy provides useful contextualization and not merely padding.

Phillips was born in 1914 on a farm in New Zealand.  He came from a family of tinkerers.  His father found ingenious ways to bring running water and electricity to the farm before these were widely available in their area.  The son inherited a deeply pragmatic feel for what works and what helps.

Phillips had a practical, rather than intellectual, intelligence.  Through correspondence and vocational courses, he trained and passed qualifying examinations as an engineer.  As soon as he was able, he set off on a journey to England — mostly by land.  The journey took him from New Zealand to Australia, Japan, Korea, China, Manchuria, Russia, Germany, and finally to England, arriving in 1935 at the age of 21.  Phillips appears to have approached the trip with an adventurous, but naïve spirit.  He was arrested in Japan for taking pictures in a restricted military area.  He offered his services as an engineer to a Siberian mine, which, in the event, did not want him, the mine being part of the Gulag with the work provided by prisoners.

After several years in a variety of engineering jobs in England, Phillips had only just decided to seek a degree at the London School of Economics (LSE) when the war broke out.  Phillips joined the Royal Air Force and was stationed in Singapore in time for the Japanese invasion of Malaya.  He provided signal service by modifying the armaments of the obsolete Brewster Buffalo fighter aircraft to make them somewhat less overmatched against the advanced Japanese fighters. Phillips was named a member of The Most Excellent Order of the British Empire (M.B.E) for his heroism in defense of the transport Empire Star, which came under heavy Japanese air attack while evacuating British troops and civilians from Singapore.  He ultimately was imprisoned by the Japanese on Java.  Here his practical engineering skills proved useful, as he was able to cobble together radios and to figure out clever ways to hide them in order to keep his fellow prisoners apprised of the war news.

The war was a prelude.  The heart of Phillips’ story is the LSE.  His observation of the social organization of the prison camp piqued Phillips’ interest in the social sciences.  He came at the subject with the mindset of an engineer, but not, it must be said, with that of a central planner, but rather as a practical man who could identify and solve problems.

On being demobbed in 1946, Phillips decided to remain in England, and briefly studied at the School of Oriental Studies (Mandarin and Chinese history) and the School of Slavonic and East European Studies (Russian).  He had a gift for languages, proving ultimately to be fluent in Mandarin, Russian, and French, as well as English, and to have a working knowledge of Dutch, Malay, and German.  He entered the LSE — a war-weary veteran among callow youth — reading sociology.  In the end, he squeaked by with a Third Class degree, having passed his sociology examinations, but having failed applied economics and economic history and just passing economic principles by a single mark (41 of 100).  Bollard places part of the blame on his “nicotine addiction,” which strikes me as rather implausible, given the prevalence of heavy smoking at the time and the many successful nicotine addicts.

Still, Phillips stunningly poor performance in his first degree sets the stage for a most extraordinary story:  in 1949, he barely achieved a B.A. in sociology, by 1954 he received a Ph.D. in economics, and by 1958 he was Tooke Professor of Economics at the LSE.  The key to this success was the Phillips-Newlyn machine. Phillips tried to make sense of some Richard Sayer’s lectures, drawing on some hydraulic analogies in Kenneth Boulding’s textbook, and ultimately produced a paper based on them.  Walter Newlyn, who later became a well-known British monetary economist, was also an ex-serviceman and a student with Phillips at the LSE.  He read Phillips’ draft and introduced him to John Hicks’ IS-LM model of Keynesian economics.  Together Phillips and Newlyn with support of the LSE decided to construct a hydraulic working model of the economy out of old aircraft parts.  This might seem today a quixotic endeavor, but Bollard helps us to recall that Phillips worked at a time when digital computers were primitive, expensive, and not widely available and when the Keynesian model was only beginning to be understood.

To make the machine required all of Phillips’ engineering prowess.  At one frustrating juncture, he said “at least Heath Robinson’s contraptions always worked” (p. 130).  (The cartoonist Heath Robinson was the British equivalent of the American Rube Goldberg.)  But, as Bollard makes clear, the problems were economic as well as mechanical.  Verbal and graphical descriptions could elide and ignore aspects of the economy that the engineering requirement that the model should actually work forced Phillips to face.  These included the need to develop a consistent set of stock/flow relationships, to account for the role of unemployed resources and capacity constraints in the economy, to be specific about the kinds of policy interventions that were possible, and to account for the transitional processes between equilibria.

The machine forced concreteness and clarity onto the model.  It was documented in a journal article, was a success, and was taken up as a tool by James Meade and others in their teaching.  The LSE supported an improved model, which was eventually commercialized as MONIAC, the acronym for a name suggested by Abba Lerner:   Monetary National Income Automatic Computer.  Twelve to fourteen of the machines were built — mostly for universities, but also for two central banks and the Ford Motor Company.  James Meade had a pair of mirror-image machines built that could be connected together to illustrate international macroeconomics.  The machine was talked about in the popular press and by politicians.  Several of the machines are preserved in museums today.

MONIAC formed the basis for Phillips’ doctoral dissertation.  The machine so impressed the economists at the LSE that Phillips received his Ph.D. in 1954 and was quickly promoted to Reader in Economics.  Bollard refers to the position of reader as the equivalent of associate professor in the system of ranks employed in the United States and increasingly around the world.  But in fact, in Britain in the early 1950s, professorial chairs were very few and represented a fairly exalted status, so that a readership was as high as many academics could ever expect and more nearly equivalent to a typical full professorship in the United States today.  In 1958, he was named to the Tooke Chair in Economic Science and Statistics in the University of London (of which the LSE is a part), a chair previously held by Edgeworth and Hayek — not a bad show for the poor sociologist of 1949.

The lessons of MONIAC formed the basis for Phillips’ most important work in economics.  The machine convinced Phillips both of the necessity of a fully worked out model of the economy and of the limitations of such physical models.  Its operation impressed upon him the possible instabilities of the economic system and the potential role of policy in reducing them.  Phillips addressed these themes by immersing himself in the emerging field of control theory, again drawing on his engineering background.  In two papers in 1954 and 1957 he analyzed the susceptibility of an economy in which processes take place over time to display fluctuations and instability and the role of economic policy in smoothing those fluctuations.  He applied the proportional-integral-and-derivative (PID) control system to economic problems.  This is probably Phillips’ most important contribution to economics.  In the context of the control approach, he identified the importance of expectations and the noninvariance of economic relationships, now commonly known as the Lucas critique.  While on sabbatical at Cambridge, Milton Friedman met Phillips and from him got the idea of adaptive expectations, which he and colleagues, such as Phillip Cagan, subsequently applied frequently in empirical analyses.  Bollard does not note that Friedman repaid Phillips in a debased coin, asserting — quite wrongly — that the Phillips curve displayed elementary errors in economic analysis.

The Phillips curve — a name that he himself never used — was the product of Phillips’ most famous paper.  Bollard rightly observes that the paper has been misunderstood — in part because of Phillips’ own natural diffidence — and that it should be seen against the background of control theory.  Phillips depreciated his own efforts as “a wet weekend’s work” (p. 165).  Bollard — mistakenly in my view — piles on, saying that Phillips’ “statistical approach was not sophisticated” (p. 166).

The issue of the relationship of inflation and unemployment was a long-standing one.  Phillips’ interest arose out of policy discussions in the late 1950s and out of the recent availability of his colleague Henry Phelps-Brown’s new data set.  The plot of inflation against unemployment rates was a hodge-podge without much apparent order, until Phillips decided to connect the dots — that is, to treat it as a time series.  This revealed a series of looping patterns in the data, corresponding to business cycles, which Phillips understood to be the typical result of the dynamic systems that he had studied theoretically.  His principal concern was with the short-run behavior of the system.  The paper is frequently regarded as an atheoretical data-mining exercise; but that misses the point.  Phillips thought about the economy as a system of differential equations, which could generate dynamic behavior around a longer-run equilibrium locus, which is what we usually identify as the Phillips curve.  As Bollard notes, Phillips had actually drawn a theoretical version of the Phillips curve in his 1954 paper.  In the famous 1958 paper, he implicitly used the conceptual framework of the 1954 paper to decompose the empirical relationship of wage-inflation and unemployment into a long-run locus and an associated short-run dynamics — implicit, because the differential equations are never mentioned.  Proceeding without a computer to estimate the nonlinear, long-term solution to a system of differential equations, Phillips employed characteristic cleverness and focused on results in his handling of the limited data.  Far from being unsophisticated statistics, Phillips displayed the kind of statistical sophistication that combined deep theoretical and practical understanding to turn the crudest materials into practical knowledge — the economic equivalent of the radios that he built and secreted away in the Japanese prisoner-of-war camps.  It was a tour de force of data analysis.  And it launched an industry — propelled by economists who failed to understand the framework that informed Phillips’ original paper.  Despite the fame that it engendered, Phillips himself hardly pursued this line of research further.

Although his last published paper appeared in 1968, the Phillips curve article of ten years earlier was for all intents and purposes his last important paper.  His interests turned to continuous-time econometrics, a natural extension of his focus on differential equations, and to development economics with a special interest in China.  Phillips was by all accounts an exemplary teacher.  He was an important figure in the conversion of the LSE from its quasi-Austrian and anti-quantitative mold under Lionel Robbins into a powerhouse of econometrics in the 1960s and 1970s.  Phillips helped to recruit Denis Sargan and Rex Bergstrom and to teach subsequent leaders in econometrics, such David Hendry and Peter Phillips.  Phillips’ work on PID control systems is closely related to error-correction modeling and to cointegrated time-series modeling, areas in which Sargan and his LSE students played an important part.

In 1967, thirty-two years after coming to Britain, Phillips returned to the Antipodes — precisely to the Australian National University.  After suffering a stroke in 1970, he finally returned to New Zealand, and took up teaching again in 1973.  In 1975, he suffered another, massive stroke and died at age 60.  While his life was eventful, his career as an economist was short.  Bollard has done a great service by presenting a fascinating account of the life and by reminding us of what Phillips’ achievements as an economist actually were.

Kevin D. Hoover is Professor of Economics and Philosophy at Duke University and Editor of History of Political Economy.  He has written extensively on the history of macroeconomics, including recently “The Genesis of Samuelson and Solow’s Price-Inflation Phillips Curve,” History of Economics Review 61(Winter 2015): 1-16.

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Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Australia/New Zealand, incl. Pacific Islands
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

Brazil in Transition: Beliefs, Leadership, and Institutional Change

Author(s):Alston, Lee J.
Melo, Marcus Andre
Mueller, Bernardo
Pereira, Carlos
Reviewer(s):Weller, Leonardo

Published by EH.Net (January 2017)

Lee J. Alston, Marcus Andre Melo, Bernardo Mueller and Carlos Pereira, Brazil in Transition: Beliefs, Leadership, and Institutional Change. Princeton: Princeton University Press, 2016. xviii + 259 pp. $39.50 (hardcover), ISBN: 978-0-691-16291-1.

Reviewed for EH.Net by Leonardo Weller, São Paulo School of Economics, FGV.

Brazil in Transition is an intriguing book that holds the reader’s attention throughout. Alston, Melo, Mueller and Pereira make a rather provocative claim: that Brazil is likely to grow into a developed economy because it is in the process of becoming an open, inclusive and fiscally sound society. This inevitably comes as a surprise because Brazil is in its worst economic crisis since the 1930s: GDP fell by 3.8% in 2015 and is expected to fall again by 3.2% in 2016; the government is running a fiscal deficit of 10% of GDP; inflation is way above the 4.5% target; unemployment is at two digits; and poverty has been rising quickly. If one reads the Brazilian press, the book seems out of place, to say the least. Yet this is precisely the reason why it is interesting, whether it is right or wrong. The authors refer to history to contradict the current hysteria. They claim that Brazil is likely to follow a development path that started in the 1990s. The present crisis would be a “bump in the road.”

The authors apply a version of the New Institutional Economics in which beliefs play a central role. Beliefs are the way the “dominant network” understands how the “world works.” Composed of politicians, entrepreneurs, the media and top civil servants, the dominant network builds institutions that they believe will deliver specific economic results.

In the 1960s and ‘70s, Brazil’s dominant network believed that the state was supposed to stimulate industrialization without redistributing wealth. The institutions put in place resulted in rapid growth and rising inequality. Brazil was ruled by a dictatorship and the well-being of the majority did not concern those in power. This changed, however, in the 1980s, when democratization enfranchised the people, so the need to promote social inclusion became part of the dominant network’s beliefs. The book analyzes in detail the 1988 Constitution as an institution forged to redistribute wealth and introduce checks and balances in statecraft. The new constitution extended the public retirement scheme to rural workers, required the state to provide universal free education and healthcare, and professionalized civil servant careers.

The constitution was inclusive but not fiscally sustainable. It required the state to increase expenditure, which resulted in enormous deficits. Four-digit inflation compromised economic growth and lowered real wages in the 1980s. Income concentration reached its record level in the early 1990s. The institutions designed to promote social inclusion failed to do so. Nevertheless, that frustrated outcome opened a “window of opportunity,” which the authors define as a crucial moment in which the dominant network may (or may not) adjust its beliefs and change institutions in order to improve economic results.

The authors claim that institutional change is not automatic: it takes leadership to bring about the transition. They assert that former President Fernando Henrique Cardoso (1995-2002) was such a man to provide it. An influential intellectual and respected politician, Cardoso had the reputation and skills to form a strong coalition that transformed institutions for the better. The Real Plan controlled inflation and the Fiscal Responsibility Law reduced the fiscal deficit. In parallel, the Cardoso administration launched a number of social programs, universalized the access to basic education and privatized inefficient state-owned companies.

Though growth was dismal in the 1990s, price stability redistributed wealth. The public acknowledged the positive outcomes of orthodoxy, so former President Lula (2003-10), a left-wing trade unionist, maintained Cardoso’s main macroeconomic policies once in office. His successor and protégé Dilma Rousseff (2011-16) increased expenditure to boost demand but was impeached based on the fiscal laws approved under Cardoso. The book was released before President Michel Temer took office. As predicted in the foreword, his administration is attempting to rebalance fiscal accounts (though so far without success).

Brazil has indeed become a more inclusive, open society. The authors are persuasive when they assert that the changes in beliefs under Cardoso have driven the country into an institutional deepening process that works in an autopilot mode. Yet the conclusion that this process will transform Brazil into a developed economy is quite a stretch. It is true that development is more than growth, but it takes growth to make a developing economy into a developed economy. The book lacks an economic analysis to back its conclusion. It presents rather limited quantitative evidence. It ignores the consequences of deindustrialization and labor laws that date from the 1940s, when the country was industrializing. Legal rigidities between employers and employees keep productivity low in a service economy, and that has not changed at all.

Brazil’s extremely complex tax system is a fundamental problem for the book’s main argument. Since the 1990s the government has been increasing taxation to match the rise in expenditure that the 1988 Constitution requires. The conjunction of social inclusion and fiscal orthodoxy has pushed Brazil to the wrong side of the Laffer Curve, where companies either evade taxes or go out of business. Taxation alone may block economic development. It explains to a great extent why the investment rate is below 20%, which is far too low for sustainable growth.

Finally, the authors ignore the impact of the demographic bonus in social indicators, from education to income distribution. This is problematic because Brazil experienced one of the world’s quickest falls in fertility in the last six decades (precisely the period under analysis): the number of births per fertile woman fell from 6.2 to 1.8 since 1960. As a Brazilian who intends to retire at some point in life, I am afraid that the improvements in education the book joyfully describes have been too little too late. Schools are not forming the highly productive workers the country will need to support its aging population. The public pension scheme is already bankrupt and Brazil performs rather poorly in international education surveys. We will likely get old before getting rich.

Brazil in Transition has the merit of addressing the present crisis in a historical context. Though Alston, Melo, Mueller and Pereira are right in recognizing the country’s institutional changes since the 1990s, they fail to acknowledge that persistent economic problems are likely to keep it in the mid-income trap. A window of opportunity may appear in the near future, but, as the authors suggest, it will take leadership to make Brazil suitable for growth. This is guesswork rather than history, but it seems highly unlikely that President Temer will be the man to provide it.

Leonardo Weller’s research is on Latin America’s financial history, more specifically sovereign debt crises and rescue loans before the First World War.

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Subject(s):Economic Development, Growth, and Aggregate Productivity
Government, Law and Regulation, Public Finance
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: WWII and post-WWII

Innovation and Its Enemies: Why People Resist New Technologies

Author(s):Juma, Calestous
Reviewer(s):Mokyr, Joel

Published by EH.Net (January 2017)

Calestous Juma, Innovation and Its Enemies: Why People Resist New Technologies. New York: Oxford University Press, 2016. xii + 416 pp. $30 (hardcover), ISBN: 978-0-19-046703-6.

Reviewed for EH.Net by Joel Mokyr, Department of Economics, Northwestern University.

Technological progress is, by general consensus, the chief engine of modern economic growth. It is also an untidy and highly non-linear historical process. Any notion that in the real world some kind of good-ideas-drive-out-bad-ideas rule obtains should be abandoned from the outset. Many old and bad ideas are retained for many years, even centuries, and many good ideas are rejected, resisted, maligned, and at times abandoned. In 1679, William Petty, the founder of political economy, wrote that “when a new invention is first propounded, in the beginning every man objects, and the poor inventor runs the gantloop of all petulent wits … not one [inventor] of a hundred outlives this torture … and moreover, this commonly is so long a doing that the poor inventor is either dead or disabled by the debts contracted to pursue his design” (The Economic Writings of Sir William Petty, Charles Henry Hull, ed. Cambridge University Press, 1899, Vol. 1, p. 74).

In the interest of full disclosure: the title of Calestous Juma’s engaging and informed book is identical to the title of a paper written by this reviewer and published in 2000 and elaborated upon in my Gifts of Athena (2002). Juma graciously acknowledges this in the first footnote to the book. There is no question that he has taken the idea a great deal further, yet it is written very much in the same spirit. Resistance to new technology has three major origins. First, there are the incumbents who fear a threat to the stream of rents generated by their physical capital, human capital, market power, or political influence. Innovation inevitably disrupt such rents. Second, there is the concern about broader repercussions: innovations have unintended ripple effects on a host of social and political variables that may generate additional costs and pain to people even if they themselves have no direct say over whether to adopt the innovation. And beyond that there is risk- and loss-aversion, the often well-founded fear than a new technique may have unanticipated and unknowable consequences. These three motives often merge and create powerful forces that use political power and persuasion to thwart innovations. As a result, technological progress does not follow a linear and neat trajectory. It is, as social constructionists have been trying to tell us for decades, a profoundly political process.

As the late Nathan Rosenberg pointed out in a classic essay entitled “Uncertainty and Technological Change,” by definition innovation is a journey into the unknown. The unforeseen and unintended consequences could be negative, making what seemed at the time to be an improvement actually welfare-reducing. The classic case of reducing engine-knock by adding lead to gasoline in the 1920s with horrid consequences that only now are becoming fully known stands as a classic example, but many others come to mind. Knowing this has biased the popular view of innovations — and various organizations have played upon these fears. Yet it is striking that the bias is not distributed uniformly: while transgenic salmon is still not available to consumers despite the complete absence of any evidence of harmful effects, cellular phones and GPS have spread like wildfire, perhaps because they were able to align themselves with the forces of globalization.

In a series of fascinating case studies arranged in separate chapters, Juma illustrates these principles over and over again. The chapters have clever titles (my favorite is the one on the fierce and persistent resistance of the American dairy lobby to margarine, entitled “smear campaigns”) and are well-written and documented. A few of them deal with well-known cases, such as the resistance of Moslem society to the printing press and the struggle of European farm lobbies and environmentalists against transgenic crops. Others concern little-known episodes, such as the tale of AquaBounty, an aquaculture firm founded by Elliott Entis, which ingeniously devised a slightly genetically-altered salmon that matures in half the time of regular salmon. The technique offers considerable cost savings and environmental advantages, yet has no discernible negative side effects. Yet the idea was fought tooth and nail by well-meaning but misguided environmentalists as well as salmon fishers, who worried about competition and denounced Entis’s idea using inflammatory terms such as “Frankenfish.” The product is still not available and environmentally correct chain stores such as Whole Foods have already announced they will not carry it. Yet with fishery depletion one of the major environmental disasters looming, such techniques are exactly what is needed.

Juma is at his most eloquent and informative in his chapter on transgenic crops. The use of such crops, as he points out, is not only a way to increase agricultural productivity but also environmentally responsible, as it leads to lower use of pesticides and fertilizer. Yet it is ironically opposed by a coalition of environmentalists that led to the formulation of the infamous Cartagena protocols of 2000. As he points out, the main thrust of this emblematic manifestation of resistance to transgenic crops, known as the “precautionary principle,” was to reverse the burden of proof: the originator of the biological innovation had to show it was harmless before it could be marketed — basically an impossible task. As he stresses over and over again, the logical error of those driven by loss- or risk-aversion is to assume that the status quo is risk-free.

One could quibble about some of Juma’s decisions to include certain episodes and not others. The struggle between Edison’s DC and Westinghouse’s AC (the “war of the currents”) is not really a case of “resistance to innovation” as much as a struggle between two incompatible new network standards. Most readers will be disappointed that there is no chapter on the long and fascinating history of popular resistance to nuclear power, one of the paradigmatic cases of technological conservatism that is still with us. This reviewer would have liked more discussion of the Luddites — the resistance movement that gave the phenomenon its name — as well as the fanatical resistance to medical innovations such as the anti-vaccination campaigns conducted by certain groups mostly affiliated with Christian and Muslim radical philosophy. Religious authorities, whose beliefs are often based on “not-playing-God,” get little attention despite their record of resisting many new ideas. To economic historians, the absence of much discussion of workers’ resistance based on the fear of technological unemployment and dystopian scenarios in the Player Piano mode seems a bit disappointing, as this seems to be a main concern of modern-day critics of innovation, such as Jeremy Rifkin, as well as more serious academics. The cost of innovation in terms of accelerated depreciation of human capital should have been stressed a bit more. Yet these minor quibbles do not detract from the value of a timely and insightful book.

In the end, perhaps the surprising thing is not that there has been so much resistance to technological progress, but that humanity has actually been able to overcome most of it. For much of human history, the heavy hand of conservatism and neophobia (what Timur Kuran has called the “tenacious past”), suppressed intellectual innovators of all kinds, condemning many past societies to a fate of virtual technological stasis. When reactionary forces were weakened in Europe after 1500, innovation slowly found its way to the surface, but even then it had to struggle against opponents every inch of the way. In that sense our globalized age must consider itself lucky. While some societies may try to resist certain innovations, original and creative minds can always go offshore and develop their ideas in more hospitable places. In the end, if an idea is truly superior, it will catch on, if with a disastrous delay. After all, Islamic countries in the end overcame their reluctance to the printing press (in no small part thanks to a Hungarian-born convert to Islam named Ibrahim Muteferrika, as Juma recounts). Yet the absence of printing and inexpensive books in Arabic or Turkish for centuries has had inestimably deleterious consequences for the intellectual and political development of the Middle East. As Juma stresses repeatedly, doing nothing is risky too, especially if your competitors storm ahead.

Joel Mokyr is the author of A Culture of Growth: The Origins of the Modern Economy (Princeton University Press, 2017).

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Subject(s):History of Technology, including Technological Change
Geographic Area(s):General, International, or Comparative
Time Period(s):17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Karl Polanyi: A Life on the Left

Author(s):Dale, Gareth
Reviewer(s):Knoedler, Janet T.

Published by EH.Net (September 2016)

Gareth Dale, Karl Polanyi: A Life on the Left.  New York: Columbia University Press, 2016.  ix + 381 pp. $40 (hardcover), ISBN 978-0-231-17608-8.

Reviewed for EH.Net by Janet T. Knoedler, Department of Economics, Bucknell University.

Gareth Dale’s intellectual biography, Karl Polanyi: A Life on the Left, excavates the numerous intellectual influences on Karl Polanyi’s life and work during the tumultuous first half of the twentieth century.  Dale frames this biography using Polanyi’s own description of his life as “a ‘world’ life” (p. 10).  Indeed!  During the first three decades of his professional life, Polanyi witnessed two world wars and a worldwide depression; and as he explored the causes and consequences of these major episodes of twentieth century history, he collaborated with leading thinkers in progressive political and intellectual circles in Europe and the United States.  And in the end Polanyi produced a body of work that remains relevant today.  Using extensive primary and secondary sources, Dale examines the individuals and the ideas that led Polanyi to produce his masterpiece, The Great Transformation (hereafter, GT), and Polanyi’s many other contributions to scholarly and political discourse along the way.

During the eventful five decades of his professional life, Polanyi combined political engagement with the great issues of his day and scholarly pursuit of knowledge in a wide range of disciplines.  Before World War I, as a newly minted Ph.D. in jurisprudence, Polanyi, along with other leftists, formed the Galileo Circle, which promoted such progressive issues as universal suffrage, land reform, and racial tolerance, and he joined Hungary’s Radical Bourgeois political party.  As Dale explains, Polanyi was sympathetic to the Marxist critique of capitalism, but was drawn more to the ideas of Ernst Mach, Leo Tolstoy, G. K. Chesterton, Edouard Bernstein, Henry George, and Henry Charles Carey.  Polanyi came to perceive that the exploitation he and his colleagues were striving to overturn was rooted in ‘conquest and enserfment’” (p. 50), ideas that would become more fully developed in GT.  When the war broke out, Polanyi served as an officer in the Austro-Hungarian army, where his experience led him to ponder the “human capacity to construct sociotechnical systems geared to the wreaking of carnage” (p. 59).  A bout with typhus forced him to bed, during which he read the Bible and converted to Christianity, but a version of Christianity underpinned by an activist ethos in support of radical social change.  During his recuperation, he relocated to Vienna, where he lived for a time with Eugenie Schwarzwald, a noted social reformer, and learned from her frequent guests, including Hans Kelsen and Karl Popper.  There he also met his future wife, Ilona Duczynska, a scholar/activist committed to the communist revolution, and her pragmatism and activism remained an enormous influence on Polanyi throughout the rest of his life.

At this time, Vienna was the only large European city to be run by a labor party, which allowed Polanyi to observe social democracy at close quarters.  While in Vienna, Polanyi began to write about world affairs for the prominent Osterreichische Volkswirt, where he again came into contact with Kelsen, as well as Peter Drucker, Gottfried Haberler, Friedrich Hayek, and Joseph Schumpeter.  To supplement his meager salary, he taught part time at the People’s College in Vienna, where he began to delve more deeply into the history of economic ideas.  After reading H. G. Wells, Polanyi concluded that, not just war, but market-based society as well, was bringing catastrophic social disintegration to the world.  Polanyi increasingly viewed the international scene through the analytical framework that he would use in the GT: “with the enfranchisement of the working class, democratic government in the modern era had entered into an irreconcilable tension with the rule of capital” (p. 104).

However, by the 1930s, Austria’s social democratic movement was displaced by Nazism.  The Polanyis relocated to London, where they moved within a new circle of socialist friends and liberal idealists, including G. D. H. Cole, Richard Tawney, Harold Laski, Thomas Green, Arnold Toynbee, A. D. Lindsey, and John Macmurray.  Dale singles out Toynbee’s “Challenge and Response” framework as inspiring Polanyi’s concept of the double movement.  Polanyi began to read the classical economists, but rejected their analysis of market capitalism for “reducing human beings and nature to commodity status” (p. 156).  As Dale puts it, through his synthesis of the classical economists and the Christian socialists, “Polanyi had arrived at the thesis for which he was to make his name: that the introduction of laissez-faire liberalism provokes a protectionist reaction . . . that he famously termed the ‘double movement’” (p. 156).

However, due to the economic distress in Britain during this time, Polanyi was only able to find part-time work.  Through his influential contacts, he made a lecture tour in the United States, which led to a visiting position at Bennington College.  There he expanded his network of influences to include E. H. Carr, Erich Fromm, Aurel Kolnai, Karl Mannheim, Franz Borkenau, and Lionel Robbins.  There he also drafted the GT.  As Dale recounts, the book was, for Polanyi, not simply an analysis of the economics of industrial capitalism, but also a philosophy of history, a fusion of Christian socialism and modern British welfare policy, and an “analytical survey of contemporary history” (p. 169).  Though his famous brother, Michael Polanyi, predicted that the GT would make Karl famous, Dale reports that the initial reviews of the GT were lukewarm at best, some overtly hostile.

After the war, with the support of Carter Goodrich and Walter Stewart, Polanyi secured a permanent position in the Columbia economics department.  There Polanyi came into contact with prominent American economists and sociologists: along with Goodrich, John Maurice Clark, Talcott Parsons, Robert Merton, Seymour Lipset, C. Wright Mills, Arthur Burns, Moses Finley, and Paul Lazarsfeld.  Ironically, as Dale remarks, even in that diverse crowd of intellects, the sociologists at Columbia saw Polanyi as an economist while the economists saw him as a sociologist.  At Columbia, Polanyi began work on Trade and Market in the Early Empires, a study of ancient non-market economies.  During these years, Polanyi flourished as a scholar, thanks to a regular income, good research support, and collaboration with his colleagues and graduate students.  Moreover, working with anthropologists on the topic of non-market economies, Polanyi was “thrilled” to see that the evidence supported “the lack of a primary orientation to material gain . . . by ‘primitive’ people” (p. 226).  Polanyi’s study of non-market societies led him to develop his substantivist approach to economics, i.e., an institutional economic analysis that relied on the broader concept of provisioning rather than on the narrower concept of decision-making under scarcity being cemented in mainstream economics at the time.  Despite this scholarly success, Polanyi reentered the political realm with the Co-Existence project in the early 1960s, to engage in the debate over Hungary’s future.  His death in 1964 prevented him from seeing this project through.

Dale concludes his book with the observation that Polanyi has again become relevant for twenty-first century capitalism.  Workers are “bought and sold like cucumbers” (p. 282); welfare critics offer simplistic solutions to poverty and unemployment; global capitalism is increasingly ‘financialized;’ and trade is producing a race to the bottom.  As Dale puts it, “It is Polanyi’s diagnosis of the corrupting consequences of the marketization of labor power and nature that gives his work a contemporary feel and explains its continued appeal” (p. 282).  However, while Polanyi’s grounding in social democracy instilled in him a faith in the power of government to mitigate the excesses of industrial capitalism, as Dale notes, Polanyi did not live to see how modern governments would themselves be captured by the “interests and imperatives of capital accumulation” (p. 284).

Gareth Dale has done an outstanding job of recounting Polanyi’s very full life in both the political and academic realms.  A truly important contribution is how he has woven, throughout his narrative of Polanyi’s different periods and activities, the origin of the ideas that underpinned the GT.  Moreover, Dale has used extensive work in five different archival repositories as well as Polanyi’s own writings, and the writings of many of those who influenced Polanyi during the key turning points of his life, to place Polanyi in his historical context.  Dale has also placed Polanyi’s work in the modern context by highlighting the increased relevance of Polanyi’s critique of market capitalism.  If at times Dale’s description of the pantheon of important thinkers who influenced Polanyi becomes dizzying to the reader, it should be seen as testament to the rich tapestry of intellectual ideas upon which Polanyi daily seemed to gaze, and not the fault of Gareth Dale, who has done a masterful job in situating and summarizing these myriad important influences.  For those interested in the work, not only of Karl Polanyi, but of many leading liberal thinkers of the first six decades of the twentieth century, this book will be invaluable.

Janet Knoedler is co-editor and co-author of three books, The Institutionalist Tradition in Labor Economics (with Dell P. Champlin), Thorstein Veblen and the Revival of Free-Market Capitalism (with Dell P. Champlin and Robert Prasch), and Introduction to Political Economy (with Charles Sackrey and Geoffrey Schneider), as well as numerous articles on institutional economics.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (September 2016). All EH.Net reviews are archived at

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

The Economic History of Mexico

The Economic History of Mexico

Richard Salvucci, Trinity University



This article is a brief interpretive survey of some of the major features of the economic history of Mexico from pre-conquest to the present. I begin with the pre-capitalist economy of Mesoamerica. The colonial period is divided into the Habsburg and Bourbon regimes, although the focus is not really political: the emphasis is instead on the consequences of demographic and fiscal changes that colonialism brought.  Next I analyze the economic impact of independence and its accompanying conflict. A tentative effort to reconstruct secular patterns of growth in the nineteenth century follows, as well as an account of the effects of foreign intervention, war, and the so-called “dictatorship” of Porfirio Diaz.  I then examine the economic consequences of the Mexican Revolution down through the presidency of Lázaro Cárdenas, before considering the effects of the Great Depression and World War II. This is followed by an examination of the so-called Mexican Miracle, the period of import-substitution industrialization after World War II. The end of the “miracle” and the rise of economic instability in the 1970s and 1980s are discussed in some detail. I conclude with structural reforms in the 1990s, the North American Free Trade Agreement (NAFTA), and slow growth in Mexico since then. It is impossible to be comprehensive and the references appearing in the citations are highly selective and biased (where possible) in favor of English-language works, although Spanish is a must for getting beyond the basics. This is especially true in economic history, where some of the most innovative and revisionist work is being done, as it should be, by historians and economists in Mexico.[2]


Where (and What) is Mexico?

For most of its long history, Mexico’s boundaries have been shifting, albeit broadly stable. Colonial Mexico basically stretched from Guatemala, across what is now California and the Southwestern United States, and vaguely into the Pacific Northwest.  There matters stood for more than three centuries[3]. The big shock came at the end of the War of 1847 (“the Mexican-American War” in U.S. history). The Treaty of Guadalupe Hidalgo (1848) ended the war, but in so doing, ceded half of Mexico’s former territory to the United States—recall Texas had been lost in 1836. The northern boundary now ran on a line beginning with the Rio Grande to El Paso, and thence more or less west to the Pacific Ocean south of San Diego. With one major adjustment in 1853 (the Gadsden Purchase or Treaty of the Mesilla) and minor ones thereafter, because of the shifting of the Rio Grande, there it has remained.

Prior to the arrival of the Europeans, Mexico was a congeries of ethnic and city states whose own boundaries were unstable. Prior to the emergence of the most powerful of these states in the fifteenth century, the so-called Triple Alliance (popularly “Aztec Empire”), Mesoamerica consisted of cultural regions determined by political elites and spheres of influence that were dominated by large ceremonial centers such as La Venta, Teotihuacán, and Tula.

While such regions may have been dominant at different times, they were never “economically” independent of one another. At Teotihuacan, there were living quarters given over to Olmec residents from the Veracruz region, presumably merchants. Mesoamerica was connected, if not unified, by an ongoing trade in luxury goods and valuable stones such as jade, turquoise and precious feathers. This was not, however, trade driven primarily by factor endowments and relative costs. Climate and resource endowments did differ significantly over the widely diverse regions and microclimates of Mesoamerica. Yet trade was also political and ritualized in religious belief. For example, calling the shipment of turquoise from the (U.S.) Southwest to Central Mexico the outcome of market activity is an anachronism. In the very long run, such prehistorical exchange facilitated the later emergence of trade routes, roads, and more technologically advanced forms of transport. But arbitrage does not appear to have figured importantly in it.[4]

In sum, what we call “Mexico” in a modern sense is not of much use to the economic historian with an interest in the country before 1870, which is to say, the great bulk of its history. In these years, specificity of time and place, sometimes reaching to the village level, is an indispensable prerequisite for meaningful discussion. At the very least, it is usually advisable to be aware of substantial regional differences which reflect the ethnic and linguistic diversity of the country both before and after the arrival of the Europeans. There are fully ten language families in Mexico, and two of them, Nahuatl and Quiché, number over a million speakers each.[5]


Trade and Tribute before the Europeans

In the codices or deerskin folded paintings the Europeans examined (or actually commissioned), they soon became aware of a prominent form of Mesoamerican economic activity: tribute, or taxation in kind, or even labor services. In the absence of anything that served as money, tribute was forced exchange. Tribute has been interpreted as a means of redistribution in a nonmonetary economy. Social and political units formed a basis for assessment, and the goods collected included maize, beans, chile and cotton cloth. It was through the tribute the indigenous “empires” mobilized labor and resources. There is little or no evidence for the existence of labor or land markets to do so, for these were a European import, although marketplaces for goods existed in profusion.

To an extent, the preconquest reliance on barter economies and the absence of money largely accounts for the ubiquity of tribute. The absence of money is much more difficult to explain and was surely an obstacle to the growth of productivity in the indigenous economies.

The tribute was a near-universal attribute of Mesoamerican ceremonial centers and political empires. The city of Teotihuacan (ca. 600 CE, with a population of 125,000 or more) in central Mexico depended on tribute to support an upper stratum of priests and nobles while the tributary population itself lived at subsistence. Tlatelolco (ca 1520, with a population ranging from 50 to 100 thousand) drew maize, cotton, cacao, beans and precious feathers from a wide swath of territory that broadly extended from the Pacific to Gulf coasts that supported an upper stratum of priests, warriors, nobles, and merchants. It was this urban complex that sat atop the lagoons that filled the Valley of Mexico that so awed the arriving conquerors.

While the characterization of tribute as both a corvée and a tax in kind to support nonproductive populations is surely correct, its persistence in altered (i.e., monetized) form under colonial rule does suggest an important question. The tributary area of the Mexica (“Aztec” is a political term, not an ethnic one) broadly comprised a Pacific slope, a central valley, and a Gulf slope. These embrace a wide range of geographic features ranging from rugged volcanic highlands (and even higher snow-capped volcanoes) to marshy, humid coastal plains. Even today, travel through these regions is challenging. Lacking both the wheel and draught animals, the indigenous peoples relied on human transport, or, where possible, waterborne exchange. However we measure the costs of transportation, they were high. In the colonial period, they typically circumscribed the subsistence radius of markets to 25 to 35 miles. Under the circumstances, it is not easy to imagine that voluntary exchange, particularly between the coastal lowlands and the temperate to cold highlands and mountains, would be profitable for all but the most highly valued goods. In some parts of Mexico–as in the Andean region—linkages of family and kinship bound different regions together in a cult of reciprocal economic obligations. Yet absent such connections, it is not hard to imagine, for example, transporting woven cottons from the coastal lowlands to the population centers of the highlands could become a political obligation rather than a matter of profitable, voluntary exchange. The relatively ambiguous role of markets in both labor and goods that persisted into the nineteenth century may perhaps derive from just this combination of climatic and geographical characteristics. It is what made voluntary exchange under capitalistic markets such a puzzlingly problematic answer to the ordinary demands of economic activity.


[See the relief map below for the principal physical features of Mexico.]


[See the political map below for Mexican states and state capitals.]




Used by permission of the University of Texas Libraries, The University of Texas at Austin.


“New Spain” or Colonial Mexico: The First Phase

Mexico was established by military conquest and civil war. In the process, a civilization with its own institutions and complex culture was profoundly modified and altered, if not precisely destroyed, by the European invaders. The catastrophic elements of conquest, including the sharp decline of the existing indigenous population, from perhaps 25 million to fewer than a million within a century due to warfare, disease, social disorganization and the imposition of demands for labor and resources should nevertheless not preclude some assessment, however tentative, of its economic level in 1519, when the Europeans arrived.[6]

Recent thinking suggests that Spain was far from poor when it began its overseas expansion. If this were so, the implications of the Europeans’ reactions to what they found on the mainland of Mexico (not, significantly in the Caribbean, and, especially, in Cuba, where they were first established) is important. We have several accounts of the conquest of Mexico by the European participants, of which Bernal Díaz del Castillo is the best known, but not the only one. The reaction of the Europeans was almost uniformly astonishment by the apparent material wealth of Tenochtitlan. The public buildings, spacious residences of the temple precinct, the causeways linking the island to the shore, and the fantastic array of goods available in the marketplace evoked comparisons to Venice, Constantinople, and other wealthy centers of European civilization. While it is true that this was a view of the indigenous elite, the beneficiaries of the wealth accumulated from numerous tributaries, it hardly suggests anything other than a kind of storied opulence. Of course, the peasant commoners lived at subsistence and enjoyed no such privileges, but then so did the peasants of the society from which Bernal Díaz, Cortés, Pedro de Alvarado and the other conquerors were drawn. It is hard to imagine that the average standard of living in Mexico was any lower than that of the Iberian Peninsula. The conquerors remarked on the physical size and apparent robust health of the people whom they met, and from this, scholars such as Woodrow Borah and Sherburne Cook concluded that the physical size of the Europeans and the Mexicans was about the same. Borah and Cook surmised that caloric intake per individual in Central Mexico was around 1,900 calories per day, which certainly seems comparable to European levels.[7]

Certainly, the technological differences with Europe hampered commercial exchange, such as the absence of the wheel for transportation, metallurgy that did not include iron, and the exclusive reliance on pictographic writing systems. Yet by the same token, Mesoamerican agricultural technology was richly diverse and especially oriented toward labor-intensive techniques, well suited to pre-conquest Mexico’s factor endowments. As Gene Wilken points out, Bernardino de Sahagún explained in his General History of the Things of New Spain that the Nahua farmer recognized two dozen soil types related to origin, source, color, texture, smell, consistency and organic content.  They were expert at soil management.[8] So it is possible not only to misspecify, but to mistake the technological “backwardness” of Mesoamerica relative to Europe, and historians routinely have.

The essentially political and clan-based nature of economic activity made the distribution of output somewhat different from standard neoclassical models. Although no one seriously maintains that indigenous civilization did not include private property and, in fact, property rights in humans, the distribution of product tended to emphasize average rather than marginal product. If responsibility for tribute was collective, it is logical to suppose that there was some element of redistribution and collective claim on output by the basic social groups of indigenous society, the clans or calpulli.[9] Whatever the case, it seems clear that viewing indigenous society and economy as strained by population growth to the point of collapse, as the so-called “Berkeley school” did in the 1950s, is no longer tenable. It is more likely that the tensions exploited by the Europeans to divide and conquer their native hosts and so erect a colonial state on pre-existing native entities were mainly political rather than socioeconomic. It was through the assistance of native allies such as the Tlaxcalans, as well as with the help of previously unknown diseases such as smallpox that ravaged the indigenous peoples, that the Europeans were able to place a weakened Tenochtitlan under siege and finally defeat it.


Colonialism and Economic Adjustment to Population Decline

With the subjection first of Tenochtitlan and Tlatelolco and then of other polities and peoples, a process that would ultimately stretch well into the nineteenth century and was never really completed, the Europeans turned their attention to making colonialism pay. The process had several components: the modification or introduction of institutions of rule and appropriation; the introduction of new flora and fauna that could be turned to economic use; the reorientation of a previously autarkic and precapitalist economy to the demands of trade and commercial exploitation; and the implementation of European fiscal sovereignty. These processes were complex, required much time, and were, in many cases, only partly successful. There is considerable speculation regarding how long it took before Spain (arguably a relevant term by the mid-sixteenth century) made colonialism pay. The best we can do is present a schematic view of what occurred. Regional variations were enormous: a “typical” outcome or institution of colonialism may well have been an outcome visible in central Mexico. Moreover, all generalizations are fragile, rest on limited quantitative evidence, and will no doubt be substantially modified eventually. The message is simple: proceed with caution.

The Europeans did not seek to take Mesoamerica as a tabula rasa. In some ways, they would have been happy to simply become the latest in a long line of ruling dynasties established by decapitating native elites and assuming control. The initial demand of the conquerors for access to native labor in the so-called encomienda was precisely that, with the actual task of governing be left to the surviving and collaborating elite: the principle of “indirect rule.”[10] There were two problems with this strategy: the natives resisted and the natives died. They died in such large numbers as to make the original strategy impracticable.

The number of people who lived in Mesoamerica has long been a subject of controversy, but there is no point in spelling it out once again. The numbers are unknowable and, in an economic sense, not really important. The population of Tenochtitlan has been variously estimated between 50 and 200 thousand individuals, depending on the instruments of estimation.  As previously mentioned, some estimates of the Central Mexican population range as high as 25 million on the eve of the European conquest, and virtually no serious student accepts the small population estimates based on the work of Angel Rosenblatt. The point is that labor was abundant relative to land, and that the small surpluses of a large tributary population must have supported the opulent elite that Bernal Díaz and his companions described.

By 1620, or thereabouts, the indigenous population had fallen to less than a million according to Cook and Borah. This is not just the quantitative speculation of modern historical demographers. Contemporaries such as Jerónimo de Mendieta in his Historia eclesiástica Indiana (1596) spoke of towns formerly densely populated now witness to “the palaces of those former Lords ruined or on the verge of. The homes of the commoners mostly empty, roads and streets deserted, churches empty on feast days, the few Indians who populate the towns in Spanish farms and factories.” Mendieta was an eyewitness to the catastrophic toll that European microbes and warfare took on the native population. There was a smallpox epidemic in 1519-20 when 5 to 8 million died. The epidemic of hemorrhagic fever in 1545 to 1548 was one of the worst demographic catastrophes in human history, killing 5 to 15 million people. And then again in 1576 to 1578, when 2 to 2.5 million people died, we have clear evidence that land prices in the Valley of Mexico (Coyoacán, a village outside Mexico City, as the reconstructed Tenochtitlán was called) collapsed. The death toll was staggering. Lesser outbreaks were registered in 1559, 1566, 1587, 1592, 1601, 1604, 1606, 1613, 1624, and 1642. The larger point is that the intensive use of native labor, such as the encomienda, had to come to an end, whatever its legal status had become by virtue of the New Laws (1542). The encomienda or the simple exploitation of massive numbers of indigenous workers was no longer possible. There were too few “Indians” by the end of the sixteenth century.[11]

As a result, the institutions and methods of economic appropriation were forced to change. The Europeans introduced pastoral agriculture – the herding of cattle and sheep – and the use of now abundant land and scarce labor in the form of the hacienda while the remaining natives were brought together in “villages” whose origins were not essentially pre- but post-conquest, the so-called congregaciones, at the same time that the titles to now-vacant lands were created, regularized and “composed.”[12] (Land titles were a European innovation as well). Sheep and cattle, which the Europeans introduced, became part of the new institutional backbone of the colony. The natives would continue to rely on maize for the better part of their subsistence, but the Europeans introduced wheat, olives (oil), grapes (wine) and even chickens, which the natives rapidly adopted. On the whole, the results of these alterations were complex. Some scholars argue that the native diet improved even in the face of their diminishing numbers, a consequence of increased land per person and of greater variety of foodstuffs, and that the agricultural potential of the colony now called New Spain was enhanced. By the beginning of the seventeenth century, the combined indigenous, European immigrant, and new mixed blood populations could largely survive on the basis of their own production. The introduction of sheep lead to the introduction and manufacture of woolens in what were called obrajes or manufactories in Puebla, Querétaro, and Coyoacán. The native peoples continued to produce cottons (a domestic crop) under the stimulus of European organization, lending, and marketing. Extensive pastoralism, the cultivation of cereals and even the incorporation of native labor then characterized the emergence of the great estates or haciendas, which became a characteristic rural institution through the twentieth century, when the Mexican Revolution put an end to many of them. Thus the colony of New Spain continued to feed, clothe and house itself independent of metropolitan Spain’s direction. Certainly, Mexico before the Conquest was self-sufficient. The extent to which the immigrant and American Spaniard or creole population depended on imports of wine, oil and other foodstuffs and textiles in the decades immediately following the conquest is much less clear.

At the same time, other profound changes accompanied the introduction of Europeans, their crops and their diseases into what they termed the “kingdom” (not colony, for constitutional reasons) of New Spain.[13] Prior to the conquest, land and labor had been commoditized, but not to any significant extent, although there was a distinction recognized between possession and ownership.  Scholars who have closely examined the emergence of land markets after the conquest—mainly in the Valley of Mexico—are virtually unanimous in this conclusion. To the extent that markets in labor and commodities had emerged, it took until the 1630s (and later elsewhere in New Spain) for the development to reach maturity. Even older mechanisms of allocation of labor by administrative means (repartimiento) or by outright coercion persisted. Purely economic incentives in the form of money wages and prices never seemed adequate to the job of mobilizing resources and those with access to political power were reluctant to pay a competitive wage. In New Spain, the use of some sort of political power or rent-seeking nearly always accompanied labor recruitment. It was, quite simply, an attempt to evade the implications of relative scarcity, and renders the entire notion of “capitalism” as a driving economic force in colonial Mexico quite inexact.


Why the Settlers Resisted the Implications of Scarce Labor

The reasons behind this development are complex and varied. The evidence we have for the Valley of Mexico demonstrates that the relative price of labor rose while the relative price of land fell even when nominal movements of one or the other remained fairly limited. For instance, the table constructed below demonstrates that from 1570-75 through 1591-1606, the price of unskilled labor in the Valley of Mexico nearly tripled while the price of land in the Valley (Coyoacán) fell by nearly two thirds. On the whole, the price of labor relative to land increased by nearly 800 percent. The evolution of relative prices would have inevitably worked against the demanders of labor (Europeans and increasingly, creoles or Americans of largely European ancestry) and in favor of the supplier (native labor, or people of mixed race generically termed mestizo). This was not of course what the Europeans had in mind and by capture of legal institutions (local magistrates, in particularly), frequently sought to substitute compulsion for what would have been costly “free labor.” What has been termed the “depression” of the seventeenth century may well represent one of the consequences of this evolution: an abundance of land, a scarcity of labor, and the attempt of the new rulers to adjust to changing relative prices. There were repeated royal prohibitions on the use of forced indigenous labor in both public and private works, and thus a reduction in the supply of labor. All highly speculative, no doubt, but the adjustment came during the central decades of the seventeenth century, when New Spain increasingly produced its own woolens and cottons, and largely assumed the tasks of providing itself with foodstuffs and was thus required to save and invest more.  No doubt, the new rulers felt the strain of trying to do more with less.[14]


Years Land Price Index Labor Price Index (Labor/Land) Index
1570-1575 100 100 100
1576-1590 50 143 286
1591-1606 33 286 867


Source: Calculated from Rebecca Horn, Postconquest Coyoacan: Nahua-Spanish Relations in Central Mexico, 1519-1650 (Stanford: Stanford University Press, 1997), p. 208 and José Ignacio Urquiola Permisan, “Salarios y precios en la industria manufacturer textile de la lana en Nueva España, 1570-1635,” in Virginia García Acosta, (ed.), Los precios de alimentos y manufacturas novohispanos (México, DF: CIESAS, 1995), p. 206.


The overall role of Mexico within the Hapsburg Empire was in flux as well. Nothing signals the change as much as the emergence of silver mining as the principal source of Mexican exportables in the second half of the sixteenth century. While Mexico would soon be eclipsed by Peru as the most productive center of silver mining—at least until the eighteenth century—the discovery of significant silver mines in Zacatecas in the 1540s transformed the economy of the Spanish empire and the character of New Spain’s as well.




Silver Mining

While silver mining and smelting was practiced before the conquest, it was never a focal point of indigenous activity. But for the Europeans, Mexico was largely about silver mining. From the mid- sixteenth century onward, it was explicitly understood by the viceroys that they were to do all in their power to “favor the mines,” as one memorable royal instruction enjoined. Again, there has been much controversy of the precise amounts of silver that Mexico sent to the Iberian Peninsula. What we do know certainly is that Mexico (and the Spanish Empire) became the leading source of silver, monetary reserves, and thus, of high-powered money. Over the course of the colonial period, most sources agree that Mexico provided nearly 2 billion pesos (dollars) or roughly 1.6 billion troy ounces to the world economy. The graph below provides a picture of the remissions of all Mexican silver to both Spain and to the Philippines taken from the work of John TePaske.[15]


Since the population of Mexico under Spanish rule was at most 6 million people by the end of the colonial period, the kingdom’s silver output could only be considered astronomical.

This production has to be considered in both its domestic and international dimensions. From a domestic perspective, the mines were what a later generation of economists would call “growth poles.” They were markets in which inputs were transformed into tradable outputs at a much higher rate of productivity (because of mining’s relatively advanced technology) than Mexico’s other activities. Silver thus became Mexico’s principal exportable good, and remained so well into the late nineteenth century.  The residual claimants on silver production were many and varied.  There were, of course the silver miners themselves in Mexico and their merchant financiers and suppliers. They ranged from some of the wealthiest people in the world at the time, such as the Count of Regla (1710-1781), who donated warships to Spain in the eighteenth century, to individual natives in Zacatecas smelting their own stocks of silver ore.[16] While the conditions of labor in Mexico’s silver mines were almost uniformly bad, the compensation ranged from above market wages paid to free labor in the prosperous larger mines  of the Bajío and the North to the use of forced village  labor drafts in more marginal (and presumably less profitable) sites such as Taxco. In the Iberian Peninsula, income from American silver mines ultimately supported not only a class of merchant entrepreneurs in the large port cities, but virtually the core of the Spanish political nation, including monarchs, royal officials, churchmen, the military and more. And finally, silver flowed to those who valued it most highly throughout the world. It is generally estimated that 40 percent of Spain’s American (not just Mexican, but Peruvian as well) silver production ended up in hoards in China.

Within New Spain, mining centers such as Guanajuato, San Luis Potosí, and Zacatecas became places where economic growth took place rapidly, in which labor markets more readily evolved, and in which the standard of living became obviously higher than in neighboring regions. Mining centers tended to crowd out growth elsewhere because the rate of return for successful mines exceeded what could be gotten in commerce, agriculture and manufacturing. Because silver was the numeraire for Mexican prices—Mexico was effectively on a silver standard—variations in silver production could and did have substantial effects on real economic activity elsewhere in New Spain. There is considerable evidence that silver mining saddled Mexico with an early case of “Dutch disease” in which irreducible costs imposed by the silver standard ultimately rendered manufacturing and the production of other tradable goods in New Spain uncompetitive. For this reason, the expansion of Mexican silver production in the years after 1750 was never unambiguously accompanied by overall, as opposed to localized prosperity. Silver mining tended to absorb a disproportional quantity of resources and to keep New Spain’s price level high, even when the business cycle slowed down—a fact that was to impress visitors to Mexico well into the nineteenth century. Mexican silver accounted for well over three-quarters of exports by value into the nineteenth century as well. The estimates vary widely, for silver was by no means the only, or even the most important source of revenue to the Crown, but by the end of the colonial era, the Kingdom of New Spain probably accounted for 25 percent of the Crown’s imperial income.[17] That is why reformist proposals circulating in governing circles in Madrid in the late eighteenth century fixed on Mexico. If there was any threat to the American Empire, royal officials thought that Mexico, and increasingly, Cuba, were worth holding on to. From a fiscal standpoint, Mexico had become just that important.[18]


“New Spain”: The Second Phase                of the Bourbon “Reforms”

In 1700, the last of the Spanish Hapsburgs died and a disputed succession followed. The ensuring conflict, known as the War of Spanish Succession, came to an end in 1714. The grandson of French king Louis XIV came to the Spanish throne as King Philip V. The dynasty he represented was known as the Bourbons. For the next century of so, they were to determine the fortunes of New Spain. Traditionally, the Bourbons, especially the later ones, have been associated with an effort to “renationalize” the Spanish empire in America after it had been thoroughly penetrated by French, Dutch, and lastly, British commercial interests.[19]

There were at least two areas in which the Bourbon dynasty, “reformist” or no, affected the Mexican economy. One of them dealt with raising revenue and the other was the international position of the imperial economy, specifically, the volume and value of trade. A series of statistics calculated by Richard Garner shows that the share of Mexican output or estimated GDP taken by taxes grew by 167 percent between 1700 and 1800. The number of taxes collected by the Royal Treasury increased from 34 to 112 between 1760 and 1810. This increase, sometimes labelled as a Bourbon “reconquest” of Mexico after a century and a half of drift under the Hapsburgs, occurred because of Spain’s need to finance increasingly frequent and costly wars of empire in the eighteenth century. An entire array of new taxes and fiscal placemen came to Mexico. They affected (and alienated) everyone, from the wealthiest merchant to the humblest villager. If they did nothing else, the Bourbons proved to be expert tax collectors.[20]

The second and equally consequential change in imperial management lay in the revision and “deregulation” of New Spain’s international trade, or the evolution from a “fleet” system to a regime of independent sailings, and then, finally, of voyages to and from a far larger variety of metropolitan and colonial ports. From the mid-sixteenth century onwards, ocean-going trade between Spain and the Americas was, in theory, at least, closely regulated and supervised. Ships in convoy (flota) sailed together annually under license from the monarchy and returned together as well. Since so much silver specie was carried, the system made sense, even if the flotas made a tempting target and the problem of contraband was immense. The point of departure was Seville and later, Cadiz. Under pressure from other outports in the late eighteenth century, the system was finally relaxed. As a consequence, the volume and value of trade to Mexico increased as the price of importables fell. Import-competing industries in Mexico, especially textiles, suffered under competition and established merchants complained that the new system of trade was too loose. But to no avail. There is no measure of the barter terms of trade for the eighteenth century, but anecdotal evidence suggests they improved for Mexico. Nevertheless, it is doubtful that these gains could have come anywhere close to offsetting the financial cost of Spain’s “reconquest” of Mexico.[21]

On the other hand, the few accounts of per capita real income growth in the eighteenth century that exist suggest little more than stagnation, the result of population growth and a rising price level. Admittedly, looking for modern economic growth in Mexico in the eighteenth century is an anachronism, although there is at least anecdotal evidence of technological change in silver mining, especially in the use of gunpowder for blasting and excavating, and of some productivity increase in silver mining. So even though the share of international trade outside of goods such as cochineal and silver was quite small, at the margin, changes in the trade regime were important. There is also some indication that asset income rose and labor income fell, which fueled growing social tensions in New Spain. In the last analysis, the growing fiscal pressure of the Spanish empire came when the standard of living for most people in Mexico—the native and mixed blood population—was stagnating. During periodic subsistence crisis, especially those propagated by drought and epidemic disease, and mostly in the 1780s, living standards fell. Many historians think of late colonial Mexico as something of a powder keg waiting to explode. When it did, in 1810, the explosion was the result of a political crisis at home and a dynastic failure abroad. What New Spain had negotiated during the Wars of Spanish Succession—regime change– provide impossible to surmount during the Napoleonic Wars (1794-1815). This may well be the most sensitive indicator of how economic conditions changed in New Spain under the heavy, not to say clumsy hand, of the Bourbon “reforms.”[22]


The War for Independence, the Insurgency, and Their Legacy

The abdication of the Bourbon monarchy to Napoleon Bonaparte in 1808 produced a series of events that ultimately resulted in the independence of New Spain. The rupture was accompanied by a violent peasant rebellion headed by the clerics Miguel Hidalgo and José Morelos that, one way or another, carried off 10 percent of the population between 1810 and 1820. Internal commerce was largely paralyzed. Silver mining essentially collapsed between 1810 and 1812 and a full recovery of mining output was delayed until the 1840s. The mines located in zones of heavy combat, such as Guanajuato and Querétaro, were abandoned by fleeing workers. Thus neglected, they quickly flooded.

At the same time, the fiscal and human costs of this period, the Insurgency, were even greater.[23] The heavy borrowings in which the Bourbons engaged to finance their military alliances left Mexico with a considerable legacy of internal debt, estimated at £16 million at Independence. The damage to the fiscal, bureaucratic and administrative structure of New Spain in the face of the continuing threat of Spanish reinvasion (Spain did not recognize the Independence of Mexico (1821)) in the 1820s drove the independent governments into foreign borrowing on the London market to the tune of £6.4 million in order to finance continuing heavy military outlays. With a reduced fiscal capacity, in part the legacy of the Insurgency and in part the deliberate effort of Mexican elites to resist any repetition Bourbon-style taxation, Mexico defaulted on its foreign debt in 1827. For the next sixty years, through a serpentine history of moratoria, restructuring and repudiation (1867), it took until 1884 for the government to regain access to international capital markets, at what cost can only be imagined. Private sector borrowing and lending continued, although to what extent is currently unknown. What is clear is that the total (internal plus external) indebtedness of Mexico relative to late colonial GDP was somewhere in the range of 47 to 56 percent.[24]

This was, perhaps, not an insubstantial amount for a country whose mechanisms of public finance were in what could be mildly termed chaotic condition in the 1820s and 1830s as the form, philosophy, and mechanics of government oscillated from federalist to centralist and back into the 1850s.  Leaving aside simple questions of uncertainty, there is the very real matter that the national government—whatever the state of private wealth—lacked the capacity to service debt because national and regional elites denied it the means to do so. This issue would bedevil successive regimes into the late nineteenth century, and, indeed, into the twentieth.[25]

At the same time, the demographic effects of the Insurgency exacted a cost in terms of lost output from the 1810s through the 1840s. Gaping holes in the labor force emerged, especially in the fertile agricultural plains of the Bajío that created further obstacles to the growth of output. It is simply impossible to generalize about the fortunes of the Mexican economy in this period because of the dramatic regional variations in the Republic’s economy. A rough estimate of output per head in the late colonial period was perhaps 40 pesos (dollars).[26] After a sharp contraction in the 1810s, income remained in that neighborhood well into the 1840s, at least until the eve of the war with the United States in 1846. By the time United States troops crossed the Rio Grande, a recovery had been under way, but the war arrested it. Further political turmoil and civil war in the 1850s and 1860s represented setbacks as well. In this way, a half century or so of potential economic growth was sacrificed from the 1810s through the 1870s. This was not an uncommon experience in Latin America in the nineteenth century, and the period has even been called The Stage of the Great Delay.[27] Whatever the exact rate of real per capita income growth was, it is hard to imagine it ever exceeded two percent, if indeed it reached much more than half that.


Agricultural Recovery and War

On the other hand, it is clear that there was a recovery in agriculture in the central regions of the country, most notably in the staple maize crop and in wheat. The famines of the late colonial era, especially of 1785-86, when massive numbers perished, were not repeated. There were years of scarcity and periodic corresponding outbreaks of epidemic disease—the cholera epidemic of 1832 affected Mexico as it did so many other places—but by and large, the dramatic human wastage of the colonial period ceased, and the death rate does appear to have begun to fall. Very good series on wheat deliveries and retail sales taxes for the city of Puebla southeast of Mexico City show a similarly strong recovery in the 1830s and early 1840s, punctuated only by the cholera epidemic whose effects were felt everywhere.[28]

Ironically, while the Panic of 1837 appears to have at least hit the financial economy in Mexico hard with a dramatic fall in public borrowing (and private lending), especially in the capital,[29] an incipient recovery of the real economy was ended by war with the United States. It is not possible to put numbers on the cost of the war to Mexico, which lasted intermittently from 1846 to 1848, but the loss of what had been the Southwest under Mexico is most often emphasized. This may or may not be accurate. Certainly, the loss of California, where gold was discovered in January 1848, weighs heavily on the historical imaginations of modern Mexicans. There is also the sense that the indemnity paid by the United States–$15 million—was wholly inadequate, which seems at least understandable when one considers that Andrew Jackson offered $5 million to purchase Texas alone in 1829.

It has been estimated that the agricultural output of the Mexican “cession” as it was called in 1900, was nearly $64 million, and that the value of livestock in the territory was over $100 million. The value of gold and silver produced was about $35 million. Whether it is reasonable to employ the numbers in estimating the present value of output relative to the indemnity paid is at least debatable as a counterfactual, unless one chooses to regard this as the annuitized value on a perpetuity “purchased” from Mexico at gunpoint, which seems more like robbery than exchange.  In the long run, the loss may have been staggering, but in the short run, much less so. The northern territories Mexico lost had really yielded very little up until the War. In fact, the balance of costs and revenues to the Mexican government may well have been negative.[30]

Whatever the case, the decades following the war with the United States until the beginning of the administration of Porfirio Díaz (1876) are typically regarded as a step backward. The reasons are several. In 1850, the government essentially went broke. While it is true that its financial position had disintegrated since the mid-1830s, 1850 marked a turning point. The entire indemnity payment from the United States was consumed in debt service, but this made no appreciable dent in the outstanding principal, which hovered around 50 million pesos (dollars).  The limits of debt sustainability had been reached: governing was turned into a wild search for resources, which proved fruitless. Mexico continued to sell of parts of its territory, such as the Treaty of the Mesilla (1853), or Gadsden Purchase, whose proceeds largely ended up in the hands of domestic financiers rather than foreign creditors’.[31] Political divisions, if anything, terrible before the war with the United States, turned catastrophic. A series of internal revolts, uprisings and military pronouncements segued into yet another violent civil war between liberals and conservatives—now a formal party—the so-called Three Years’ War (1856-58). In 1862, frustrated by Mexico’s suspension of foreign debt service, Great Britain, Spain and France seized Veracruz. A Hapsburg prince, Maximilian, was installed as Mexico’s second “emperor.” (Agustín de Iturbide was the first). While only the French actively prosecuted the war within Mexico, and while they never controlled more than a very small part of the country, the disruption was substantial. By 1867, with Maximillian deposed and the French army withdrawn, the country required serious reconstruction. [32]


Juárez, Díaz and the Porfiriato: authoritarian development.

To be sure, the origins of authoritarian development in nineteenth century Mexico were not with Porfirio Díaz, as is often asserted. Their beginnings actually went back several decades earlier, to the last presidency of Santa Anna, generally known as the Dictatorship (1853-54). But Santa Anna was overthrown too quickly, and now for the last time, for much to have actually occurred. A ministry for development (Fomento) had been created, but the Liberal revolution of Ayutla swept Santa Anna and his clique away for good. Serious reform seems to have begun around 1870, when the Finance Minister was Matías Romero. Romero was intent on providing Mexico with a modern Treasury, and on ending the hand-to- mouth financing that had mostly characterized the country’s government since Independence, or at least since the mid-1830s. So it is appropriate to pick up with the story here. Where did Mexico stand in 1870?[33]

The most revealing data that we have on the state of economic development come from various anthropometric and cost of living studies by Amilcar Challu, Aurora Gómez Galvarriato, and Moramay López Alonso.[34] Their research overlaps in part, and gives a fascinating picture of Mexico in the long run, from 1735 to 1940. For the moment, let us look at the period leading up to 1867, when the French withdrew from Mexico. If we look at the heights of the “literate” population, Challu’s research suggests that the standard of living stagnated between 1750 and 1840. If we look at the “illiterate” population, there was a consistent decline until 1850. Since the share of the illiterate population was clearly larger, we might infer that living standards for most Mexicans declined after 1750, however we interpret other quantitative and anecdotal evidence.

López Alonso confines her work to the period after the 1840s. From 1850 through 1890, her work generally corroborates Challu’s. The period after the Mexican War was clearly a difficult one for most Mexicans, and the challenge that both Juárez and Díaz faced was a macroeconomy in frank contraction after 1850. The regimes after 1867 were faced with stagnation.

The real wage study of by Amilcar Challu and Aurora Gómez Galvarriato, when combined with the existing anthropometric work, offers a pretty clear correlation between movements in real wages (down) and height (falling). [35]

It would then appear growth from the 1850s through the 1870s was slow—if there was any at all—and perhaps inferior to what had come between the 1820s and the 1840s. Given the growth of import substitution during the Napoleonic Wars, roughly 1790-1810, coupled with the commercial opening brought by the Bourbons’   post-1789 extension of “free trade” to Mexico, we might well see a pattern of mixed performance (1790-1810), sharp contraction (the 1810s), rebound and recovery, with a sharp financial shocks coming in the mid-1820s and mid -1830s (1820s-1840s), and stagnation once more (1850s-1870s). Real per capita output oscillated, sometimes sharply, around an underlying growth rate of perhaps one percent; changes in the distribution of income and wealth are more or less impossible to identify consistently, because studies conflict.

Far less speculative is that the foundations for modern economic growth were laid down in Mexico during the era of Benito Juárez. Its key elements were the creation of a secular, bourgeois state and secular institutions embedded in the Constitution of 1857. The titanic ideological struggles between liberals and conservatives were ultimately resolved in favor of a liberal, but nevertheless centralizing form of government under Porfirio Diáz. This was the beginning of the end of the Ancien Regime. Under Juárez, corporate lands of the Church and native villages were privatized in favor of individual holdings and their former owners compensated in bonds. This was effectively the largest transfer of land title since the late sixteenth century (not including the war with the United States) and it cemented the idea of individual property rights. With the expulsion of the French and the outright repudiation of the French debt, the Treasury was reorganized along more modern lines. The country got additional breathing room by the suspension of debt service to Great Britain until the terms of the 1825 loans were renegotiated under the Dublán Convention (1884). Equally, if not more important, Mexico now entered the railroad age in 1876, nearly forty years after the first tracks were laid in Cuba in 1837. The educational system was expanded in an attempt to create at least a core of literate citizens who could adopt the tools of modern finance and technology. Literacy still remained in the neighborhood of 20 percent, and life expectancy at birth scarcely reached 40 years of age, if that. Yet by the end of the Restored Republic (1876), Mexico had turned a corner. There would be regressions, but the nineteenth century had finally arrived, aptly if brutally signified by Juárez’ execution of Maximilian in Querétaro in 1867.[36]

Porfirian Mexico

Yet when Díaz came to power, Mexico was, in many ways, much as it had been a century earlier. It was a rural, agrarian nation whose primary agricultural output per person was maize, followed by wheat and beans. These were produced on haciendas and ranchos in Jalisco, Guanajuato, Michoacán, Mexico, Puebla as well as Oaxaca, Veracruz, Aguascalientes, Chihuahua and Sonora. Cotton, which with great difficulty had begun to supply a mechanized factory regime (first in spinning, then weaving) was produced in Oaxaca, Yucatán, Guerrero and Chiapas as well as in parts of Durango and Coahuila. Domestic production of raw cotton rarely sufficed to supply factories in Michoacán, Querétaro, Puebla and Veracruz, so imports from the Southern United States were common. For the most part, the indigenous population lived on maize, beans, and chile, producing its own subsistence on small, scattered plots known as milpas. Perhaps 75 percent of the population was rural, with the remainder to be found in cities like Mexico, Guadalajara, San Luis Potosí, and later, Monterrey. Population growth in the Southern and Eastern parts of the country had been relatively slow in the nineteenth century. The North and the center North grew more rapidly.  The Center of the country, less so. Immigration from abroad had been of no consequence.[37]

It is a commonplace to see the presidency of Porfirio Díaz (1876-1910) as a critical juncture in Mexican history, and this would be no less true of economic or commercial history as well. By 1910, when the Díaz government fell and Mexico descended into two decades of revolution, the first one extremely violent, the face of the country had been changed for good. The nature and effect of these changes remain not only controversial, but essential for understanding the subsequent evolution of the country, so we should pause here to consider some of their essential features.

While mining and especially, silver mining, had long held a privileged place in the economy, the nineteenth century had witnessed a number of significant changes. Until about 1889, the coinage of gold, silver, and copper—a very rough proxy for production given how much silver had been illegally exported—continued on a steadily upward track. In 1822, coinage was about 10 million pesos. By 1846, it had reached roughly 15 million pesos. There was something of a structural break after the war with the United States (its origins are unclear), and coinage continued upward to about 25 million pesos in 1888. Then, the falling international price of silver, brought on by large increases in supply elsewhere, drove the trend after 1889 sharply downward. By 1909-10, coinage had collapsed to levels previously unrecorded since the 1820s, although in 1904 and 1905, it had skyrocketed to nearly 45 million pesos.[38]

It comes as no surprise that these variations in production corresponded to sharp changes in international relative prices. For example, the market price of silver declined sharply relative to lead, which in turn encountered a large increase in Mexican production and a diversification into other metals including zinc, antinomy, and copper. Mexico left the silver standard (for international transactions, but continued to use silver domestically) in 1905, which contributed to the eclipse of this one crucial industry, which would never again have the status it had when Díaz became president in 1876, when precious metals represented 75 percent of Mexican exports by value. By the time he had decamped in exile to Paris, precious metals accounted for less than half of all exports.

The reason for this relative decline was the diversification of agricultural exports that had been slowly occurring since the 1870s. Coffee, cotton, sugar, sisal and vanilla were the principal crops, and some regions of the country such as Yucatán (henequen) and Durango and Tamaulipas (cotton) supplied new export crops.


Railroads and Infrastructure

None of be of this would have occurred without the massive changes in land tenure that had begun in the 1850s, but most of all, without the construction of railroads financed by the migration of foreign capital to Mexico under Díaz. At one level, it is a well-known story of social savings, which were substantial in Mexico because the terrain was difficult and the alternative modes of carriage few. One way or another, transportation has always been viewed as an “obstacle” to Mexican economic development. That must be true at some level, although recent studies (especially by Sandra Kuntz) have raised important qualifications. Railroads may not have been gateways to foreign dependency, as historians once argued, but there were limits to their ability to effect economic change, even internally. They tended to enlarge the internal market for some commodities more than others. The peculiarities of rate-making produced other distortions, while markets for some commodities were inevitably concentrated in major cities or transshipment points which afforded some monopoly power to distributors even as a national market in basic commodities became more of a reality. Yet, in general, the changes were far reaching.[39]

Conventional figures confirm conventional wisdom. When Díaz assumed the presidency, there were 660 km (410 miles) of track. In 1910, there were 19,280 km (about 12,000 miles). Seven major lines linked the cities of Mexico, Veracruz, Acapulco, Juárez, Laredo, Puebla, Oaxaca. Monterrey and Tampico in 1892. The lines were built by foreign capital (e.g., the Central Mexicano was built by the Atchison, Topeka and Santa Fe), which is why resolving the long-standing questions of foreign debt service were critical. Large government subsidies on the order of 3,500 to 8,000 pesos per km were granted, and financing the subsidies amounted to over 30 million pesos by 1890. While the railroads were successful in creating more of a national market, especially in the North, their finances were badly affected by the depreciation of the silver peso, given that foreign liabilities had to be liquidated in gold.

As a result, the government nationalized the railroads in 1903. At the same time, it undertook an enormous effort to construct infrastructure such as drainage and ports, virtually all of which were financed by British capital and managed by “Don Porfirio’s contactor,” Sir Weetman Pearson.  Between railroads, ports, drainage works and irrigation facilities, the Mexican government borrowed 157 million pesos to finance costs.[40]

The expansion of the railroads, the build-out of infrastructure and the expansion of trade would have normally increased output per capita. Any data we have prior to 1930 are problematic, and before 1895, strictly speaking, we have no official measures of output per capita at all. Most scholars shy away from using levels of GDP in any form, other than for illustrative purposes.  Aside from the usual problems attending national income accounting, Mexico presents a few exceptional challenges. In peasant families, where women were entrusted with converting maize into tortilla, no small job, the omission of their value added from GDP must constitute a sizeable defect in measured output. Moreover, as the commercial radius of Mexican agriculture expanded rapidly as railroads, roads, and later, highways spread extensively, growth rates represented increased commercialization rather than increased growth. We have no idea how important this phenomenon was, but it is worth keeping in mind when we look at very rapid growth rates after 1940.

There are various measures of cumulative growth during the Porfiriato. By and large, the figure from 1900 through 1910 is around 23 percent, which is certainly higher than rates achieved during the nineteenth century, but nothing like what was recorded after 1940. In light of declining real wages, one can only assume that the bulk of “progress” flowed to the recipients of property income. This may well have represented a reversal of trends in the nineteenth century, when some argue that property income contracted in the wake of the Insurgency[41].

There was also significant industrialization in Mexico during the Porfiriato. Some industry, especially textiles, had its origins in the 1840s, but its size, scale and location altered dramatically by the end of the nineteenth century. For example, the cotton textile industry saw the number of workers, spindles and looms more than double from the late 1870s to the first decade of the nineteenth century. Brewing and its associated industry, glassmaking, became well established in Monterrey during the 1890s. The country’s first iron and steel mill, Fundidora Monterrey, was established there as well in 1903. Other industries, such as papermaking and cigarettes followed suit. By the end of the Porfiriato, over 10 percent of Mexico’s output was certainly industrial.[42]


From Revolution to “Miracle”

The Mexican Revolution (1910-1940) began as a political upheaval provoked by a crisis in the presidential succession when Porfirio Díaz refused to leave office in the wake of electoral defeat after signaling his willingness to do so in a famous pubic interview of 1908.[43] It was also the result of an agrarian uprising and the insistent demand of Mexico’s growing industrial proletariat for a share of political power. Finally, there was a small (fewer than 10 percent of all households) but upwardly mobile urban middle class created by economic development under Díaz whose access to political power had been effectively blocked by the regime’s mechanics of political control. Precisely how “revolutionary” were the results of the armed revolt—which persisted largely through the 1910s and peaked in a civil war in 1914-1915—has long been contentious, but is only tangentially relevant as a matter of economic history. The Mexican Revolution was no Bolshevik movement (of course, it predated Bolshevism by seven years) but it was not a purely bourgeois constitutional movement either, although it did contain substantial elements of both.

From a macroeconomic standpoint, it has become fashionable to argue that the Revolution had few, if any, profound economic consequences. It seems as if the principal reason was that revolutionary factions were interested in appropriating rather than destroying the means of production. For example, the production of crude oil peaked in Mexico in 1915—at the height of the Revolution—because crude oil could be used as a source of income to the group controlling the wells in Veracruz state. This was a powerful consideration.[44]

Yet in another sense, the conclusion that the Revolution had slight economic effects is not only facile, but obviously wrong. As the demographic historian Robert McCaa showed, the excess mortality occasioned by the Revolution was larger than any similar event in Mexican history other than the conquest in the sixteenth century. There has been no attempt made to measure the output lost by the demographic wastage (including births that never occurred), yet even the effect on the population cohort born between 1910 and 1920 is plain to see in later demographic studies.  [45]

There is also a subtler question that some scholars have raised. The Revolution increased labor mobility and the labor supply by abolishing constraints on the rural population such as debt peonage and even outright slavery. Moreover, the Revolution, by encouraging and ultimately setting into motion a massive redistribution of previously privatized land, contributed to an enlarged supply of that factor of production as well. The true impact of these developments was realized in the 1940s and 1950s, when rapid economic growth began, the so-called Mexican Miracle, which was characterized by rates of real growth of as much as 6 percent per year (1955-1966). Whatever the connection between the Revolution and the Miracle, it will require a serious examination on empirical grounds and not simply a dogmatic dismissal of what is now regarded as unfashionable development thinking: import substitution and inward-oriented growth.[46]

The other major consequence of the Revolution, the agrarian reform and the creation of the ejido, or land granted by the Mexican state to rural population under the authority provided it by the revolutionary Constitution on 1917 took considerable time to coalesce, and were arguably not even high on one of the Revolution’s principal instigators, Francisco Madero’s, list of priorities. The redistribution of land to the peasantry in the form of possession if not ownership – a kind of return to real or fictitious preconquest and colonial forms of land tenure – did peak during the avowedly reformist, and even modestly radical presidency of Lázaro Cárdenas (1934-1940) after making only halting progress under his predecessors since the 1920s. From 1940 to 1965, the cultivated area in Mexico grew at 3.7 percent per year and the rise in productivity in basic food crops was 2.8 percent per year.

Nevertheless, the long-run effects of the agrarian reform and land redistribution have been predictably controversial. Under the presidency of Carlos Salinas (1988-1994) the reform was officially declared over, with no further land redistribution to be undertaken and the legal status of the ejido definitively changed. The principal criticism of the ejido was that, in the long run, it encouraged inefficiently small landholding per farmer and, by virtue of its limitations on property rights, made agricultural credit difficult for peasants to obtain.[47]

There is no doubt these are justifiable criticisms, but they have to be placed in context. Cárdenas’ predecessors in office, Alvaro Obregón (1924-1928) and Plutarco Elías Calles (1928-1932) may well have preferred a more commercial model of agriculture with larger, irrigated holdings. But it is worth recalling that one of the original agrarian leaders of the Revolution, Emiliano Zapata, had an uneasy relationship with Madero, who saw the Revolution in mostly political terms, from the start and quickly rejected Madero’s leadership in favor of restoring peasant lands in his native state of Morelos.  Cárdenas, who was in the midst of several major maneuvers that would require widespread popular support—such as the expropriation of foreign oil companies operating in Mexico in March 1938—was undoubtedly sensitive to the need to mobilize the peasantry on his behalf. The agrarian reform of his presidency, which surpassed that of any other, needs to be considered in those terms as well as in terms of economic efficiency.[48]

Cárdenas’ presidency also coincided with the continuation of the Great Depression. Like other countries in Latin America, Mexico was hard hit by the Great Depression, at least through the early 1930s.  All sorts of consumer goods became scarcer, and the depreciation of the peso raised the relative price of imports. As had happened previously in Mexican history (1790-1810, during the Napoleonic Wars and the disruption of the Atlantic trade), in the medium term domestic industry was nevertheless given a stimulus and import substitution, the subsequent core of Mexico’s industrialization program after World War II, was given a decisive boost. On the other hand, Mexico also experienced the forced “repatriation” of people of Mexican descent, mostly from California, of whom 60 percent were United States citizens. The effects of this movement—the emigration of the Revolution in reverse—has never been properly analyzed. The general consensus is that World War II helped Mexico to prosper. Demand for labor and materials from the United States, to which Mexico was allied, raised real wages and incomes, and thus boosted aggregate demand. From 1939 through 1946, real output in Mexico grew by approximately 50 percent. The growth in population accelerated as well as the country began to move into the later stages of the demographic transition, with a falling death rate, while birth rates remained high.[49]


From Miracle to Meltdown: 1950-1982  

The history of import substitution manufacturing did not begin with postwar Mexico, but few countries (especially in Latin America) became as identified with the policy in the 1950s, and with what Mexicans termed the emergence of “stabilizing development.” There was never anything resembling a formal policy announcement, although Raúl Prebisch’s 1949 manifesto, “The Economic Development of Latin America and its Principal Problems” might be regarded as supplying one. Prebisch’s argument, that a directed change in the composition of imports toward capital goods to facilitate domestic industrialization was, in essence, the basis of the policy that Mexico followed. Mexico stabilized the nominal exchange rate at 12.5 pesos to the dollar in 1954, but further movement in the real exchange rate (until the 1970s) were unimportant. The substantive bias of import substitution in Mexico was a high effective rate of protection to both capital and consumer goods. Jaime Ros has calculated these rates in 1960 ranged between 47 and 85 percent, and between 33 and 109 percent in 1980. The result, in the short to intermediate run, was very rapid rates of economic growth, averaging 6.5 percent in 1950 through 1973. Other than Brazil, which also followed an import substitution regime, no country in Latin America experienced higher rates of growth. Mexico’s was substantially above the regional average. [50]

[See the historical graph of population growth in Mexico through 2000 below]


Source: Essentially, Estadísticas Históricas de México (various editions since 1999; the most recent is 2014) (Accessed July 20, 2016)


But there were unexpected results as well. The contribution of labor to GDP growth was 14 percent. Capital’s contribution was 53 percent, and the remainder, total factor productivity (TFP) 28 percent.[51] As a consequence, while Mexico’s growth occurred through the accumulation of capital, the distribution of income became extremely skewed. The ratio of the top 10 percent of household income to the bottom 40 percent was 7 in 1960, and 6 in 1968. Even supporters of Mexico’s development program, such as Carlos Tello, conceded that it probable that it was the organized peasants and workers experienced an effective improvement of their relative position. The fruits of the Revolution were unevenly distributed, even among the working class.[52]

By “organized” one means such groups as the most important labor union in the country, the CTM (Confederation of Mexican Workers) or the nationally recognized peasant union, the CNC, both of which formed two of the three organized sectors of the official government party, the PRI, or Party of the Institutional Revolution that was organized in 1946. The CTM in particular was instrumental in supporting the official policy of import substitution, and thus benefited from government wage setting and political support. The leaders of these organizations became important political figures in their own right. One, Fidel Velázquez, as both a federal senator and the head of the CTM from 1941 to his death in 1997. The incorporation of these labor and peasant groups into the political system offered the government both a means of control and a guarantee of electoral support. They became pillars of what the Peruvian writer Mario Vargas Llosa famously called “the perfect dictatorship” of the PRI from 1946 to 2000, during which the PRI held a monopoly of the presidency and the important offices of state. In a sense, import substitution was the economic ideology of the PRI.[53]

Labor and economic development during the years of rapid growth is, like many others, a debated subject. While some have found strong wage growth, others, looking mostly at Mexico City, have found declining real wages. Beyond that, there is the question of informality and a segmented labor market. Were workers in the CTM the real beneficiaries of economic growth, while others in the informal sector (defined as receiving no social security payments, meaning roughly two-thirds of Mexican workers) did far less well? Obviously, the attraction of a segmented labor market model can address one obvious puzzle: why would industry substitute capital for labor, as it obviously did, if real wages were not rising? Postulating an informal sector that absorbed the rapid influx of rural migrants and thus held nominal wages steady while organized labor in the CTM got the benefit of higher negotiated wages, but in so doing, limited their employment is an attractive hypothesis, but would not command universal agreement. Nothing has been resolved, at least for the period of the “Miracle.” After Mexico entered a prolonged series of economic crises in the 1980s—here labelled as “meltdown”—the discussion must change, because many hold that the key to relative political stability and the failure of open unemployment to rise sharply can be explained by falling real wages.

The fiscal basis on which the years of the Miracle were constructed was conventional, not to say conservative.[54] A stable nominal exchange rate, balanced budgets, limited public borrowing, and a predictable monetary policy were all predicated on the notion that the private sector would react positively to favorable incentives. By and large, it did. Until the late 1960s, foreign borrowing was considered inconsequential, even if there was some concern on the horizon that it was starting to rise. No one foresaw serious macroeconomic instability. It is worth consulting a brief memorandum from Secretary of State Dean Rusk to President Lyndon Johnson (Washington, December 11, 1968) –to get some insight into how informed contemporaries viewed Mexico. The instability that existed was seen as a consequence of heavy-handedness on the part of the PRI and overreaction in the security forces. Informed observers did not view Mexico’s embrace of import-substitution industrialization as a train wreck waiting to happen. Historical actors are rarely so prescient.[55]


Slowing of the Miracle and Echeverría

The most obvious problems in Mexico were political. They stemmed from the increasing awareness that the limits of the “institutional revolution” had been reached, particularly regarding the growing democratic demands of the urban middle classes. The economic problem, which was far from obvious, was that import substitution had concentrated income in the upper 10 per cent of the population, so that domestic demand had begun to stagnate. Initially at least, public sector borrowing could support a variety of consumption subsidies to the population, and there were also efforts to transfer resources out of agriculture via domestic prices for staples such as maize. Yet Mexico’s population was also growing at the rate of nearly 3 percent per year, so that the long term prospects for any of these measures were cloudy.

At the same time, growing political pressures on the PRI, mostly dramatically manifest in the army’s violent repression of student demonstrators at Tlatelolco in 1968 just prior to the Olympics, had convinced some elements in the PRI, people like Carlos Madrazo, to argue for more radical change. The emergence of an incipient guerilla movement in the state of Guerrero had much the same effect. The new president, Luis Echeverría (1970-76), openly pushed for changes in the distribution of income and wealth, incited agrarian discontent for political purposes, dramatically increased government spending and borrowing, and alienated what had typically been a complaisant, if not especially friendly private sector.

The country’s macroeconomic performance began to deteriorate dramatically. Inflation, normally in the range of about 5 percent, rose into the low 20 percent range in the early 1970s. The public sector deficit, fueled by increasing social spending, rose from 2 to 7 percent of GDP. Money supply growth now averaged about 14 percent per year. Real GDP growth had begun to slip after 1968 and in the early 1970s, in deteriorated more, if unevenly. There had been clear convergence of regional economies in Mexico between 1930 and 1980 because of changing patterns of industrialization in the northern and central regions of the country.  After 1980, that process stalled and regional inequality again widened. [56]

While there is a tendency to blame Luis Echeverria for all or most of these developments, this forgets that his administration coincided with the First OPEC oil shock (1973) and rapidly deteriorating external conditions. Mexico had, as yet, not discovered the oil reserves (1978) that were to provide a temporary respite from economic adjustment after the shock of the peso devaluation of 1976—the first change in its value in over 20 years. At the same time, external demand fell, principally transmitted from the United States, Mexico’s largest trading partner, where the economy had fallen into recession in late 1973. Yet it seems reasonable to conclude that the difficult international environment, while important in bring Mexico’s “miracle” period to a close, was not helped by Echeverría’s propensity for demagoguery, of the loss of fiscal discipline that had long characterized government policy, at least since the 1950s. The only question to be resolved was to what sort of conclusion the period would come. The answer, unfortunately, was disastrous.[57]


Meltdown: The Debt Crisis, the Lost Decade and After

In contemporary parlance, Mexico had passed from “stabilizing” to “shared” development under Echeverría. But the devaluation of 1976 from 12.5 to 20.5 pesos to the dollar suggested that something had gone awry. One might suppose that some adjustment in course, especially in public spending and borrowing, would have occurred. But precisely the opposite occurred. Between 1976 and 1979, nominal federal spending doubled. The budget deficit increased by a factor of 15. The reason for this odd performance was the discovery of crude oil in the Gulf of Mexico, perhaps unsurprising in light of the spiking prices of the 1970s (the oil shocks of 1973-74, 1978-79), but nevertheless of considerable magnitude. In 1975, Mexico’s proven reserves were 6 billion barrels of oil. By 1978, they had increased to 40 billion. President López Portillo set himself to the task of “administering abundance” and Mexican analysts confidently predicted crude oil at $100 a barrel (when it stood at $37 in current prices in 1980). The scope of the miscalculation was catastrophic. At the same time, encouraged by bank loan pushing and effectively negative real rates of interest, Mexico borrowed abroad. Consumption subsidies, while vital in the face of slowing import substitution, were also costly, and when supported by foreign borrowing, unsustainable, but foreign indebtedness doubled between 1976 and 1979, and even further thereafter.

Matters came to a head in 1982. By then, Mexico’s foreign indebtedness was estimated at over $80 billion dollars, an increase from less than $20 billion in 1975. Real interest rates had begun to rise in the United States in mid-1981, and with Mexican borrowing tied to international rates, debt service rapidly increased. Oil revenue, which had come to constitute the great bulk of foreign exchange, followed international crude prices downward, driven in large part by a recession that had begun in the United States in mid-1981. Within six months, Mexico, too, had fallen into recession. Real per capital output was to decline by 8 percent in 1982.  Forced to sharply devalue, the real exchange rate fell by 50 percent in 1982 and inflation approached 100 percent. By the late summer, Finance Minister Jesus Silva Herzog admitted that the country could not meet an upcoming payment obligation, and was forced to turn to the US Federal Reserve, to the IMF, and to a committee of bank creditors for assistance. In late August, in a remarkable display of intemperance, President López Portillo nationalized the banking system. By December 20, 1982, Mexico’s incoming President, Miguel de la Madrid (1982-88) appeared, beleaguered, on the cover of Time Magazine framed by the caption, “We are in an Emergency.”  It was, as the saying goes, a perfect storm, and with it, the Debt Crisis and the “Lost Decade” in Mexico had begun. It would be years before anything resembling stability, let alone prosperity, was restored. Even then, what growth there was a pale imitation of what had occurred during the decades of the “Miracle.”


The 1980s

The 1980s were a difficult decade.[58]  After 1981, annual real per capita growth would not reach 4 percent again until 1989, and in 1986, it fell by 6 percent. In 1987, inflation reached 159 percent. The nominal exchange rate fell by 139 percent in 1986-1987. By the standards of the years of stabilizing development, the record of the 1980s was disastrous. To complete the devastation, on September 19, 1985, the worst earthquake in Mexican history, 7.8 on the Richter Scale, devastated large parts of central Mexico City and killed 5 thousand (some estimates run as high as 25 thousand), many of whom were simply buried in mass graves. It was as if a plague of biblical proportions had struck the country.

Massive indebtedness produced a dramatic decline in the standard of living as structural adjustment occurred. Servicing the debt required the production of an export surplus in non-oil exports, which in turn, required a reduction in domestic consumption. In an effort to surmount the crisis, the government implemented an agreement between organized labor, the private sector, and agricultural producers called the Economic Solidarity Pact (PSE). The PSE combined an incomes policy with fiscal austerity, trade and financial liberalization, generally tight monetary policy, and debt renegotiation and reduction. The centerpiece of the “remaking” of the previously inward orientation of the domestic economy was the North American Free Trade Agreement (NAFTA, 1993) linking Mexico, the United States, and Canada. While average tariff rates in Mexico had fallen from 34 percent in 1985 to 4 percent in 1992—even before NAFTA was signed—the agreement was generally seen as creating the institutional and legal framework whereby the reforms of Miguel de la Madrid and Carlos Salinas (1988-1994) would be preserved. Most economists thought its effects would be relatively larger in Mexico than in the United States, which generally appears to have been the case. Nevertheless, NAFTA has been predictably controversial, as trade agreements are wont to be. The political furor (and, in some places, euphoria) surrounding the agreement have faded, but never entirely disappeared. In the United States in particular, NAFTA is blamed for deindustrialization, although pressure on manufacturing, like trade liberalization itself, was underway long before NAFTA was negotiated. In Mexico, there has been much hand wringing over the fate of agriculture and small maize producers in particular. While none of this is likely to cease, it is nevertheless the case that there has been a large increase in the volume of trade between the NAFTA partners. To dismiss this is, quite plainly, misguided, even where sensitive and well organized political constituencies are concerned. But the legacy of NAFTA, like most everything in Mexican economic history, remains unsettled.  As a result, the agreement was subject to a controversial renegotiation in 2018, largely fueled by protectionist sentiment in the Trump administration. While the intent was to increase costs in the Mexican automobile industry so as to price labor in the United Stats back into the industry, the long
term effect of the measure—not to say its ratification—remains to be seen.


Post Crisis: No Miracles

Still, while some prosperity was restored to Mexico by the reforms of the 1980s and 1990s, the general macroeconomic results have been disappointing, not to say mediocre. The average real compensation per person in manufacturing in 2008 was virtually unchanged from 1993 according to the Instituto Nacional De Estadística  Geografía e Informática, and there is little reason to think the compensation has improved at all since then. It is generally conceded that per capita GDP growth has probably averaged not much more than 1 percent a year. Real GDP growth since NAFTA according to the OECD has rarely reached 5 percent and since 2010, it has been well below that.



Source: (Accessed July 21, 2016). The vertical scale cuts the horizontal axis at 1982


For virtually everyone in Mexico, the question is why, and the answers proposed include virtually any plausible factor: the breakdown of the political system after the PRI’s historic loss of presidential power in 2000; the rise of China as a competitor to Mexico in international markets; the explosive spread of narcoviolence in recent years, albeit concentrated in the states of Sonora, Sinaloa, Tamaulipas, Nuevo León and Veracruz; the results of NAFTA itself; the failure of the political system to undertake further structural economic reforms and privatizations after the initial changes of the 1980s, especially regarding the national oil monopoly, Petroleos Mexicanos (PEMEX); the failure of the border industrialization program (maquiladoras) to develop substantive backward linkages to the rest of the economy. This is by no means an exhaustive list of the candidates for poor economic performance. The choice of a cause tends to reflect the ideology of the critic.[59]

Yet it seems that, at the end of the day, the reason why post-NAFTA Mexico has failed to grow comes down to something much more fundamental: a fear of growing, embedded in the belief that the collapse of the 1980s and early 1990s (including the devastating “Tequila Crisis” of 1994-1995, which resulted in a another enormous devaluation of the peso after an initial attempt to contain the crisis was bungled)  was so traumatic and costly as to render event modest efforts to promote growth, let alone the dirigisme of times past, as essentially unwarranted. The central bank, the Banco de México (Banxico) rules out the promotion of economic growth as part of its remit—even as a theoretical proposition, let alone as a goal of macroeconomic policy– and concerns itself only with price stability. The language of its formulation is striking. “During the 1970s, there was a debate as to whether it was possible to stimulate economic growth via monetary policy.  As a result, some governments and central banks tried to reduce unemployment through expansive monetary policy.  Both economic theory and the experience of economies that tried this prescription demonstrated that it lacked validity. Thus, it became clear that monetary policy could not actively and directly stimulate economic activity and employment. For that reason, modern central banks have as their primary goal the promotion of price stability” (translation mine). Banxico is not the Fed: there is no dual mandate in Mexico.[60]  This may well change during the new presidential administration of Andrés Manuel López Obrador (known colloquially in Mexico as AMLO).

The Mexican banking system has scarcely made things easier. Private credit stands at only about a third of GDP. In recent years, the increase in private sector savings has been largely channeled to government bonds, but until quite recently, public sector deficits were very small, which is to say, fiscal policy has not been expansionary. If monetary and fiscal policy are both relatively tight, if private credit is not easy to come by, and if growth is typically presumed to be an inevitable concomitant to economic stability for which no actor (other than the private sector) is deemed responsible, it should come as no surprise that economic growth over the past two decades has been lackluster.  In the long run, aggregate supply determines real GDP, but in the short run, nominal demand matters: there is no point in creating productive capacity to satisfy demand that does not exist. And, unlike during the period of the Miracle and Stabilizing Development, attention to demand since 1982 has been limited, not to say off the table completely. It may be understandable, but Mexico’s fiscal and monetary authorities seem to suffer from what could be termed, “Fear of Growth.” For better or worse, the results are now on display. After its current (2016) return to a relatively austere budget, it remains to be seen how the economic and political system in contemporary Mexico handles slow economic growth.

The response of the Mexican public to a generation of stagnation in living standards, as well as to rising insecurity and the perception of widespread public corruption, was the victory of AMLO in the presidential election of July 2018.

AMLO had previously run for President with a different party. After two unsuccessful attempts, he started a new one, called MORENA. He then proceeded to win 53 percent of the vote, virtually obliterating the opposition parties, the incumbent PRI, and the PAN. MORENA also won majorities in both houses of Congress. To most observers, this signified that AMLO would be a potentially strong president, assuming his congressional party remained loyal to him. His somewhat checkered “leftist” past guaranteed that not everyone was thrilled at the prospect of a strong AMLO presidency.

Expectations for AMLO’s presidency are thus high, perhaps unrealistically so. While his initial budget has been generally well received by the financial markets, there is little question as to where AMLO’s priorities lie. He has advocated increases in spending on infrastructure, has moved to restore the real minimum wage to its level in 1994, and pledged to revitalize domestic agriculture. Whether these and a number of other reforms that AMLO has somewhat paradoxically labelled “Republican Austerity” will restore the country to its pre-1982 growth path now constitutes one of the most watched economic experiments in Latin America. [61]

[1] I am grateful to Ivan Escamilla and Robert Whaples for their careful readings and thoughtful criticisms.

[2] The standard reference work is Sandra Kuntz Ficker, (ed), Historia económica general de México. De la Colonia a nuestros días (México, DF: El Colegio de Mexico, 2010).

[3] Oscar Martinez, Troublesome Border (rev. ed., University of Arizona Press: Tucson, AZ, 2006) is the most helpful general account in English.

[4] There are literally dozens of general accounts of the pre-conquest world. A good starting point is Richard E.W. Adams, Prehistoric Mesoamerica (3d ed., University of Oklahoma Press: Norman, OK, 2005). More advanced is Richard E.W. Adams and Murdo J. Macleod, The Cambridge History of the Mesoamerican Peoples: Mesoamerica. (2 parts, New York: Cambridge University Press, 2000).

[5] Nora C. England and Roberto Zavala Maldonado, “Mesoamerican Languages” Oxford Bibliographies

(Accessed July 10, 2016)

[6] For an introduction to the nearly endless controversy over the pre- and post-contact population of the Americas, see William M. Denevan (ed.), The Native Population of the Americas in 1492 (2d rev ed., Madison: University of Wisconsin Press, 1992).

[7] Sherburne F Cook and Woodrow Borah, Essays in Population History: Mexico and California (Berkeley, CA: University of California Press, 1979), p. 159.

[8]Gene C. Wilken, Good Farmers Traditional Agricultural Resource Management in Mexico and Central America (Berkeley: University of California Press, 1987), p. 24.

[9] Bernard Ortiz de Montellano, Aztec Medicine Health and Nutrition (New Brunswick, NJ: Rutgers University Press, 1990).

[10] Bernardo García Martínez, “Encomenderos españoles y British residents: El sistema de dominio indirecto desde la perspectiva novohispana”, in Historia Mexicana, LX: 4 [140] (abr-jun 2011), pp. 1915-1978.

[11] These epidemics are extensively and exceedingly well documented. One of the most recent examinations is Rodofo Acuna-Soto, David W. Stahle, Matthew D. Therrell , Richard D. Griffin,  and Malcolm K. Cleaveland, “When Half of the Population Died: The Epidemic of Hemorrhagic Fevers of 1576 in Mexico,” FEMS Microbiology Letters 240 (2004) 1–5. (http://, accessed July 10, 2016.) See in particular the exceptional map and table on pp. 2-3.

[12] See in particular, Bernardo García Martínez. Los pueblos de la Sierrael poder y el espacio entre los indios del norte de Puebla hasta 1700 (Mexico, DF: El Colegio de México, 1987) and Elinor G.K. Melville, A Plague of Sheep: Environmental Consequences of the Conquest of Mexico (New York: Cambridge University Press, 1997).

[13] J. H. Elliott, “A Europe of Composite Monarchies,” Past & Present 137 (The Cultural and Political Construction of Europe): 48–71; Guadalupe Jiménez Codinach, “De Alta Lealtad: Ignacio Allende y los sucesos de 1808-1811,” in Marta Terán and José Antonio Serrano Ortega, eds., Las guerras de independencia en la América Española (La Piedad, Michoacán, MX: El Colegio de Michoacán, 2002), p. 68.

[14] Richard Salvucci, “Capitalism and Dependency in Latin America,” in Larry Neal and Jeffrey G. Williamson, eds., The Cambridge History of Capitalism (2 vols.), New York: Cambridge University Press, 2014), 1: pp. 403-408.

[15] Source: TePaske Page, (Accessed July 19, 2016)

[16]  Edith Boorstein Couturier, The Silver King: The Remarkable Life of the Count of Regla in Colonial Mexico (Albuquerque, NM: University of New Mexico Press, 2003).  Dana Velasco Murillo, Urban Indians in a Silver City: Zacatecas, Mexico, 1546-1810 (Stanford, CA: Stanford University Press, 2015), p. 43. The standard work on the subject is David Brading, Miners and Merchants in Bourbon Mexico, 1763-1810 (New York: Cambridge University Press, 1971) But also see Robert Haskett, “Our Suffering with the Taxco Tribute: Involuntary Mine Labor and Indigenous Society in Central New Spain,” Hispanic American Historical Review, 71:3 (1991), pp. 447-475. For silver in China see (accessed July 13, 2016). For the rents of empire question, see Michael Costeloe, Response to Revolution: Imperial Spain and the Spanish American Revolutions, 1810-1840 (New York: Cambridge University Press, 1986).

[17] This is an estimate. David Ringrose concluded that in the 1780s, the colonies accounted for 45 percent of Crown income, and one would suppose that Mexico would account for at least about half of that. See David R. Ringrose, Spain, Europe and the ‘Spanish Miracle’, 1700-1900 (New York: Cambridge University Press, 1996), p. 93; Mauricio Drelichman, “The Curse of Moctezuma: American Silver and the Dutch Disease,” Explorations in Economic History 42:3 (2005), pp. 349-380.

[18] José Antonio Escudero, El supuesto memorial del Conde de Aranda sobre la Independencia de América) México, DF: Universidad Nacional Autónoma de México, 2014) (, accessed July 13, 2016)

[19] Allan J. Kuethe and Kenneth J. Andrien, The Spanish Atlantic World in the Eighteenth Century. War and the Bourbon Reforms, 1713-1796 (New York: Cambridge University Press, 2014) is the most recent account of this period.

[20] Richard J. Salvucci, “Economic Growth and Change in Bourbon Mexico: A Review Essay,” The Americas, 51:2 (1994), pp. 219-231; William B Taylor, Magistrates of the Sacred: Priests and Parishioners in Eighteenth Century Mexico (Palo Alto: Stanford University Press, 1996), p. 24; Luis Jáuregui, La Real Hacienda de Nueva España. Su Administración en la Época de los Intendentes, 1786-1821 (México, DF: UNAM, 1999), p. 157.

[21] Jeremy Baskes, Staying AfloatRisk and Uncertainty in Spanish Atlantic World Trade, 1760-1820 (Stanford, CA: Stanford University Press, 2013); Xabier Lamikiz, Trade and Trust in the Eighteenth-century Atlantic World: Spanish Merchants and their Overseas Networks (Suffolk, UK: The Boydell Press., 2013). The starting point of all these studies is Clarence Haring, Trade and Navigation between Spain and the Indies in the Time of the Hapsburgs (Cambridge, MA: Harvard University Press, 1918).

[22] The best, and indeed, virtually unique starting point for considering these changes in their broadest dimensions   are the joint works of Stanley and Barbara Stein: Silver, Trade, and War (2003); Apogee of Empire (2004), and Edge of Crisis (2010), All were published by Johns Hopkins University Press and do for the Spanish Empire what Laurence Henry Gipson did for the First British Empire.

[23] The key work is María Eugenia Romero Sotelo, Minería y Guerra. La economía de Nueva España, 1810-1821 (México, DF: UNAM, 1997)

[24] Calculated from José María Luis Mora, Crédito Público ([1837] México, DF: Miguel Angel Porrúa, 1986), pp. 413-460. Also see Richard J. Salvucci, Politics, Markets, and Mexico’s “London Debt,” 1823-1887 (NY: Cambridge University Press, 2009).

[25] Jesús Hernández Jaimes, La Formación de la Hacienda Pública Mexicana y las Tensiones Centro Periferia, 1821-1835  (México, DF: El Colegio de México, 2013). Javier Torres Medina, Centralismo y Reorganización. La Hacienda Pública Durante la Primera República Central de México, 1835-1842 (México, DF: Instituto Mora, 2013). The only treatment in English is Michael P. Costeloe, The Central Republic in Mexico, 1835-1846 (New York: Cambridge University Press, 1993).

[26] An agricultural worker who worked full time, 6 days a week, for the entire year (a strong assumption), in Central Mexico could have expected cash income of perhaps 24 pesos. If food, such as beans and tortilla were added, the whole pay might reach 30. The figure of 40 pesos comes from considerably richer agricultural lands around the city of Querétaro, and includes as an average income from nonagricultural employment as well, which was higher.  Measuring Worth would put the relative historic standard of living value in 2010 prices at $1.040, with the caveat that this is relative to a bundle of goods purchased in the United States. (

[27]The phrase comes from Guido di Tella and Manuel Zymelman. See Colin Lewis, “Explaining Economic Decline: A review of recent debates in the economic and social history literature on the Argentine,” European Review of Latin American and Caribbean Studies, 64 (1998), pp. 49-68.

[28] Francisco Téllez Guerrero, De reales y granos. Las finanzas y el abasto de la Puebla de los Angeles, 1820-1840 (Puebla, MX: CIHS, 1986). Pp. 47-79.

[29]This is based on an analysis of government lending contracts. See Rosa María Meyer and Richard Salvucci, “The Panic of 1837 in Mexico: Evidence from Government Contracts” (in progress).

[30] There is an interesting summary of this data in U.S Govt., 57th Cong., 1 st sess., House, Monthly Summary of Commerce and Finance of the United States (September 1901) (Washington, DC: GPO, 1901), pp. 984-986.

[31] Salvucci, Politics and Markets, pp. 201-221.

[32] Miguel Galindo y Galindo, La Gran Década Nacional o Relación Histórica de la Guerra de Reforma, Intervención Extranjera, y gobierno del archiduque Maximiliano, 1857-1867 ([1902], 3 vols., México, DF: Fondo de Cultura Económica, 1987).

[33] Carmen Vázquez Mantecón, Santa Anna y la encrucijada del Estado. La dictadura, 1853-1855 (México, DF: Fondo de Cultura Económica, 1986).

[34] Moramay López-Alonso, Measuring Up: A History of Living Standards in Mexico, 1850-1950 (Stanford, CA: Stanford University Press, 2012);  Amilcar Challú and Auroro Gómez Galvarriato, “Mexico’s Real Wages in the Age of the Great Divergence, 1730-1930,” Revista de Historia Económica 33:1 (2015), pp. 123-152; Amílcar E. Challú, “The Great Decline: Biological Well-Being and Living Standards in Mexico, 1730-1840,” in Ricardo Salvatore, John H. Coatsworth, and Amilcar E. Challú, Living Standards in Latin American History: Height, Welfare, and Development, 1750-2000 (Cambridge, MA: Harvard University Press, 2010), pp. 23-67.

[35]See Challú and Gómez Galvarriato, “Real Wages,” Figure 5, p. 101.

[36] Luis González et al, La economía mexicana durante la época de Juárez (México, DF: 1976).

[37] Teresa Rojas Rabiela and Ignacio Gutiérrez Ruvalcaba, Cien ventanas a los países de antaño: fotografías del campo mexicano de hace un siglo) (México, DF: CONACYT, 2013), pp. 18-65.

[38] Alma Parra, “La Plata en la Estructura Económica Mexicana al Inicio del Siglo XX,” El Mercado de Valores 49:11 (1999), p. 14.

[39] Sandra Kuntz Ficker, Empresa Extranjera y Mercado Interno: El Ferrocarril Central Mexicano (1880-1907) (México, DF: El Colegio de México, 1995).

[40] Priscilla Connolly, El Contratista de Don Porfirio. Obras públicas, deuda y desarrollo desigual (México, DF: Fondo de Cultura Económica, 1997).

[41] Most notably John Tutino, From Insurrection to Revolution in Mexico: Social Bases of Agrarian Violence, 1750-1940 (Princeton, NJ: Princeton University Press, 1986). p. 229. My growth figures are based on the INEGI, Estadísticas Historicas de México, 2014) (, Accessed July 15, 2016).

[42] Stephen H. Haber, Industry and Underdevelopment: The Industrialization of Mexico, 1890-1940 (Stanford, CA: Stanford University Press, 1989); Aurora Gómez-Galvarriato, Industry and Revolution: Social and Economic Change in the Orizaba Valley (Cambridge, MA: Harvard University Press, 2013).

[43] There are literally dozens of accounts of the Revolution. The usual starting point, in English, is Alan Knight, The Mexican Revolution (reprint ed., 2 vols., Lincoln, NE: 1990).

[44] This argument has been made most insistently in Armando Razo and Stephen Haber, “The Rate of Growth of Productivity in Mexico, 1850-1933: Evidence from the Cotton Textile Industry,” Journal of Latin American Studies 30:3 (1998), pp. 481-517.

[45]Robert McCaa, “Missing Millions: The Demographic Cost of the Mexican revolution,” Mexican Studies/Estudios Mexicanos 19:2 (Summer 2003): 367-400; Virgilio Partida-Bush, “Demographic Transition, Demographic Bonus, and Ageing in Mexico, “ Proceedings of the United Nations Expert Group Meeting on Social and Economic Implications of Changing Population Age Structures. ( (Accessed July 15, 2016), pp. 287-290.

[46] An implication of the studies of Alan Knight, and of Clark Reynolds, The Mexican Economy: Twentieth Century Structure and Growth (New Haven, CT: Yale University Press, 1971).

[47] An interesting summary of revisionist thinking on the nature and history of the ejido appears in Emilio Kuri, “La invención del ejido, Nexos, January 2015.

[48]Alan Knight, “Cardenismo: Juggernaut or Jalopy?” Journal of Latin American Studies, 26:1 (1994), pp. 73-107.

[49] Stephen Haber, “The Political Economy of Industrialization,” in Victor Bulmer-Thomas, John Coatsworth, and Roberto Cortes-Conde, eds., The Cambridge Economic History of Latin America (2 vols., New York: Cambridge University Press, 2006), 2:  537-584.

[50]Again, there are dozens of studies of the Mexican economy in this period. Ros’ figures come from “Mexico’s Trade and Industrialization Experience Since 1960: A Reconsideration of Past Policies and Assessment of Current Reforms,” Kellogg Institute (Working Paper 186, January 1993). For a more general study, see Juan Carlos Moreno-Brid and Jaime Ros, Development and Growth in the Me3xican Economy. A Historical Perspective (New York: Oxford University Press, 2009). A recent Spanish language treatment is Enrique Cárdenas Sánchez, El largo curso de la economía mexicana. De 1780 a nuestros días (México, DF: Fondo de Cultura Económica, 2015). A view from a different perspective is Carlos Tello, Estado y desarrollo económico. México 1920-2006 (México, DF, UNAM, 2007).

[51]André A. Hoffman, Long Run Economic Development in Latin America in a Comparative Perspective: Proximate and Ultimate Causes (Santiago, Chile: CEPAL, 2001), p. 19.

[52]Tello, Estado y desarrollo, pp. 501-505.

[53] Mario Vargas Llosa, “Mexico: The Perfect Dictatorship,” New Perspectives Quarterly 8 (1991), pp. 23-24.

[54] Rafael Izquierdo, Política Hacendario del Desarrollo Estabilizador, 1958-1970 (México, DF: Fondo de Cultura Económica, 1995. The term stabilizing development was itself termed by Izquierdo as a government minister.

[55]See Foreign Relations of the United States, 1964-1968. Mexico and Central America (Accessed July 15, 2016).

[56] José Aguilar Retureta, “The GDP Per Capita of the Mexican Regions (1895:1930): New Estimates, Revista de Historia Económica, 33: 3 (2015), pp. 387-423.

[57] For a contemporary account with a sense of the immediacy of the end of the Echeverría regime, see “Así se devaluó el peso,” Proceso, November 13, 1976.

[58] The standard account is Stephen Haber, Herbert Klein, Noel Maurer, and Kevin Middlebrook, Mexico since 1980 (New York: Cambridge University Press, 2008). A particularly astute economic account is Nora Lustig, Mexico: The Remaking of an Economy (2d ed., Washington, DC: The Brookings Institution, 1998).  But also Louise E. Walker, Waking from the Dream. Mexico’s Middle Classes After 1968 (Stanford, CA: Stanford University Press, 2013).

[59] See, for example, Jaime Ros Bosch, Algunas tesis equivocadas sobre el estancamiento económico de México (México, DF: El Colegio de México, 2013).

[60] La Banca Central y la Importancia de la Estabilidad Económica  June 16, 2008.  (, Accessed July 15, 2016.). Also see Brian Winter, “This Man is Brilliant: So Why Doesn’t Mexico’s Economy Grow Faster?” Americas Quarterly ( (Accessed July 21, 2016)

[61]   For AMLO in his own words, see his A New Hope For Mexico: Saying No to Corruption, Violence, and Trump’s Wall. Translated by Natascha Uhlman (New York: O/R Books, 2018).

Citation: Salvucci, Richard . “Mexico: Economic History” EH.Net Encyclopedia, edited by Robert Whaples. December 27, 2018. URL


Hall of Mirrors: The Great Depression, the Great Recession, and the Uses — and Misuses — of History

Author(s):Eichengreen, Barry
Reviewer(s):Rockoff, Hugh

Published by EH.Net (February 2016)

Barry Eichengreen, Hall of Mirrors: The Great Depression, the Great Recession, and the Uses — and Misuses — of History. New York: Oxford University Press, 2015. vi + 512 pp. $30 (hardcover), ISBN: 978-0-19-939200-1.

Reviewed for EH.Net by Hugh Rockoff, Department of Economics, Rutgers University.
Barry Eichengreen knows as much or more about the financial history of the Great Depression as any living economic historian, and it shows in this splendid new book which compares the Great Recession with the Great Depression. The U.S. story, on which I will focus here, is the centerpiece, but as might be expected from Eichengreen, what happened in the rest of the world is also explored in detail. Eichengreen’s thesis is straightforward. In 2008 the United States, and with it the rest of the world, was headed for another Great Depression. Thanks to strong doses of monetary and fiscal stimulus, and lender-of-last-resort operations, especially in the United States, a second Great Depression was averted. Ideas were important: Much of the success can be attributed to John Maynard Keynes, Milton Friedman, and Anna Schwartz, and the lessons they drew from the Great Depression. But there was a downside to success. Because of the severity of the crisis in the 1930s the financial system underwent a massive reform that put it in a tough but effective straightjacket. The Great Recession was milder; politicians and lobbyists who opposed strict regulation regrouped, and the reforms were moderate at best. The Great Depression and the Great Recession were separated by eighty years, a long period of financial stability produced, according to Eichengreen, by New Deal financial reforms. But, he concludes, because the damage done by deregulation was only partly undone, “we are likely to see another such crisis in less than eighty years (p. 387).”

The analysis in the book is rigorous. Nevertheless, Eichengreen has written a book that can be read by policy makers, journalists, and the famous, and hopefully numerous, intelligent layperson. There are no charts, tables, or equations. Indeed, it would make a good textbook for an undergraduate course on the financial crisis. Eichengreen writes clearly. And he has sprinkled the text with biographical snippets that both inform and entertain. We meet William Jennings Bryan in the 1920s when he is using his oratorical skills to sell real estate in Florida; and we meet Charles Dawes, prominent banker, Vice President, Nobel Peace Prize winner (for his work on German Reparations), and composer of the melody for “It’s All in the Game.”

To make his case that the two crises were similar except for actions taken by governments, Eichengreen recounts both crises and identifies one parallel after another. The 1920s had Charles Ponzi; we had Bernie Madoff. In the 1920s the head of the Bank of England, Montagu Norman, was given, perhaps unconsciously, to “constructive ambiguity” (p. 23); we had Alan Greenspan. The 1920s witnessed the Florida land boom; we had subprime mortgages. Charles Dawes’s bank got needed assistance from the Reconstruction Finance Corporation, but the Guardian Group in Detroit was allowed to fail; we had Bear Stearns and Lehman Brothers. And this is just a taste. Eichengreen adds many, many more. Indeed, the parallels come so thick and fast that one is reminded of the phrase Albert Einstein used to describe two distant particles that were thought to be entangled: “spooky action at a distance.”

The book is divided into four parts. Part I, “The Best of Times,” consists of six chapters that cover the 1920s and the first decade of our century.  Here we learn (without attempting to be exhaustive) about real estate booms in the twenties, the attempt after World War I to reconstruct the gold standard, the repeated attempts to solve the German reparations problem, the Smoot-Hawley tariff, and the U.S. Stock market bubble. Then Eichengreen turns to our era and describes financial deregulation, the subprime mortgage boom, the expansion of the shadow banking sector, and the spread of this type of banking to Europe. Eichengreen doesn’t present new, controversial interpretations of events. Rather he presents conclusions based on careful readings of the available literature including the latest work by economic historians. What is new is the web of parallels he draws between the two crises. Others, of course, have noted the similarities, not the least Ben Bernanke as he wrestled with the crisis; but no one has created such a large catalog of parallels.

In Part II, “The Worst of Times,” nine chapters in all, we learn first about the stock market crash in 1929, the banking crises of 1930-33, and the spread of the Great Depression to Europe. Then he turns to the Great Recession: Bear Stearns, Lehman Brothers, AIG and all that, and the spread of the crisis to Europe.

In the seven chapters of Part III, “Toward Better Times,” we learn about Roosevelt’s attempts to revive the economy: the National Industrial Recovery Act, the Reconstruction Finance Corporation, Federal Reserve Policy in the 1930s, and Roosevelt’s conflicted ideas about budget deficits. European responses to the crisis are also discussed at length, and Japan’s Korekiyo Takahashi is celebrated as the finance minister who got it right. Takahashi, aided it must be said by costly Japanese military adventures, authorized a heavy dose of money-financed deficit spending and the result was the best economic performance among the industrial nations. Eichengreen then turns to our crisis: zero interest rates, quantitative easing, bailouts, and the fiscal stimulus. The argument is usually that what the government did helped, but more should have been done.

In Part IV, “Avoiding the Next Time,” Eichengreen focusses particularly on Dodd-Frank and the Euro. His main efforts are directed at explaining why so little was done to prevent another crisis. A number of potential reforms get favorable mentions: consolidation of regulatory agencies, higher capital requirements for financial institutions, and regulations that limit risk taking. But Eichengreen doesn’t rank possible reforms or explain in detail how they would work. Here I wanted Eichengreen to go on a bit, and tell us more about his ideas on what should have and presumably still can be done to prevent another crisis. His approach to Glass-Steagall is an example of his above the fray stance toward regulation. Eichengreen mentions Glass-Steagall, and the separation of commercial from investment banking many times — one chapter is titled “Shattered Glass.” He rejects the argument made mostly forcefully by Andrew Ross Sorkin (2012) — although it is one that must have occurred to many observers — that ending the separation of commercial and investment banking didn’t have much to do with causing the crisis. After all, Merrill Lynch, Bear Stearns, and Lehman brothers were not branches of commercial banks when they went off the rails. And AIG was an insurance company. Eichengreen tells us that ending Glass Steagall was “indicative of a trend” (p. 424), which it surely was, but he seems to feel that it was more than that. Here I would have liked to learn more about Eichengreen’s ideas about how ending Glass-Steagall undermined the system. Did it create moral hazard, because firms knew they could merge with a bank if they got in trouble? Or was it some other mechanism? And more urgently, I would have liked to have read more about Eichengreen’s views on how high a priority restoring Glass-Steagall should be, and where the lines should be drawn.

Comment and Conclusion

Eichengreen’s book is a synthesis. It pulls together an enormous body of studies by economic historians, policy makers, and journalists. Specialists in financial history will be familiar with many parts of the story. But I doubt there are any who will not learn a great deal from reading Eichengreen’s account. While I was persuaded by most of Eichengreen’s arguments I did have a recurring concern about how far we can go as social scientists, as opposed to policy advocates, in making assertions about what would have happened if alternative policies had been followed on the basis of two observations. It is one thing to claim that without aggressive monetary and fiscal actions and bailouts we might have ended up in another Great Depression.  And for me, as I suspect for most of us, that possibility justifies much of what was done. Even, say, a one-third chance of another Great Depression makes pulling out the stops worthwhile. But that claim is very different from the claim that we would have ended up in a Great Depression if less had been done. The truth is that we can’t be sure what path the economy would have followed if less had been done, or where we would be today.

Consider the following table which shows unemployment after four financial panics. When you compare 2008 only with 1930, it seems clear that we did a lot a better after the panic of 2008, and the things we did in 2008 “worked” at least up to a point: We avoided a Great Depression. On the other hand, we did, arguably, worse after 2008 than after the panic of 1907 when help for the economy was provided mainly through the circumscribed lender-of last-resort actions undertaken by J.P. Morgan.  And we did almost exactly the same as after the crisis of 1893, when only some limited stimulus came well after the crisis in the form of gold inflows and spending on the Spanish-American War. In fact, the 2008 and 1893 unemployment rates are so similar that it looks like another case of “spooky action at a distance.”

2008 1930 1907 1893
-1 4.6 2.9 2.5 4.3
0 5.8 8.9 3.1 6.8
1 9.3 15.7 7.5 9.3
2 9.6 22.9 5.7 8.5
3 8.9 20.9 5.9 9.3
4 8.1 16.2 7.0 8.5
5 7.4 14.4 5.9 7.8
6 6.2 10.0 5.7 5.9
7 5.3 9.2 8.5 5.0

Source: Historical Statistics of the United States, Millennial Edition: Volume 2, Work and Welfare, series Ba475 for 1893, 1907, and 1930 (pp. 2-82 and 2-83), and the standard Bureau of Labor Statistics series for 2008.

My point is not that 1893 is necessarily a better analog than 1930. One could argue the point, but I don’t think we know. Constructing a counterfactual macroeconomic history of a financial crisis and recession is essentially an exercise in forecasting, and we economists are just not very good at macroeconomic forecasting. We are in the position, I believe, of physicians in days gone by: we have some drugs that experience tells us sometimes relieve pain and suffering. But how they work and why they work in some cases and not in others, and what the long-run side effects are – we have some ideas we can discuss, or more likely debate, but the bottom line is that we don’t know.

(If we were entangled with the Depression of 1890s, we would want to know what happened in 1901 the year that corresponds to 2016. Among other things, 1901 began with a slide on the stock market of about 9%. Sound familiar?! Despite a spring rally the market finished the year off by about the same percentage. By the way, this is just an observation; I am not giving investment advice.)

Many excellent books and articles have been written about the financial crisis of 2008 and there will undoubtedly be many more. Gary Gorton’s papers and books and Ben Bernanke’s memoir immediately spring to mind, but the list of good books and articles is already a long one. There is nothing like a financial crisis to concentrate the minds of economists. However, if financial history is not your thing, and you want to read just one book about the financial crisis, you couldn’t do better than Hall of Mirrors.


Andrew Ross Sorkin, “Reinstating an Old Rule Is Not a Cure for Crisis” New York Times, May 21, 2012.

Hugh Rockoff is Distinguished Professor of Economics at Rutgers University and a Research Associate with the National Bureau of Economic Research.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (February 2016). All EH.Net reviews are archived at

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

America’s Bank: The Epic Struggle to Create the Federal Reserve

Author(s):Lowenstein, Roger
Reviewer(s):Richardson, Gary

Published by EH.Net (February 2016)

Roger Lowenstein, America’s Bank: The Epic Struggle to Create the Federal Reserve. New York: Penguin Press, 2015. 368 pp. $30 (hardcover), ISBN: 978-1-594-20549-1.

Reviewed for EH.Net by Gary Richardson, Federal Reserve Bank of Richmond and Department of Economics, University of California at Irvine.

Roger Lowenstein, author of a series of New York Times’ best-selling books on recent financial history, including one of my favorite homilies on hubris, When Genius Failed, has written a new book on the foundation of the Federal Reserve, America’s Bank. The book illuminates the long and painful birth of the United States’ central banking system, which involved more than a century of debate about how to structure our nation’s financial system. America’s Bank is cogent, informed, and opinionated, but also polished, enlightening, and entertaining. The book is a work of scholarship based upon primary sources and demonstrating mastery of the academic literature. It could have been submitted as a doctoral dissertation in history at most universities in the United Sates, but it captures readers’ imaginations in ways that academic writing seldom does. It tells a story with heroes, like Paul Warburg, and ghosts, like Andrew Jackson, and brings to life politicians whose names every school child in the United States remembers, like Woodrow Wilson and William Jennings Bryan, and that most people have forgotten, like Carter Glass and Nelson Aldrich.

The introduction’s first paragraph establishes that the author is not an apologist for the Fed, with some offhand skepticism about recent Fed decisions. The author notes that the Fed today has enormous influence around the world, and that it “manages, sometimes adroitly and sometimes wantingly, the supply of credit whose ebb and flow alternately buoys and batters business. It supervises — or it is supposed to supervise — the nation’s banks” (p. 1).

After that, the book describes the Fed’s creation as a crowning achievement of Progressive politics circa 1913. The Federal Reserve Act reconciled ideas and ideals of three main streams of turn-of-the-century political thought — progressive, populist, and laissez-faire. The leaders of all of these movements in both political parties contributed ideas to and advocated passage of the final legislation. This reconciliation bridged intellectual and political divides between those in favor of and hostile to centralization and federalism which had bedeviled the American republic since its birth after the revolution from England.

The book’s introduction recounts Alexander Hamilton and Thomas Jefferson’s debate over the first Bank of the United States. Their debate sets the stage for “The Road to Jeykyl Island,” which is Part One of the book. Chapter 1 tells how “national bank” and “central bank” became phrases of condemnation in America’s political lexicon. The chapter explains the monetary babel of colonial and antebellum America, when thousands of currencies, all denominated in dollars of different potential values were issued by thousands of privately owned and operated commercial banks. This monetary chaos impeded commerce and bred panics, which every fifteen years or so shut down the financial system, triggering long and painful recessions. Each recession inspired a flurry of reform proposals by businessmen and politicians. The reiteration of recession and reform fills much of Chapters 2 and 3. These chapters also introduce the protagonists of this part of the narrative: Republican senator Nelson Aldrich, the chair of the Senate Finance Committee; Frank Vanderlip, president of National City Bank of New York (now Citibank) and a former Treasury official; and Paul Warburg, a successful, German-born financier who was a partner at the leading investment bank Kuhn, Loeb, and Co (which merged with Lehman Brothers in the 1970s). While these well-intentioned men and many others hoped to reform financial institutions which they believed impeded American commerce and industry, political tensions kept all of their plans on the drawing board. Chapters 4 through 6 focus on the Panic of 1907, the political response, the National Monetary Commission, and the realization rising in the minds of many businessmen and politicians that America should and could create a central bank. These efforts culminated in the Aldrich Plan to create a National Reserve Association, which the National Monetary Commission submitted to Congress without informing them that the initial draft of the plan had been written, secretly, by a cabal consisting of Aldrich, Vanderlip, Warburg, A. Piatt Andrew (an economics professor from Harvard and Assistant Secretary of Treasury), and Henry Davison (a senior partner at J.P. Morgan, a founder of Bankers Trust, and an adviser to the National Monetary Commission). Their infamous vacation on Jekyll Island, when they pretended to be on a duck hunt but actually wrote a proposal for a central bank, is the topic of Chapter 7.

My review skims over these chapters, because the content in them is well known, at least among economic historians. Elmus Wicker (2005) details the recession-reform dynamic in his monograph entitled The Great Debate on Banking Reform. Wicker elucidates the roles of Aldrich and Warburg and the conclave at Jekyll Island. That story has been known for nearly one hundred years. In 1916, B.C. Forbes wrote about it in articles published in Leslie’s Weekly and the magazine Current Opinion. The participants themselves denied the Jekyll Island caucus had occurred for twenty years, until the publication of Aldrich’s biography in 1930, after which all of the participants revealed their roles in drafting the blueprint for the Federal Reserve. From these personal accounts and the conventional academic literature, Lowenstein has crafted a compelling narrative that is accurate, informative, and fun to read. I’ve recommend this section of the book to students and relatives, including my brother and a cousin, who received copies for Christmas and found every page fascinating. A specialist who has read Wicker or the original sources will find pleasurable prose and a source to assign to students, but few historical revelations.

Why then, do I believe Lowenstein’s work merits substantial scholarly praise? The second part of the book, entitled “The Legislative Arena,” crafts a new and coherent account of the Jekyll Island proposal’s tumultuous transition into Congressional legislation acceptable to the American electorate. Numerous accounts exist, but often disagree, even on basic points, due to the cacophony of competing claims over authorship of the Federal Reserve Act. In 1914, Edwin Seligman, a prominent professor at Columbia University, wrote that “in its fundamental features the Federal Reserve Act is the work of Mr. Warburg more than any other man.” In the 1920s in his memoir, An Adventure in Constructive Finance, in speeches, and in submissions to prominent publications including the New York Evening Post and the New York Times, Carter Glass claimed credit for the key ideas in the Act. Critics responded. One example is Samuel Untermyer, former counsel to the House Committee on Banking and Currency. He published a pamphlet titled “Who is Entitled to the Credit for the Federal Reserve Act? An Answer to Senator Carter Glass,” in which he asserted that Glass’s claim of primary authorship was “fiction,” “fable,” and a “work of imagination.” Glass, he argued, claimed credit for many ideas advocated by Senator Robert Owen and Congressional staff. Another example is Paul Warburg. In reply to Glass’s memoir, Warburg published a two-volume tome describing his “recollections of certain events in the history of banking reform,” including copies of correspondence between himself and other founders of the Federal Reserve, and a line-by-line comparison of the Aldrich Plan, originally drafted at Jekyll Island and submitted to Congress in the final report of the National Monetary Commission, and the final Federal Reserve Act, which evolved from bills introduced in the House by Carter Glass and the Senate by Robert Owen in the spring of 1913. Warburg demonstrated that much of the text of the Federal Reserve Act was identical to text of the bill submitted by the National Monetary Commission and also to text of reform proposals that he had written single-handedly and published prior to the conclave on Jekyll Island.

As a professor of economics and professional historian, I had despaired at the confusion concerning who should receive credit for the creation of the Federal Reserve, confusion literally carved in stone on statues in the foyer of the Federal Reserve Building. I knew of one account, a chapter in a biography of Woodrow Wilson, which covered part of this ground, but I feared a comprehensive and coherent account would never emerge.

The second part of Lowenstein’s book fills this void. Chapter 8, “Into the Crucible,” tells how Warburg and other allies of Aldrich advocated for financial reform. They circulated the plan among bankers, incorporated suggestions, and established the National Citizens’ League for the Promotion of a Sounding Banking System, which sought to popularize reform on Main Street as well as Wall Street. Opposition solidified among progressives and Democrats, who feared the Aldrich Plan to create a National Reserve Association was a Trojan horse destined to create a national banking monopoly. Chapters 9 and 10 cover the 1912 presidential campaign, when opposition to the creation of a central bank appeared as a key plank in the Democratic Platform, and William Jennings Byran required Woodrow Wilson to publicly repudiate the Aldrich Plan in return for political support. Chapters 10 through 13 tell how after winning the election, the Democrats adopted the mantle of reform, and turned the Republican plan to create a National Reserve Association into their own plan to create a Federal Reserve Association, based upon similar scientific principles but with a different political superstructure. President Wilson then convinced Republicans and Democrats as well as progressives and populists to vote for the proposal, which was signed into law two days before the first Christmas of Wilson’s presidency.

Lowenstein’s novel narrative is a substantial scholarly achievement. I checked many of his sources, and over the phone and in person, I questioned him about how he came to key conclusions. Future historians may revisit aspects of his story, but I believe the core of his work will stand the test of time. I recommended this part of the book to members of the Federal Open Market Committee, to my Ph.D. advisor (who told me he had learned little from the first half of the book and stopped reading) — and I recommend it to readers of my review.

The epilogue discusses how our nation’s perpetual debates about centralization versus local autonomy, Main Street versus Wall Street, and elastic versus stagnant monetary systems continue today. While reiterating these core concepts may be useful, the epilogue is the weakest part of the manuscript. It begins by stating that “The Federal Reserve System established in 1913 was identical in its framework to the system today. The federalist structure enacted a century ago remains in force; so does the essential purpose … along with setting short-term interest rates … the Fed is in charge of the nation’s monetary policy.” These statements seem misleading or incorrect. The Banking Act of 1935 replaced the Fed’s federalist structure of regional Reserve Banks with authority to operate independently with a national central bank controlled from Washington via the Board of Governors and Federal Open Market Committee. When the Fed was founded, its essential purpose was not monetary policy. The original Fed determined neither the inflation rate nor the exchange rate. Those aggregate prices were set by the gold standard, which had been de jure since the Gold Act of 1900 and de facto for several decades before. The original Fed did not alter interest rates to influence levels of employment, unemployment, or output. Despite my qualms about the epilogue (and a quibble about the inconsistent and inaccurate use of the term “fiat money” throughout the manuscript), I think America’s Bank is worth reading repeatedly. I will assign it to undergraduates when I teach about the history of the Federal Reserve, and I will keep a copy on my bookshelf next Alan Meltzer’s three-volume History of the Federal Reserve and Milton Friedman and Anna Schwartz’s Monetary History of the United States.


Elmus Wicker, The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed, Columbus: Ohio State University Press, 2005.

Gary Richardson is the Historian of the Federal Reserve System, a research economist at the Federal Reserve Bank of Richmond, a professor of economics at the University of California at Irvine, and Research Associate at the National Bureau of Economic Research.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (February 2016). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII

The Little Big Number: How GDP Came to Rule the World and What to Do about It

Author(s):Philipsen, Dirk
Reviewer(s):Frey, Donald E.

Published by EH.Net (November 2015)

Dirk Philipsen, The Little Big Number: How GDP Came to Rule the World and What to Do about It. Princeton, NJ: Princeton University Press, 2015. xi + 398 pp.  $30 (cloth). ISBN: 978-0-691-16652-0.

Reviewed for EH.Net by Donald E. Frey, Department of Economics, Wake Forest University.

Dirk Philipsen argues that growth of GDP has become the world’s overriding goal, with bad results; and, rather surprisingly, that the cause of this is national product accounting itself. That is, widespread knowledge of the magnitude of GDP (essentially single-handedly) has produced growth mania. This is a rather sweeping assertion, raising important questions, but inviting skepticism.

The book opens with the story of the construction of modern national income and product accounts. Philipsen emphasizes misgivings Simon Kuznets, the architect of the accounts, had about the value judgments and assumptions he had built upon.  He also tells of the advocacy needed to create national accounts at a time when policymakers blundered in ignorance of such information. Imperfect as he thinks they are, Philipsen nevertheless credits the accounts for playing a worthwhile role in the Depression and in World War II.

Early success, Philipsen says, catapulted GDP into an undeserved role as the only influential measure of society’s overall wellbeing. In the mid-twentieth century, economic growth seemed the antidote to “calamities of depression, war, and revolution…” (p. 120). In the post-war context, that apparently seemed good enough to link GDP growth with wellbeing. Eventually, “more jobs, more revenue, more wealth, and more stuff for everyone effectively allowed political leaders to sidestep deeper questions” as economic growth became the nation’s overriding goal (p. 121).

Counter examples to this sweeping assertion are abundant. To this day, even undergraduate texts clearly emphasize that GDP is a measure of production, not of welfare. In the 1950s and 1960s, political rhetoric, as I recall it, focused less on GDP itself than on what a growth dividend would allow — sustaining a costly contest with the Soviets (which included even Moon expeditions), a war on poverty, enforcing civil rights for minorities, environmental clean-up, creating Medicare and so on. Fixation on GDP growth did not seem to divert attention from higher goals in that era.

More recently, during the Great Recession’s recovery phase, surveys constantly showed that no one confused rising GDP statistics with improved personal wellbeing as unemployment and personal debt remained high. Further, some (for example, Tea Party in America and “Austerity” party in Europe) actively resisted growth stimulus in favor of budget-balancing.

A part of Philipsen’s argument seems to be that GDP and true wellbeing may actually have a negative correlation.  For example, consider huge expenditures to alleviate effects of the various harms that befall persons or society (e.g., pp. 153, 274).  The punchline is that GDP counts expenditures on recovery (from diseases, accidents, earthquakes, etc.) as a gain to GDP, even though wellbeing may still be below its prior state. Clearly, GDP adds nothing to wellbeing.

However, only an incorrect comparison allows such a conclusion. Expenditures on remedies should be judged by the reduction in pain and suffering they produce, not by their inability to remove all effects. In short, GDP (though it only measures production) does not generally have an inverse relation to wellbeing.

Philipsen gives a summary of the faults of GDP (pp. 156-157). And he is correct that as a measure of final production, weighted by market prices, GDP fails in a lot of ways. Indeed, market prices don’t qualify as morally correct weights. But in a secular nation, founded on the moral individualism and relativism of the Enlightenment, what is an acceptable substitute?  Philipsen’s answers are not impressive, and even contradict each other. For example, he complains that human activities not caught up as measurable transactions are “culturally devalued” by GDP (p. 156).  Later, he complains that “GDP reduces human and social complexity to a market transaction” (p. 157).  Which is morally worse — cultural devaluation outside the market nexus or reductionism by the market?

Next Philipsen considers alternatives to using GDP as a welfare measure. These range from designing a radically adjusted GDP (but still a measure of product), to ditching GDP in favor of some single, aggregated, non-economic measure of wellbeing, to a “dashboard” of indicators, that presumably lets each indicator speak for itself to policymakers. His discussion of these alternatives seemed more balanced and nuanced than much of the rest of the book.

My judgment is that policymakers already wisely look at a variety of social indicators, not just GDP. A variety of indicators provides more information than a single number that hides as much as it reveals. In fact, it has been indicators (not necessarily systematized) completely unrelated to GDP that in the past have launched various successful movements in public health, conservation, education, fuel efficiency, reducing atmospheric ozone, etc. Some reforms occurred before GDP accounts even existed. Whole Cabinet-level departments of government are guided by non-GDP indicators.

My comments do not mean that GDP needs no improvement. GDP has long been adjusted for depreciation to get NDP. And more such adjustments, provided they are consistent with the foundations of national accounting, could be justified. The depletion of natural resources comes to mind.

I disagree with Philipsen that national income accounts have a primary effect on private decision making. Businesses have their own motives in taking actions — but seeing their (minuscule) contribution to GDP growth surely isn’t one of them. Conversely, I also question whether the failure of GDP to account for some things (such as depletion of natural resources) changes many private decisions.  Surely, if a firm buys rights to an oil field with large proven reserves, it can’t believe that after years of pumping it could sell the rights for as large a price as it originally paid. This is true no matter how national accounts handle resource depletion.

For most of the last two hundred years Americans did not even have GDP statistics to goad them to engage in growth-focused activities. Further, conservation and environmental movements arose to redress these economic behaviors that involved wanton destruction of nature or harm to people. In fact, Philipsen’s case against growth mania largely depends on the awareness of growth-related harms that reform movements have highlighted. In short, this book doesn’t convince me that GDP has caused our problems, or that tinkering with it will cure them. Other things are at work.

This book deserves one and a half cheers. Its cautionary story of the creation of GNP accounting is eye-opening, and well told. The list of ways that GDP could be improved, even as a measure of production, contains both good and questionable ideas — but all provoke thought. The book easily could be used as a directory of research criticizing GDP. But ultimately, the thesis that GDP statistics are all-important in leading us astray seems flawed.

Donald E. Frey, now retired, taught national income and product accounts for years as part of the macroeconomics curriculum at Wake Forest University.  He is the author of America’s Economic Moralists (SUNY Press, 2009).

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (November 2015). All EH.Net reviews are archived at

Subject(s):History of Economic Thought; Methodology
Living Standards, Anthropometric History, Economic Anthropology
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

Little Business on the Prairie: Entrepreneurship, Prosperity, and Challenge in South Dakota

Author(s):Wright, Robert E.
Reviewer(s):Santos, Joseph M.

Published by EH.Net (October 2015)

Robert E. Wright, Little Business on the Prairie: Entrepreneurship, Prosperity, and Challenge in South Dakota.  Sioux Falls, SD: Center for Western Studies, 2015. x + 340 pp. $17 (paperback), ISBN: 978-0-931170-68-3.

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

In Little Business on the Prairie: Entrepreneurship, Prosperity, and Challenge in South Dakota, Robert E. Wright, the Nef Family Chair of Political Economy at Augustana University (Sioux Falls, SD), evaluates, through the lens of an entrepreneurship growth model, patterns of economic growth and development in the Northern Plains from 10,000 BC to the present.  The model is based on the familiar proposition that incentives shaped by strong social infrastructure — robust economic and personal freedoms, secure property rights, and rule of law more generally — attract and inspire innovative and replicative entrepreneurs who create economic growth and development.  Whereas, weak (or no) social infrastructure attracts and inspires exploitive entrepreneurs who seek rents and, thus, impede economic growth and development.

According to Wright, the Northern Plains and, since November 2, 1889, the state of South Dakota have overwhelmingly attracted and inspired innovative and replicative entrepreneurs.  For its part, the state of South Dakota has done so, thanks to its political economy, whereby a fiercely democratic, locally empowered body politic has long assured economic freedom within a competitive market structure.  Examples of productive innovation and replication throughout the state since its inception abound.  South Dakota’s entrepreneurs have creatively disrupted farming, ranching, food processing, mining, entertainment, tourism, communications, high-technology manufacturing, healthcare, and, perhaps most notably, financial services.  How a cooperative entrepreneurial spirit among public servants and private bankers disrupted financial services amid the Great Inflation, the Volcker experiment, and the Supreme Court’s decision in Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299 (1978) is a must read.  This multilayered and colorful story of interconnected public-policy interventions and private outcomes that attracted Citibank to South Dakota in 1980 is generally misunderstood.  Wright sets the record straight.

Broadly speaking, then, the entrepreneurship growth model and, specifically, strong social infrastructure explains the state’s relatively strong economic performance throughout its history, despite recent decades of outmigration from its most-rural communities.  For example, according to the U.S. Census Bureau, from 2009 to 2013, the average median annual household income in the state was $49,495, or roughly 93% of the average median annual household income in the nation during that time.  Meanwhile, the state unemployment rate (currently 3.7%) has remained well below the national unemployment rate (currently 5.1%) for decades, including during the recent financial crisis, shortly after which the state unemployment rate peaked briefly at 5.2%.

Such economic performance is, at once, extraordinarily impressive and profoundly tragic.  This is because it occurs even though five of the nine Native American reservations in South Dakota encompass five of the nation’s nineteen poorest counties: Oglala Lakota County (Pine Ridge Reservation; 55.1% in poverty), Ziebach County (Cheyenne River Reservation; 48.7% in poverty), Todd County (Rosebud Reservation; 44% in poverty), Corson County (Standing Rock Reservation; 43% in poverty), and Buffalo County (Crow Creek Reservation; 41% in poverty) (US Census Bureau, 2013).  By comparison, Lincoln County, home to bedroom communities south of Sioux Falls, is the seventh least-poor county in the nation, with 4.3% living in poverty.

Wright argues essentially that patterns of economic growth and development in Native American communities — in South Dakota and throughout the United States more generally — have long been shaped by their social infrastructure, both freely determined and imposed.  For example, Wright demonstrates that large-scale, complex specialization, production, and exchange were common among Native Americans of the Northern Plains when social infrastructure was strong; when otherwise, exploitive entrepreneurs — first native and, then, European — reversed the course of economic progress in native communities.  Wright recognizes the federal government as primarily responsible for the relatively poor quality of life of most Native Americans in the state.  Nevertheless, he challenges the state’s government to improve the treatment of Native Americans by, for example, working to establish more depository institutions on the relatively under-banked reservations.  He argues that failing to improve the economic condition of Native Americans in the state is not only immoral, but also impractical: the current situation tarnishes the state’s image and its access to much-needed capital.

In the last chapter of the book, Wright proffers ten challenges that lie ahead for policymakers, businesses, and households in South Dakota.  These challenges range from stewarding the state’s natural resources to fostering its growing cultural diversity to, of course, preserving its entrepreneurial ethos.  On balance, Wright is sanguine about the economic future of the state.  Its biggest challenge, he reasons, “will be spreading [the state’s] entrepreneurial spirit and institutions to the rest of the nation” (p. 221).

Wright has written a timely and well-researched book, in which he showcases how entrepreneurship has created economic growth and development in the highly resourceful, economically vibrant, and strikingly beautiful Mount Rushmore State.  Wright presents his argument in a mostly cheerful and optimistic tone.  Some readers may wish for a more critical evaluation of the state’s social infrastructure and, in particular, how governmental policies contribute to the quality of life of historically underrepresented or otherwise economically challenged South Dakotans.  In any case, Wright persuasively supports the popular notion informed by theories of endogenous growth that social infrastructure causes income and wealth.  And, he effectively conveys how public interventions — most well intentioned and imperfect — and private outcomes are interconnected in complicated and, often, unforeseeable ways.

Joseph M. Santos is the Dykhouse Scholar in Money, Banking, and Regulation in the Department of Economics at South Dakota State University, where he teaches macroeconomics and monetary economics, and writes on financial markets and monetary policy.  He is the author most recently of “Back to the Futures: The Winnipeg Grain Exchange and the creation of the Canadian Wheat Board,” in the Canadian Journal of Economics (Vol. 47, n. 4, November, 2014).

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (October 2015). All EH.Net reviews are archived at

Subject(s):Business History
Economywide Country Studies and Comparative History
Geographic Area(s):North America
Time Period(s):General or Comparative
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII