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How the Republicans Caused the Stock Market Crash of 1929: GPT’s, Failed Transitions, and Commercial Policy

Author(s):Beaudreau, Bernard C.
Reviewer(s):Ramirez, Carlos D.

Published by EH.NET (August 2007)

Bernard C. Beaudreau, How the Republicans Caused the Stock Market Crash of 1929: GPT’s, Failed Transitions, and Commercial Policy. Lincoln, NE: iUniverse, 2005. xx + 200 pp. $19 (paperback), ISBN: 0-595-37908-7.

Reviewed for EH.NET by Carlos D. Ramirez, Department of Economics, George Mason University.

In his book, Bernard C. Beaudreau (Professor of Economics at Universite Laval, Quebec City, Canada) “presents an alternative view of the Stock Market Boom and Crash of 1929 as having resulted from government intervention, specifically from a case of flawed government policy in the form of the Republican Party’s 1928 election promise of an upward tariff revision ? the Smoot-Hawley Tariff Bill” (p. xi). He claims that the tariff aggravated the problem of “underincome” (which he defines as the failure of aggregate income and expenditures to rise commensurately with productive capacity), thereby amplifying the extent of the Depression.

The logic of his argument is as follows: The technological progress of the 1910s and 1920s, manifested by the increasing adoption of electricity-based, mass production processes (coined in the book as “extremely-high-throughput, continuous-flow mass production techniques,” or EHTCFPT), resulted in a phenomenal increase in industrial productive capacity throughout the 1920s. But this increase in capacity was not accompanied by an increase in wages, and thus expenditures did not increase commensurately. Beaudreau argues that the government’s first response to resolve the problem of “underincome” was to resort to tariff protection (e.g. the Smoot-Hawley Act). By protecting domestic markets, the tariff would increase sales, employment, and earnings. In fact, Beaudreau argues that initially the stock market reacted positively to the tariff as investors were anticipating future higher sales. He even points out that the stock market crashed in October of 1929 as a result of bad news regarding the implementation of the tariff ? by October of 1929 it was presumably apparent that the tariff bill would not be enacted as a coalition of “Insurgent Republicans” and Democrats called for lower tariffs on manufactures. By December of that year, he continues, the tariff was no longer being perceived as being “good news” as investors this time were anticipating retaliatory tariffs from trading partners. Thus, when the tariff finally made it into law in 1930, the stock market reaction was largely negative. According to the logic of the argument, then, before December of 1929, the tariff bill was perceived to be “good news” by investors. After December, however, it was perceived to be “bad.” Besides, he argues, the tariff aggravated the problem of “underincome” because it further stimulated firms to adopt EHTCFPT, as they wanted to increase their production capacity in anticipation of future higher demand.

After realizing the failure of the tariff to resolve the problem of “underincome,” Beaudreau argues, the government resorted to the National Industrial Recovery Act of 1933 as a second response. However, this response also ultimately failed to completely resolve the “underincome” problem. In the end, Beaudreau returns to the tariff issue and argues that it was an ill-conceived policy idea since according to his estimates the output gap was too large to be resolved by the tariff alone.

The argument is laid out in eight chapters. Chapter 1 presents an overview of the history of U.S. tariff policy (and even tariff theory) from the antebellum period to the early twentieth century, all in ten pages. Chapter 2 presents the “Theory of Underincome,” which is presented as an exchange game between two players: producers and merchants. Because of a coordination failure, it is possible that “income inertia” or “underincome” arises in equilibrium. Chapter 3 provides an account of the innovation process in American manufacturing, based on the electrification of the production process. It uses Ford Motor Company as an illustrative case of how the U.S. became industrialized by relying on EHTCFPT. This chapter also provides an account of the spread of electric power across several industries. Chapter 4 then moves to the core of his thesis arguing that the U.S. was suffering from “underincome” and that Congress’s first response was to increase protection. Chapter 5 extends this argument, and provides “a blow-by-blow account of the demise of the Smoot-Hawley Tariff Bill of 1929” and how the stock market reacted. Chapter 6 provides some details on the “Second Policy Response” ? the implementation of the National Industrial Recovery Act of 1933. In chapter 7, Beaudreau returns to the tariff issue, providing quantitative estimates of the amount of output gap. Beaudreau argues that the tariff was doomed to fail from the very beginning, as it was a policy response that was too weak, given the size of the output gap. Chapter 8 provides a brief summary and some concluding remarks.

In all honesty, it is very unlikely that readers will find Beaudreau’s argument to be persuasive. To begin with, the theory of “underincome” appears not to be all that different from a textbook description of a Keynesian-style slump in aggregate demand. Viewed from this perspective, Beaudreau’s “underincome” hypothesis is, at best, not new, at worst, very convoluted and hard to follow. Equally unconvincing is the suggestion that Republicans were responsible for the stock market crash of 1929 (as the title implies) because by October of that year, investors thought that the tariff bill was “as good as dead.” To make such a connection, at the very least, Beaudreau should have performed a formal event study, studying the behavior of stocks that were most exposed to the tariff bill, and compare it to the behavior of stocks immune to the implementation of the tariff.

This isn’t the first time that Beaudreau has made the claim that Republicans were somehow responsible for the stock market crash, or that too much technology was bad for the economy. A very similar argument is presented in his earlier book published in 1996. In fact, William Hausman reviewed Beaudreau’s 1996 book (Mass Production, the Stock Market Crash, and the Great Depression: The Macroeconomics of Electrification_, Westport, CT: Greenwood Press) for EH.NET in 1998 (see http://eh.net/bookreviews/library/0071). Unsurprisingly, it did not leave a very positive impression on him either.

Carlos D. Ramirez is Associate Professor of Economics at George Mason University. His major fields of research are banking and financial economic history. He has published banking and financial history articles in the Journal of Finance, Journal of Money, Credit, and Banking, Journal of Economic History, and Public Choice.

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

Market Services and the Productivity Race, 1850-2000: British Performance in International Perspective

Author(s):Broadberry, Stephen
Reviewer(s):Field, Alex

Published by EH.NET (June 2007)

Stephen Broadberry, Market Services and the Productivity Race, 1850-2000: British Performance in International Perspective. Cambridge: Cambridge University Press, 2006. xvii + 409 pp. $95 (cloth), ISBN: 0-521-86718-5.

Reviewed for EH.NET by Alex Field, Department of Economics, Santa Clara University.

As I was preparing this review of Stephen Broadberry’s latest book, my daughter leaned over to see what I was currently reading. She glanced quickly at the cover, shook her head and said, in a voice tinged with pity, “Dad, that just looks incredibly boring.” Then, catching sight of the word ‘productivity’ in the title, and knowing something of my own recent work, she added, apologetically, “Oh, did you write this?”

Such are the occupational hazards facing those of us who study productivity history, hardy but sensitive souls whose pulse can quicken in the presence of minute differences in rates of TFP increase. For a general audience, this book will indeed be slow going. But for those interested in the motors of economic growth and development, considered particularly from a comparative perspective, this work is a notable achievement. In it, Broadberry brings together research on the comparative productivity performance since the 1870s of Britain, the United States, and Germany. The emphasis is on Britain, and Broadberry’s main theme is the necessity of focusing on the service sector, not just or even principally manufacturing, in understanding Britain’s relative decline. Differential trends in service sector productivity, not industry, he argues, explain most of the movement in the comparative productivity performance of Britain’s aggregate economy.

How can this be? The basic story is that U.S. productivity in manufacturing in 1870 was already about fifty percent higher than it was in Britain, and the same was true 120 years later. Britain was ahead of the U.S. and Germany in 1870 not because of its lead in industry but because of its lead in services. By 1890, however, the U.S. had caught up and subsequently forged ahead in services, widening its lead in the sector up through the Second World War. Thus it was differential productivity trends in services, not any fundamental alterations in trends in manufacturing, that account for most of the overtaking and surpassing of Britain by the United States in aggregate labor productivity.

Critical to the story is the Chandlerian theme of the transition from low volume, high margin to high volume low margin operations, particularly in transportation, communication, and distribution (Chandler, 1977). The models for such transition originated in the United States, and it was the more rapid diffusion of such organizational methods in the U.S. that enabled it to overtake Britain in services and in the overall economy by 1890. But not all service sectors were equally amenable to this transition, explaining why Britain’s relative decline was not more severe. With respect to Germany, Britain’s continuing lead in services relative to Germany accounted for its ability to maintain an overall productivity advantage with respect to that country through about 1960.

Modern business enterprise originated in the U.S. in the railroad and telegraph sectors, spreading to wholesale and retail distribution, before being adopted in some sectors of manufacturing. Britain’s relative productivity decline was most notable in transport and communication and distribution, whereas the country retained a strong position in finance, a sector which offered unfavorable terrain (at least until recently) for the adoption of high volume low margin operations. Broadberry attributes the slower service sector productivity growth in Britain to labor resistance to work intensification combined with the fact that many services, unlike manufactures, weren’t tradeable, and therefore didn’t face the same competitive pressures. For industrial products, poor productivity performance eventually meant they were replaced by imports and the sector shrank. For nontradeable services, and those protected by non-tariff regulatory barriers, poor productivity performance could persist, dragging down comparative productivity performance for the entire economy. Still, Broadberry is at pains to present a variegated view of the British service sector, emphasizing areas where its comparative advantages in organizing through networks rather than internal firm hierarchies continued to serve it well. Germany’s success in overtaking Britain after 1960 is explicable in terms of a different structure of labor relations and patterns of human capital formation after the Second World War.

The book has three sections. The first is concerned principally with laying out the argument and presenting the data. The second focuses on broad explanations for the comparative productivity trends (I did not find that the theoretical model in chapter 5, based on the work of Broadberry and Ghosal, added much). The third section presents a series of detailed historical/empirical chapters dissecting the performance of different parts of the British service sector in different time periods, carrying the story forward through the 1990s. Taken together this material provides a compelling case that it is both possible and necessary to focus on the service sector in understanding productivity history at the national level and in comparative perspective. The data for services may not always be quite as good as they are for industry, but there is much more here than one might imagine, and it is unworkable and unjustifiable to restrict our attention to manufacturing simply because “the light is better there.”

One of the difficulties with the book and the way the data are presented, however, is the melding of a narrative structure focusing on the one hand on the history of British productivity growth and on the other hand on its comparative productivity performance with respect to the U.S. and Germany in different time periods. From an historical perspective, one is principally interested in what drove aggregate productivity forward, both in individual countries and in the world as a whole. There are of course also reasons for measuring comparative productivity performance at different times, but excessive focus on these numbers risks obscuring important aspects of the process of economic growth. For example, compare two time periods in which there is apparently no change in comparative performance. It makes a big historical difference whether this is because there was no change in levels in either country or because levels in both countries increased at the same rate. To his credit, Broadberry provides detailed time series data on the evolution of levels for the individual countries. Still, because the narrative is principally couched in terms of the explanation of relative decline, Broadberry finds himself repeatedly compelled to emphasize that even in periods in which the country may have performed poorly in comparison with other countries, the absolute growth rate of labor productivity in Britain was high by world historical standards.

The point I am making is separate from but in a sense related to the important methodological issues which have motivated the exchanges between Broadberry on the one hand and Ward and Devereux on the other. To calculate comparative productivity ratios one chooses a benchmark year, calculates value added per worker or per hour in the domestic currencies of each country, and then converts the value added in the two countries to a common metric using a PPP adjusted exchange rate. Using domestic rates of economic growth, one then projects forward and backwards. Because of index number and other problems, however, growth rates from one PPP based comparative productivity benchmark will not always or necessarily produce a later or earlier comparative productivity measure consistent with a later or earlier PPP based benchmark. Broadberry has tried to address this problem by choosing 1937 as a benchmark (unlike Maddison, who used 1990), and by using other benchmarks as a check on the projections forward and backwards using domestic growth rates. He is persuaded the methodology is defensible, and the remaining discrepancies tolerable, but he will probably not satisfy all of his critics. Those seeking more detailed discussion of these problems, which also bedevil work on contemporary economies, should consult, for example, Ward and Devereux (2003).

There are some aspects of Broadberry’s treatment of U.S. productivity history with which I differ. For example, he endorses Abramovitz and David on the importance of capital accumulation rather than TFP in explaining trends in U.S. labor productivity growth in the last third of the nineteenth century (p. 109). But TFP growth in the U.S. private domestic economy was over 1 percent per year from the early 1870s through 1906, lower of course than rates experienced in the second quarter of the twentieth century but certainly respectable and indeed substantially higher than during a comparable period of the twentieth century (Field 2008, forthcoming).

Secondly, Broadberry correctly identifies very strong labor productivity and TFP growth in transportation and communication in the 1930s as part of what underlay the continuing advance of U.S. service sector productivity and the consequent widening of the US/UK productivity gap during the Depression years. But this was not necessarily a period of increasing “industrialization” of transport services as Broadberry suggests (p. 12). The introduction of modern business enterprise in railroads occurred in the last third of the nineteenth century. The growth sector within transportation in the 1930s was trucking, a sector comprised of small, non-hierarchically organized companies. What is striking about the 1930s in the U.S. is not only the extraordinarily high TFP growth in trucking (a rapidly growing sector), but the relatively strong advance in the railroad sector, which, in contrast with the 1920s, was experiencing capital shallowing. Since railroads were still such a large part of the economy, this mattered (see Field, 2006). As Broadberry’s narrative indicates (pp. 230-235), nothing comparable happened in railroads in Britain. Greater emphasis on the importance for the United States of the Depression build out of the surface road network, and the role of street and highway spending in the U.S. in generating spillovers in transportation would have made the narrative historically richer (Field, 2003).

There is also some tendency to be too dismissive of trends in industry in explaining the huge gap opened up between the U.S. and Britain by the 1950s. The driver of aggregate trends in comparative productivity, Broadberry asserts, are trends within the respective service sectors. But his own data show that the widening of the US/UK productivity differential between 1870 and 1960 was more marked in industry (250.4/153.6) than it was in services (137.7/85.9) (Table 2.1). Table 2.1 includes data for industry ? construction and mining as well as manufacturing ? and it is true that the increase in manufacturing alone, although substantial, was not as dramatic as in the service sector as a whole. My point is that whereas the surge in U.S. service sector productivity certainly played a very important part in widening the productivity lead opened up by the U.S. at mid-century, trends in industry and in manufacturing also contributed substantially. Broadberry’s larger thesis is sustained, however, because whereas by 1990 faster productivity growth in British industry and manufacturing had restored the US/UK advantage to roughly where it had been in 1870, the same cannot be said for services.

Finally somewhat more emphasis, particularly in the US/UK comparisons, on changing sectoral shares in explaining aggregate productivity growth would have been useful. For example (p. 28) “over the long run, Britain was overtaken at the aggregate level because of a loss of labour productivity leadership in services.” It would be fairer to say that Britain was overtaken because of a loss in productivity leadership in services combined with the very sharp growth in the share of services, particularly in the United States. (The UK-German analysis does place considerable emphasis on the retention of a large agricultural sector in German and its implications in terms of a smaller service sector.)

These are small bones to pick. Broadberry has written an impressive book that will interest economic historians and students of economic growth, particularly those focusing on Britain.

References:

Chandler, Alfred D. 1977. The Visible Hand: The Managerial Revolution in American Business. Cambridge: Harvard University Press.

Field, Alexander J. 1987. “Modern Business Enterprise as a Capital-Saving Innovation,” Journal of Economic History 47 (June 1987): 473-85.

Field, Alexander J. 2003. “The Most Technologically Progressive Decade of the Century,” American Economic Review 93 (September): 1399-1414.

Field, Alexander J. 2006. “Technological Change and U.S. Economic Growth in the Interwar Years,” Journal of Economic History?? 66 (March 2006): 203-36.

Field, Alexander J. 2008. “U.S. Economic Growth in the Gilded Age,” Journal of Macroeconomics 29 (prepared for submission to a special issue).

Ward, Marianne and John Devereux. 2003. “Measuring British Decline: Direct vs. Long Span Income Measures,” Journal of Economic History 63: 826-51.

Alex Field is the Michel and Mary Orradre Professor of Economics at Santa Clara University. His current research interests include U.S. productivity history and the implications of evolutionary theory for the behavioral sciences.

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

Europe’s Third World: The European Periphery in the Interwar Years

Author(s):Aldcroft, Derek H.
Reviewer(s):Wolf, Nikolaus

Published by EH.NET (June 2007)

Derek H. Aldcroft, Europe’s Third World: The European Periphery in the Interwar Years. Aldershot: Ashgate, 2006. xi + 217 pp. $100 (cloth), ISBN: 0-7546-0599-X.

Reviewed for EH.NET by Nikolaus Wolf, Centre for the Study of Globalisation and Regionalisation, University of Warwick.

Aldrcoft’s book is a compact and very useful survey on what we know about the economic development of the European Periphery during the interwar years. In large parts it reads like an extension of Berend and Ranki (1982) into the 1930s and like Berend and Ranki, Aldcroft refuses to present an overarching scheme or some unified model for the European Periphery. The main virtue of the book is to synthesize in a highly readable way a vast literature on the puzzling persistence of economic backwardness outside the north-western European core. Moreover, the book underlines the urgent need for further comparative research into the economic history of the Europe’s periphery.

The book is organised in nine chapters, covering thirteen European countries, namely Poland and Hungary in Central Europe, the three Baltic States, the Balkan countries of Albania, Bulgaria, Romania and Yugoslavia, and the Mediterranean countries of Turkey, Greece, Spain, and Portugal. There are many informative comparative tables on these countries, a list of references that is quite impressive (though of course incomplete: I missed for example the excellent 1997 book of Feinstein, Toniolo and Temin) given the shortness of the text, and a very good index. But the reader will not find any maps, except the one on the front cover, which is rather misleading about the geographical scope of the book. This absence of maps is understandable from a publisher’s perspective, especially because the cartography of Europe after 1914 is rather challenging, but it is hard to justify from an academic point of view. Good maps on the ethno-linguistic patchwork, on the extreme differences in natural geography, or on the presence or absence of infrastructure across the European Periphery would have been very telling about the economics of this region.

The first chapter argues for an “economic rather than a geographic” (page 3) definition of the European Periphery, encompassing those countries as peripheral which at the turn of the last century still had at least 50 percent of their population dependent on agriculture and with per capita incomes of less than 50 percent of the advanced European nations. On these grounds the exclusion of Czechoslovakia from the book is straightforward, but less so the exclusion of Italy. Here and elsewhere in the book, Aldcroft should have touched upon the massive regional differences within countries that prevailed during the interwar years. Then of course the exclusion of southern Italy but also that of Slovakia from the European Periphery would have become even more debatable, as well as the inclusion of Upper Silesia or some parts of Spain into the periphery: geography matters and I will come back to this. The chapter continues with a description of several common characteristics of these peripheral countries, which implicitly also indicates Aldcroft’s conceptual framework for economic backwardness as such. All countries showed a low land and labor productivity in agriculture, coupled with a not much higher productivity in industry, which is reflected in the dominance of primary commodities in their foreign trade. Urbanization rates were much below Western Europe and the development of infrastructure and capital in a broad sense lagged behind. A growing population was fragmented into a diversity of ethno-linguistic groups, which contributed to political instability and helped to bring about authoritarian regimes. Chapter two elaborates on this to describe the situation of Europe’s periphery prior to 1914: agriculture hampered rather than helped economic progress, human capital formation was slow and institutions poor. It also touches upon the “core-periphery” concept of development limited by economic dependency, but Aldcroft is skeptical about its general applicability (pp. 19-23).

Chapter three on “Peripheral Europe in the Interwar Setting” is the key narrative of the book as it surveys in about thirty pages the interwar experience of the thirteen countries in question. Here Aldcroft shows his outstanding command of a vast literature to tell a tale of many small and often young states fighting against a series of disasters. After a brief description of the difficult post-war reconstruction he rightly points to the fragility of the economic upturn in the late 1920s. Manufacturing production in the periphery grew, but all too often nurtured by subsidies and tariff protection, while still too slow to induce any structural change. When the Great Depression hit, it made a bad situation worse, by limiting access to markets while (often) increasing the debt burden. Aldcroft argues that the policy turn towards strategies of economic nationalism in most parts of the European Periphery during the mid-1930s was essentially without alternative (page 59). He mentions the raising share of defense spending in public expenditure due to a climate of military threat and concludes that “the international background … was scarcely the most auspicious of environments for latecomers to modern development” (page 67). It might have been rewarding to explore that international background a bit closer ? I missed some reference to the work of Eichengreen on international cooperation or more specifically to Ritschl on the international reparations problem. Instead, the following chapters (four to eight) look into some details of the country-specific experiences, before chapter nine concludes with a question mark on “development stalled?”

The country chapters give a concise and suitable introduction into the economic development of the periphery during these years. While Aldcroft acknowledges that the available data on the overall performance of the peripheral economies “should be treated with some caution” (page 172), the data show an intriguing variety in experience. The Baltic countries fared better than most of the Periphery, especially Estonia and Latvia, as did Greece or Bulgaria compared to the rest of the Balkans. Albania did ? for the little we know about it ? develop least, while Poland struggled for most of the period to catch-up to her pre-war level. This cross-country variation within the European Periphery, but also the changes over time that Aldcroft’s survey depicts in a very compact manner, suggest to this reviewer a reconsideration of the “core-periphery” debate in a way that places geography where it belongs: at the very heart of economic development.

As stated earlier, Aldcroft used an “economic rather than a geographic” (page 3) definition of the European Periphery, but he is reluctant to provide the reader with a conceptual framework to make economic sense of it. Paradoxically, geography might deliver such an economic framework. Rosenstein-Rodan’s landmark work of 1943 on economic development dealt with Eastern and South-Eastern Europe, and was elaborated in the work of Krugman and others on the “new” Economic Geography. In Krugman (1991), and in the vast literature that has developed in the wake of Krugman, a core-periphery pattern emerges from the notion that different access to markets can be self-replicating, without any recurrence to economic dependency or exploitation. Aldcroft’s whole book can be read as a history of failed development due to bad access to markets for peripheral countries, made worse by the limits that international politics imposed, especially for the new stats of Eastern Europe. A suitable example is provided by Poland between the wars. The reunification of Poland inevitably reduced the size of her accessible markets in the early 1920s as the Polish domestic market was far too small to make good for the loss of access to Russia. The implied dependency on German markets threatened the state, and Poland tried to channel her trade over the Baltic Sea ? often competing with Britain ? and improve access to “friendly” capital. When Scandinavia entered the Sterling Bloc and capital inflows dried up, Poland was left with a possibly hopeless strategy of autarchic industrialization that started in 1936. Other countries seem to fit into such a picture. Countries that fared best in the 1930s were those with (politically enabled) access to significant markets: Bulgaria and Greece that opened up to Nazi Germany; Estonia and Latvia that became de facto part of the Sterling bloc. The data on many of these states are still very poor, but there are signs for some improvement. While we still lack reliable GDP estimates for Poland, Latvia, Lithuania, or Albania, recent work on Estonia (by Jaak Velge) or Bulgaria (by Ivanov and Tooze) has started to fill some of those gaps and may help to rewrite the history of the European Periphery some day.

For the time being, Aldcroft’s book provides a highly readable and compact survey on what we currently know about the economic development of Europe’s periphery during the interwar years, linking up with the work of Berend and Ranki (1982) for the period up to 1914. It is a good starting point for further research into one of the most promising areas in European economic history.

References:

Ivan T. Berend and Gyoergy Ranki (1982), The European Periphery and Industrialization, 1780-1914, New York: Cambridge University Press.

Charles Feinstein, Gianni Toniolo, and Peter Temin (1997), The European Economy between the Wars, Oxford: Oxford University Press.

Paul Rosenstein-Rodan (1943), “Problems of Industrialization of Eastern and South-Eastern Europe,” Economic Journal 53: 202-11.

Paul Krugman (1991), “Increasing Returns and Economic Geography,” Journal of Political Economy 99: 183-99.

Nikolaus Wolf is a Senior Research fellow at the Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick and a Research Affiliate (International Trade) at the CEPR. He works on European economic geography in the long run. Recent publications include “Estimating Financial Integration in the Middle Ages: What Can We Learn from a TAR-model?” Journal of Economic History (2006), with Oliver Volckart and “Endowments vs. Market Potential: What Explains the Relocation of Industry after the Polish Unification in 1918?” Explorations in Economic History (2007).

Subject(s):Historical Geography
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII

California Dreaming: Ideology, Society, and Technology in the Citrus Industry of Palestine, 1890-1939

Author(s):Karlinsky, Nahum
Reviewer(s):Rhode, Paul

Published by EH.NET (November 2006)

Douglas Cazaux Sackman, Orange Empire: California and the Fruits of Eden. Berkeley, CA: University of California Press, 2005. xv + 386 pp. $45 (cloth), ISBN: 0-520-23886-9.

Nahum Karlinsky, California Dreaming: Ideology, Society, and Technology in the Citrus Industry of Palestine, 1890-1939 (translated from Hebrew by Naftali Greenwood). Albany, NY: State University of New York Press, 2005. xiv + 270 pp. $45 (cloth), ISBN: 0-7914-6527-6.

Reviewed for EH.NET by Paul Rhode, Department of Economics, University of North Carolina, Chapel Hill.

In the summer of 1927, Frank Adams, a Professor of Irrigation at the University of California, joined a tour-group studying the agriculture of Palestine. One event receiving special note “was a California luncheon tendered the members of the Commission at the home of one of the settlers in the colony of Benjamin. The hosts were all former students of the University of California College of Agriculture … or those who have had some agricultural training and experience on California farms or … agricultural enterprises.”[1] This scientific inter-exchange lies at the intersection of these two valuable recent books exploring the growth of the citrus production in two distant, but environmentally similar lands.

Employing a cultural history approach, Sackman chronicles the rise of the California orange industry between 1870 and 1950. By his account, powerful regional boosters in southern California cultivated, or rather manufactured, an advertising image of a sunny “Garden of Eden” to better market their commodities and hide their exploitation of immigrant workers and their increasingly chemical-dependent production techniques. Across its first four chapters, Orange Empire sketches the founding myths of the local industry, covering the introduction of the Washington navel orange at the Tibbets farmstead, the conquest of blue mold by USDA pomologist G. Harold Powell, and the establishment of cooperative state-federal citrus research system.

But the heart of the work is the analysis of citrus marketing, especially of Sunkist’s advertising efforts, in Chapter 3, which bears the telling title “Pulp Fiction.” Sackman sees the Sunkist co-operative (p. 12) as the “driving force behind the rise of the Orange Empire.” Early attempts to promote California citrus appear lame, even a little bizarre. He observes that the state’s exhibit at the Chicago World’s Fair of 1893 displayed a model of the Liberty Bell made from oranges. The California Fruit Growers Exchange, formed in the same year, developed a more effective campaign of “scientific salesmanship” of oranges under the Sunkist label. Beginning with a 1907 promotional drive in Iowa using catch phrase “Oranges for Health-California for Wealth,” the cooperative became a leading national advertiser by the early 1920s. Among the bold claims in its magazine copy was that citrus was a good source of the newly-discovered Vitamin C — a claim that Sackman suspiciously notes was based on nutrition research partially funded by Sunkist. A sense of the tenor of the argument is offered on p. 115: “By using the legitimating stories of medical science and playing cultural fears of disease, Sunkist configured nature’s oranges as a vital ingredient for the health and growth of the nation.” Similar statements abound. The operation of advertising is indeed mysterious. Yet are tastes holding that fresh oranges are beautiful, delicious, and healthy (compared with other snacks) merely the product of Sunkist brain-washing? Despite his immersion in post-modern rhetoric, even the author does really appear to believe so (see p. xi). Maybe, sometimes, an orange is just an orange. And delicious at that.

Karlinsky adopts an approach more familiar to economic historians, one embracing the evaluation of evidence regarding production costs, export markets, technological choice, and the difficulties of cartelization. Like Sackman, he also emphasizes the play of ideology, specifically of conflicting visions within the Zionist movement, in shaping the development of the Jewish citrus industry in Palestine over the period from 1890 to 1939. One core ideological issue was whether the new sector was to develop along capitalist, private enterprise lines as advocated by pioneering grower, Moshe Smilansky, or along communal lines as advocated by Arthur Ruppin and Zionist socialists. A second, related set of issues involved nationalism and the use of hired labor. Should the citrus colonies rely on Jewish workers exclusively as the Ben-Gurion and Zionist Labor Movement demanded, or could cheaper Arab hired hands be employed? It is fascinating to compare the role and treatment of Mexican workers in the California citrus industry, which Sackman’s fourth chapter places in a new light, with intense debates raging at the same time in the Zionist movement over “the conquest of labor.” Another interesting point of comparison is the ideological position of cooperatives such as Sunkist. Sackman briefly (p. 93) notes that its founders declared themselves free “from commercial exploitation” by middlemen. But this understates how different cooperative members believed their community-based production and marketing organization was from the standard modes of operation of the family farms in the American Midwest. California agriculture offered something new, although not as radically different as some desired.

Karlinsky’s title, California Dreaming: Ideology, Society, and Technology in the Citrus Industry of Palestine, is evocative but a little misleading. The Hebrew version of the book was called Citrus Blossoms: Jewish Entrepreneurship in Palestine, 1890-1939. One imagines that in bringing out an English translation (and a good one at that), the editors at the SUNY Press decided a slight repackaging would increase the work’s American market. Karlinsky discusses the “California model” in excellent detail, but only beginning in Chapter 5 on production techniques and in Chapter 9 on marketing. (The phrase “California model” was commonly used in the industry to characterize the agricultural and marketing practices propelling California to global leadership. The term was explicitly adopted by Harold Powell, Jr. when he moved to South Africa with a mission to reproduce California’s success there in the 1910s.)

A major point of the fifth chapter is that while Jewish leaders admired California’s achievement and studied its techniques regarding the use of hired labor, plant spacing, cultivation, irrigation, picking and packing, and joint marketing, the industry in Palestine did not actually adopt many of these practices on a sustained basis. As one example, by the 1920s, California citrus farmers were irrigating with electric-driven horizontal centrifugal pumps and underground cement tubes. Despite expert advice to adopt the “California irrigation method,” Jewish planters persisted in using piston pumps driven by internal combustion engines and in manual irrigating via ditches. As another example, during the “big planting period” of the early 1930s, Jewish farmers abandoned the wide spacing advocated by California’s citrus experts in favor of tighter spacing and earlier maturation. Karlinsky concludes (p. 120) the “attempt to transplant the California model to Palestine … did not turn out well, mainly due to differences in conditions: scarcity of land, availability of cheap unskilled labor, high interest rates, and the wish to obtain a return on equity as quickly as possible.”

The situation was similar in packing and marketing. Attempts in the early 1920s to install an efficient, large-scale, American-style packing plant failed miserably. The machinery was designed for the round American oranges, not for the oval Shamouti variety grown in Palestine. Growers, moreover, were initially suspicious of the drive towards centralization they considered inherent in the modern techniques. Finally, efforts to form marketing cooperatives, including the Padress and the Jaffa Citrus Exchange, went through repeated trials and efforts at reorganization.

Given his interests and sources, Karlinsky is relatively silent on the growth of the Arab side of the Palestinian citrus industry. Chapter 6 provides a short overview of technological innovations in that sector. This brevity is unfortunate because except for the 1926-35 period, when Jewish planting outpaced Arab planting before falling back again, the two sectors were of roughly equal size and shared many of the same patterns of expansion and crisis. The Arab sector predated Jewish efforts and tended to be more traditional. But it also grew rapidly during the Mandate era, using lower production costs to compete in export markets. One of the hypotheses advanced in the text is that capital from Jewish land purchases as well as lessons about modern techniques learned by Arabs working in Jewish orchards pushed the expansion of the Arab sector. As Karlinsky explicitly states, a definite comprehensive study of the Arab half of the Palestinian citrus industry awaits another treatment.

As with the English-language title of Karlinsky’s book, Orange Empire does not fully convey the contents of the Sackman’s work. The scope of this book — which (p. xii) asserts it is the first historical monograph on the California citrus industry written since Carey McWilliams’s 1946 Southern California — is both larger and smaller than is suggested. Orange Empire visits all of the “stations of the cross” in the McWilliams version of California’s agricultural history — the 1913 riot at the Durst ranch in Wheatland, the 1934 EPIC campaign of Upton Sinclair, the strike-breaking activities of the Associated Farmers during the 1930s, the controversies surrounding John Steinbeck’s Grapes of Wrath, and the story behind Dorothea Lange’s iconic 1936 photograph of the “Migrant mother.” Little matter that Durst produced hops; that Lange’s mother picked peas, not oranges; or that Charles Teague, the book’s key opponent of EPIC and proponent of the Associated Farmers, was a lemon (and walnut) producer. Using care to distinguish between California oranges and lemons is important because the producers of the latter continued to be much more dependent on tariff protection to stave off European competition than producers of the former.

The cost of this broad take on the subject matter is that Sackman pays limited attention to many issues of interest to economic historians. The economic literature has focused on whether the cooperatives such as Sunkist were strictly rent-extracting output-restricting cartels or whether they increased efficiency by lowering costs and solving marketing problems. In either case, how did such organizations solve the “free rider” problem to retain members and market position? The advertising of Sunkist was costly and inevitably some of the increased demand would spill over to non-Sunkist citrus. How were outsiders prevented from reaping what they did not sow? Advertising and branding might also provide informative signals about quality to consumers concerned about purchasing spoilt or dry and pulpy fruit. Sackman’s treatment leaves these issues largely unexplored. Although focused on Palestine, Karlinsky’s work does a far better job discussing the challenges of running a cartel. Sackman’s book is also silent on tariff policy and global trade, providing no indication of the role of protectionism in building California’s Orange Empire. Finally and most unfortunately, the book’s last chapter devotes just a few pages to the Empire’s fall, to its disappearance from Southern California in the post-War period as a result of suburbanization, smog, and the open land of the San Joaquin Valley. That is a story bearing a fresh telling.

Note:

1. Frank Adams, “Agriculture in Palestine,” California Countryman (Jan. 1928), p. 21.

Paul Rhode is the author (with Jos? Morilla Critz and Alan L. Olmstead) of “‘Horn of Plenty’: The Globalization of Mediterranean Horticulture and the Economic Development of Southern Europe, 1880-1930,” Journal of Economic History (1999). Beginning in January 2007, he will join the Department of Economics at the University of Arizona.

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Orange Empire: California and the Fruits of Eden

Author(s):Sackman, Douglas Cazaux
Reviewer(s):Rhode, Paul

Published by EH.NET (November 2006)

Douglas Cazaux Sackman, Orange Empire: California and the Fruits of Eden. Berkeley, CA: University of California Press, 2005. xv + 386 pp. $45 (cloth), ISBN: 0-520-23886-9.

Nahum Karlinsky, California Dreaming: Ideology, Society, and Technology in the Citrus Industry of Palestine, 1890-1939 (translated from Hebrew by Naftali Greenwood). Albany, NY: State University of New York Press, 2005. xiv + 270 pp. $45 (cloth), ISBN: 0-7914-6527-6.

Reviewed for EH.NET by Paul Rhode, Department of Economics, University of North Carolina, Chapel Hill.

In the summer of 1927, Frank Adams, a Professor of Irrigation at the University of California, joined a tour-group studying the agriculture of Palestine. One event receiving special note “was a California luncheon tendered the members of the Commission at the home of one of the settlers in the colony of Benjamin. The hosts were all former students of the University of California College of Agriculture … or those who have had some agricultural training and experience on California farms or … agricultural enterprises.”[1] This scientific inter-exchange lies at the intersection of these two valuable recent books exploring the growth of the citrus production in two distant, but environmentally similar lands.

Employing a cultural history approach, Sackman chronicles the rise of the California orange industry between 1870 and 1950. By his account, powerful regional boosters in southern California cultivated, or rather manufactured, an advertising image of a sunny “Garden of Eden” to better market their commodities and hide their exploitation of immigrant workers and their increasingly chemical-dependent production techniques. Across its first four chapters, Orange Empire sketches the founding myths of the local industry, covering the introduction of the Washington navel orange at the Tibbets farmstead, the conquest of blue mold by USDA pomologist G. Harold Powell, and the establishment of cooperative state-federal citrus research system.

But the heart of the work is the analysis of citrus marketing, especially of Sunkist’s advertising efforts, in Chapter 3, which bears the telling title “Pulp Fiction.” Sackman sees the Sunkist co-operative (p. 12) as the “driving force behind the rise of the Orange Empire.” Early attempts to promote California citrus appear lame, even a little bizarre. He observes that the state’s exhibit at the Chicago World’s Fair of 1893 displayed a model of the Liberty Bell made from oranges. The California Fruit Growers Exchange, formed in the same year, developed a more effective campaign of “scientific salesmanship” of oranges under the Sunkist label. Beginning with a 1907 promotional drive in Iowa using catch phrase “Oranges for Health-California for Wealth,” the cooperative became a leading national advertiser by the early 1920s. Among the bold claims in its magazine copy was that citrus was a good source of the newly-discovered Vitamin C — a claim that Sackman suspiciously notes was based on nutrition research partially funded by Sunkist. A sense of the tenor of the argument is offered on p. 115: “By using the legitimating stories of medical science and playing cultural fears of disease, Sunkist configured nature’s oranges as a vital ingredient for the health and growth of the nation.” Similar statements abound. The operation of advertising is indeed mysterious. Yet are tastes holding that fresh oranges are beautiful, delicious, and healthy (compared with other snacks) merely the product of Sunkist brain-washing? Despite his immersion in post-modern rhetoric, even the author does really appear to believe so (see p. xi). Maybe, sometimes, an orange is just an orange. And delicious at that.

Karlinsky adopts an approach more familiar to economic historians, one embracing the evaluation of evidence regarding production costs, export markets, technological choice, and the difficulties of cartelization. Like Sackman, he also emphasizes the play of ideology, specifically of conflicting visions within the Zionist movement, in shaping the development of the Jewish citrus industry in Palestine over the period from 1890 to 1939. One core ideological issue was whether the new sector was to develop along capitalist, private enterprise lines as advocated by pioneering grower, Moshe Smilansky, or along communal lines as advocated by Arthur Ruppin and Zionist socialists. A second, related set of issues involved nationalism and the use of hired labor. Should the citrus colonies rely on Jewish workers exclusively as the Ben-Gurion and Zionist Labor Movement demanded, or could cheaper Arab hired hands be employed? It is fascinating to compare the role and treatment of Mexican workers in the California citrus industry, which Sackman’s fourth chapter places in a new light, with intense debates raging at the same time in the Zionist movement over “the conquest of labor.” Another interesting point of comparison is the ideological position of cooperatives such as Sunkist. Sackman briefly (p. 93) notes that its founders declared themselves free “from commercial exploitation” by middlemen. But this understates how different cooperative members believed their community-based production and marketing organization was from the standard modes of operation of the family farms in the American Midwest. California agriculture offered something new, although not as radically different as some desired.

Karlinsky’s title, California Dreaming: Ideology, Society, and Technology in the Citrus Industry of Palestine, is evocative but a little misleading. The Hebrew version of the book was called Citrus Blossoms: Jewish Entrepreneurship in Palestine, 1890-1939. One imagines that in bringing out an English translation (and a good one at that), the editors at the SUNY Press decided a slight repackaging would increase the work’s American market. Karlinsky discusses the “California model” in excellent detail, but only beginning in Chapter 5 on production techniques and in Chapter 9 on marketing. (The phrase “California model” was commonly used in the industry to characterize the agricultural and marketing practices propelling California to global leadership. The term was explicitly adopted by Harold Powell, Jr. when he moved to South Africa with a mission to reproduce California’s success there in the 1910s.)

A major point of the fifth chapter is that while Jewish leaders admired California’s achievement and studied its techniques regarding the use of hired labor, plant spacing, cultivation, irrigation, picking and packing, and joint marketing, the industry in Palestine did not actually adopt many of these practices on a sustained basis. As one example, by the 1920s, California citrus farmers were irrigating with electric-driven horizontal centrifugal pumps and underground cement tubes. Despite expert advice to adopt the “California irrigation method,” Jewish planters persisted in using piston pumps driven by internal combustion engines and in manual irrigating via ditches. As another example, during the “big planting period” of the early 1930s, Jewish farmers abandoned the wide spacing advocated by California’s citrus experts in favor of tighter spacing and earlier maturation. Karlinsky concludes (p. 120) the “attempt to transplant the California model to Palestine … did not turn out well, mainly due to differences in conditions: scarcity of land, availability of cheap unskilled labor, high interest rates, and the wish to obtain a return on equity as quickly as possible.”

The situation was similar in packing and marketing. Attempts in the early 1920s to install an efficient, large-scale, American-style packing plant failed miserably. The machinery was designed for the round American oranges, not for the oval Shamouti variety grown in Palestine. Growers, moreover, were initially suspicious of the drive towards centralization they considered inherent in the modern techniques. Finally, efforts to form marketing cooperatives, including the Padress and the Jaffa Citrus Exchange, went through repeated trials and efforts at reorganization.

Given his interests and sources, Karlinsky is relatively silent on the growth of the Arab side of the Palestinian citrus industry. Chapter 6 provides a short overview of technological innovations in that sector. This brevity is unfortunate because except for the 1926-35 period, when Jewish planting outpaced Arab planting before falling back again, the two sectors were of roughly equal size and shared many of the same patterns of expansion and crisis. The Arab sector predated Jewish efforts and tended to be more traditional. But it also grew rapidly during the Mandate era, using lower production costs to compete in export markets. One of the hypotheses advanced in the text is that capital from Jewish land purchases as well as lessons about modern techniques learned by Arabs working in Jewish orchards pushed the expansion of the Arab sector. As Karlinsky explicitly states, a definite comprehensive study of the Arab half of the Palestinian citrus industry awaits another treatment.

As with the English-language title of Karlinsky’s book, Orange Empire does not fully convey the contents of the Sackman’s work. The scope of this book — which (p. xii) asserts it is the first historical monograph on the California citrus industry written since Carey McWilliams’s 1946 Southern California — is both larger and smaller than is suggested. Orange Empire visits all of the “stations of the cross” in the McWilliams version of California’s agricultural history — the 1913 riot at the Durst ranch in Wheatland, the 1934 EPIC campaign of Upton Sinclair, the strike-breaking activities of the Associated Farmers during the 1930s, the controversies surrounding John Steinbeck’s Grapes of Wrath, and the story behind Dorothea Lange’s iconic 1936 photograph of the “Migrant mother.” Little matter that Durst produced hops; that Lange’s mother picked peas, not oranges; or that Charles Teague, the book’s key opponent of EPIC and proponent of the Associated Farmers, was a lemon (and walnut) producer. Using care to distinguish between California oranges and lemons is important because the producers of the latter continued to be much more dependent on tariff protection to stave off European competition than producers of the former.

The cost of this broad take on the subject matter is that Sackman pays limited attention to many issues of interest to economic historians. The economic literature has focused on whether the cooperatives such as Sunkist were strictly rent-extracting output-restricting cartels or whether they increased efficiency by lowering costs and solving marketing problems. In either case, how did such organizations solve the “free rider” problem to retain members and market position? The advertising of Sunkist was costly and inevitably some of the increased demand would spill over to non-Sunkist citrus. How were outsiders prevented from reaping what they did not sow? Advertising and branding might also provide informative signals about quality to consumers concerned about purchasing spoilt or dry and pulpy fruit. Sackman’s treatment leaves these issues largely unexplored. Although focused on Palestine, Karlinsky’s work does a far better job discussing the challenges of running a cartel. Sackman’s book is also silent on tariff policy and global trade, providing no indication of the role of protectionism in building California’s Orange Empire. Finally and most unfortunately, the book’s last chapter devotes just a few pages to the Empire’s fall, to its disappearance from Southern California in the post-War period as a result of suburbanization, smog, and the open land of the San Joaquin Valley. That is a story bearing a fresh telling.

Note:

1. Frank Adams, “Agriculture in Palestine,” California Countryman (Jan. 1928), p. 21.

Paul Rhode is the author (with Jos? Morilla Critz and Alan L. Olmstead) of “‘Horn of Plenty’: The Globalization of Mediterranean Horticulture and the Economic Development of Southern Europe, 1880-1930,” Journal of Economic History (1999). Beginning in January 2007, he will join the Department of Economics at the University of Arizona.

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Chimneys in the Desert: Industrialization in Argentina during the Export Boom Years, 1870-1930

Author(s):Rocchi, Fernando
Reviewer(s):Horowitz, Joel

Published by EH.NET (June 2006)

Fernando Rocchi, Chimneys in the Desert: Industrialization in Argentina during the Export Boom Years, 1870-1930. Stanford, CA: Stanford University Press, 2005. xviii + 394 pp. $70 (cloth), ISBN: 0-8047-5012-2.

Reviewed for EH.NET by Joel Horowitz, Department of History, St. Bonaventure University.

Argentina’s inability to sustain the prosperity, which in the late 1920s made it one of the richest countries in the world, has led to much speculation about the causes of that failure. Many have placed a good deal of the blame on Argentina’s failure to create a self-sustaining process of industrialization. However, as Fernando Rocchi (Chair, Department of History, Universidad Torcuato Di Tella, Argentina) points out in the book under review, there have been extremely few modern systematic studies of the early stages of industrialization. Many commentators have just accepted the view, which principally came from the industrialists, that early industrialization occurred in a largely hostile environment, since the primary providers of credit, the state owned banks, were unwilling to grant loans and little or no tariff protection was provided.

Rocchi sets out to shift this vision. His work is wide ranging, well written and extremely perceptive. It is based on an impressive array of sources, including but not limited to company and bank records and diplomatic archives. Given the state of the archives and libraries, this is an extraordinary accomplishment. In many cases, the author makes his point by showing how individual companies operated. In this way we can see the micro level, as well as the larger trends. As Rocchi points out, Argentine industrialization differed from the classical models since the country had little in the way of an artisanal tradition. Most of its skilled workers were immigrants. For Rocchi the key hindrance to industrialization lay in the small size of the market that prevented the achievement of enough efficiency to win markets abroad. This was despite the rapid population growth, creation of a national market, and a culture of consumption. Argentina also lacked key inputs such as coal and iron and had relatively high labor costs. Rocchi argues, quite convincingly, that industrialization was not constrained by the inability to obtain capital from the state controlled banks. He demonstrates, using the archives of the Banco de la Naci?n and the Banco de la Provincia de Buenos Aires, that numerous large and medium-sized companies did receive loans from state controlled banks. Companies also raised money on the stock market. He argues, however, that self financing, which was very common, may have been the best strategy given the volatility of consumer demand which depended on foreign purchases of Argentine exports. Rocchi does not really demonstrate that consumer demand was that much less dependable than in other countries.

How much tariff protection industry had is difficult to demonstrate given the complex way that rates were calculated, but Rocchi makes clear that industrial production was frequently protected by either protective or revenue tariffs. Arguments in congress show that critical support existed for the idea of protecting industry. Clearly the conditions for industrialization were much more complex than has usually been thought and it would be difficult to classify them as hostile.

Rocchi’s goals are larger than just showing the beginning of industry. He devotes a well crafted chapter to the creation of a consumer society in Buenos Aires, which in many ways resembled that of the contemporary North Atlantic world with department stores and the like. Harrods, the well known English department store, even had a branch in Buenos Aires. The author also includes a chapter on how Buenos Aires-based firms created national markets for themselves, intensifying the central role of the city in Argentine economics. Large firms were created, as were trusts. Rocchi also discusses how conflict with the labor force helped forge cooperation between industrialists.

Rocchi gives us a picture of a rather dynamic sector of the economy that responds relatively well to growing demands but is limited by the size and nature of the economy. This is a convincing argument but not one without flaws. The author is, at times, somewhat too determined to claim originality for his arguments. He clearly builds on others and while he has made by far the best case for his ideas, at times he does not give others all their due. More importantly, although the book purports to cover the period from 1870 to 1930, very little material exists for the period after the first fair presidential election in 1916. We therefore lack a full discussion of the impacts of World War I and of the 1920s. In the latter period the nature of industrialization shifted due to the intensification of direct investment by foreign firms, particularly from the United States. If one is going to make arguments about the nature of industrialization prior to the Great Depression, it would be helpful to know more about these changes.

Despite these caveats, Fernando Rocchi has given us an excellent work that has reshaped our vision of early industrialization in Argentina. It also helps us to understand some of the innate problems of the economy and shows why some of the prescriptions later given for the economy did not solve its problems. Like all good books, this should inspire further research. Anyone interested in the problematic history of the Argentine economy will find this book a stimulating and convincing work.

Joel Horowitz is Professor of History at St. Bonaventure University and is currently finishing a monograph on political mobilization in Buenos Aires between 1916 and 1930.

Subject(s):Industry: Manufacturing and Construction
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: Pre WWII

The Emergence of Modern Business Enterprise in France, 1800-1930

Author(s):Smith, Michael Stephen
Reviewer(s):Hautcoeur, Pierre-Cyrille

Published by EH.NET (May 2006)

Michael Stephen Smith, The Emergence of Modern Business Enterprise in France, 1800-1930 . Cambridge, MA: Harvard University Press, 2005. x + 575 pp. $60 (hardcover), ISBN: 0-674-01939-3.

Reviewed for EH.NET by Pierre-Cyrille Hautcoeur, Ecole des Hautes Etudes en Sciences Sociales.

Michael S. Smith, associate professor of history at the University of North Carolina, proposes a synthesis on the emergence of big business in France in the tradition of Alfred Chandler. The book “seeks to explain how and why France acquired the roster of large corporate enterprises that would come to dominate France’s domestic economy and project French economic influence throughout Europe and the world over the course of the twentieth century” (p. 1). It “argues that the same forces that were giving rise to a new kind of very large, very complex business organization in the United States, Germany, and Great Britain between 1880 and 1930 were also at work in France” (p. 2), contrary to the idea of a special or a backward path for French economic development.

The book is well written and structured, revealing an exceptional knowledge of a large historiography and a capacity to organize it in a simple and mostly convincing narrative. It is also well presented, with minor typographical errors (usually in references to French names or publications, e.g. note 6, p. 501). The index includes all personal and firms names mentioned in the main text (not including the notes), as well as some analytical categories.

The book is divided into three parts and sixteen chapters, plus an introduction and a conclusion. Part one deals in less than one hundred pages with commerce, banking and transportation, in three chronological chapters (1800-1840s; 1850s-1870s; 1870s-1900s), with no discussion of the twentieth century.

Part two deals in two hundred pages with “the flowering of industrial capitalism.” It starts with seven chapters on particular industries (textiles, coal, iron and steel, “hardware, machinery and construction,” consumer goods, chemicals, “glass, paper and print”). It ends with a transversal chapter on “the new world of industrial capitalism” that deals with problems common to many industries and not dealt with elsewhere.

Part three analyzes in 160 pages the second industrial revolution and the beginnings of managerial capitalism, from 1880 onward. It includes four “industry based” chapters on the steel, electrical, automobile and “chemicals and materials” industries, and ends with a transversal chapter on “the new world of managerial capitalism.”

In order to make visible the method followed by the author, I will discuss a few chapters in more detail.

After an introduction in which the author presents a well-balanced (although not always up-to-date) synthesis on the “foundations for modern capitalism” before 1800, the first chapter centers on merchant capitalism, which it studies on a local basis and on an individual basis more than in terms of formal organization. It then follows the traditional historiography, sometimes missing the most recent works (even if it would be more consistent with its overall thesis, e.g., J.P. Hirsch, C. Lemercier). The role of the Haute-banque is presented in the conventional way.

Chapter two describes the interrelated revolutions in banking and transportation, which were grounded in Saint-Simonian ideas and networks during the Second Empire. The chapter clearly shows the role of the relationship between the government and these networks in these changes. It does not discuss the conventional wisdom, nor look at the organizational consequences of these relationships (government administrations were structured, not only business ones). The organization of the railroads is not really discussed, except for its “grande politique” dimensions. The internal organization of the banks is not discussed either, and the concept of a financial system is not introduced.

Chapter eight presents the chemical industry. Like most industry-based chapters, it is mostly organized as a succession of firms’ histories in relation with the invention of new products and processes, but says almost nothing of firm or market organization. Technological innovation seems the only important way to success, and its origins are not much discussed.

The transversal chapter 11 discusses three major themes: how industrial enterprises were financed, how they recruited and managed their labor force, and how they managed their external environment, especially the state. Finance and accounting practices are briefly described, but they are not analyzed as strategic choices and/or major explanations with responsibility for the varying success of firms or industries. The main conclusion is “the normality of the French industrial experience — that is, its similarity to the British experience” (p. 303) in finance, accounting and labor relations. As concerns the management of the external environment, the author concentrates on three subjects: tariff policy, competition policy and railroad policy (network subsidies and rate regulation). The precise organization of business and the instruments of its intervention in policymaking or in policy application (industry-level or local-level organizations, such as the chambers of commerce) is not examined (except, briefly, for the iron and steel, chemical and textiles industries, mostly in terms of restriction to competition). In the view of this reviewer, this chapter is too brief and comes too late in comparison with its strategic importance in understanding the rise of big business as a major economic phenomenon.

The third part focuses on those few industries in which French firms underwent a true Chandlerian revolution from the point of view of the author. Chapters on iron and steel, the electrical, automobile and chemical industries show how concentration, both through vertical and horizontal integration, allowed for the creation of important and complex organizations (although the internal organization is always treated only briefly).

One important question is whether the factors behind the smaller size of French firms had an impact on their efficiency and their ability to develop all the economies of scale and scope favored by Chandlerian business historians. These factors certainly included market sharing (in iron and steel), interlocking directorates and participation, and family firms’ preoccupation with secrecy and family control, all elements mentioned by the author but without providing a satisfactory answer to the above question.

Like chapter 11, chapter 16 has a crucial role and could well have been extended beyond its twenty pages. It discusses the creation of complex organizational structures, the growing role of professional managers and the new challenges in corporate policies that made them necessary. After a rapid presentation of the railroad’s pioneering role in organization, it presents the changes in management in industrial firms. It describes examples of divisional organization as early as the late nineteenth century, and emphasizes rightly the importance of holding structures from the 1920s onwards. It mostly insists on the rise of engineers as the main managers of French industrial firms, but discusses little their education, their efficiency, or the importance for their management style or their links with public administration. Overall, it suggests that new techniques of management or organization (including assembly lines) were already well developed in France prior to World War II.

The conclusion describes briefly the evolution of French big business in the second half of the twentieth century.

As a whole, the book gives a quite complete picture of French big (mostly manufacturing) firms in the nineteenth and early twentieth centuries. It reflects the many and important developments in the recent historiography of French business, and also its shortcomings, which explain most of the quibbles mentioned above.

Nevertheless, the reader (especially if he is an economic and not a business historian) could have expected something more. Although in the prologue, the author presents a short survey of (English-speaking) macroeconomic interpretations of French development, he is not really in a position to discuss the views expressed at the macroeconomic level. Some assertions such as “firm-level research demonstrated that French industry was more expansive and technologically advanced … than once thought” (p. 4), or “by the end of the nineteenth century, the activities [of the big firms] had become the focal point of economic life in France” (p. 324), suffer from a methodological bias, since the overall importance of big business in the economy is neither discussed nor compared to that in other countries. The book focuses on firms, not economic development, with an ambiguity since the only reason to discuss French firms separately is their link with French economic development. Bringing in more data comparing big firms with macroeconomic data (which exist at the industry level at least for the period after 1890) could have helped solve that problem. A short discussion of industries where big firms did not develop — and why — would also have been useful.

A second, related quibble: the international position of French firms is mentioned but little discussed, even though some of them had major international operations. If “it is with an eye to France’s eventual success in the late twentieth century that this book tells the story of the modernization of French business” (p. 5), one cannot but point out to the author that today’s big firms make most of their business abroad (not only by exports, but also by producing abroad), so much so that their impact on the French economy is sometimes questioned.

A third point, related to the two previous ones: the book is not very quantitative. It deals with a great number of firms, but provides little quantified comparisons among them (which could give way to typologies, for example) or between them and the rest of the economy or their foreign equivalents. The few tables (eight for the entire book, no figures) list the biggest firms in a given industry at a particular date; only the last two give some international comparison, and they provide few elements of comparison (total assets in general).

Fourth point: the relationship between French firms and the state is discussed in the very first chapters for the early nineteenth century, and somewhat in chapter 11, but almost never thereafter, although discussions of nationalization are widespread in the interwar period. The relationships between government and big business people or organizational practices are worth more discussion. The role of governments regulations (major in the 1930s), but also of semi-public bodies such as the chambers of commerce (important during the all period), is under-appreciated. (Actually neither the Code de commerce, nor the chambers of commerce, the commercial courts, nor the commerce minister appear in the index, even if some of them occasionally appear in the text.)

In conclusion, the book is a very useful synthesis for American students or scholars (French readers will find it strange that the discussion centers only on English-language historiographical debates, even if they are mostly based on French scholarship), more than an original contribution to our knowledge.

Pierre-Cyrille Hautcoeur is Professor of Economic History, Ecole des Hautes Etudes en Sciences Sociales and Research Fellow, Paris Jourdan Sciences Economiques (PSE) (joint research unit, CNRS-EHESS-ENPC-ENS). He specializes in monetary and financial history. His recent publications include “Efficiency, Competition and the Development of Life Insurance in France (1870-1939); or: Why Some People Don’t Trust Pension Funds,” Explorations in Economic History 41 (2004): 205-32; “Was the Great War a Watershed? The Economics of World War One in France,” in S. Broadberry and M. Harrisson, editors, The Economics of World War One (2005); and “Why Didn’t France Follow the British Stabilization after World War One?” (with M. Bordo), NBER Working Paper 9860, forthcoming in the European Review of Economic History.

Subject(s):Business History
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII

Peddling Panaceas: Popular Economists in the New Deal Era

Author(s):Best, Gary Dean
Reviewer(s):Dighe, Ranjit S.

Published by EH.NET (October 2005)

Gary Dean Best, Peddling Panaceas: Popular Economists in the New Deal Era. New Brunswick, NJ: Transaction Publishers, 2005. xii + 270 pp. $49.95 (cloth), ISBN: 0-7658-0288-0.

Reviewed for EH.NET by Ranjit S. Dighe, Department of Economics, State University of New York at Oswego.

The most popular economist in the New Deal era was John Maynard Keynes, right? Of course not. While many New Deal policies would later be called Keynesian, Keynes was little known to the American public prior to the publication of The General Theory in 1936, and his influence in New Deal policy circles was minimal. The story of Keynes’s 1934 audience with President Franklin D. Roosevelt is often recounted: Keynes came away wishing Roosevelt “was more literate, economically speaking,” while Roosevelt dismissed Keynes as “a mathematician rather than a political economist.”[1]

The classical or “orthodox” economists of the time fared even less well with the Roosevelt Administration and the public. It seemed natural to associate them with the old economic order and its collapse in the first four years of the Depression. Moreover, orthodox prescriptions like liquidating labor and commodities, hewing to the gold standard, and balancing the budget were pure castor oil — hardly a welcome tonic for people seeking relief. Those prescriptions, with some notable exceptions like the widespread opposition of economists to the Smoot-Hawley tariff, may also have sounded too similar to those of the discarded and discredited Hoover Administration.

Instead, the most popular economists of the time were liberal-leaning amateur economists who beat the drums for various reforms in the popular press. While the Depression spawned a host of would-be economists, offering reforms ranging from the radical to the reactionary, a few of these amateur economists exerted tangible influence. They pressed for policies that the Roosevelt administration eventually adopted and promoted them among the general public. Gary Dean Best’s new book, Peddling Panaceas: Popular Economists in the New Deal Era, deals with three of the most influential of these writers: Edward A. Rumely (and his Committee for the Nation), Stuart Chase, and David Cushman Coyle.

Best, a retired professor of history in the University of Hawaii system, is the author of a dozen books that deal directly or indirectly with interwar America, including five books on the New Deal. Despite his own prolific output on this era, Best is remarkably un-self-referential in this book, though the book does continue the policy grouping from his 1990 book Pride, Prejudice, and Politics. That book broke down Roosevelt’s advisers into three groups, and this one treats each of its subjects as a representative of one of those groups. Rumely and the Committee for the Nation were reflationists, whose great victory came early with Roosevelt’s decision to take the country off the gold standard in 1933; Chase was a planner, like Raymond Moley and Rexford Tugwell, who favored more centralized control of industry and agriculture, as embodied in the National Recovery Administration (NRA) and the Agricultural Adjustment Administration (AAA); Coyle was a “Brandeisian,” a trust-buster in the mold of Louis Brandeis, with a deep distrust of big business and high finance.

The title Peddling Panaceas, recalling as it does Paul Krugman’s caustic Peddling Prosperity (1995), may lead the reader to suspect that Best holds little brief for these “popular economists” and the New Deal policies they advocated. Such suspicions are correct, as is evident from the full title of Best’s 1990 book, Pride, Prejudice, and Politics: Roosevelt versus Recovery, 1933-1938. In that book and in a provocative interview with The Objectivist Center in 1990 [2], Best condemns the New Deal from a conservative economic perspective similar to that of Robert Higgs [3]; in a nutshell, both say the New Deal retarded recovery because it provided a poor investment climate for business. In this new book Best mostly soft-pedals his negative assessment of the New Deal in favor of relatively neutral histories of Chase, Coyle, and the Committee for the Nation and their respective beliefs and influences with the public and the administration.

The book is organized tidily, perhaps too tidily, into nine chapters, three each for Chase, Coyle, and Rumely’s Committee for the Nation. While this arrangement is numerically elegant, it sacrifices some context and clarity. The introductory and concluding sections are just a few pages each (and are not numbered as chapters), with the result that the general reader may be frustrated by the lack of background. A non-specialist would likely feel bewildered by the opening sentence of chapter 1, with its referencing of “the ‘war’ between the planners and the Brandeisians” and of the miscategorization of reflationists as inflationists. A longer introductory chapter, numbered as chapter 1, would have been helpful.

The first three chapters deal with Rumely and the Committee for the Nation, whose program Best clearly sees as the most reasonable. Rumely’s colorful resume included editing and publishing the New York Evening Mail, promoting vitamins and other products in the 1920s, and working in his family’s agricultural machinery business. From his background Rumely was acutely aware of the farm depression that had begun in the 1920s and reached new depths in the early 1930s. Like the Greenbackers and some of the Populists two and three generations earlier, he believed that deflation was devastating the farm sector and the economy as a whole, and that the solution was to take the dollar off the gold standard and regulate its value so as to stabilize prices at an earlier, pre-deflation level. This monetarist prescription was too radical for even William Jennings Bryan and his fellow bimetallists in 1896, but by the early 1930s it would receive strong support from two of America’s leading academic economists, George F. Warren (of Warren-Pearson Index fame) of Cornell and Irving Fisher of Yale. Rumely began forming his committee in the summer of 1932 and managed to recruit a number of prominent businessmen. He wrote frequently to President-elect Roosevelt, influential congressmen like Senator Elmer Thomas of Oklahoma, and Henry Wallace, who joined the group’s executive committee shortly before he became Secretary of Agriculture. By January 1933 he had settled on the name Committee for the Nation for Rebuilding Purchasing Power and Prices, or Committee for the Nation for short, and taken the group public. The group lobbied Congress and the White House, and added numerous economists and businessmen to its ranks. Its efforts bore fruit almost immediately, as Roosevelt took the country off the gold standard in April and the Agricultural Adjustment Act, signed into law in May, included Senator Thomas’s “inflation amendment,” authorizing the president to inflate prices using any of six methods. Rumely declared victory in a letter to his daughter that month: “The Administration has adopted the Committee’s policy and this country is on the way to restoration of the 1926 price level, we believe” (p. 21).

Dissatisfaction soon set in among Committee members, however. Merely de-linking the dollar and gold, and ending the deflation, was not the group’s whole agenda. Fisher and many others favored a “commodity-backed dollar,” with its value tied to an index of commodity prices, and were disappointed when the administration and Congress did not enact such a plan. Probably most Committee members thought the NRA and AAA approaches of raising prices by restricting production were counterproductive. Most demoralizing of all was the failure of prices to return to their talismanic 1926 level (the average of the Prosperity Decade price levels). The Committee won perhaps its greatest victory in January 1934 when Roosevelt raised the dollar price of gold to the level commensurate with a “1926 dollar,” but even with the simultaneous pledge to buy up unlimited quantities of gold that price, the price level rose only partway toward that target. (And of course, once prices finally did reach that level, they kept on rising. Small wonder, then, that the reflationists were often called inflationists.) Committee members pushed for further devaluation of the dollar relative to gold, but to no avail. By 1936, Rumely and others on the Committee continued to press for reflation but believed the country had a bigger problem, namely the New Deal itself, which they found coercive, anti-business, and socialistic. Like the Association against the Prohibition Amendment, another business-heavy lobby that allied itself with Roosevelt on a single issue and reconstituted itself later as an anti-New Deal group (the American Liberty League), the Committee transformed itself in 1937 into an anti-Roosevelt group, the National Committee to Uphold Constitutional Government. The group helped block Roosevelt’s court-packing scheme and raised money in 1938 to defeat congressmen who had supported it and re-elect those who had opposed it. When the “Roosevelt depression” began in late 1937, the National Committee called once again for a reflationary monetary stimulus but derided the administration’s planned fiscal “pump-priming” as an “economic fallacy” which will eventually and “inevitably lead to destruction of democracy and to one-man government” (p. 84).

Stuart Chase, unlike Rumely, found a natural affinity with the New Deal program in general. His most common complaint was that it did not go far enough. An engineer turned accountant turned social critic, and a gifted prose stylist, Chase may well have been America’s most popular economist in the 1930s despite having no formal training as an economist. (The closest he came was spending several years researching the meat-packing industry for the government. To be fair, the Ph.D. credential was less important in Chase’s time than it is now.) He was technically employed as a research economist by the Labor Bureau, Inc., from 1922 to 1939, but for all practical purposes he was a professional pundit, as the nature of the research seemed to be to advocate for various liberal economic reforms in books and magazine articles for popular consumption. In scores of opinion pieces in magazines like The Nation, The New Republic, and Harper’s, Chase attacked waste, deplored the phenomenon of poverty amidst plenty, and cheered the New Deal. A technocrat by nature, Chase found the decentralized American economy hopelessly chaotic, wasteful, and unstable. His timing was perfect, for he had been making these charges all through the 1920s, most notably in a book written just before the crash and published just after, Prosperity: Fact or Myth?. As the Depression deepened and people lost faith in the economy’s ability to right itself, Chase became the pop prophet of economic planning.

Chase’s 1932 book A New Deal was especially prophetic. It may even have been the source of the phrase “new deal” as used by Roosevelt for the first time a few months later at the Democratic convention. Unlike the orthodox economic planks in the Democratic platform, which bore little resemblance to the eventual New Deal policies, Chase’s proposals amounted to a comprehensive reform program that did look a lot like the First New Deal. Chase called for a managed currency to replace the gold standard, drastic curbs on stock speculation, higher wages and shorter work weeks, a massive public works program, and rural electrification. Most strikingly, Chase, a self-proclaimed “collectivist,” called for national and regional planning boards and collectivized production in moribund sectors like railroads, coal, oil, electric power, steel, meat packing, wheat, and cotton. He refined those recommendations in subsequent articles in 1932 and said the ideal would be to shepherd “all basic industries into state trusts, under government supervision but operating as independent units as far as possible.” While these ideas did not originate with Chase, his eloquent exposition of them surely helped popularize them, making for a ready reception when Roosevelt finally proposed them himself.

Like the administration, Chase thought much about the twin evils of overproduction and underconsumption. To Chase, industrial overcapacity was a problem that would only get worse without new restrictions and regulations on private investment. He seemed to view new capital investment as something that firms undertook blindly, without considering whether idle plant and equipment could be obtained more cheaply or whether new goods in the industry could be sold. While viewing the Depression economy as well below full employment, he seemed to regard full-employment output as a fixed value, not one that grew a few percent each year. “Gentlemen, the market has come to the end of its adolescent growth,” he wrote in his 1934 book The Economy of Abundance. “The boy has reached maturity.” Toward solving the problem of overproduction, Chase also recommended shorter working hours for all. His main approach toward bringing production and consumption into balance, however, was to raise mass purchasing power through expanded public-works employment, higher minimum wages, and guaranteed subsistence income for everyone willing to work.

Chase’s faith in collectivism was little shaken by the mounting evidence that the NRA philosophy of restricting production was also retarding recovery, nor by the rising tide of public and business disaffection with the NRA, nor by the Supreme Court’s invalidation of the NRA in May 1935, which effectively ended the First New Deal. By this time business and the administration had grown exasperated with each other, and no attempt to revive the NRA was made. The Second New Deal, which commenced almost immediately thereafter, was characterized by a decided preference for labor over capital and a zeal for permanent reform. Chase remained loyal to the New Deal, and even did some consulting work for various New Deal agencies from 1935 to 1939, but by this time he was swimming against the tide. Regulation had become the order of the day, whereas Chase in 1935 and 1936 was still pushing as hard as ever for more direct government control of production and investment. By 1938, however, he was back on the same page as the administration, muting his support for collectivism and arguing for more of what the administration was already doing: enlarged and permanent public-works programs to absorb the remaining unemployed, greater progressivity in tax and transfer programs so as to redistribute income from savers to spenders, and a more expansionary fiscal policy in general. As fascism engulfed Europe, Chase made the by-now-commonplace argument that Roosevelt’s New Deal had saved America from a similar fate. “It is a safety valve which protects us against the explosion of totalitarianism.”

David Cushman Coyle, though less well remembered than Chase, was possibly even more influential, especially within the administration. Another engineer with a utopian bent and a talent for getting his message out, Coyle published at least three books that sold over a million copies, countless articles in the popular press, and a number of articles in scholarly and semi-scholarly journals as well. Coyle shared much of Chase’s agenda, though he never embraced collectivism, and like Chase he did some advisory work for various New Deal agencies. Best describes Coyle’s program as a synthesis of the proto-Keynesian writings of 1920s “popular economists” William T. Foster and Waddill Catchings and the anti-big-business, social democratic views of Supreme Court Justice Louis Brandeis. The basic prescriptions of Foster and Catchings, including large-scale countercyclical public works, were broadly consistent with the New Deal. But Brandeis’s Jeffersonian disdain for “bigness” was at odds with the First New Deal, in particular the NRA. After the NRA’s court-ordered dissolution in 1935, Brandeis exerted tremendous influence on the New Deal, most of it indirectly through his close friend Felix Frankfurter and Frankfurter’s New Deal prot?g?s, Thomas G. Corcoran and Benjamin V. Cohen. But nobody articulated the Brandeisian aspect of the New Deal better than Coyle, whom Moley called the “economic philosopher” of the Second New Deal.

Coyle’s influence on the New Deal began early, with a 1932 article in Corporate Practice Review that caught the eye of Frankfurter, then a Harvard law professor and Roosevelt adviser. The article argued that the key economic problem was how to divert money from saving and investment to “consumption of the goods that business is trying to sell.” The interests of business and finance were irreconcilable, he believed, because the “man-eating ogre Finance” thrived on high levels of saving and investment, which inevitably led to overbuilding, underconsumption, and instability. Such investment helped only Wall Street, not Main Street. “The normal processes of finance are poisonous to business.” Coyle recommended higher taxes on large incomes and inheritances as a way to soak up those unproductive savings, so that they would not be invested in overcapacity. Frankfurter was so impressed that he helped Coyle distribute a thousand copies of the article, under the new title The Irrepressible Conflict: Business and Finance. It ended up circulating through the Roosevelt White House as well, attracting the attention of the president himself. Coyle quickly became a New Deal insider, celebrated by the Brandeisian faction of the administration and also popular with Federal Reserve Chair Mariner Eccles.

Coyle was much more at home in the Second New Deal than in the First, and 1935 produced a bumper crop of laws that were in line with his recommendations. Social security legislation had been part of his program to raise mass purchasing power, and the Social Security Act made it a reality (though he objected to the Social Security tax, which he thought should not fall on wage-earning consumers but on the rich). The Wheeler-Rayburn Public Utility Holding Bill, aimed at breaking up large holding companies, made life difficult for Big Finance. The Banking Act of 1935 gave the Federal Reserve greater control over bank credit and imposed interest-rate ceilings on deposits, possibly deterring saving. The Revenue Act of 1935 was the “soak the rich” bill Coyle had long wanted, as it raised taxes on top earners, corporations, and estates. In 1936 Coyle saw another cherished cause become law, when Congress imposed a tax on undistributed corporate profits. Although Roosevelt said the tax was intended to raise revenue, it seems likely that part of the administration’s rationale for it and the new taxes in the Revenue Act was the same as Coyle’s: a penny saved (or re-invested) is a penny wasted. If this is so, then, from the New Dealers’ perspective, the much-noted failure of investment during the New Deal was actually a success!

The severe economic contraction that began in the summer of 1937 seems to have brought the New Deal’s legislative activism to a halt. With the government hemorrhaging revenue and the public growing impatient with the administration’s management of the economy, there was little support for bold new spending proposals of the type Coyle was advocating. Coyle had become passionate about natural resource conservation, and sought a massive expansion of programs like the Civilian Conservation Corps, as well as big federal subsidies for education and public health. Needless to say, this latest wish list went unfulfilled. Coyle had insisted all along that a program like his was necessary to keep capitalism alive, with “adequate markets free of paralytic spasms,” and in late 1939 he warned that continued paralysis could push America toward a fascist system of centralized production and dictatorship.

What are we to make of Coyle, Chase, and Rumely? Even though none of them spoke for the administration directly, Coyle and Chase served as key popularizers of its economic program and all three exerted some influence on that program, at least indirectly. While it is easy in hindsight to dismiss some of their proposals as quackery, in the crisis of the Depression the line between quackery and “bold, persistent experimentation” must have been hard to discern. And few would deny that some of that quackery became law (e.g., the NRA). As for Rumely and the Committee for the Nation, one might argue that they do not belong in the same category as Chase and Coyle, since the Committee not only included top-flight economists like Fisher and Warren but had a goal (taking the dollar off the gold standard) that seems entirely orthodox today. But in the financial circles of 1932-33, a monetary crank was probably defined as someone who favored going off the gold standard. By doing more to highlight the Committee’s orthodox opposition, which must have been considerable, Best could have established a greater commonality between Coyle, Chase, and the Committee.

A bigger complaint is that Best’s disdain for Roosevelt too often gets the better of him. For example, he characterizes Roosevelt’s first inaugural address as “a speech more worthy of a backwoods rabble rouser … Unfortunately, it was not simply a wild shot, but the opening gun in a prolonged assault that would prolong the tragedy of the depression for another eight years.” More worrisome for an economic historian is when Best mentions various phases of the Depression business cycle and crudely connects them to the New Deal without supporting detail. It is simplistic to say, as he does, that the apparent reason for the economy’s continued slide after a minor uptick in mid-1932 was anxiety over the possible policies of the Roosevelt administration. Net investment was already negative by then, and the monetary collapse of that period, brought on by general runs on the banks, seems hard to pin on the election returns alone. The debt-deflation of 1929-33, exacerbated by real wage deflation in 1932, was also a likely factor in the decline. (Also, if anxiety over Roosevelt was to blame for the ten percent drop in industrial production in the four months before his inauguration, then shouldn’t he receive at least some credit for the 69 percent increase in industrial production in the four months right after his inauguration?) Still dicier is Best’s statement that the 1937-38 contraction occurred because “the massive spending in [1936] to ensure Roosevelt’s reelection had triggered an inflationary wage-price spiral that triggered a collapse of the economy in late 1937.” It is by now well established that the 1937-38 contraction was preceded by severely contractionary monetary and fiscal policies, including a doubling of bank reserve requirements and a sharp swing of the full-employment budget from a small deficit to a huge surplus.[4] Best seems less interested in a careful examination of these fluctuations than in telling tales of crime and punishment.

All told, these flaws are easy enough to overlook. Peddling Panaceas offers a coherent and compelling alternative intellectual history of the New Deal (a “public intellectual history”?) and provides new detail on three important factions of New Deal policymaking. The chapters on the Committee for the Nation will be of particular interest to anyone researching the political economy of the end of the gold standard. The book would make a useful counterpart to more sympathetic histories of New Deal policymaking such as Arthur M. Schlesinger, Jr.’s classic The Age of Roosevelt trilogy (1960) or Irving Bernstein’s A Caring Society (1985). Perhaps an even better match would be William J. Barber’s Designs within Disorder (1996), a history of Roosevelt and the “real” economists.

Notes: 1. Irving Bernstein, A Caring Society (Boston: Houghton Mifflin, 1985), p. 109.

2. “The New Deal’s War against Economic Recovery” (interview with Gary Dean Best), The Objectivist Center, July 2000. Internet: http://www.objectivistcenter.org/articles/interviewnew-deal-war-against-economic-recovery.asp

3. Robert Higgs, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War,” The Independent Review 1(4): 561-90 (Spring 1997).

4. Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960 (New York: Princeton University Press, 1963), p. 545; Larry C. Peppers, “Full-Employment Surplus Analysis and Structural Change: The 1930s,” Explorations in Economic History 10: 197-210 (1973), p. 200.

Ranjit S. Dighe is Associate Professor of Economics at the State University of New York at Oswego. He is the author of several papers on American labor markets in the Great Depression, as well as The Historian’s Wizard of Oz: Reading L. Frank Baum’s Classic as a Political and Monetary Allegory (2002). He is currently researching business support for Prohibition.

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

The History of Foreign Investment in the United States, 1914-1945

Author(s):Wilkins, Mira
Reviewer(s):Edelstein, Michael

Published by EH.NET (January 2005)

Mira Wilkins, The History of Foreign Investment in the United States, 1914-1945. Cambridge MA: Harvard University Press, 2004. xxvi + 980 pp. $95 (cloth), ISBN: 0-674-01308-5.

Reviewed for EH.NET by Michael Edelstein, Department of Economics, Queens College and the Graduate School, City University of New York.

The book jacket of this volume describes the author, Mira Wilkins of Florida International University, as “the foremost authority on foreign investment in the United States.” Book jackets are known for their hyperbole and general flimflam. However, in this case the book jacket writer is underselling the author. Mira Wilkins is the foremost authority on both foreign investment in the United States and U.S. investment abroad.

The current volume is Wilkins’s fourth on the subject of American cross-border investment flows. Previous volumes include The Emergence of Multinational Enterprise: American Business Abroad from the Colonial Era to 1914 (1970), The Maturing of Multinational Enterprise: American Business Abroad from 1914 to 1970 (1974), and The History of Foreign Investment in the United States to 1914 (1989), all published by Harvard University Press. The current volume is a comprehensive history of the cross-border inflows from 1914 to 1945, covering both foreign direct investment (FDI) and foreign portfolio investment (FPI) in the United States. There are 612 pages of text and 254 pages of footnotes.

A modern capitalist economy is a highly complex phenomenon. It is arguable that one of the most insightful perches from which to observe its workings is that of a scholar of foreign investment. Scholars, of course, know that long-distance portfolio and direct investment are a central feature of the investment process in modern economic growth. Modern British historians, for example, have long debated the extent and character of inter-regional investment flows between the “provinces” and “London.” Similarly, American economic historians have worried about the size and character of inter-regional investment flows from the older regions on the East coast to the Midwest, mountain, and Pacific regions. However, very importantly, there are practically no aggregate data to track the inter-regional movement of funds and corporate competencies. Furthermore, private corporate and financial records are not organized to easily research these inter-regional phenomena. In this sense, our national political institutions and legislation offer something of a gift, at least in the U.S. case, as they provide an abundance of public and private data on cross-border movement of funds, ownership, patents, etc. So, in fact, Mira Wilkins presents us with an extremely rich business history of world and American enterprise, granted through the unique lens of what foreigners thought would enhance their net worth. Still, the breadth of foreign investment activity in the U.S., especially in the period covered by this volume, 1914-1945, means Wilkins is covering a very large chunk of American business and financial history.

In the nineteenth century foreign FDI and FPI in the U.S. was subject to slow, if any, institutional change. In general there were very few barriers to cross-border investment in the U.S. America was a world-class debtor. The immense size of its investment activities and their profits could not help but draw savings from most of the developed economies of Western Europe, although predominantly the U.K. FPI was paramount but FDI was not trivial, including FDI in the form that Wilkins may be said to have discovered, the free-standing company. The aggregates of FPI and FDI clearly had an annual ebb and flow but even these cyclical variations have a certain regularity explored by Kuznets, Abramovitz, and Williamson. The only abrupt, non-cyclical shocks to the volume and character of foreign investments were associated with the Civil War and its longer lasting greenback monetary regime.

The period with which Wilkins is here concerned, 1914-1945, is quite different. The U.S. moved from net debtor to net creditor status, the most important one in the post-World War II world. Furthermore, this movement took place in an environment with very abrupt institutional and cyclical changes that must have astounded those who could remember the quieter environment before 1914. First, World War I entailed severe restrictions by the European belligerents on all forms of current foreign investment; outstanding FPI in the U.S. was commandeered to fund munitions and other purchases. Then, with American entry to World War I, German FDI and other investments were commandeered by the U.S. government, including their patent wealth. By the end of World War I the U.S. was a net creditor. Inward flows of FDI and FPI returned in the immediate post-World War I years but were subject to radically evolving war debt repayment and currency restrictions. The mid-years of the 1920s show a high tide of foreign investment in the U.S. as some semblance of economic and financial order returned to Europe and U.S. growth was energized by electrification and the automobile. This high tide then gave way to the brutal 1929-1933 downturn, ending with the collapse of the U.S. banking system and the devaluation of the dollar. Foreign investment of both types dropped precipitously in these years. Inward foreign investment recovered, 1933-1939. The Hawley-Smoot Tariff Act probably induced some FDI trying to get behind the heightened tariff barriers but both FPI and FDI were also importantly influenced by foreigners seeking a safer haven from Europe’s autarkic and confiscatory regimes. When World War II started in 1939 the European belligerents again imposed capital restrictions and commandeered U.S. investments to fund munitions purchases. Even before 1939, the German government and German corporations, remembering U.S. actions during World War I, made it a matter of policy to sell off, abandon, or hide their U.S. investments through third-party investors in Holland, Switzerland, Panama, etc. With U.S. entry into World War II, of course, Axis investments were once again commandeered and confiscated by the U.S. government, again including German patent wealth. This then is the chapter structure of Wilkins’s book, 1914-1918, 1919-1923, 1924-1929, 1929-1933, 1933-1939, 1939-1941, and 1941-45. And, the weight of her analysis proves this chapter structure correct; each short period has very different institutional and expectational structures governing both FDI and FPI placed in the U.S.

In each period, Wilkins separately covers FDI and FPI. In the case of FPI, discussion moves country by country, sector by sector, with the greatest depth for the U.K., the most important FPI sender. There is excellent coverage of the portfolios and motivations of foreign mutual funds, mortgage, insurance, and banking enterprises which held American FPI. On trend, FPI in American railroad and land resources retreated while industrial and utility FPI increased.

FDI is analyzed sector by sector and company by company. Any reasonably sized foreign company with investment in the U.S. has a story in each of Wilkins’s chapters. There is a wonderful richness to each period’s history. One can only wonder at the presentiment of Unilever’s U.S. subsidiary, for example, which opened new factory floor space and new product lines, and started radio advertising, 1930-32. And in each year, 1930 to 1932, net profits after taxes rose, higher than ever before in the Unilever subsidiary’s history. In the same years, Royal Dutch Shell moved aggressively to acquire more oil fields and reserves, despite losses; Anglo-Persian remained aloof, too absorbed with the drop in oil prices and (unsuccessful) moves to control world prices.

A central part of the FDI story during these years is the ups and downs of German FDI in the U.S. After commandeering German property during World War I and holding it captive for some years after the war, American alien property authorities quietly relented in the mid-1920s and German owners reappeared, often from behind American and other covers. As before World War I, German FDI was particularly strong where German technology and patents were at the frontiers of industrial capabilities (e.g., chemicals), the patents often acting as a bargaining chip in secret world market sharing agreements. Indeed, these patent-sharing agreements are one of the most significant stories that Wilkins covers. That she was able to gather so much information on these matters is surely due to the radical shift in Franklin Roosevelt’s antitrust policy. By the late 1930s, the White House, Congress, and Justice Department had decided that illegal international cartel arrangements and the immense patent holdings of large domestic and foreign corporations represented a threat to an American recovery based on rapid technical change. A good deal of the energy of the 1939-1941 Temporary National Economic Committee, its hearings, and its reports were focused on these phenomena. While the Justice Department’s antitrust cases in this area were moth-balled during World War II, the antitrust division returned to the fray after 1945 and altered the terrain of corporate patent and research strategy with its court-ordered settlements requiring wider licensing of patents. The terrain was also altered by the commandeering of German patent assets during World War II, made widely available to American corporations for war and post-war production. Much is known about the U. S. government’s commandeering of German assets during both world wars. Wilkins deserves a great deal of credit for carrying her story forward into the post-World War II years, assembling the disparate threads of the post-war history of these ex-German assets.

One way to measure the course of FPI and FDI in the U.S. over these years is as a percentage of GNP (p. 565). In 1914, total foreign investment (FI = FDI + FPI) was 19.5% of GNP while FDI was 4.7%. By 1918, the total (FI) was down to 3.9% while FDI was 1.3%. The war years had dramatically reduced the investment total and its FPI-FDI distribution. The 1920s did not change these percentages very much but the 1930s raised them so that by 1939 they stood at 6.8-9.6% and 3.2%, respectively. By the end of World War II, however, they were back to where they were in 1918; total FI was 3.7% and FDI was 1.3%. What Wilkins has carefully laid out is the micro-history of these movements, who entered, who stayed out, who endured, and who failed. One acquires very clear ideas of what, why, and how capital was reallocated and expanded during the first half of the twentieth century at the level of the firm and the central role of technological knowledge. Wilkins’s rich account of foreign investment in the U.S. is also a major part of the story of the retreat from the pre-World War I high-tide of globalization. Business and economic historians of the twentieth century are surely and greatly in Mira Wilkins’s debt. Finally, it should also be said that students of the macroeconomic movements of foreign investment will ignore this micro-history and its abrupt changes at their peril.

Michael Edelstein is the author of the “International Transactions and Foreign Commerce” chapter in the Millennial Edition of Historical Statistics of the United States (Cambridge University Press, forthcoming).

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

Imperialism, Nationalism and the Making of the

Author(s):Mukherjee, Aditya
Reviewer(s):Roy, Tirthankar

Published by EH.NET (January 2005)

Aditya Mukherjee, Imperialism, Nationalism and the Making of the Indian Capitalist Class, 1920-1947. New Delhi, Thousand Oaks and London: Sage Publications, 2002. 461 pp. $110 (hardcover), ISBN: 0-7619-9564-1.

Reviewed for EH.NET by Tirthankar Roy, Gokhale Institute of Politics and Economics.

The interwar years were the most turbulent period in the politics of colonial India. After remaining dormant for some years, the Indian National Congress revived under a new leadership early in the period. The “non-cooperation movement” of 1920-22 was a struggle for rights that demonstrated M.K. Gandhi’s ability to mobilize the masses and paralyze administration. These were unprecedented developments with implications for the future of British rule in India, implications not lost on London. Indian business understood these implications too, and saw that the Congress could become an effective platform for making demands for economic concessions. Indians by then dominated the business world of Bombay, Ahmedabad and Madras, and were a force to be reckoned with in European-dominated Calcutta and Kanpur. The First World War had created enormous opportunities of accumulation for Indian capitalists. These lobbies organized themselves in major chambers of commerce that maintained a conscious distance from their European-dominated counterparts. The 1920s brought them close to the Congress and Gandhi, so that in a short time, the demand for state aid to business and the demand for autonomy in national economic policy became identical. The next two decades saw major figures in Indian industry and trade spiritedly fighting this dual battle, with help from the Congress. At 1947, when India attained freedom, business leaders and political leaders had no essential disagreement on the future shape of the economy. They agreed, for example, that a policy of restricting import and foreign capital would be good for national development.

Aditya Mukherjee, Professor of Contemporary Indian History at the Jawaharlal Nehru University of New Delhi, tells the story of the participation of Indian capitalists in nationalist politics. The book consists of twelve chapters. Chapters 1 and 2 set out the objectives and arguments. Chapters 3 through 5 deal with fiscal and monetary policy issues. Chapters 6 to 9 discuss trade and industrial policy. Chapter 10 deals with Indian capitalists’ views on foreign capital. Chapter 11 draws links between business-politics collaboration before 1947 and policy-making after 1947. The principal episodes that figure in this narrative include the “ratio controversy” or debate over the rupee-sterling exchange in the 1920s; the large remittance on the government account which was the reason why Britain wanted control on Indian finances and did not like devaluation of the rupee; monetary policy during the Great Depression; struggle over tariffs and preferential treatment for British goods in the Indian market; currency standard; and the sterling balances accumulated by India on account of its contribution to the Second World War. The book is essentially a very detailed narrative history of Indian business responses to these episodes and issues.

None can deny that business participation in politics in this period is an important part of the history of Indian nationalism and of economic history. That being said, the interwar debates on these episodes have been studied many times over in historical scholarship, so often indeed that one gets the impression that nothing mattered to the economy of India more than the bickering between London and Bombay. Among books published in the last twenty-five years, those by B.R. Tomlinson, G. Balachandran, and D. Rothermund studied the ratio controversy, remittances and the depression; that by Claude Markovits studied business-politics interaction in Bombay; and those by Basudev Chatterji and Sunanda Sen dealt with trade policy issues. The chapter by A.G. Chandavarkar in The Cambridge Economic History of India is a good survey of monetary policy debates. And none of these authors was exactly a pioneer in choosing to focus on these issues. Biographies of business leaders like G.D. Birla or Purshotamdas Thakurdas, and official histories of major chambers of commerce, revisited the role of the capitalists in nationalist politics. Did historians of interwar India really need another book on a subject that had been squeezed bone-dry?

The strength of Mukherjee’s work lies in the detailed picture. It is a meticulous day-by-day account of events and episodes. A specialist historian in need of specific details on specific episodes should consult this book. Indeed, Mukherjee may well be the last word, mercifully, in meeting such needs. The weakness of the book lies in the big picture in which it locates itself. And this is a big weakness in my view, one that would make it difficult for most readers to see the point of its rich raw material.

The argument of the book derives from a dependency framework, by which I mean the frequent use of two key ideas. First, the colonial regime repressed Indian business aspirations and opportunities. And second, the colonial regime deprived Indian government of the right to pursue an autonomous economic policy. Few economic historians of India would reject these ideas outright, but most would use them on a case-by-case basis, and with an open mind as to how these factors mattered to India’s economic growth. Mukherjee treats these as incontestable truths and has no doubt about their significance. Using them as premises, the book makes two further arguments. First, Indian capitalists, “demonstrating remarkable maturity … saw through British intentions” of keeping India under “the vice-like grip” of Britain. They resisted repression and imperialist exploitation, and “wrenched” and “wrested” an economic space for themselves. And second, while the capitalists entered politics, they neither used politics to serve self-interest nor molded politics to that end. Rather, nationalist politics and the resistance of Indian business to the “hostile colonial context” existed as two autonomous spheres. These spheres joined together not out of selfish motives, but because there was real substantive identity between the capitalists’ fight for freedom and the nation’s fight for freedom.

It is necessary to note where these arguments are coming from. The book reads as if it is written with a 1970s readership in mind. Its main point of reference is a set of writings, including some very obscure and outlandish ones, which defined the party-line of the extreme left in India twenty-five to thirty years ago. The two points that constitute the dependency framework are shared with the orthodox leftist interpretation of Indian history. The book, however, breaks with the extreme left by rejecting their view that Indian business was too weak or “comprador” vis-?-vis foreign capital or the colonial state. And by doing so, it tries to establish a centrist perspective, the line closer to the Congress and democratic left party-lines in the 1970s.

In terms of its arguments, this is a political book. That does not necessarily reduce the scholarly worth of its arguments. What does reduce their worth is the fact that these debates have long been dead outside die-hard ideologue circles. The book does not engage itself with the pictures of business-politics interaction drawn in more recent scholarship, Markovits for example. Furthermore, the 1990s economic reforms and re-globalization of the Indian economy has exposed the whole dependency framework to a serious critique. The book believes that Indian capitalists were repressed by colonialism, so that their struggle for concessions and the nation’s struggle for autonomy were both battles for freedom. An advocate of present-day globalization might say that the rise of the Indian capitalist class owed to the “first globalization” of the nineteenth century. That is, it owed to colonialism itself. Their struggle for concessions, in that case, cannot be seen as a battle for freedom; at least partly it was an opportunistic and strategic movement. Moreover, the “remarkable maturity” Indian capital showed in resisting foreign capital by using nationalist politics pushed independent India towards an insanely protectionist regime that delivered poor economic growth. There was indeed a conflict between business self-interest and national welfare, which the book either cannot see or does not admit. By not engaging itself with critiques such as these, the book remains years behind the times.

The back-cover of the book advertises it as “a comprehensive economic history of colonial India” in the early-twentieth century. In fact, its “economic history” is pedestrian, biased, and antiquated. That said, the book remains a potentially valuable reference for the historian of Indian nationalism on the strength of the impressive quantity of material that it processes.

Tirthankar Roy is Professor, Gokhale Institute of Politics and Economics, Pune (India). His publications include The Economic History of India, 1857-1947 (Delhi: Oxford University Press, 2000).

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