is owned and operated by the Economic History Association
with the support of other sponsoring organizations.

Deutschlands Krise und Konjunktur, 1924-1934: Binnenkonjuktur, Auslandsverschuldung und Reparationsproblem zwischen Dawes-Plan und Transfersperre

Author(s):Ritschl, Albrecht
Reviewer(s):Voth, Hans-Joachim

Published by EH.NET (March 2003)

Albrecht Ritschl, Deutschlands Krise und Konjunktur, 1924-1934:

Binnenkonjuktur, Auslandsverschuldung und Reparationsproblem zwischen

Dawes-Plan und Transfersperre. Berlin: Akademie Verlag, 2002. 297 pp.

$79.80 (cloth), ISBN: 3-05-003650-8.

Reviewed for EH.NET by Hans-Joachim Voth. Department of Economics, Universitat

Pompeu Fabra, Barcelona.

Wrong tales last longer, or so it seems. An op-ed piece for the Wall Street

Journal on January 29, 2003 recounted the old Kindleberger/Landes story

about how the withdrawal of funds in the runup to the 1929 crash in the US led

to a downturn in Germany. Never mind that the timing is all wrong, or that

domestic reasons as well as changes in US monetary policy possibly played a

more important role — it’s a good story, and connected with one of the most

dramatic episodes in twentieth-century economic history. Of twenty-six European

democracies in 1920, thirteen had become dictatorships by 1938. Nowhere were

the consequences more catastrophic than in the case of Germany — and nowhere

did economic breakdown loom larger as a contributing factor in the demise of

democracy. A mere five years after the end of hyperinflation, the country’s

economy began to turn down once more. With the possible exception of the US, no

other nation experienced a more severe depression. Unemployment skyrocketed to

six million and industrial production fell by half; by 1932, communists and

Nazis together held a majority of seats in parliament. Ever since, debate has

raged about the inevitability or otherwise of the final outcome — Hitler’s

rise to power. Was economic misery crucial? Did the prosperity of the roaring

twenties demonstrate that Germany’s economy was in perfectly good shape? Or was

Weimar already living on borrowed time? Once the downturn began, could it have

been mitigated? Questions such as these are not just for the economic

historians, who have debated them for decades [Borchardt 1991, Kershaw 1990].

In Germany, where politicians can score an easy goal by claiming that the other

side is “emulating Br?ning” (the German chancellor during the early 1930s whose

austerity policy allegedly aggravated the slump), they are also deeply

political. Albrecht Ritschl’s Deutschlands Krise und Konjunktur attempts

to rethink many of these vexed and contentious issues. The book is primarily

addressed to a German audience, but its argument and the new data it contains

will be of interest to other scholars working on the Great Depression. It is

also an example of a peculiar art form, which needs some explaining before we

can turn to the book’s contents.

In the Anglo-Saxon world, the Ph.D. separates amateurs from professional

scholars. Uniquely, Germany has two doctorates for young and aspiring

researchers — the first is often not much of an academic affair at all, and

mainly serves to reinforce social distinctions (the delight of being called

“Herr Doktor!”, grovelling treatment from realtors, etc.). The second

dissertation, the Habilitation, on the other hand, is often only

completed in one’s late 30s or early 40s, after half a decade or so of

indentured servitude. What it lacks in originality it makes up for in length —

the second dissertation has to be an ?ber-dissertation, often exceeding 500

pages. As a result, creativity is stifled, manuscripts are basically

unreadable, and the transition to independent scholarship comes much too late

for most scholars; no other institution has contributed more to the decline of

German academia as the Habilitation.

In contrast to the mostly mindless outpourings generated by this peculiarity of

the German system, Albrecht Ritschl’s book is a contribution to scholarship. It

is actually two books between a single set of covers — one that tries to

rectify numerous problems with the national accounts for interwar Germany, and

the other an economic analysis of the slump’s causes and the policy

alternatives that could have been pursued. Aficionados of German economic

history will be grateful for having the final set of estimates for GDP and

especially for government borrowing in published form. For much too long, these

calculations were similar to an iceberg in the cold waters of German economic

history, with only a small percentage visible above the waterline, and the main

volume of work removed from the public’s eye, being only available as

unpublished working papers or in manuscript form. Ritschl has not just reworked

published figures, but made use of the extensive range of semi-official sources

published in Germany at the time. He also collected substantial amounts of

archival material, which reveal the full extent of Nazi (and pre-Nazi)

government borrowing. While some scholars may quibble with some of the

assumptions, most of the revisions are likely to supplant or augment earlier

estimates. As a result, we can now say with greater certainty than before that

during the brief halcyon days of the Weimar Republic, growth was possibly

slower than previously thought, and that deficit spending during the Nazi

recovery was nowhere near as rampant as popular mythology claims. While not as

wide-ranging as other revisions of national accounts nor as important in its

implications, this is a thorough and useful addition to the literature.

The second book contained in this volume sets itself an altogether more

ambitious aim — to provide a new explanation for the severity of the Great

Depression in Germany, and to bury alternative interpretations that have been

offered in the past. The “big idea” is that a change in the seniority of debt,

agreed as part of the renegotiation of Germany’s reparations debts, shut off

access to foreign funds when they were needed most — after 1929, when the

country had entered into a severe recession and was about to plunge even

further. Deemed the main culprit for the outbreak of World War I in the

Versailles treaty, Germany was saddled with paying reparations of an

unspecified value. Until 1932, the volume of claims and the form of payment was

being negotiated — mostly at the conference table, sometimes at gunpoint (such

as in 1923, when the French and Belgian armies invaded the Ruhr because a

shipment of telegraph poles was overdue). After the hyperinflation, in 1924,

the Dawes Plan gave Germany access to a big loan, some relief from reparations

payment, as well as “transfer protection” — money to satisfy the allies could

only be sent abroad when the conversion of marks into foreign currency did not

undermine the currency’s stability. Implicitly, this enabled the Germans to try

and “crowd out” reparations by other borrowing — since the ability to repay

foreign debt is not unlimited, and since transfer protection effectively made

reparations payments junior debt. The idea that Weimar’s borrowing/spending

spree (resulting in gleaming new spas, public swimming pools, rapid

electrification of the railways, generous public housing programmes etc.) is

partly to blame for the brutal downturn after 1929 is not particularly novel.

Also, numerous others have highlighted the importance of transfer protection

under the Dawes Plan. What makes this variation of the tale interesting is the

claim that a radical change under the Young Plan drastically undermined the

ability to borrow abroad — with reparations the senior debt, who would want to

lend? Ritschl presents a theoretical model that demonstrates exactly how the

change in seniority might have made a difference. This is a laudable exercise,

but it is somewhat uninspiring — the model adds little or nothing to the

simple verbal argument, generates no surprising implications or new ways of

testing the basic hypothesis.

The book’s main shortcomings are its unwillingness to confront the data and an

inability to show any evidence that would substantiate its key arguments. This

applies both to the borrowing binge and the debt hangover after 1929. There is

some archival evidence that suggests that Germany was keen to pile the

non-reparation debt high in order to leave the allies dry, such as an

incriminating internal document from the Foreign Office in Berlin. In effect,

the Germans deliberately tried to ensure that there were “American Reparations

to Germany” (as Stephen Schuker called them (see Schuker 1988)) — Germany

borrowed more from US investors than it ever paid in reparations, and then

defaulted on its debts. Yet those crafty Krauts clearly did not all get

together to crowd out the reparations — there were also drastic steps to

curtail foreign borrowing, not least by one of the chief conspirators in

Ritschl’s tale, the President of the Reichsbank, Hjalmar Schacht. Any borrowing

should have been good borrowing in his book if Ritschl’s main thesis is

correct. Instead, he repeatedly railed against the evils of foreign borrowing

in any shape, size or form, effectively seized control over access to foreign

funds, and succeeded in bringing inflows to a standstill for an extended

period. What is also missing is some assessment of the level of foreign

borrowing that should have been expected and that would have been “normal” in

an economy recovering from a major shock — for example, by comparing the

volume of debt issuance with Third World countries stabilizing after

hyperinflations since 1945 [for an instructive list of cases, see Fischer,

Sahay and V?gh 2002].

If the story of a deliberate crowding out of reparations appears questionable,

the central hypothesis has even less to recommend it. The well of international

credit ran dry for pretty much every borrower around the world after 1929 —

which is the origin of the Kindleberger story. Without compelling empirical

evidence to show that Germany suffered more than everyone else, it is hard to

see how the highly idiosyncratic explanation for its troubles could be

plausible at all. There are a number of obvious variables one could and should

have checked before basing so many claims on so little — did the spreads of

German bonds widen dramatically over those of other borrowers in the London and

New York markets? Was it even harder for Germany to get access to credit than

for everyone else? To this reviewer’s dismay, the book makes no attempt to

address these questions, despite the easy availability of data and the wealth

of information in the forms of charts and tables that the author assembles.

Also, inconvenient facts are largely ignored or belittled. In fact, Germany did

borrow — the famous Lee Higginson loan of 1930 — even after the change in

debt seniority rules. Ritschl notes that the conditions were not generous,

perhaps even humiliating. Yet he fails to resolve the conundrum: how could the

country obtain a loan at all if the prospect of repayment was nil? More

importantly, as recent work by Temin and Ferguson shows, political decisions —

and not the letter of the Young Plan — stood between Germany and further fresh

loans in 1931. Had the Reich not decided to build a pocket battleship and to

pursue a misguided tariff union with Austria (violating the spirit of the

Versailles treaty, and probably its letter), France would most likely have

extended fresh credit [Temin and Ferguson 2003]. Also, the author’s own data

show clearly that commercial paper issuance abroad revived in 1930, after a

brief downturn in late 1929, and that it only dried up for good towards the end

of the year (p. 120). If the seniority clause was as important as the author

claims, then it evidently took contemporaries at least eighteen months to

figure this out; and by the time they allegedly did, there were plenty of other

reasons not to lend. An externally imposed credit crunch may be the right

explanation for at least some of the German Slump’s severity; yet Ritschl’s

seniority-clause story cannot be squared with the available evidence.

True to the cliometric tradition, the book presents some counterfactuals of

German GDP during the 1920s and 1930s. Had the Reich paid up and transferred

the reparations instead of borrowing right, left and center, it could have

avoided most of the downturn, or so Ritschl argues. Between 1928 and 1931,

there would have been healthy growth, while the 1920s would have been more

subdued. Except for a small dip in 1932, the slump could have been avoided

almost entirely: Germany’s depression would have looked more like that of

France than the US experience. The underlying cause is that actual policy was

pro-cyclical twice — during the expansion and during the downturn. In

traditional accounts, the villain in the piece is Heinrich Br?ning, a dour and

ascetic Catholic whose austerity measures were designed to aggravate the slump

in a bid to show that Germany could not pay reparations. Ritschl substitutes

his story of externally imposed fiscal discipline due to credit constraints,

and turns Br?ning’s gratuitous hairshirt exercise into the just punishment for

the Republic’s debt-financed consumption mania during the 1920s. The story is

problematic on several counts. First of all, the counterfactuals are predicated

on using the Keynesian import multiplier. This is despite the fact that a good

part of the book is actually devoted to showing that Keynesian interpretations

do not apply to interwar Germany, that the fiscal multipliers are unstable,

etc. This reviewer was troubled to see the author return so happily to the same

analytical toolkit at the earliest convenience, having spent so much time

dismantling it just a few pages before. Also, it seems altogether unlikely that

Germany could have emulated the relatively good French performance, as Ritschl

argues. This was largely due to a unique set of circumstances that sheltered

the latter from the contractionary impulse that was being transmitted via the

gold standard [Eichengreen 1992, Eichengreen 2002]. Finally, how likely is it

that Germany could have borrowed much more in 1931 or 1932 if it had been more

restrained in the late 1920s, given the worldwide turmoil on financial markets

and the severe crisis in the US?

Given the unfortunate lack of compelling data analysis and the lack of cohesion

overall, it is to be feared that many of the interesting and challenging ideas

in this work may not find their way into peer-refereed journals. Yet it would

be useful if at least the data revisions could be presented and published in

English so that they may serve as a basis for future substantive work on the

many fascinating questions that Weimar’s economic history continues to raise.


Borchardt, Knut, Perspectives on Modern German Economic History and

Policy (Cambridge, New York: Cambridge University Press, 1991).

Eichengreen, Barry, Golden Fetters: The Gold Standard and the Great

Depression, 1919-1939 (New York: Oxford University Press, 1992).

Eichengreen, Barry, “Still Fettered after All These Years,” Macintosh Lecture,

delivered at Queen’s University, 2002.

Fischer, Stanley, Ratna Sahay and Carlos V?gh, “Modern Hyper- and High

Inflations,” Journal of Economic Literature, XL (2002), 837-80.

Kershaw, Ian (editor), Weimar: Why Did German Democracy Fail? (New York:

St. Martin’s Press, 1990).

Schuker, Stephen, “American “Reparations” to Germany,” Studies in

International Finance, 61 (1988).

Temin, Peter and Thomas Ferguson, “Made in Germany: The German Currency Crisis

of July 1931,” Research in Economic History, forthcoming (2003).

Hans-Joachim Voth is Associate Professor of Economics at Universitat Pompeu

Fabra, Barcelona, a Research Fellow in the International Macro Program at the

CEPR, London, and a Research Fellow at the Centre for History and Economics,

King’s College, Cambridge. His latest publications include “With a Bang, not a

Whimper: Pricking Germany’s Stockmarket Bubble in 1927 and the Slide into

Depression” (Journal of Economic History, 2003), “Factor Prices and

Productivity Growth during the British Industrial Revolution” (with Pol Antr?s,

Explorations in Economic History, 2003, forthcoming) and “The Longest

Years — New Estimates of Labor Input in Britain, 1760-1830″ (Journal of

Economic History, 2001).

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

A Perilous Progress: Economists and Public Purpose in Twentieth-Century America

Author(s):Bernstein, Michael A.
Reviewer(s):Barber, William J.

Published by EH.NET (April 2002)


Michael A. Bernstein, A Perilous Progress: Economists and Public Purpose in Twentieth-Century America. Princeton, NJ: Princeton University Press, 2001. xi + 358 pp. $39.50 (hardback), ISBN: 0-691-04292-6.

Reviewed for EH.NET by William J. Barber, Department of Economics, Wesleyan University.

This volume is part chronicle and part sermon. Both parts are rewardingly excellent.

The chronicle traces the course of the American economics profession from its beginning in the late nineteenth century to the close of the twentieth century. The author (Professor of History and Associated Faculty Member in Economics at the University of California, San Diego) takes note of the fledgling profession’s early struggles to establish standing and credibility with regard to the expertise its members could bring to the shaping of economic policy. The door to the corridors of power was opened a crack — but only a crack — in the Washington of World War I. Greater opportunities beckoned in the 1920s when Secretary of Commerce Herbert Hoover — who rejected the notion of inevitability in the business cycle — recruited economists to mount studies sponsored by the President’s Conference on Unemployment. Hoover nonetheless turned a deaf ear when more than a third of the membership of the American Economic Association petitioned him to veto the Smoot-Hawley Tariff in 1930. For the profession, the decade of the 1930s was difficult altogether. Though its members were represented on an unprecedented scale in the ranks of the New Deal’s bureaucracy, the absence of policy remedies for Depression around which a consensus could be formed was damaging to their public image.

In Bernstein’s account, a recognition that the economics profession could usefully serve the public purpose dated from economic mobilization for World War II. This trend was sustained and extended in the “national security state” of the Cold War era. The creation of the Council of Economic Advisers in 1946 was a signal achievement that institutionalized a role for economists in government, conveying an authority far beyond that accorded to other social scientists. Bernstein makes valuable use of the archives in the various Presidential Libraries — as well as the records of the American Economic Association — in crafting his narrative.

The author inspects the CEA’s performance in the Kennedy-Johnson administration in some detail and for good reason. The demand-side tax cut of 1964 — engineered by a CEA composed of Walter Heller, James Tobin, and Kermit Gordon — was the high water mark of Keynesian-style economics. For a time, confidence in the ability of economists to “fine tune” macroeconomic policies to achieve full employment and to accelerate economic growth seemed to be well-placed. That faith was shaken in the later 1960s as military spending in Vietnam fueled inflationary pressures that the Johnson administration failed to contain. But worse was to come. The sense of Keynesian triumphalism that prevailed in the early 1960s was effectively shattered in the “stagflation” of the 1970s. The backlash brought monetarist and supply-side doctrines into prominence. The author adds a richness of detail to this oft-told story.

The sermon dimension of the volume appears in the concluding chapters in which the author surveys the “state of the art” at the close of the twentieth century. At this moment in time, economists appear to have lost a capacity to say anything useful to serve the public purpose. The profession’s preoccupation with models remote from reality and with a virtually unchallenged faith in the allocative superiority of free markets have meant, in effect, that its practitioners have turned to serving the acquisitive purposes of private interest and have lost touch with the public interest. Bernstein argues this point with some vigor in a useful discussion of unfortunate consequences that have flowed from exercises in de-regulation and in the privatizing of functions formerly performed in the public sector.

Altogether, this book is an impressive achievement.

William J. Barber is Andrews Professor of Economics, Emeritus, at Wesleyan University. His recent works include Designs within Disorder: Franklin D. Roosevelt, the Economists, and the Shaping of American Economic Policy, 1933-1945 (Cambridge University Press, 1996).

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

The End of Globalization: Lessons from the Great Depression

Author(s):James, Harold
Reviewer(s):Hatton, Tim

Published by EH.NET (January 2002)

Harold James, The End of Globalization: Lessons from the Great

Depression. Cambridge, MA: Harvard University Press, 2001. viii + 260 pp.

$39.95 (cloth), ISBN: 0-674-00474-4.

Reviewed for EH.NET by Tim Hatton, Department of Economics, University of


Harold James, who is highly renowned for his wide-ranging research on

monetary history, has written a new book analyzing the process of

de-globalization during the interwar period. He relates this to the economic

structures and institutions that developed during the era of globalization

before 1914 and he asks whether a globalization backlash could occur all over

again in the present. The book has already received considerable acclaim. No

less an organ than the Economist gave the book a full-page review (29

September, p. 107). In the wake of global uncertainty caused by the September

11th attacks on the United States, the Economist‘s reviewer commented

that “It would be hard to think of a better instance of the right book on the

right subject published at the right time.” Praise indeed. The review went on

to urge vigilance against de-globalizing tendencies in the light of the

catastrophic interwar experience.

So much for reviews of reviews. What does the book actually say? It starts

with a breezy summary of globalization before 1914 and, with this as

background plots out the dismal record of the interwar years. The three

chapters that follow deal, respectively with banking and monetary policy,

trade and tariff policy and labor and migration policy. Each in its own way

offers telling insights into the mechanics of de-globalization that are

persuasive and compelling. There follows a chapter on the politics of

nationalism and then a concluding chapter on the lessons for today. This last

chapter, perhaps the most important for the general reader, is the least

satisfactory for reasons I shall come to below.

The chapter on money and banking is Harold James at his best. With enormous

poise and consummate command of the literature, he develops the story of

structural weaknesses leading to financial instability and banking failures.

He describes how hot money flows transmitted contagion from one country to

another and how, as a result, the gold exchange standard fell like a row of

dominoes. James puts banking collapses, or the threat of collapse, at the very

center of the interwar story, beginning in central Europe in the late 1920s,

then spreading to Britain, the US and finally France and the gold bloc. In

the case of Britain, for example, he argues that the incipient threat of

banking collapse (as a result of losses in central Europe and elsewhere)

explains the puzzle of why Britain went off the gold standard without a fight

— that is without trying to stave off devaluation with tough monetary

measures. This stands in sharp contrast to accounts that emphasize the

dramatic disappearance of French and American credits, the concern about

domestic employment and even the indisposition of Governor Norman. Similarly

for the United States, the banking crisis of 1932-33 is seen as originating

in the international sphere rather than in the domestic economy.

The next chapter looks at the causes of declining international trade and

rising tariff barriers. James sees delicate domestic political balances across

the industrialized world, which promoted logrolling politics, as lending an

upward ratchet effect to trade barriers. But his most compelling point is that

during the 1930s trade and payments policies became ever more closely and

inextricably entwined. Thus what began with tariffs ended with trading blocs,

bilateralism and exchange controls. International co-operation proved totally

unable to untie this Gordian knot. Perhaps the most telling quote comes from

Sir Frederick Leith Ross (the British Government’s Chief Economic Advisor)

who, in discussions leading up to the abortive 1933 World Economic Conference

in London, commented thus: “The Financial Sub-Committee thought action in the

monetary sphere was dependent on greater freedom in the movement of goods,

while the Economic Sub-Committee considered that no progress could be made

until financial and monetary questions were settled” (p. 130).

Two shorter chapters then deal with migration and nationalism. On

international migration, James argues that the US immigration acts of 1921 and

1924, followed by growing restrictions elsewhere, led to increasing labor

market pressures which lent impetus to calls for national economic polices,

and in one notorious case added to pressure for “lebensraum.” But the argument

that immigration policies were a globalization backlash is not treated in any

depth. The following chapter deals with the interrelations between economic

events and nationalism, stressing the disenchantment with internationalism

(even among central bankers, of which Schacht is an extreme example) and the

rise of national policies of self-sufficiency that took place against the

backdrop of the apparently successful Soviet industrialization drive.

In the final chapter James asks: “Can it happen again?” Could the progressive

globalization that proceeded cautiously and incrementally from the 1950s, and

that seems to have accelerated since the fall of the Berlin wall, lead to a

backlash that could precipitate the descent once more into the economic

turmoil and de-globalization characteristic of the interwar years? His

conclusion is cautious and (contrary to the impression given by the

Economist‘s reviewer) somewhat agnostic: “The absence of … two

features — the intellectual cement and the specific model of national success

— explains why the pendulum is so slow in swinging back from globality. But

it does not explain why it will not swing” (p. 224).

To my mind this rather negative conclusion follows from James’s failure to

fully confront the following questions. How different is the globalized world

now as compared with that of 1914? And given this structure, are the shocks

that occurred in the following two decades likely to be repeated? And if so,

with what effect? To be fair, this closing chapter does argue that trade and

capital markets have become progressively more liberalized, that (under the

so-called Washington consensus) international institutions remain fragile, but

that for lack of a coherent alternative vision anti-globalization forces

remain weak and unorganized. But there is little direct analysis of the likely

threats that shocks might pose to globalization in the world economy today.

Here’s how such an assessment might go. Trade is probably as globalized as it

was in 1913, international capital may be even more so, but international

migration is not — nor is it likely to become so in the foreseeable future.

Banking systems and financial markets may be as vulnerable to panics and

crises as they were in the interwar period. So the risks may be there. But a

shock like the First World War with its legacy of political and economic

turmoil and the concomitant disruption to trade and payments seems unlikely,

at least in the developed world which, after all, accounts for ninety percent

of trade and income. Such an event seems all the more remote since the demise

of the Soviet Union and the admittedly faltering steps of the successor states

towards rapprochement with the capitalist world.

Furthermore, James seems not to have noticed the radical developments in

monetary policy during the past decade — developments which have surely

lowered the downside risk. Alan Greenspan’s Fed is not the Fed of George

Harrison, neither is the Bank of England the Bank of Montague Norman, nor is

the ECB the Bank of Haljmar Schacht. Not only is the gold exchange standard,

which (according to the new orthodoxy) magnified the economic shocks of the

1920s and precipitated depression on a world scale, long since dead and

buried, new lessons have been learned from the experience of the 1980s and

1990s. One key lesson is that in a world of globalized capital there is no

hiding place between freely floating exchange rates and full currency union.

A second lesson is that the money supply or the exchange rate make poor

targets for monetary policy. As a consequence a new monetary regime has

emerged over the last decade. Among 90 central banks surveyed by researchers

at the Bank of England, more than 60 percent now have inflation targets

(although some, like the ECB, have intermediate targets as well).

In a world where inflation targeting characterizes many of the leading

economies, where more and more central banks are becoming independent, and

where we no longer worship at the alter of gold, shocks like those of the

interwar period would not be transferred across the exchanges in the domino

pattern that Harold James so eloquently describes. The stock market crash of

1987 and the Asian meltdown of 1997 did not turn into worldwide crises, and

similar shocks in the future are equally unlikely to bring the whole edifice

of trade and payments tumbling down. But even if there were more serious

shocks, the interlinking of trade policy and monetary policy in a downward

descent into bilateralism as in the interwar period is simply not seen as

feasible by the major players today. Thus, the lessons for today from the

interwar experience should be drawn from the fundamental differences between

now and then, and not from the superficial similarities. It is odd that Harold

James does not draw this conclusion since it would seem to follow directly

from his own analysis of the interwar period.

I cannot resist this final comment. James argues that the most worrying

development is wrongheaded approaches to economic policy that have

characterized the countries of Africa, with devastating effect. And he goes on

to remark that “frighteningly, the same diagnosis applies to continental

Europe.” I have to say that policies in Europe are not even remotely like some

of those we have seen in Africa — and they are not going in that direction

either. Indeed the EU has seen progressive liberalization in trade and in a

wide variety of other areas, especially in the last decade. Fortress Europe is

nowhere on the agenda (except perhaps in asylum policy). While progress may

sometimes have been slow it has nevertheless been inexorable. If Harold James

were to visit Europe more often I am sure he would revise his opinion of it.

Some of us who live here would be glad to show him around!

But I have carped on for far too long about the concluding chapter of what,

after all, is a fine book about the economic de-globalization of the interwar

period. James’s sheer depth of knowledge about the period and his clear

writing style make this stimulating book a pleasure to read — and to

recommend to others.

Tim Hatton is Professor of Economics at the University of Essex in the UK. He

has worked on international migration, unemployment and other labor market

issues in the century after 1850.

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: Pre WWII

The First World War and the International Economy

Author(s):Wrigley, Chris
Reviewer(s):Greasley, David

Published by EH.NET (May 2001)


Chris Wrigley, editor, The First World War and the International Economy. Cheltenham: Edward Elgar, 2000. x + 221 pp.$95 (cloth), ISBN:1-85898-675-3.

Reviewed for EH.NET by David Greasley, Economic History, University of Edinburgh.

This volume comprises an introductory essay by the editor, and a further eight more specialized chapters. The contributors take different approaches to gauge the Great War’s impact. Some consider individual countries, for example Peter Fearon and Kenneth Brown look respectively at the US and Japan, while others, including Andrew Marrison and Sarah Palmer, provide cross-country studies, of the rise of protection and the changing position of women. Additionally, Alan Fowler and Joachim Voth each consider the war’s impact on one important sector, namely cotton in Britain and banking in Germany. Chris Wrigley sets the scene by considering the experiences of a variety of countries, though he argues that the war’s main effect lay in Europe. The agenda he sets and the questions posed span across the war’s consequences for manufacturing, food and fuel, trade and business, and labor and business. Wrigley highlights and anticipates that the First World War did mark a discontinuity in the development of the world economy, but that its impacts were complex and varied, and sometimes are, as in the cases of Japan and the US, overstated.

The second chapter, by Terry Mills, reinforces the introduction by showing how modern methods of extracting trends and cycles from output time series might shed light on the war’s longer-term effects. The empirics of this discussion are rather modest, with only four countries receiving detailed analysis, and one of these, Canada, where trend growth declined between the world wars, does not benefit from detailed attention in later chapters. The four-country results do show a variety of experiences, with Britain appearing hardest hit by World War One. The data, however, are not always comparable, for example GDP is used for the UK, while the US and German data are GDP per capita, and post-World War One boundary changes did tend to reduce the UK’s GDP, but raise her GDP per capita.

The discussions of the US by Fearon and Japan by Brown point to continuity in these countries’ aggregate industrial growth records, but they usefully pinpoint compositional shifts towards heavy industry and construction. Changes in the geographical location of US industry, notably the rise of west coast shipbuilding, and in personnel management and reduced labor turnover are also highlighted. Fearon, though, takes a cautious, sensible, approach in gauging and downplaying the war’s impact in the US. Similarly, Brown, while offering speculation that Japan’s treatment at Versailles, by the other victors, may have influenced Japanese politics and policies on the road to Pearl Harbor, discerns only a modest direct impact. Usefully, he shows that Japan’s cotton industry grew modestly, especially compared to steel, over the war years.

Fowler considers in detail the fortunes of Lancashire’s cotton industry, emphasizing the deleterious effects of the war, especially on exports to India. To an extent his analysis, by stressing that rising tariffs during the war hit Lancashire hard, coincides with that of Timothy Leunig, which argues that the industry remained competitive in open markets to 1914. Fowler also argues persuasively that raw material shortages, and thus the rising costs, were damaging the British industry by 1917. Less convincing is the discussion of Japanese competition in the Indian market, which the data in Table 4.1 show to be of less importance than suggested by the discussion in the text. Nor does Fowler consider Susan Wolcott’s view that sterling’s real exchange rise against the rupee provided a crucial opportunity for domestic Indian manufacturers to make profitable investment in cotton.

Voth poses a more specific question than other contributors, asking whether or not the war, via the post-war inflation, led to the collapse of the German banking system in 1931. He concludes that it did not, drawing upon the work of Richard Grossman, which highlights that bank failures were more prevalent in countries with fewer branches per bank, and more branches per capita. However, to the extent that extreme macroeconomic shocks led to the banking collapses, and these shocks were linked to war-related inflation and a dysfunctional Gold Standard, the First World War contributed to macroeconomic instability and bank failures.

The chapters by Marrison, Wrigley, and Palmer, offer valuable international comparisons. The prize for breadth goes to Marrison, who reports measures of protection for thirty countries, both for the war years and for the preceding and subsequent decades. His measure, customs duties revenue relative to import values shows a modest average rise in the 1920s, but also a wide variety of experience, with India, the UK, and the Netherlands witnessing the sharpest shifts towards protection. Other countries, though, especially those of south and east Europe, and of the periphery, maintained their higher rates of protection, and to an extent direct controls and prohibitions blur the comparative and inter-temporal protectionist records. Wrigley’s discussion of the war’s impact on organized labor spans much of Europe, and shows how the power of organized labor rose during the war, but was much diminished by the international economic downturn of 1921. Rather differently Palmers emphasizes the complexity and paradoxes of women’s wartime experience, using cross-country examples for illustrative rather than comparative purposes. She sees the Great War as both promoting and inhibiting progress towards female equality.

Collectively the chapters of this volume offer useful insights on how the First War impacted on elements of the international economy. For the European economies the authors show that the war was an important though complex discontinuity in their development. The case that the US and Japan were less affected is also well made, though other parts of the world, for example India, and perhaps Canada given Mills’s results, deserve more specific attention. The other reservation is that many of the chapters rest heavily on previously published research. Drawing this material together has value, but does not represent leading-edge research.

David Greasley is Reader in Economic History, University of Edinburgh. He is working presently on aspects both of New Zealand’s macroeconomic history (with Les Oxley), and the Great Depression (with Jakob Madsen).


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

The Great Depression in Europe, 1929-1939

Author(s):Clavin, Patricia
Reviewer(s):Ferderer, Pete

Published by EH.NET (April 2001)

Patricia Clavin, The Great Depression in Europe, 1929-1939. New York:

St. Martin’s Press, 2000. viii + 244 pp. $65 (cloth), ISBN: 0-312-23734-0;

$21.95 (paperback), ISBN: 0-312-23735-9.

Reviewed for EH.NET by Pete Ferderer, Department of Economics, Macalester

College, St. Paul, Minnesota.

Patricia Clavin provides a narrative account of the Great Depression in

Europe written for non-economists. She addresses four questions: What were the

origins of the depression? Why was it so severe? How was the recovery effected

and was it sustainable? And what were the implications of that recovery for

political relations in, and between, nation-states?

Clavin’s account reflects the new consensus that the international gold

standard, and the monetary collapse it helped produce, takes center stage in

explaining the Great Depression. Her primary objective is to show how the

political behavior of different interest groups within nations, as well as

cooperation among nations, affected the evolution of policy and commitment to

the gold standard. From this perspective the relevant question is not what

should have been done to prevent the Great Depression, but what

could have been done given the constraints placed on policymakers by

the “historical political economy.”

The book echoes many of the themes emphasized by Barry Eichengreen in

Golden Fetters (1992). Moreover, it incorporates new scholarship

produced since the publication of Eichengreen’s classic and offers a somewhat

unique perspective. For these reasons, the book will make a valuable

contribution to the library of anyone who is interested in this fascinating

period of history.

Clavin begins by providing a detailed account of the numerous economic,

political, and social changes produced by the First World War. She then

explains how the interplay between these changes undermined economic policy

cooperation as countries returned to gold in the second half of the 1920s.

The destruction of labor, land and capital during the war caused European

products to be less competitive in world markets and made Europe dependent on

capital flows from the United States. The unproductive deployment of these

inflows, most notably in Germany, sowed the seeds for the debt crisis that

began to simmer in 1927. As concerns about debt servicing grew, governments

became more willing to impose tariffs and quotas on imports to protect foreign

exchange. Moreover, the structural shift in the balance of payments and

emergence of the United States as a net creditor shifted the “balance of

monetary power” to the Federal Reserve. According to Clavin, this was a

problem because the Federal Reserve lacked the experience and “cosmopolitan”

perspective on questions of international finance to provide effective

leadership to the system.

The political and social changes were equally important. First, the peace

treaties failed to institutionalize international economic cooperation among

nations. Second, boundaries were redrawn as the old empires of Central and

Eastern Europe were dismantled and economically integrated regions sliced up.

In some cases (i.e., Germany, Austria and Hungary) nations were prohibited

from cooperating with one another. Third, extension of the vote to

disenfranchised groups (i.e., the working class, women, and younger citizens)

“altered the context for, and expectations of, economic policy” (p. 8).

Fourth, the proliferation of new constitutions based on proportional

representation helped to shift the focus of policy from external to internal


According to Clavin, the interplay among these economic, political and social

changes “provided an ideal climate for economic nationalism to flourish” (p.

8). In this context, the hyperinflation and “creeping protectionism” of the

1920s are easy to understand: inflation and tariff taxes were politically

expedient and “enabled governments to sidestep awkward political choices and

helped to ease the distributional conflict in society” (p. 31).

Economic nationalism conditioned the choice of exchange parities when

countries returned to the gold standard. Seeking to reestablish itself as a

financial power (and benefit the financial interests of London), Britain

sought credibility and returned to gold with sterling overvalued. Motivated in

part by “fascist bravado,” Italy returned to gold with the lira overvalued. In

France, the political calculation of the Poincar? government was different:

“Instead of asking, as they had in London and Rome, how much deflation

industry and agriculture could bear, the question was one of how much

inflation the French middle classes could tolerate without wiping out their

fixed assets entirely” (p. 55). The uncoordinated manner in which the parities

were chosen destabilized trade patterns and revealed, from the outset, that

the viability of the system was in question. The subsequent sterilization of

gold inflows by the Federal Reserve and Banque de France provided further

evidence that governments were unwilling to cooperate and play by the “rules

of the game.”

The deterioration of relations among nations further disrupted relations

within nations. In countries with overvalued currencies (i.e., Britain after

its return to gold, the U.S. and gold bloc after the sterling devaluation in

1931, and the gold bloc after dollar devaluation in 1933), policymakers were

forced to pursue deflationary policies. These policies reduced confidence and

increased political instability. As competing interest groups (industrialists,

bankers, farmers and workers) blamed one another for the economic malaise, or

people simply blamed those who were different (Jews and Gypsies), social

tension proliferated. As one Australian farmer wrote to Keynes following a

meeting with a local banker, “we left immediately, with hot blood in our

heads, to go home and organize a rifle club” (p. 105).

One of the contributions of the historical-political approach is that it sheds

light on the deeper forces that produced the monetary collapse. In addition,

it helps explain why the monetary collapse had persistently non-neutral

effects. The rise in protectionism and other rent-seeking behavior brought

about by deflation reversed the gains from trade and reduced technological

transfer. Also, political instability reduced capital accumulation by raising

uncertainty. In short, the feedback between political and economic outcomes

caused the classical dichotomy to breakdown during the Great Depression.

So why didn’t governments respond in a more productive manner to the economic

collapse? Policy was constrained by interest group politics and the collective

memory of 1920s inflation. The latter generated a “deep fear of budget

deficits amongst politicians and the public at large, and made any kind of

monetary and fiscal experimentation in the Great Depression politically,

technically and psychologically very difficult, if not impossible” (p. 35).

As the depression deepened, however, the constraints on policy innovation

became less binding and societies were reorganized. Germany provides the

starkest case. While state spending was only 17 percent of GNP in 1932, it

stood at 33 percent in 1938. Under the Nazis, Germany became a command economy

with the government placing strict controls on foreign trade, prices, wages,

and banking. Its powerful economic expansion made it easier for Germany to

bring other countries of Eastern and Central Europe, desperate for export

markets, into its political orbit. In contrast, the rise of fascism in Germany

fostered cooperation within the French Left, which lead to the rise of the

Popular Front in 1936 and its unique set of policy innovations. Britain, which

suffered smaller income declines, experienced relatively little change in the

balance of power among government, business and labor.

The fact that the industrialized world overcame the economic devastation

produced by the Second World War — changes that were more dramatic than those

associated with the First World War — without descending into another

depression, is testimony to the important role that political relations among

and within nations play in economic development. World leaders had learned an

important lesson from history and were highly motivated to create

“institutionalized international cooperation on finance and trade” (p. 214).

Despite their various shortcomings, the Bretton Woods institutions (the IMF,

World Bank and GATT) stand as important symbols of human progress.

Pete Ferderer is Associate Professor of Economics at Macalester College. He

has written several papers on the Great Depression, including “To Raise the

Golden Anchor? Financial Crises and Uncertainty During the Great Depression,”

(co-authored with David Zalewski) Journal of Economic History, Vol. 59,

No 3 (Sept. 1999). His current research focuses on the provision of liquidity

to securities markets by “market makers” during the interwar period.

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

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

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

Published by EH.NET (March 2001)


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

Charting Twentieth-Century Monetary Policy: Herbert Hoover and Benjamin Strong, 1917-1927

Author(s):Wueschner, Silvano A.
Reviewer(s):Toma, Mark

Published by EH.NET (October 2000)

Silvano A. Wueschner, Charting Twentieth-Century Monetary Policy: Herbert

Hoover and Benjamin Strong, 1917-1927. Westport, CT: Greenword Press,

1999. xi + 178 pp. $59.95 (cloth), ISBN: 0-313-30978-7.

Reviewed for EH.NET by Mark Toma, Department of Economics, University of


Charting Twentieth-Century Monetary Policy by Silvano Wueschner,

Assistant Professor of History at William Penn College, is a history of the

political forces that shaped United States monetary policy during the 1920s.

What is intriguing about this account is the injection of Herbert Hoover into

the picture. While a big-time player in the Great Depression, Hoover was

seemingly only a bit-player earlier in the 1920s as head of the Commerce

Department. By documenting the birth and growth of Hoover’s monetary policy

agenda in the 1920s, Wueschner’s analysis sets the stage for a deeper

understanding of the politics of the Great Depression.

Wueschner’s account of monetary policy during the 1920s unfolds as a struggle

between Hoover who covertly exercised influence through kindred spirits on the

Federal Reserve Board and Benjamin Strong who overtly exercised influence as

Governor of the Federal Reserve Bank of New York. Simply put, Strong was a

monetary internationalist who favored cooperation between the Fed and the Bank

of England while Hoover was a monetary nationalist who favored rivalry among

national central banks. On the domestic front, the tables were turned. Hoover

was all in favor of cooperation — as long as the Federal Reserve Board led

the way with strong central powers over discount and open market operation

powers. In contrast, Strong opposed the Board as monetary czar. He sought to

increase the powers of the individual Reserve banks, particularly the New York


In the 1920s, the divisive issue between the two sides was whether the Fed’s

monetary policy would be “easy,” as favored by Strong, to smooth the way for

the international gold standard, or “tight,” as favored by Hoover, to combat

stock market speculation. The basic structure of the Federal Reserve seemed to

favor Hoover since the original Reserve Act provided the Board with relatively

strong powers to influence the discount rates established by the individual

Reserve banks. The Act contained a loophole in the Board’s control, however.

Individual Reserve banks were authorized to conduct open market operations on

their own. With the New York Fed playing a leading role, Reserve banks tended

to purchase government securities for their own accounts when discount policy

was tight. The overall result, as summarized in the title of the penultimate

chapter “Easy Money,” was that the easy money policy won by default. Strong’s

internationalism beat Hoover’s nationalism in the 1920s.

Although beyond the scope of book, it is interesting to consider how the

policy tension between Hoover and Strong in the 1920s set the stage for policy

during the Great Depression. As is well known, the Hoover Administration won

an isolationist victory on trade policy with passage of the Smoot-Hawley

Tariff Act. Less purposefully, Hoover also attained the type of monetary

policy that he had earlier sought as the Board effectively exercised its

muscle in shutting down open market operations during the Great Depression.

Hoover’s fiscal and monetary nationalism carried the day.

Wueschner’s history has much to offer two groups of academic researchers —

those with a general interest in the politics of US democracy and those with a

special interest in the monetary policy of the early Federal Reserve. I, for

one, was surprised to learn that the head of the Commerce Department in the

1920s played such an important role in shaping the course of monetary policy

for decades to come.

Mark Toma is an Associate Professor of Economics at the University of

Kentucky. His recent research (“Open Market Operations and the Great

Depression,” working paper) is on Federal Reserve policy during the 1920s and


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

Monopolies in America: Empire Builders and Their Enemies from Jay Gould to Bill Gates

Author(s):Geisst, Charles R.
Reviewer(s):Troesken, Werner

Published by EH.NET (August 2000)

Charles R. Geisst, Monopolies in America: Empire Builders and Their Enemies

from Jay Gould to Bill Gates. New York: Oxford University Press, 2000. x +

355 pp. $30 (cloth), ISBN: 0-19-512301-8.

Reviewed for EH.NET by Werner Troesken, Departments of History and Economics,

University of Pittsburgh.

Monopolies in America by Charles R. Geisst, is a history of the trust

and antitrust movements from their inception in the late nineteenth century

through to the present day. In light of the on-going struggle between Microsoft

and the Department of Justice, this is a timely contribution to the vast

literature on the political economy of antitrust. The book is organized

chronologically and summarizes some of the more colorful developments in the

historical battle between big business and its critics, in and out of


Geisst’s central conclusion is that “monopoly is the logical outcome of free

market economic organization (p. 319).” This conclusion does not sit well with

either standard economic theory or previous historical studies. Economic theory

suggests monopoly — or more precisely high degrees of market concentration —

only in industries with substantial entry barriers and economies of scale. But

in industries where entry barriers are low and economies of scale are limited,

both theory and casual empiricism (look at agriculture or retailing) indicate

much less concentration and market power. Indeed, previous historical studies,

notably Naomi Lamoreaux’s The Great Merger Movement in American Business

(New York, 1985), find that far from being inevitable, the great industrial

combinations of the late nineteenth century were anomalies: most trusts and

combinations failed. Geisst does not discuss the predictions of standard

economic theory, nor does he discuss or cite the work of Lamoreaux.

Chapter 1, “The Monopolist Menace,” focuses on the development of the railroads

and their close ties to state and federal legislators. Geisst emphasizes the

economic and political corruption that came with the railroads. For example, he

explains how the managers of railroads routinely “watered stock” and made the

stock market a very dangerous place for investors. Despite such pervasive

corruption on the part of managers, Geisst claims that investors “always came

back for more,” attracted by the promise of riches floated by inaccurate press

accounts (p. 19). Apparently, investors during this period were a gullible lot.

Later in the chapter, Geisst describes how state legislatures routinely “looked

the other way” as the railroads plundered consumers and investors (e.g., pp.

24-25). Why did voters tolerate such abuses? Explaining the ease with which

Pennsylvania railroads secured patently pro-business legislation, the author

writes that “the people and politicians in Pennsylvania still came under Adams’

criticism as being ‘not marked by intelligence; they are, in fact, dull,

uninteresting, very slow and very persevering.’ It was just this sort of

plodding dullness that made corporations work relatively efficiently” (p. 21).

This portrayal of state legislators as the tools of railroad interests

contrasts sharply with other studies of state railroad regulation, which have

found strong evidence that state regulators were quite sympathetic to the needs

of farmers and shippers. See, for example, Christopher Grandy, “Can Government

Be Trusted to Keep Its Part of the Social Contract?: New Jersey and the

Railroads, 1825-1888,” Journal of Law Economics and Organization, 1989;

Mark T. Kanazawa and Roger G. Noll, “The Origins of State Railroad Regulation:

The Illinois Constitution of 1870″ in Claudia Goldin and Gary Libecap, editors,

The Regulated Economy, (Chicago, 1994); and Gabriel Kolko’s Railroads

and Regulation, 1877-1916 (Princeton, 1965). These studies are neither

discussed nor cited.

Chapter 2, “‘Good’ and ‘Bad’ Trusts,” is broader in scope, discussing such

combinations as the Meat-Packing Trust, the “Banking Trust,” and Standard Oil.

Geisst argues that the rise of the great industrial trusts was driven by a

“general price deflation” which pushed “down profit margins,” and the severe

economic slowdown after 1893 (p. 51). He also ascribes the rise of large

combinations to tariffs, lax antitrust enforcement, and other policy mistakes

(e.g., pp. 51 and 319). Alfred Chandler’s competing interpretation in The

Visible Hand (Cambridge, MA, 1977), which emphasizes the efficiency

characteristics of large firms, is not discussed or cited. This omission occurs

despite well-known studies by economic historians showing that the largest and

most successful combinations persisted in industries experiencing rapid

technological change and exhibiting significant economies of scale. (See, for

example, John James, “Structural Change in American Manufacturing, 1850-1890,”

Journal of Economic History, 1983; and Gary D. Libecap, “The Rise of the

Chicago Packers and the Origins of Meat Inspection and Antitrust,” Economic

Inquiry, 1992).

In discussing Standard Oil, Geisst points out that Standard received large

rebates from the railroads. From Geisst’s perspective these rebates constitute

prima facie evidence that Standard was behaving in an anticompetitive manner

(see, for example, pp. 37-38). Yet it is well-known that Standard Oil received

these rebates, at least in part, because Standard, unlike most of its

competitors, shipped its oil via tank cars rather than barrels. (See Harold F.

Williamson and Arnold R. Daum, The American Petroleum Industry: The Age of

Illumination, 1859-1899, Evanston, IL, 1959, pp. 528-37.) There was a sound

efficiency rationale for giving Standard rebates for using tank cars — they

were cheaper and safer for the railroads to haul than barrels. The rebate

programs may well have had anti-competitive effects, but given their historical

significance, efficiency rationales deserve at least some hearing.

To be clear, I do not wish to imply that all was goodness and light with the

trusts. There is compelling evidence that the trusts repeatedly used

anticompetitive strategies in an effort to gain market power. For example,

event study methodology shows that the tobacco trust used predatory pricing to

reduce the acquisition cost of its competitors (Malcolm R. Burns, “Predatory

Pricing and the Acquisition Cost of Competitors,” Journal of Political

Economy, 1986); direct evidence shows the sugar trust earned a sixty

percent rate of return on its investments in predation (see, generally, David

Genesove and Wallace P. Mullin, “Testing Static Oligopoly Models: Conduct and

Cost in the Sugar Industry, 1890-1914,” Rand Journal of Economics, 1998;

and “Predation and Its Rate of Return: The Sugar Industry, 1887-1914,” working

paper); and event study methodology and voting analyses show how the sugar

trust used its political clout to alter tariff policy. Clearly the trusts

corrupted the democratic process — though they certainly were not alone in

this (Sara Fisher Ellison and Wallace P. Mullin, “Economics and Politics: The

Case of Sugar Tariff Reform,” Journal of Law and Economics, 1995) — and

event study methodology shows the merger of several railroads to create the

Northern Securities company was anticompetitive (Robin Praeger, “The Effects of

Horizontal Mergers on Competition: The Case of the Northern Securities

Company,” Rand Journal of Economics, 1992).

Moreover, historical experience and economic theory both tell us that antitrust

policy can ameliorate things: clearly, the break-up of AT&T increased consumer

surplus and reduced the political clout of a corporate titan; and there is

evidence that had the Supreme Court broken up U.S. Steel in 1920 it would have

accomplished similar ends (see George L. Mullin, Joseph C. Mullin, and Wallace

P. Mullin, “The Competitive Effects of Mergers: Stock Market Evidence from the

U.S. Steel Dissolution Suit,” Rand Journal of Economics, 1995).

My point, then, is simply this: Geisst omits an important piece of the story

when he fails to consider efficiency interpretations of the trusts, and he

would not have omitted this aspect of the story had he considered the entire

corpus of historical and economic knowledge. Even potentially complementary and

supportive studies, like those cited in the two preceding paragraphs, are

omitted from the analysis.

Chapter 3, “Looking the Other Way,” focuses on the 1920s. After claiming that

the twenties were halcyon days for the rich and big business, Geisst observes

(p. 93): “Yet amidst what appeared to be prosperity, the wages of the average

worker were actually dropping. The rich got richer while the working class

scraped to make ends meet. The F.W. Woolworth Company reported profit margins

of 20 percent but actually lowered the wages of salesgirls in its stores,

citing the need for belt tightening.” In short, the rich got richer, and the

poor got poorer. Geisst is not the first writer to make this claim about the

1920s, and he undoubtedly will not be the last. Alas, even when read in a light

favorable to such pessimistic views, the evidence on this point is decidedly

mixed, and when read in a more objective light, the existing evidence

contradicts the pessimistic case. Good summaries of the academic debate about

what happened to wages in the 1920s can be found in any introductory textbook

on American economic history, such as Walton and Rockoff; Atack and Passell; or

Hughes and Cain. The basic thrust of the debate can also be captured by looking

at the Historical Statistics of the United States (1976, pp. 164-68),

which reports a steady increase in the earnings of most industrial workers

between 1921 and 1929.

Later in the chapter, Geisst discusses the shady brokerage practices of banks

in the era before the Glass-Steagall Act. He writes (pp. 102-03): “Many of the

banks produced literature designed to educate investors on the intricacies of

stocks and bonds. What was less apparent, however, was the fact that many of

those investors were sold securities that the banks had a vested interest in,

namely, securities underwritten and held by the banks themselves. Investors

were not aware that the banks were selling them their own inventories, many

times at greatly inflated prices. At other times the risks associated with many

bonds sold by bank subsidiaries were not made clear to their buyers.” This

passage contains no notes or cites to supporting studies, nor is it followed by

any sort of presentation of supporting evidence in the form of statistics

and/or anecdotes. Nonetheless, Geisst goes on to assume that such abuses were

commonplace, and given this, concludes that laws like the Glass-Steagall Act

were “steps in the right direction” and “served to police malefactors in the

banking business” (p. 135).

There are competing interpretations. Probably the best known of these is a

paper in the American Economic Review (1994), “Is the Glass-Steagall Act

Justified? A Study of the U.S. Experience With Universal Banking Before 1933,”

by Randall S. Kroszner and Raghuram G. Rajan, both economists at the University

of Chicago. Kroszner and Rajan systematically compare the securities

underwritten by commercial banks and those underwritten by investment banks.

Their findings suggest investors anticipated the conflicts of interest that

confronted commercial banks and thereby constrained underwriting behavior and

forced commercial banks to deal in better known, low risk securities. Geisst

neither discusses nor cites Kroszner and Rajan.

Subsequent chapters in Monopolies in America are similar in tone and

presentation to those just discussed, with a few notable exceptions. In chapter

7, Geisst discusses McGee’s well-known study of Standard Oil, and the Chicago

School approach to antitrust more generally (e.g., pp. 244-45). And in chapter

8, he briefly considers academic defenders of hostile takeovers and other

controversial developments during the 1980s. He writes (p. 303): “Another

business school professor, Mike Jensen at the University of Rochester, gained

wide notoriety by being one of the few academics to defend corporate raids and

takeovers. He also argued against a growing trend that decried executive

compensation as being too high. He actually favored paying corporate executives

more, not less.” For readers unfamiliar with this line thought it would have

been helpful if Geisst had explained why Jensen made these arguments. Instead

Geisst chose to summarize Jensen’s reasoning curtly: “In [Jensen’s] view,

hostile takeovers were nothing more than businesses vying for a position, a

natural series of events (p. 303).” The discussion of McGee and the Chicago

School in chapter 7 is equally illuminating.

Monopolies in America is best described as a work of popular history:

the writing is clear; important persons and events are usually recounted ably;

the anecdotes are interesting, though not necessarily instructive; and the

narrative is not cluttered with caveats and footnotes. But given the

shortcomings discussed above, it says nothing specialists will find

particularly interesting, nor does it survey the existing literature in a way

that would make it useful in undergraduate courses on economic history.

Werner Troesken is Associate Professor of History and Economics at the

University of Pittsburgh. He has published a book and several articles on the

political economy of regulation.

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Latin America and the World Economy since 1800

Author(s):Coatsworth, John
Taylor, Alan
Reviewer(s):Salvucci, Richard

Published by EH.NET (February 2000)

John Coatsworth and Alan Taylor, editors, Latin America and the World

Economy since 1800. Cambridge, MA: Harvard University Press, 1999. xv +

484 pp. $49.95 (cloth), ISBN 0-674-51280-4; $24.95 (paper), 0-674-51281-2.

Reviewed for EH.NET by Richard

Salvucci, Department of Economics, Trinity University, San Antonio, Texas.

Welcome to the Cliometric Revolution, Latin Style

When I started graduate school in 1973, there were no textbooks on Latin

American economic history. Today, depending on your definition of a textbook,

there are 3 or 4 in English alone. In 1973, we argued about the Asiatic mode of

production and precapitalist economic formations. Today we discuss conditional

convergence. In 1973, bourgeois economists were the enemy. Today a bourgeois

economist is your dissertation supervisor. Welcome to the Cliometric

Revolution, Latin style. It’s been 25 years in coming,

but now that it’s come, it’s come with a vengeance.

The present anthology is an artifact of that revolution and like all

historical artifacts, it requires a bit of study to appreciate its meaning in

full. And so to begin, I’m going to quibble with the idea that what you read

here is really all that novel. After all, there’s always been some cliometric

work on Latin America, as the outstanding books of Carlos Dmaz Alejandro on

Argentina or Clark Reynolds on Mexico might attest. In my primary field,

Mexican history, you could point to things done by Luis Tellez or by Jaime

Zabludovsky as recognizably cliometric, but Tellez and Zabludovsky have gone

on to major careers in government service rather into careers as economic

historians. What’s more unusual is to find suitably trained professionals doing

purely academic work-doing economic history for a living. For that we can

thank, at least partly, a sea change in development ideologies in Latin

America, where economists in universities can now spend their time thinking

about conditional convergence (whose acquaintance they may have made in some

gringo institution) rather than about the Asiatic mode of production. And I

think I have some idea why.

For my generation, it was the fall of Allende in 1973 that was critical.

For this one, it is the fall of the Berlin Wall. That makes all the difference

in the world. You can write sympathetically about the economic history of

Cuban sugar mills without espousing the labor theory of value.

You can study the history of financial markets in Brazil without being

implicated in the overthrow of Joco Goulart in 1964. For

now, at least,

there are no gangster regimes advocating “market friendly” policies while

energetically murdering their own citizens. The ideological and political

baggage of the 1960s and 1970s is, for want of a better phrase, just so much

history. Hence

what we read here by so many relative newcomers to the field. Their authors

are students, not prisoners of the past, and that’s what makes their

scholarship worthwhile. I do have a small bone to pick with the volume’s title.

This is not a book about Latin America since 1800.

It is mostly about Argentina, Brazil and Mexico since 1870, which is not quite

the same thing. There are no Indians. There is no Caribbean or Central America.

No Andes. But worse, there are really no papers that engage with the period

before 1870 and that is a real problem. As John Coatsworth’s perceptive essay

on the nineteenth century puts it, “the available quantitative evidence shows

that Latin America became an underdeveloped region between the early eighteenth

and the late nineteenth century” (p. 26). In other words, most of the papers

in the volume-Carlos Newland’s excepted-do not address the principal issue of

Latin America’s economic history, namely, the origins of what Lant Pritchett

has called

“divergence, big time.” Even

if you argue in reply, that X (what existed before 1870) causes Y (what changed

later), the historian is liable to wonder why X occurred when it did and not

before, especially if Y is extremely profitable, the proverbial big bill on the


I think

I know why. Sensible historians avoid the period before 1870 because it is a

Hobbesian world where life, not to mention some of its major actors, was nasty,

brutish and short. For most of Spanish America,

the era before 1870 (and after Independence in the 1820s) is much, much harder

to work in, let alone understand. The archives with which I am familiar (mostly

Mexican, to be sure) are a mess-disorganized,

uncatalogued, impenetrable-and very nearly impossible to utilize. Of course,

the messiness of the sources faithfully reflects the messiness of economic and

political life at the time, with unending coups, countercoups,

invasions, constitutions, blockades, wars, partitions, regulations,

proclamations, declamations, you name it. There’s no stable structure for

understanding, essentially. Unfortunately, this is where the action is,

unless you regard disorder itself as the proximate cause of poor economic

performance. As anyone reading this is probably aware, there’s really no

consensus about that either.

For this reason, I take claims made for the cliometric potential of Latin

American economic history the way I take tequila: in limited doses, and with

many grains of salt. Still,

triumphalism only infects the blurbs to the volume, for the “Introduction”

by John Coatsworth and Alan Taylor is conspicuously moderate in tone. So maybe

I shouldn’t complain. Besides, the papers are generally very good and a couple

are outstanding. One of the most coherent themes here is the importance of

financial markets and institutions in facilitating or accommodating economic

growth. This really is a new direction, at least in the Latin American context,

for I can think of little in the older historiography that makes this point

with any cogency. A very interesting paper by

Michael Twomey provides the relevant context in arguing that

“[t]he general trend of direct foreign investment [in the twentieth century]

has been downward relative to income and, probably, total capital stock” (p.

192). Portfolio investment aside, which

Twomey identifies as mainly, until 1990, loans to governments, the implication

is that domestic sources of capital were increasingly important between 1913

and 1950, the years when foreign direct investment fell sharply relative to

GDP. Twomey’s argument

frames papers by Stephen Haber, Anne Hanley, Leonard I. Nakamura and Carlos E.

J. M. Zarazaga, Gerardo della Paolera and Alan M. Taylor, and Gail D. Triner.

First, Brazil. Anne Hanley’s study of business finance and the Sco Paulo Bolsa

offers a good point of departure. In the spirit of Twomey’s conclusions,

Hanley argues that the role of foreign capital in direct investment “while

sizeable, mainly played a supporting role in the domestic business formation

that was the cornerstone of Sco Paulo’s development.”

The industrial and utilities sectors “actually found their base in the domestic

capital market” (both quotations, p. 126). And it was the impersonal mechanism

of the stock exchange rather than traditional kin-based finance that fueled “a

type of financial Big Bang” between 1905 and 1913 (p. 131). Similarly, Gail

Triner finds that the recharter of the Banco do Brasil in 1905 created a

“natural infrastructure for financial transactions” (p. 224) that supported a

“strong, centralized role for the national government in the economy.” And

like Hanley, Triner emphasizes that “[t]he banking system increasingly

accumulated and reallocated financial resources of the private sector at the

expense of either personal or other institutional channels” (p. 226, both

quotations). After 1905 the real money supply and the monetized economy grew

rapidly even as the economic predominance of Sco Paulo was consolidated.

The evolution of a modern financial infrastructure for Brazil had measurable

implications for the growth of industrial productivity in Brazil after 1890.

Stephen Haber’s sophisticated analysis of capital market regulation and the

development of a securities market argues that “one crucial piece of the puzzle

explaining the lack of industrial development

before 1890 and rapid industrial growth after 1890 was access to capital”

(p. 279). The maturation of debt and equity markets along with the

establishment of limited liability laws and mandatory financial disclosure

lowered the cost of capital. As a result, the cotton textile industry,

which is Haber’s focus, grew more quickly than it would have had traditional

patterns of kin-based and other less formal avenues of finance been maintained.

In short, “entrepreneurs who could best combine the factors of production and

choose the optimal output mix were able to mobilize capital that otherwise

would not have been available to them” (p.


Argentina has always seemed baffling. Between 1870 and 1900, real per capita

product there doubled, but after 1900, it would not do so again until 1958. In

other words, the rate of real per capita growth fell from 2.3 percent per year

to 1.19 percent per year, which is some slowdown. For Gerardo della Paolera and

Alan Taylor, a capital constraint is (part of)

the answer

. The domestic financial system was simply unable to replace the dwindling

supply of British capital after World War I. Caught between the gold standard,

international convertibility, and repeated financial crises,

the monetary authority, the Caja de Conversisn, was unable to support domestic

banks and maintain convertibility at the same time. For this reason, Argentine

banks “had to maintain a higher capital cushion” than their foreign

counterparts who could borrow abroad much more easily.

“[D]omestic banks could not fill the void left by the retreat of foreign

capital after 1914″ (p. 163). A paper by Leonard I. Nakamura and Carlos E.

J. M. Zarazaga raises some questions about this argument by looking at returns

to Argentine debt instruments, which don’t

seem particularly high.

Daniel Dmaz Fuentes’ chapter on the gold standard in Argentina, Brazil and

Mexico reminds us that the Argentine peso was inconvertible between 1914 and

1927, an awkward point for della Paolera and Taylor as well.

Nevertheless, their discussion of the non-monetary aspects of financial crises

in Argentina is very stimulating. I have heard it said by some historians that

there is nothing “new” in the findings of the new economic history of Latin

America. I defy them to read della Paolera and Taylor and then tell me that. I

doubt the critics have read Bernanke’s 1983 paper and the subsequent work it

inspired. The remaining papers are somewhat more difficult to characterize

because they deal with a wide variety of subjects. Let me give

some examples.

Students of Mexican history will welcome the chapters by Graciela Marquez and

Aurora Gsmez-Galvarriato. Both make extensive use of archival data and both

question commonly held beliefs about Mexico between 1890 and 1920, the last

years of

the Porfiriato (the dictatorship of Porfirio Dmaz from 1876 through 1910) and

the opening decade of the Mexican Revolution (which lasted until 1920, 1938,

1968, or last week, depending on how you view Mexican history). Marquez shows

that it is not enough

to simply label Porfirian Mexico a high-tariff country since nominal

protection fell sharply during the 1890s. It never recovered its former levels

before the outbreak of the Revolution. Gsmez-Galvarriato looks at real wages in

the Santa Rosa textile factory in Veracruz. Stability in real wages through

1907 gave way to a sharp decline between 1907 and 1911. A marked recovery

occurred between 1911 and 1913, only to fall sharply during the bitterest years

of the civil war (1914-1916). From 1917 through 192 0, real wages recovered,

but did not rise much above their level in 1907. I think Marquez and

Gsmez-Galvarriato are saying that the stories we tell about Dmaz and the coming

of the Revolution are not likely to hold up under the careful scrutiny of a new

historiography informed by detailed industry and firm-level studies. Where

this leaves the big studies of the Revolution,

such as Alan Knight’s, which retells many of the old verities, remains to be


Both William Summerhill and Alan Dye contribute chapters that represent

aspects of larger projects. Dye’s study of the contracts between sugarcane

growers and millers in Cuba lays to rest the myth that the contracts between

growers and millers evolved to exploit the growers, upon whom they were

coercively imposed. Summerhill’s paper on Brazilian railroads concludes that

“The direct impact of the railroad in Brazil places it comfortably within the

top tier of the cases for which economic historians have constructed social

savings estimates” (p. 391). Interested readers can certainly learn more from

Dye’s Cuban Sugar in the Age of Mass Production

(Stanford, 1998) or Summerhill’s forthcoming Order Against Progress:

Government, Foreign Investment and Railroads in Brazil, 1854-1913

(Stanford, scheduled for Summer 2000).

Papers by Lee Alston, Gary

Libecap and Bernardo Mueller; Andri A. Hofman and Nanno Mulder; and Carlos

Newland round out the volume. All are well worth


A final observation. It’s ironic that economic historians of Latin America

stress the study of institutions, a theme that features prominently in this

volume as well. For those of us trained in the early 1970s, “institutional

history” was something to be avoided, the province of dullards and the

unimaginative. It was a matter of faith, enshrined in a famous article by

James Lockhart, that the only real historians of Latin America were social

historians, and, well, social historians had better things to do than pay

attention to, of all things, institutions. Institutions didn’t affect the

behavior of real people. And real historians studied real (read: ordinary)

people. My how times do change. There isn’t much doubt about who’s doing the

interesting history of Latin America these days. Not a few of them are

represented in this excel lent collection. Now if only I could get them to

explain the Asiatic mode of production to me, my life would be complete.

Fat chance.

Richard Salvucci teaches at Trinity University. He is co-author with Linda K.

Salvucci of “Cuba and the Latin American

Terms of Trade in the Nineteenth Century: Old Theories, New Evidence,”

forthcoming in the

Journal of Interdisciplinary History in Autumn 2000.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):General or Comparative

Economic Cycles: Long Cycles and Business Cycles since 1870

Author(s):Solomou, Solomos
Reviewer(s):Capie, Forrest

Published by EH.NET (August 1999)

Solomos Solomou, Economic Cycles: Long Cycles and Business Cycles since

1870. Manchester: Manchester University Press, 1998. x + 132 pp. $79.95

(paper), ISBN: 0-7190-4150-3; $27.95 (paper), ISBN: 0-7190-4151-1.

Reviewed for EH.NET by Forrest Capie, Department of Banking and Finance, City

University Business School, London.

To the economic historian it seems odd that from time to time economists talk

about the end of the business cycle. In the late 1920s, economists,

in the US in particular, were proclaiming an end of the business cycle, after

a long period of boom. Unfortunately, there followed almost immediately the

worst cyclical downturn of all times–though that did not seem to dent the

reputation of economists. Again in the 1960s macroeconomists were talking of th

e end of the business cycle, regrettably just before the worst postwar

recession. (Look out for these forecasts and sell!) Solomou’s plea is that for

any study of business cycles a long historical period needs to be held in view;

and when it is, it can of

course be seen, that while the nature of the cycle changes, the cycle does not

disappear. One of the many splendid things about this short book is to knock

the “death of the business cycle” story on the head, and indeed go further and

accept that cycles

will always be present.

The book is in a series designed for students, policymakers, and practitioners.

In other words it is designed to survey the literature on the subject in a

critical way and summarize the principal strands. It is in two main parts.

The first and somewhat longer part is on business cycles since 1870, and the

second is on long economic fluctuations. Each of these parts has appended a

substantial bibliography; and there is a short concluding chapter on the

lessons that can be drawn from a consideration of the analysis.

There are two principal ways of looking at business cycles. One is to see them

as the consequence of internally generated dynamics, and the other is to see

external shocks as the source. And there is the possibility of international

transmission through a fixed exchange- rate system. Solomou considers these

approaches, examines the main types of shocks, describes cyclical behavior

across the period, and provides an explanation based on an analysis. In the

process he brings out the considerable differences in cyclical behavior in the

three periods: 1870-1914, 1919-39, and 1945 onwards. The second part of the

book deals with two kinds of cycles:

Kuznets (20 years), and Kondratiev (50 years). There has been more interest in

recent times on the latter but both of these require an even longer historical

period for description and analysis; but then lack of data quickly becomes a


If reviewers are obliged to find a fault, mine would be to query the

significance attributed to the role of agriculture in the cycle after 1870.

If it was simply claimed that weather was a significant shock there would be

little cause for complaint since there is a case for the construction and

perhaps other sectors being seriously affected.

But that would be to quibble and the wrong note on which to end, for this book

can be recommended unreservedly to undergraduates and others.

Forrest Capie has written, co-written or edited sixteen books and over a

hundred articles on monetary, banking

and trade topics. His recent publications include: Tariffs and Growth

(Manchester University Press,

1994); The Future of Central Banking (Cambridge University Press 1995)

with Charles Goodhart and Stanley Fischer; Monetary Economics in the

1990s (Ma cmillan 1996); and Asset Prices and the Real Economy ed.

with G. E. Wood (Macmillan 1997). He is Editor of the Economic History


Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative