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Economic History of Tractors in the United States

William J. White, Research Triangle Institute

The farm tractor is one of the most important and easily recognizable technological components of modern agriculture in the United States. Its development in the first half of the twentieth century fundamentally changed the nature of farm work, significantly altered the structure of rural America, and freed up millions of workers to be absorbed into the rapidly growing manufacturing and service sectors of the country. The tractor represents an important application of the internal combustion engine, rivaling the automobile and the truck in its economic impact.

A tractor is basically a machine that provides machine power for performing agricultural tasks. Tractors can be used to pull a variety of farm implements for plowing, planting, cultivating, fertilizing, and harvesting crops, and can also be used for hauling materials and personal transportation. In the provision of motive power, tractors were a replacement for human effort and that of draft animals, both of which are still used extensively in other parts of the world.

Technical Description

The heart of a farm tractor is a powerful internal combustion engine that drives the wheels to provide forward motion. Direct ignition (diesel) and spark-driven engines are both found on tractors, just as with cars and light trucks. Power from the engine can be transmitted to the implement being used through a power take-off (PTO) shaft or belt pulley. The engine also provides energy for the electrical system, including the ignition system and lights, and for the most recent models, air conditioner, stereo system, and other creature comforts.

The drawing below, taken from an undated John Deere operating manual, shows a typical general-purpose tractor from the period around 1940. The machine is little more than an engine on wheels, with a seat for the operator and a hitch for pulling implements centered in the rear. Later models would feature an enclosed cab to keep the operator out of the weather, but this model features only simple controls and the metal seat. The drawing shows a wheel-tractor, which comprised more than 95% of machines sold for farm use. Tracked units, also called crawler tractors, were common in California, and of course, dominated construction and other non-farm uses for tractors.

Background and Technological History

Farmers in 1900, whether engaged in growing wheat, corn, or cotton, raising livestock, producing dairy products, or combining a variety of these or other products, had only two sources of power aside from their own strength: steam engines and draft animals. Steam boilers provided motive power for threshing small grains, and a very small number of farmers were using recently-developed steam traction engines for plowing and other arduous tasks. Draft animals provided most of the power on all types of farms, however. As of 1910, there were more than 24 million horses and mules on American farms, about three or four animals for the average farm. In addition to supplying farm power, the horses were also relied upon for transportation, of both goods and people.

Horses and mules pulled an impressive variety of farm implements at the turn of the century, including plows, disks, harrows, planters, cultivators, mowers, and reapers. Several important farm tasks were typically done by hand at this time, including picking of corn and cotton. The greatest amount of power was needed for plowing, often forcing farmers to keep one or two extra horses above the number needed for the remainder of the year. As an example, power requirements during plowing have been estimated at 60% of the annual total needs for growing wheat at that time. A new source of power, then, would be valuable to the farmer if it could replace the horsepower requirements of plowing, as long as the cost was less than that of maintaining one to two extra horses. It would be even more valuable if it could economically replace all of the functions currently performed by draft animals, and further if it could facilitate automation of the cotton and corn picking operations.

As early as the 1870s, engineers had succeeded in producing steam traction engines, referred to today as steam tractors. These monsters, weighing in excess of 30,000 pounds (excluding water), could move under their own power, and had impressive horsepower capacity. Unfortunately, their size, mechanical complexity, and constant danger of explosion made these traction engines unusable for most farms in North America. In all but the driest soils, steam traction engines tended to become mired in the mud and refuse to move. Because of these handicaps, the use of steam tractors increased slowly in the United States during the last two decades of the nineteenth century. Annual production of less than 2000 units per year in the 1890s had increased to around 4000 in the ten years after 1900. Nonetheless, the rate of growth of steam horsepower was far smaller than the growth in animal horsepower. For the reasons mentioned above, adoption of steam power was clearly not a candidate to replace the horse.

The First Gasoline Tractors

With the commercialization of the internal combustion engine, a more practical alternative emerged. Farmers bought large numbers of stationary gasoline engines in the first decade of the twentieth century, and quickly became familiar with their operation. A wide variety of household chores were simplified by the use of stationary engines, including pumping water, washing clothes, and churning butter. Companies began developing gasoline-powered traction engines during the same period; the first commercial machines were sold in 1902, and quickly became known as ‘tractors’.

The first tractors shared similar traits to the steam traction engines. Weighing between 20,000 and 30,000 pounds, with huge steel wheels or tracks, these models were large and expensive. Fairly quickly, the large manufacturers, including Hart-Parr, International Harvester, Case, and Rumely had reduced the size and cost. By the time Ford introduced its Fordson model, the first successful small tractor, average weights were down to 2000-6000 pounds, and prices were under $1000. These tractors proved to be excellent at plowing, and were quite capable of driving mowers and reapers. The large steel wheels, low clearance, and substantial weight made them unsuitable for cultivating growing crops like corn and cotton, however.

Technological Improvements

Henry Ford, who had tinkered with steam and gasoline tractors prior to achieving his success with automobile production, introduced a small, inexpensive model which he called the Fordson during the World War I. This model sold well for several years, aided considerably by a war-caused shortage of horses. After a post-war crash in farm prices drastically reduced sales in 1920-21, Ford initiated a price war in 1922 by cutting the price of its Fordson from $625 to $395. Alone of the large competitors, International Harvester matched Ford’s price, and sales boomed for those two firms throughout the rest of the 1920s. Ford’s production of tractors were always a sidelight to his main business of manufacturing automobiles, however, and when the Fordson production lines were needed for the critical Model-A launch in 1928, Ford decided to leave the tractor business.

The competition with Ford drove International Harvester to make significant improvements in its tractors. The first innovation to appear was the power take-off, offered after 1922. This device, a metal shaft turned by the rotation of the tractor motor, allowed implements to be driven directly by the tractor engine, as opposed to obtaining power from a wheel rolling along the ground. The power take-off quickly became a standard feature on all tractors, and implement makers began the process of re-designing their equipment to take advantage of this innovation.

An even more important improvement by International Harvester was the introduction of a general-purpose tractor, the Farmall, in 1925. This model, with high ground clearance, small front wheels, and minimal weight, was designed for cultivating, as well as for plowing and cutting. It was tested in Texas in 1923, and was released for broad scale distribution in 1925. Competitors, such as Deere, Massey-Harris, and Case rushed to develop a general-purpose tractor (a ‘GP’) of their own, and by the mid-1930s, GPs had replaced the standard Fordson-type tractor. In addition, these same firms began the process of modifying their implements for these tractors, and the wholesale replacement of the horse began in earnest.

A Dominant Design Emerges

Three other improvements were critical in completing the technology base for the tractor. Deere released a power lift for its models beginning in 1927. This device allowed the implement to be raised before every turn by pulling a lever. Prior to this, the farmer had to lift the implement by hand at each turn, which was a time-consuming and enervating task. As with the power takeoff, the power lift was rapidly adopted by other tractor makers. Rubber tires first became available for tractors in 1932, and by 1938 had largely replaced steel wheels. The low-pressure tires not only did less damage to fields, but also allowed a higher forward speed, due to reduced friction. Finally, the development of diesel engines in the mid-1930s gave farmers access to a lower-cost fuel for their machines. Many tractors from that time forward had a small gasoline tank for cold starts, and a large diesel tank for the majority of the operation.

International Harvester pioneered a ‘one plow’ tractor at about this time, and began selling it in 1934. This tractor was smaller and less expensive than the original Farmall, but had the same general-purpose capabilities. Its introduction offered operators on small farms the chance to replace their one horse or mule with a tractor, and was responsible for the beginnings of the tractor’s diffusion in the South. These small tractors often featured adjustable front wheels and high ground clearance, which made them considerably more flexible than the larger models. Within a few more years, manufacturers were offering their larger models in ‘high-clearance’ versions as well.

A final innovation was responsible for bringing Ford back into the tractor business in 1937. In that year, the firm agreed to enter into a joint venture with Irish inventor Harry Ferguson. Ferguson had worked for almost 20 years to perfect a ‘three-point hitch,’ a device that produced superior plowing by continuously leveling the implement as it traveled over uneven terrain. The Ford-Ferguson tractors quickly amassed a significant market share (14% by 1940), and the hitch design was rapidly imitated.

By about 1938, the technology of tractor development had achieved what is known as a ‘dominant design.’ The Farmall-type general-purpose tractors, both large and small, would change little, except for increasing in size and horsepower, over the next 30 years. Beginning in the mid-1930s, and despite the ongoing depression in the United States, tractor sales increased rapidly. Figure 1 shows the number of tractors on farms from 1910 through 1960. By the latter date, the process of technological diffusion was essentially complete. With the exception of the deep South, the increase in percent of farms with tractors from year to year had stopped.

Development of Related Equipment

The general-purpose tractor proved to be an excellent replacement for the horse in plowing, soil preparation, planting, and cultivating tasks for a wide variety of field crops. In addition, the tractor was fully capable of providing power for mowing hay and for harvesting of wheat and other small grains. In the latter application, it facilitated the practice known as ‘combining,’ the simultaneous reaping and threshing of wheat. Horse-drawn combines had been available since the 1880s, and had found limited acceptance on the larger farms of the arid West. However, a large team of horses was required to drag the heavy, complex machine through the fields. The tractors of the 1930s and 1940s had no trouble pulling a re-designed combine, and they began a process of rapid adoption in the Midwest. Eventually, a self-propelled combine was produced, with the tractor engine and cab subsumed into the combine apparatus.

The general-purpose tractor was not capable of bringing mechanization to the corn and cotton harvest until separate, but related innovations produced a corn picker in the 1920s and a mechanical cotton picker after the Second World War. Prior to the development and adoption of the corn picker, corn was often cut with a binder, followed by manual shelling. One of the more important uses of stationary gas engines early in the twentieth century was for the shelling of corn. The picker combined the operations of cutting and shelling, and also distributed the stalks back onto the field, eliminating an additional step.

Mechanical cotton pickers fundamentally altered not only the harvesting of cotton, but the very nature of cotton growing in the United States. The mechanical picker, even after extensive development, produced higher crop losses than hand picking in the hot, humid areas where most cotton was grown — Mississippi, Alabama, and east Texas. In the dry areas of west Texas, however, the picker was very efficient, both in terms of labor effort and crop yields. The mechanical cotton picker thus precipitated a relocation of cotton production westward, resulting in large-scale migration out of the deep South in the years after World War II.

As with the combine, self-propelled corn and cotton pickers were soon developed, combining the power train and cab of the tractor within the implement’s apparatus. For this reason, pickers and combines are often considered as separate machines, and their development and diffusion are not included in discussions of the impact of the tractor. It should be pointed out, however, that none of these devices could have been powered efficiently by horses or steam; the gasoline-powered tractor was necessary for their development. As such, I will include combines and mechanical pickers in assessing the impact of the tractor on inputs to agriculture.

Recent Developments

The recent history of tractor development is less dramatic than the first 50 years. The peak year of tractor production was 1951, during which 564,000 units were made. From that time, the approaching saturation of the market produced a steady fall in production and sales. As one might expect, manufacturers responded by developing ever-larger tractors to supply farms that were growing in size. Interestingly enough, this pursuit of size left the small end of the market open to foreign competition, and, as in the case of the U.S. automobile industry, imports grew to dominate the small-tractor market.

Creature comforts have been improved markedly since the 1950s as well. Enclosed cabs soon had heating and air conditioning, and are now likely to be supplied with a television and stereo-CD. As a result, modern tractors are quite comfortable in comparison with the machines of 40 years ago, let alone versus the monsters of the early tractor era.

Production and Corporate History

From a slow start in the 1920s and 1930s, tractor production grew through the late Depression years, as farmers increasingly parted with their horses and mules. Figure 2 shows the annual output of farm tractors from 1909 to 1970, including the peak years of the early 1950s. It is likely that this peak would have been reached much sooner, had it not been for the disruption of the Second World War. Not only were raw materials such as steel, copper, and rubber severely limited due to wartime production needs, but the government actually limited the total number of machines that could be built each year, and allocated only the raw materials needed for that production. Many of the tractor factories were converted over to production of tanks, airplanes, vehicles, and other military goods.

Despite the presence of corporate giants such as International Harvester and Ford in the early development of the farm tractor, there were hundreds of firms that began producing or selling machines in the first two decades of the twentieth century. As is the case with many emerging industries, inventors, entrepreneurs, and promoters were attracted to this important and rapidly-growing field. The agricultural depressions of 1920-21 and 1930-32 drove many of these firms into mergers or out of business, and by the early 1930s seven companies dominated the industry. These firms, along with Ford, would make almost all of the wheel-tractors sold in the United States from 1930 through 1955.

The dominance of the seven firms is shown in Table 1, which presents market share data by decade for the key years of tractor industry growth. As discussed above, Ford dominated the market in the 1920s, then left the business to create production capacity for the Model A; upon returning to tractors in the 1940s, Ford once again became an important presence. International Harvester was the largest consistent seller, as well as being the technological leader, while Deere would grow into the most significant challenger. By 1963, Deere overtook International Harvester in a declining market, and remains the largest presence in agricultural equipment today.

Table 1. Market Share of Leading Wheel Tractor Manufacturers by Decade
1910s 1920s 1930s 1940s 1950-55 Overall

Deere

4.0% 6.4% 21.7% 17.0% 14.5% 14.5%
International Harvester 21.4% 28.6% 44.3% 32.7% 30.6% 32.5%
Ford 20.1% 44.2% 0.0% 7.9% 19.3% 16.7%
Massey-Ferguson 2.9% 1.9% 2.9% 14.7% 10.8% 9.1%
Case 7.2% 3.6% 7.4% 7.6% 5.1% 6.2%
Allis Chalmers 6.2% 3.5% 12.6% 9.7% 10.3% 9.1%
Oliver 2.1% 2.2% 5.0% 4.8% 5.4% 4.4%
Minneapolis Moline 8.0% 0.7% 2.9% 3.2% 3.6% 3.1%
All Others 28.0% 9.0% 3.2% 2.5% 0.2% 4.4%
Source: White (2000)
Note: Totals include production of predecessor companies

Social and Economic Significance

The farm tractor had made a major impact on the social and economic fabric of the United States. By increasing the productivity of agricultural labor, mechanization freed up millions of farm operators, unpaid family workers, and farm hands. After the Second World War, many of these people relocated to the growing cities across the country and provided technically-skilled, hard-working labor to the manufacturing and service industries. Millions of others remained in rural areas, working off-farm either part-time or full-time in a variety of professions.

The landscape of the country has changed as a result. Farms have grown larger as one proprietor can manage to cultivate the land that several families would have worked in 1900. Small market towns, especially in the Plains states, have almost ceased to exist as the customer base for local businesses has dwindled. Land formerly devoted to raising and feeding horses has been converted to alternate uses or reverted to grassland or forest. Several generations of agricultural families have experienced the sadness of giving up the farm and the rural way of life.

On balance, however, the tractor has had a markedly positive economic impact. Horses and mules, while providing farm power, ate up more than twenty percent of the food they helped farmers grow! By replacing them with machines that consumed much less expensive quantities of fuel, oil, and hydraulic fluid, farmers were able to reduce their costs and pass these social savings along to food buyers. More importantly, the millions of farm workers freed up by the technology were able to contribute their labor elsewhere in the economy, creating large economic benefits. According to a recent estimate by the author, the U.S. would have been almost ten percent poorer in 1955 in the absence of the farm tractor. Along with the revolution in yields generated by the advances in biological and chemical research, the farm tractor has helped agriculture make a significant contribution to economic growth in the United States.

References for Further Study

Ankli, Robert E. “Horses vs. Tractors on the Corn Belt” Agricultural History 54 (1980): 134-148.

Berardi, Gigi M., and Charles C. Geisler, editors. Social Consequences and Challenges of New Agricultural Technology. Boulder, CO: Westview Press, 1984.

Broehl, Wayne G., Jr. John Deere’s Company. New York: Doubleday, 1984.

Clarke, Sally H. Regulation and the Revolution in United States Farm Productivity. Cambridge: Cambridge University Press, 1994.

Danbom, David B. Born in the Country: A History of Rural America. Baltimore: Johns Hopkins University Press, 1995.

Gray, R. B. The Agricultural Tractor: 1855 – 1950. St. Joseph, Michigan: American Society of Agricultural Engineers, 1954 (revised, 1975).

Griliches, Zvi. “The Demand for a Durable Input: Farm Tractors in the United States, 1921-57.” In The Demand for Durable Goods, edited by Arnold C. Harberger. Chicago: University of Chicago Press, 1960.

Hayami, Yujiro, and Vernon W. Ruttan. Agricultural Development: An International Perspective. Baltimore: Johns Hopkins Press, 1971.

Jasny, Naum. Research Methods on Farm Use of Tractors. New York: Columbia University Press, 1938.

Jones, Fred R. Farm Gas Engines and Tractors, fourth edition. New York: McGraw-Hill, 1966.

McCormick, Cyrus. The Century of the Reaper. Boston: Houghton Mifflin, 1931.

Rogin, Leo. The Introduction of Farm Machinery in Its Relation to the Productivity of Labor in the Agriculture of the United States during the Nineteenth Century. University of California Publications in Economics: Volume 9. Berkeley: University of California Press, 1931.

Sargen, Nicholas Peter. “Tractorizationin the United States and Its Relevance for the Developing Countries. New York: Garland Publishing, 1979.

Schultz, Theodore W. “Reflections on Agricultural Production, Output, and Supply.” Journal of Farm Economics 38 (1956): 748-62.

Whatley, Warren C. “Institutional Change and Mechanization in the Cotton South.” Ph.D. dissertation, Stanford University, 1983.

White, William J. “An Unsung Hero: The Farm Tractor’s Contribution to Twentieth-century United States Economic Growth.” Ph.D. dissertation, Ohio State University, 2000.

Wik, Reynold M. Steam Power on the American Farm. Philadelphia: University of Pennsylvania Press, 1953.

Wik, Reynold M. Benjamin Holt & Caterpillar: Tracks & Combines. St. Joseph, Michigan: American Society of Agricultural Engineers, 1984.

Williams, Robert C. Fordson, Farmall, and Poppin’ Johnny. Urbana, Illinois: University of Illinois Press, 1987.

Citation: White, William. “Economic History of Tractors in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL
http://eh.net/encyclopedia/economic-history-of-tractors-in-the-united-states/

African Americans in the Twentieth Century

Thomas N. Maloney, University of Utah

The nineteenth century was a time of radical transformation in the political and legal status of African Americans. Blacks were freed from slavery and began to enjoy greater rights as citizens (though full recognition of their rights remained a long way off). Despite these dramatic developments, many economic and demographic characteristics of African Americans at the end of the nineteenth century were not that different from what they had been in the mid-1800s. Tables 1 and 2 present characteristics of black and white Americans in 1900, as recorded in the Census for that year. (The 1900 Census did not record information on years of schooling or on income, so these important variables are left out of these tables, though they will be examined below.) According to the Census, ninety percent of African Americans still lived in the Southern US in 1900 — roughly the same percentage as lived in the South in 1870. Three-quarters of black households were located in rural places. Only about one-fifth of African American household heads owned their own homes (less than half the percentage among whites). About half of black men and about thirty-five percent of black women who reported an occupation to the Census said that they worked as a farmer or a farm laborer, as opposed to about one-third of white men and about eight percent of white women. Outside of farm work, African American men and women were greatly concentrated in unskilled labor and service jobs. Most black children had not attended school in the year before the Census, and white children were much more likely to have attended. So the members of a typical African American family at the start of the twentieth century lived and worked on a farm in the South and did not own their home. Children in these families were unlikely to be in school even at very young ages.

By 1990 (the most recent Census for which such statistics are available at the time of this writing), the economic conditions of African Americans had changed dramatically (see Tables 1 and 2). They had become much less concentrated in the South, in rural places, and in farming jobs and had entered better blue-collar jobs and the white-collar sector. They were nearly twice as likely to own their own homes at the end of the century as in 1900, and their rates of school attendance at all ages had risen sharply. Even after this century of change, though, African Americans were still relatively disadvantaged in terms of education, labor market success, and home ownership.

Table 1: Characteristics of Households in 1900 and 1990

1900 1990
Black White Black White
A. Region of Residence
South 90.1% 23.5% 53.0% 32.9%
Northeast 3.6% 31.8% 18.9% 20.9%
Midwest 5.8% 38.5% 18.9% 25.3%
West 0.5% 6.2% 9.2% 21.0%
B. Share Rural
75.8% 56.1% 11.9% 25.7%
C. Share of Homes Owner-Occupied
22.1% 49.2% 43.4% 67.3%

Based on household heads in Integrated Public Use Microdata Series Census samples for 1900 and 1990.

Table 2: Characteristics of Individuals in 1900 and 1990

1900 1990
Male Female Male Female
Black White Black White Black White Black White
A. Occupational Distribution
Professional/Technical 1.3% 3.8% 1.6% 10.7% 9.9% 17.2% 16.6% 21.9%
Proprietor/Manager/Official 0.8 6.9 0.2 2.6 6.5 14.7 5.4 10.0
Clerical 0.2 4.0 0.2 5.6 10.7 7.2 29.7 31.9
Sales 0.3 4.2 0.2 4.1 2.9 6.7 4.1 7.3
Craft 4.2 15.9 0 3.1 17.4 20.7 2.3 2.1
Operative 7.3 13.4 1.8 24.5 20.7 14.9 12.4 8.0
Laborer 25.5 14.0 6.5 1.5 12.2 7.2 2.0 1.5
Private Service 2.2 0.4 33.0 33.2 0.1 0 2.0 0.8
Other Service 4.8 2.4 20.6 6.6 18.5 9.0 25.3 15.8
Farmer 30.8 23.9 6.7 6.1 0.2 1.4 0.1 0.4
Farm Laborer 22.7 11.0 29.4 2.0 1.0 1.0 0.4 0.5
B. Percent Attending School by Age
Ages 6 to 13 37.8% 72.2% 41.9% 71.9% 94.5% 95.3% 94.2% 95.5
Ages 14 to 17 26.7 47.9 36.2 51.5 91.1 93.4 92.6 93.5
Ages 18 to 21 6.8 10.4 5.9 8.6 47.7 54.3 52.9 57.1

Based on Integrated Public Use Microdata Series Census samples for 1900 and 1990. Occupational distributions based on individuals aged 18 to 64 with recorded occupation. School attendance in 1900 refers to attendance at any time in the previous year. School attendance in 1990 refers to attendance since February 1 of that year.

These changes in the lives of African Americans did not occur continuously and steadily throughout the twentieth century. Rather, we can divide the century into three distinct eras: (1) the years from 1900 to 1915, prior to large-scale movement out of the South; (2) the years from 1916 to 1964, marked by migration and urbanization, but prior to the most important government efforts to reduce racial inequality; and (3) the years since 1965, characterized by government antidiscrimination efforts but also by economic shifts which have had a great impact on racial inequality and African American economic status.

1900-1915: Continuation of Nineteenth-Century Patterns

As was the case in the 1800s, African American economic life in the early 1900s centered on Southern cotton agriculture. African Americans grew cotton under a variety of contracts and institutional arrangements. Some were laborers hired for a short period for specific tasks. Many were tenant farmers, renting a piece of land and some of their tools and supplies, and paying the rent at the end of the growing season with a portion of their harvest. Records from Southern farms indicate that white and black farm laborers were paid similar wages, and that white and black tenant farmers worked under similar contracts for similar rental rates. Whites in general, however, were much more likely to own land. A similar pattern is found in Southern manufacturing in these years. Among the fairly small number of individuals employed in manufacturing in the South, white and black workers were often paid comparable wages if they worked at the same job for the same company. However, blacks were much less likely to hold better-paying skilled jobs, and they were more likely to work for lower-paying companies.

While the concentration of African Americans in cotton agriculture persisted, Southern black life changed in other ways in the early 1900s. Limitations on the legal rights of African Americans grew more severe in the South in this era. The 1896 Supreme Court decision in the case of Plessy v. Ferguson provided a legal basis for greater explicit segregation in American society. This decision allowed for the provision of separate facilities and services to blacks and whites as long as the facilities and services were equal. Through the early 1900s, many new laws, known as Jim Crow laws, were passed in Southern states creating legally segregated schools, transportation systems, and lodging. The requirement of equality was not generally enforced, however. Perhaps the most important and best-known example of separate and unequal facilities in the South was the system of public education. Through the first decades of the twentieth century, resources were funneled to white schools, raising teacher salaries and per-pupil funding while reducing class size. Black schools experienced no real improvements of this type. The result was a sharp decline in the relative quality of schooling available to African-American children.

1916-1964: Migration and Urbanization

The mid-1910s witnessed the first large-scale movement of African Americans out of the South. The share of African Americans living in the South fell by about four percentage points between 1910 and 1920 (with nearly all of this movement after 1915) and another six points between 1920 and 1930 (see Table 3). What caused this tremendous relocation of African Americans? The worsening political and social conditions in the South, noted above, certainly played a role. But the specific timing of the migration appears to be connected to economic factors. Northern employers in many industries faced strong demand for their products and so had a great need for labor. Their traditional source of cheap labor, European immigrants, dried up in the late 1910s as the coming of World War I interrupted international migration. After the end of the war, new laws limiting immigration to the US would keep the flow of European labor at a low level. Northern employers thus needed a new source of cheap labor, and they turned to Southern blacks. In some cases, employers would send recruiters to the South to find workers and to pay their way North. In addition to this pull from the North, economic events in the South served to push out many African Americans. Destruction of the cotton crop by the boll weevil, an insect that feeds on cotton plants, and poor weather in some places during these years made new opportunities in the North even more attractive.

Table 3: Share of African Americans Residing in the South

Year Share Living in South
1890 90%
1900 90%
1910 89%
1920 85%
1930 79%
1940 77%
1950 68%
1960 60%
1970 53%
1980 53%
1990 53%

Sources: 1890 to 1960: Historical Statistics of the United States, volume 1, pp. 22-23; 1970: Statistical Abstract of the United States, 1973, p. 27; 1980: Statistical Abstract of the United States, 1985, p. 31; 1990: Statistical Abstract of the United States, 1996, p. 31.

Pay was certainly better, and opportunities were wider, in the North. Nonetheless, the region was not entirely welcoming to these migrants. As the black population in the North grew in the 1910s and 1920s, residential segregation grew more pronounced, as did school segregation. In some cases, racial tensions boiled over into deadly violence. The late 1910s were scarred by severe race riots in a number of cities, including East St. Louis (1917) and Chicago (1919).

Access to Jobs in the North

Within the context of this broader turmoil, black migrants did gain entry to new jobs in Northern manufacturing. As in Southern manufacturing, pay differences between blacks and whites working the same job at the same plant were generally small. However, black workers had access to a limited set of jobs and remained heavily concentrated in unskilled laborer positions. Black workers gained admittance to only a limited set of firms, as well. For instance, in the auto industry, the Ford Motor Company hired a tremendous number of black workers, while other auto makers in Detroit typically excluded these workers. Because their alternatives were limited, black workers could be worked very intensely and could also be used in particularly unpleasant and dangerous settings, such as the killing and cutting areas of meat packing plants, foundry departments in auto plants, and blast furnaces in steel plants.

Unions

Through the 1910s and 1920s, relations between black workers and Northern labor unions were often antagonistic. Many unions in the North had explicit rules barring membership by black workers. When faced with a strike (or the threat of a strike), employers often hired in black workers, knowing that these workers were unlikely to become members of the union or to be sympathetic to its goals. Indeed, there is evidence that black workers were used as strike breakers in a great number of labor disputes in the North in the 1910s and 1920s. Beginning in the mid-1930s, African Americans gained greater inclusion in the union movement. By that point, it was clear that black workers were entrenched in manufacturing, and that any broad-based organizing effort would have to include them.

Conditions around 1940

As is apparent in Table 3, black migration slowed in the 1930s, due to the onset of the Great Depression and the resulting high level of unemployment in the North in the 1930s. Beginning in about 1940, preparations for war again created tight labor markets in Northern cities, though, and, as in the late 1910s, African Americans journeyed north to take advantage of new opportunities. In some ways, moving to the North in the 1940s may have appeared less risky than it had during the World War I era. By 1940, there were large black communities in a number of Northern cities. Newspapers produced by these communities circulated in the South, providing information about housing, jobs, and social conditions. Many Southern African Americans now had friends and relatives in the North to help with the transition.

In other ways, though, labor market conditions were less auspicious for black workers in 1940 than they had been during the World War I years. Unemployment remained high in 1940, with about fourteen percent of white workers either unemployed or participating in government work relief programs. Employers hired these unemployed whites before turning to African American labor. Even as labor markets tightened, black workers gained little access to war-related employment. The President issued orders in 1941 that companies doing war-related work had to hire in a non-discriminatory way, and the Fair Employment Practice Committee was created to monitor the hiring practices of these companies. Initially, few resources were devoted to this effort, but in 1943 the government began to enforce fair employment policies more aggressively. These efforts appear to have aided black employment, at least for the duration of the war.

Gains during the 1940s and 1950s

In 1940, the Census Bureau began to collect data on individual incomes, so we can track changes in black income levels and in black/white income ratios in more detail from this date forward. Table 4 provides annual earnings figures for black and white men and women from 1939 (recorded in the 1940 Census) to 1989 (recorded in the 1990 Census). The big gains of the 1940s, both in level of earnings and in the black/white income ratio, are very obvious. Often, we focus on the role of education in producing higher earnings, but the gap between average schooling levels for blacks and whites did not change much in the 1940s (particularly for men), so schooling levels could not have contributed too much to the relative income gains for blacks in the 1940s (see Table 5). Rather, much of the improvement in the black/white pay ratio in this decade simply reflects ongoing migration: blacks were leaving the South, a low-wage region, and entering the North, a high-wage region. Some of the improvement reflects access to new jobs and industries for black workers, due to the tight labor markets and antidiscrimination efforts of the war years.

Table 4: Mean Annual Earnings of Wage and Salary Workers

Aged 20 and Over

Male

Female

Black White Ratio Black White Ratio
1939 $537.45 $1234.41 .44 $331.32 $771.69 .43
1949 1761.06 2984.96 .59 992.35 1781.96 .56
1959 2848.67 5157.65 .55 1412.16 2371.80 .59
1969 5341.64 8442.37 .63 3205.12 3786.45 .85
1979 11404.46 16703.67 .68 7810.66 7893.76 .99
1989 19417.03 28894.69 .67 15319.29 16135.65 .95

Source: Integrated Public Use Microdata Series Census samples for 1940, 1950, 1960, 1970, 1980, and 1990. Includes only those with non-zero earnings who were not in school. All figures are in current (nominal) dollars.

Table 5: Years of School Attended for Individuals 20 and Over

Male

Female

Black White Difference Black White Difference
1940 5.9 9.1 3.2 6.9 10.5 3.6
1950 6.8 9.8 3 7.8 10.8 3
1960 7.9 10.5 2.6 8.8 11.0 2.2
1970 9.4 11.4 2.0 10.3 11.7 1.4
1980 11.2 12.5 1.3 11.8 12.4 0.6

Source: Integrated Public Use Microdata Series Census samples for 1940, 1950, 1960, 1970, and 1980. Based on highest grade attended by wage and salary workers aged 20 and over who had non-zero earnings in the previous year and who were not in school at the time of the census. Comparable figures are not available in the 1990 Census.

Black workers relative incomes were also increased by some general changes in labor demand and supply and in labor market policy in the 1940s. During the war, demand for labor was particularly strong in the blue-collar manufacturing sector. Workers were needed to build tanks, jeeps, and planes, and these jobs did not require a great deal of formal education or skill. In addition, the minimum wage was raised in 1945, and wartime regulations allowed greater pay increases for low-paid workers than for highly-paid workers. After the war, the supply of college-educated workers increased dramatically. The GI Bill, passed in 1944, provided large subsidies to help pay the expenses of World War II veterans who wanted to attend college. This policy helped a generation of men further their education and get a college degree. So strong labor demand, government policies that raised wages at the bottom, and a rising supply of well-educated workers meant that less-educated, less-skilled workers received particularly large wage increases in the 1940s. Because African Americans were concentrated among the less-educated, low-earning workers, these general economic forces were especially helpful to African Americans and served to raise their pay relative to that of whites.

The effect of these broader forces on racial inequality helps to explain the contrast between the 1940s and 1950s evident in Table 4. The black-white pay ratio may have actually fallen a bit for men in the 1950s, and it rose much more slowly in the 1950s than in the 1940s for women. Some of this slowdown in progress reflects weaker labor markets in general, which reduced black access to new jobs. In addition, the general narrowing of the wage distribution that occurred in the 1940s stopped in the 1950s. Less-educated, lower-paid workers were no longer getting particularly large pay increases. As a result, blacks did not gain ground on white workers. It is striking that pay gains for black workers slowed in the 1950s despite a more rapid decline in the black-white schooling gap during these years (Table 5).

Unemployment

On the whole, migration and entry to new industries played a large role in promoting black relative pay increases through the years from World War I to the late 1950s. However, these changes also had some negative effects on black labor market outcomes. As black workers left Southern agriculture, their relative rate of unemployment rose. For the nation as a whole, black and white unemployment rates were about equal as late as 1930. This equality was to a great extent the result of lower rates of unemployment for everyone in the rural South relative to the urban North. Farm owners and sharecroppers tended not to lose their work entirely during weak markets, whereas manufacturing employees might be laid off or fired during downturns. Still, while unemployment was greater for everyone in the urban North, it was disproportionately greater for black workers. Their unemployment rates in Northern cities were much higher than white unemployment rates in the same cities. One result of black migration, then, was a dramatic increase in the ratio of black unemployment to white unemployment. The black/white unemployment ratio rose from about 1 in 1930 (indicating equal unemployment rates for blacks and whites) to about 2 by 1960. The ratio remained at this high level through the end of the twentieth century.

1965-1999: Civil Rights and New Challenges

In the 1960s, black workers again began to experience more rapid increases in relative pay levels (see Table 4). These years also marked a new era in government involvement in the labor market, particularly with regard to racial inequality and discrimination. One of the most far-reaching changes in government policy regarding race actually occurred a bit earlier, in the 1954 Supreme Court decision in the case of Brown v. the Board of Education of Topeka, Kansas. In that case, the Supreme Court ruled that racial segregation of schools was unconstitutional. However, substantial desegregation of Southern schools (and some Northern schools) would not take place until the late 1960s and early 1970s.

School desegregation, therefore, was probably not a primary force in generating the relative pay gains of the 1960s and 1970s. Other anti-discrimination policies enacted in the mid-1960s did play a large role, however. The Civil Rights Act of 1964 outlawed discrimination in a broad set of social arenas. Title VII of this law banned discrimination in hiring, firing, pay, promotion, and working conditions and created the Equal Employment Opportunity Commission to investigate complaints of workplace discrimination. A second policy, Executive Order 11246 (issued by President Johnson in 1965), set up more stringent anti-discrimination rules for businesses working on government contracts. There has been much debate regarding the importance of these policies in promoting better jobs and wages for African Americans. There is now increasing agreement that these policies had positive effects on labor market outcomes for black workers at least through the mid-1970s. Several pieces of evidence point to this conclusion. First, the timing is right. Many indicators of employment and wage gains show marked improvement beginning in 1965, soon after the implementation of these policies. Second, job and wage gains for black workers in the 1960s were, for the first time, concentrated in the South. Enforcement of anti-discrimination policy was targeted on the South in this era. It is also worth noting that rates of black migration out of the South dropped substantially after 1965, perhaps reflecting a sense of greater opportunity there due to these policies. Finally, these gains for black workers occurred simultaneously in many industries and many places, under a variety of labor market conditions. Whatever generated these improvements had to come into effect broadly at one point in time. Federal antidiscrimination policy fits this description.

Return to Stagnation in Relative Income

The years from 1979 to 1989 saw the return of stagnation in black relative incomes. Part of this stagnation may reflect the reversal of the shifts in wage distribution that occurred during the 1940s. In the late 1970s and especially in the 1980s, the US wage distribution grew more unequal. Individuals with less education, particularly those with no college education, saw their pay decline relative to the better-educated. Workers in blue-collar manufacturing jobs were particularly hard hit. The concentration of black workers, especially black men, in these categories meant that their pay suffered relative to that of whites. Another possible factor in the stagnation of black relative pay in the 1980s was weakened enforcement of antidiscrimination policies at this time.

While black relative incomes stagnated on average, black residents of urban centers suffered particular hardships in the 1970s and 1980s. The loss of blue-collar manufacturing jobs was most severe in these areas. For a variety of reasons, including the introduction of new technologies that required larger plants, many firms relocated their production facilities outside of central cities, to suburbs and even more peripheral areas. Central cities increasingly became information-processing and financial centers. Jobs in these industries generally required a college degree or even more education. Despite decades of rising educational levels, African Americans were still barely half as likely as whites to have completed four years of college or more: in 1990, 11.3% of blacks over the age of 25 had four years of college or more, versus 22% of whites. As a result of these developments, many blacks in urban centers found themselves surrounded by jobs for which they were poorly qualified, and at some distance from the types of jobs for which they were qualified, the jobs their parents had moved to the city for in the first place. Their ability to relocate near these blue-collar jobs seems to have been limited both by ongoing discrimination in the housing market and by a lack of resources. Those African Americans with the resources to exit the central city often did so, leaving behind communities marked by extremely high rates of poverty and unemployment.

Over the fifty years from 1939 to 1989, through these episodes of gain and stagnation, the ratio of black mens average annual earnings to white mens average annual earnings rose about 23 points, from .44 to .67. The timing of improvement in the black female/ white female income ratio was similar. However, black women gained much more ground overall: the black-white income ratio for women rose 50 points over these fifty years and stood at .95 in 1989 (down from .99 in 1979). The education gap between black women and white women declined more than the education gap between black and white men, which contributed to the faster pace of improvement in black womens relative earnings. Furthermore, black female workers were more likely to be employed full-time than were white female workers, which raised their annual income. The reverse was true among men: white male workers were somewhat more likely to be employed full time than were black male workers.

Comparable data on annual incomes from the 2000 Census are not available at the time of this writing. Evidence from other labor market surveys suggests that the tight labor markets of the late 1990s may have brought renewed relative pay gains for black workers. Black workers also experienced sharp declines in unemployment during these years, though black unemployment remained about twice as great as white unemployment.

Beyond the Labor Market: Persistent Gaps in Wealth and Health

When we look beyond these basic measures of labor market success, we find more disturbingly large and persistent gaps between African Americans and white Americans. Wealth differences between blacks and whites continue to be very large. In the mid-1990s, black households held only about one-quarter the amount of wealth that white households held, on average. If we leave out equity in ones home and personal possessions and focus on more strictly financial, income-producing assets, black households held only about ten to fifteen percent as much wealth as white households. Big differences in wealth holding remain even if we compare black and white households with similar incomes.

Much of this wealth gap reflects the ongoing effects of the historical patterns described above. When freed from slavery, African Americans held no wealth, and their lower incomes prevented them from accumulating wealth at the rate whites did. African Americans found it particularly difficult to buy homes, traditionally a households most important asset, due to discrimination in real estate markets. Government housing policies in the 1930s and 1940s may have also reduced their rate of home-buying. While the federal government made low interest loans and loan insurance available through the Home Owners Loan Corporation and the Federal Housing Authority, these programs generally could not be used to acquire homes in black or mixed neighborhoods, usually the only neighborhoods in which blacks could buy, because these were considered to be areas of high-risk for loan default. Because wealth is passed on from parents to children, the wealth differences of the mid-twentieth century continue to have an important impact today.

Differences in life expectancy have also proven to be remarkably stubborn. Certainly, black and white mortality patterns are more similar today than they once were. In 1929, the first year for which national figures are available, white life expectancy at birth was 58.6 years and black life expectancy was 46.7 years (for men and women combined). By 2000, white life expectancy had risen to 77.4 years and black life expectancy was 71.8 years. Thus, the black-white gap had fallen from about twelve years to less than six. However, almost all of this reduction in the gap was completed by the early 1960s. In 1961, the black-white gap was 6.5 years. The past forty years have seen very little change in the gap, though life expectancy has risen for both groups.

Some of this remaining difference in life expectancy can be traced to income differences between blacks and whites. Black children face a particularly high risk of accidental death in the home, often due to dangerous conditions in low-quality housing. African Americans of all ages face a high risk of homicide, which is related in part to residence in poor neighborhoods. Among older people, African Americans face high risk of death due to heart disease, and the incidence of heart disease is correlated with income. Still, black-white mortality differences, especially those related to disease, are complex and are not yet fully understood.

Infant mortality is a particularly large and particularly troubling form of health difference between blacks and whites.

In 2000 the white infant mortality rate (5.7 per 1000 live births) was less than half the rate for African Americans (14.0 per 1000). Again, some of this mortality difference is related to the effect of lower incomes on the nutrition, medical care, and living conditions available to African American mothers and newborns. However, the full set of relevant factors is the subject of ongoing research.

Summary and Conclusions

It is undeniable that the economic fortunes of African Americans changed dramatically during the twentieth century. African Americans moved from tremendous concentration in Southern agriculture to much greater diversity in residence and occupation. Over the period in which income can be measured, there are large increases in black incomes in both relative and absolute terms. Schooling differentials between blacks and whites fell sharply, as well. When one looks beyond the starting and ending points, though, more complex realities present themselves. The progress that we observe grew out of periods of tremendous social upheaval, particularly during the world wars. It was shaped in part by conflict between black workers and white workers, and it coincided with growing residential segregation. It was not continuous and gradual. Rather, it was punctuated by periods of rapid gain and periods of stagnation. The rapid gains are attributable to actions on the part of black workers (especially migration), broad economic forces (especially tight labor markets and narrowing of the general wage distribution), and specific antidiscrimination policy initiatives (such as the Fair Employment Practice Committee in the 1940s and Title VII and contract compliance policy in the 1960s). Finally, we should note that this century of progress ended with considerable gaps remaining between African Americans and white Americans in terms of income, unemployment, wealth, and life expectancy.

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Conley, Dalton. Being Black, Living in the Red: Race, Wealth, and Social Policy in America. Berkeley, CA: University of California Press, 1999.

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Citation: Maloney, Thomas. “African Americans in the Twentieth Century”. EH.Net Encyclopedia, edited by Robert Whaples. January 14, 2002. URL http://eh.net/encyclopedia/african-americans-in-the-twentieth-century/

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Economic Development in the Americas since 1500: Endowments and Institutions

Author(s):Engerman, Stanley L.
Sokoloff, Kenneth L.
Reviewer(s):Nonnenmacher, Tomas

Published by EH.Net (September 2013)

Stanley L. Engerman and Kenneth L. Sokoloff, Economic Development in the Americas since 1500: Endowments and Institutions. New York: Cambridge University Press, 2012. xx + 417 pp. $99 (hardcover), ISBN: 978-1-107-00955-4.

Reviewed for EH.Net by Tomas Nonnenmacher, Department of Economics, Allegheny College.

Economic Development in the Americas since 1500: Endowments and Institutions brings together the works of Stanley Engerman and the late Kenneth Sokoloff ? along with coauthors Stephen Haber, Elisa Mariscal and Eric Zolt ? on the topic of geography, institutions, and economic development. Their thesis will be very familiar to economic historians: a causal chain links initial endowments in New World colonies to the organization of economic activity, economic power, political power, institutions, and long-run economic performance. Institutions, in Engerman and Sokoloff?s story, are endogenous, and knowing the resource allocation of a colony in 1500 explains much of its future economic performance. The book begins with three chapters that lay out the big picture and then turns to case studies on suffrage, schooling, taxation, land and immigration policies, and banking. The concluding chapters offer commentary on the use of institution-based explanations of growth and a comparison with alternative explanations of development.

The New World constituted a vast and heterogeneous set of opportunities for European nations. Engerman and Sokoloff group colonies into three categories: those with land most suitable for growing lucrative crops like sugar and tobacco, those with rich mineral resources and a substantial native population, and those with land most suitable for small-scale agriculture. Europeans exploited the natural resources in the first two categories of colonies by either importing slaves from Africa or using the Native American population. Doing so led to an uneven distribution of economic and political power that persisted via the adoption of institutions designed to protect that power. In contrast, in areas where the initial endowment of natural resources did not encourage the use of forced labor, a virtuous cycle of political competition generated pro-growth institutions. The long-run economic prosperity of the U.S. and Canada relative to their neighbors is not due to ?better? British institutions, but due to the British coming to the New World late to the game and acquiring colonies that did not possess the valuable natural endowments that made slavery so profitable. Indeed, the economic development of the British sugar colonies (Barbados, Jamaica, and Belize) is more similar to that of Spanish, Dutch, and French colonies in the Caribbean than to the U.S. and Canada. Even the Puritan work ethic has a counterexample in Providence Island off the coast of Nicaragua.

The middle chapters of the book are the heart of Engerman and Sokoloff?s analysis and provide compelling narratives and statistical evidence supporting their hypothesis of a link between inequality and institutional choice. The chapter on voting establishes the link between economic and political inequality. The original thirteen colonies had rules that linked property or wealth to the right to vote. While these restrictions were fairly strict, they still allowed a broad set of elites to participate in elections. In order to attract immigrants, new western states, which had lower population density and lower income inequality, restricted the franchise much less, using race, gender, age, and criminal record rather than wealth and property. The pattern of extending the franchise in areas with lower population density and lower income inequality is a central piece of Engerman and Sokoloff?s story. In Latin America, the right to vote was greatly limited via a literacy test. Racial boundaries were generally more porous in Latin America, making the implementation of an explicit racial criterion politically difficult. While generally rising over time, the proportion of the population voting in Latin America remained well below that in the United States and Canada through 1940. This pattern limited the access of the general population to the political process and led to rules being written for the elites.

Using literacy as a requirement for the franchise reduced the incentive to provide public school education. The schooling ratio was highest in cities (where inequality was lower), in countries with higher income, and in countries in which a higher percentage of the population voted. Political inequality and education are thus directly linked. Inequality is also linked to the tax structure, with more unequal countries relying on regressive sales and trade taxes and more equal countries relying on property and income taxes. Immigration and land policy was open in the United States and Canada and restrictive in Latin America. The cumulative effect led to enormous differences in land ownership rates by the early 1900s. In Mexico, the highest rural land ownership rate was 5.6% in the Pacific Northwest. The rural land ownership rate was 83.4% in the western United States and 87.1% in Canada. Finally, the chapter on the banking system (by Stephen Haber) draws links between elite power and banking regulation. A powerful Latin American elite manipulated the opaque regulatory process in their favor.

One measure of the importance of a research agenda is the number of scholars who build on it, and, by this measure, Engerman and Sokoloff have achieved great success. Many subsequent studies find support for their hypotheses or raise questions about the links between economic and political inequality and underdevelopment. The work of Engerman and Sokoloff is foundational to the literature on colonialism, institutions, and economic development and anyone interested in development or new institutional economics will need to read this book.

Tomas Nonnenmacher is a Professor of Economics at Allegheny College. His most recent article, ?Stability and Change on Henequen Haciendas in Revolutionary Yucat?n: Two Case Studies from the Henequen Zone? is coauthored with Shannan Mattiace and is forthcoming in Estudios Mexicanos/Mexican Studies. He is currently working on a project exploring entrepreneurship in the telegraph industry.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (September 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
North America
Time Period(s):16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Nationalism and Economic Development in Modern Eurasia

Author(s):Mosk, Carl
Reviewer(s):Mokyr, Joel

Published by EH.Net (August 2013)

Carl Mosk, Nationalism and Economic Development in Modern Eurasia. London: Routledge, 2013. 298 pp. $140 (hardcover), ISBN: 978-0-415-60518-2.

Reviewed for EH.Net by Joel Mokyr, Departments of Economics and History, Northwestern University.

Carl Mosk is an experienced and widely respected economic historian who has done important work on comparative demographic history, with a special expertise in Japanese economic history. This current book is a deeply personal set of reflections and interpretations on what William Parker used to call Bigthink economic history. It is a sprawling and wide-ranging book, somewhat idiosyncratic as such works inevitably turn out to be, but well-written, provocative, opinionated and never for a moment dull. Some of the case studies are insightful and informed interpretations, especially the essay on Japan where, despite its brevity, the author?s deep knowledge of the country shines through.

The book consists of two parts: in the first part he outlines his views on nationalism and economic progress. In the second part he discusses five case studies: Great Britain, Germany, Yugoslavia, China and Japan. The exact connection between the two parts is not always very clear except that the case studies illustrate the diversity and richness of the connection between the forms taken by nation states and their economic history. Although the book touches on many topics (such as a long digression into the Habakkuk thesis on labor-saving technological progress), the core topic is what Mosk calls ?nationalism.? What he means by that is a particular version of the beliefs underlying the nineteenth century modern nation state, an ideology about identity more than a strong belief in particularism and exceptionalism.?

One of the attractive features of this book is that it places a strong emphasis on the importance of beliefs and ideology in historical development and the emergence of economic modernity. Mosk will have none of the historical materialism (the doctrine that asserts that dominant ideas are picked purely on an economic basis) still fashionable among some. In a few pages (pp. 30-36) Mosk delves into psychology to show how such beliefs as religion and nationalism are formed, not as the result of rational reasoning, self-interest maximization, and the careful weighing of evidence and logic, but through more primitive processes. While he does not provide a more detailed discussion of how we end up accepting the beliefs we do, he argues that what he calls ?nation-state branding? (essentially, picking some ideological commitment on which the polity is founded such as liberal democracy or fascist autocracy) is only very partially based on rational and scientific reasoning.

What is it that Mosk is arguing in this book? His view is that nationalism in its various forms allowed the nation state to create a consensus behind state formation and hence enable major infrastructural investments necessary for sustained economic progress. Throughout the book, he stresses the power of nationalism, which he thinks is the only ?ism? to come out of the Enlightenment that is ?here to stay.? Mosk fully realizes that as a historical force nationalism? was a double-edged sword, and that it has been the main reason for many of the bloody wars of the twentieth century, while also (more controversially) a major factor in the emergence of economic growth. The connection between nationalism and modernization is not altogether new. In 1993, Liah Greenfeld, a historical sociologist, wrote a massive and widely-noticed (if controversial) book (also based on case-studies) in which she laid down the connections between nationalism and modernity. In her view nationalism preceded modernity and brought it about.? Mosk?s work differs from hers in emphasis, but he might have spent a bit more time engaging her views (Greenfeld?s magnum opus is not cited; a follow-up book by her is).

Mosk recognizes that earlier forms of nationalism may well have predated the modern nation state. For Mosk, nationalism was the product of the Enlightenment. This is not altogether so obvious for those who think of nationalism as a form of loyalty to a collective entity that is juxtaposed to ?others.? At its core, the Enlightenment was a product of the transnational ?Republic of Letters,? which was fundamentally cosmopolitan, pluralist, universalist, and pacifist. While it was fully congenial with the idea of self-determination, which was the flip side of individual freedom, its emphasis was clearly not nationalist. Some enlightened thinkers realized the naivet? of the universalist ideology. The youthful David Hume, ever skeptical, pointed out in his Treatise on Human Nature (1739-40) that ?there is no such passion in human minds as the love of mankind, merely as mankind. … In Italy an Englishman is a friend; in China a European is a friend; and it may be that if we were on the moon and encountered a human being there, we would love him just as a human being. But this comes only from the person?s relation to ourselves.?

In any event, Enlightenment thought increasingly came to engage nationalist ideas in the late eighteenth century for a variety of reasons. In part this change occurred through the writings of German Romantic idealists such as Herder and Fichte, and in part as the unintended consequences of the events following the French revolution. The French Revolution, as John McClelland (1996), a historian of political thought, put it well, put nationalist flesh on the bones of the doctrine of liberty as self-determination.

The public sphere we associate with the Enlightenment was sufficiently malleable and protean to produce a variety of discourses or national-branding (as Mosk would call it). It created a networked society, with circles and organizations in which opinions were formed through the interactions of intellectuals. The rise of nationalism following the French Revolution directed these opinions in a direction that most of the great Enlightenment writers would have disapproved of. One could therefore see nationalism as the illegitimate offspring of the Enlightenment rather than its inevitable progeny. Mosk points out that the rise of literacy and expansion of the franchise created nineteenth century mass politics, a fertile ground for perverse nationalism for whom investing in infrastructure was less important than cultivating a xenophobic chauvinism. But not all countries became jingoist ? Scandinavia, the Netherlands, and even Italy never quite felt the need to hate their neighbors in order to build the kind of infrastructure that economic growth demanded.

Nationalism, argues Mosk (p. 41), is committed to economic progress for everyone, much like Acemoglu and Robinson?s (2012) ?inclusive society? and North-Wallis-Weingast?s (2009) ?open access society. It would have helped the reader if he had compared his approach with those two landmark volumes.? One could beg to differ whether nationalism as such is in fact that critical to modernization.? In his classic work on progress (which Mosk does not cite either), Robert Nisbet (2008) distinguished between ?progress as freedom? (which includes material progress) and ?progress as power,? which we might think of as the emergence of the nation state and institutional change. The former was decidedly transnational and cosmopolitan in nature, the latter much more in the spirit of Mosk?s view of nationalism. But the Enlightenment view of progress was based first and foremost on reason driving scientific and technological progress and institutional reform. In its classical form in the eighteenth century, it did not require a nation-centric attitude ? yet. An example of how the distinction between the two clarifies matters is in how ideology deals with trade. Seventeenth- and eighteenth-century mercantilism contained nationalist (or ?proto-nationalist? as Mosk would say) elements in it, and it mostly found itself at loggerheads with Enlightenment philosophes who favored free trade and high mobility. Nineteenth century nationalist ideology turned, by and large, supportive of protectionism, while Enlightenment thought in its liberal incarnation, stressing that international trade was a positive-sum game, supported free trade and hopefully postulated the civilizing effect that ?sweet commerce? would have on international relations. Mosk (p. 233) sees it differently: trade and economic competition are a form of ?aggression,? meant to defeat one?s ideological opponents. This is reminiscent of the mercantilist zero-sum thinking that was mercifully supplanted by Enlightenment thinking.

One of the central theses of Mosk?s book (p. 65) is that ?progressive movements purporting to advance international causes are actually hitched to nation-state formation.? His example is predictably Communism which started out as an international movement, yet eventually became anchored in one country, Russia. Whether this is an accurate and fair representation of the history of socialism or not, one cannot avoid thinking of many transnational movements that made an effort to keep their cosmopolitan character, such as the scientific community, pacifism, or the movement to bring about European unification. Mosk provides a welcome antidote to the tedious odes to ?globalization? in the past decades (the word does not appear in his book as far as I can tell). Something similar can be said about the category of ?class? so endlessly beloved by historians nostalgic for their Marxist days. National loyalty and class solidarity seem incompatible (though at times they have been able to work out a modus vivendi). Nationalism as an ideology appears less popular among historians than class consciousness, and it is important to stress its role in the modern world.? Valuable as these messages are, Mosk tends to get carried away here and there. Even when he does, his engaging style and lively mind make for a readable volume.

Hopefully it will not be churlish to note that for the outrageous price that Routledge charges for this volume, they might at least have produced a quality volume. But this book seems to have had neither copy editor nor proofreader. It is full of annoying typos, especially in dates and names, and it has a barely-serviceable index. Moreover, many terms and concepts are not properly defined or explained. This is normal for books like this: the author has been thinking so long in certain terms that he forgets that some of readers may not be familiar with terms such as ?Axial Thought? (a reference to Karl Jaspers would have been helpful) or ?nation-state branding? (a term apparently invented by Mosk but not fully explained until the very end). Good copy editors still make for much better books ? one wonders why Routledge does not supply one.
?
References:

Acemoglu, Daron and James Robinson. 2012. Why Nations Fail: The Origins of Power, Prosperity, and Poverty.? New York: Crown.

Greenfeld, Liah. 1993. Nationalism: Five Roads to Modernity. Cambridge, MA: Harvard University Press.

Hume, David. 1739-40. Treatise of Human Nature, Book III: Morals. http://www.earlymoderntexts.com/pdf/humetre3.pdf, accessed Aug. 25, 2013.

McClelland, John S. 1996. A History of Western Political Thought. London: Routledge.

Nisbet, Robert. 2008. History of the Idea of Progress, second edition. New Brunswick, NJ: Transactions Publishers.

North, Douglass C., John Joseph Wallis, and Barry R. Weingast. 2009. Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History.? Cambridge: Cambridge University Press.

Joel Mokyr is the author of The Enlightened Economy: An Economic History of Britain, 1700-1850.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Economic Development, Growth, and Aggregate Productivity
Geographic Area(s):Asia
Europe
Time Period(s):17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Federal Reserve and the Financial Crisis

Author(s):Bernanke, Ben S.
Reviewer(s):Mitchener, Kris James

Published by EH.Net (August 2013)

Ben S. Bernanke, The Federal Reserve and the Financial Crisis. Princeton, NJ: Princeton University Press, 2013. vii + 134 pp. $20 (hardcover), ISBN: 978-0-691-15873-0.

Reviewed for EH.Net by Kris James Mitchener, Department of Economics, University of Warwick.

This book is the product of a series of university lectures given by Federal Reserve Chairman Ben Bernanke in March 2012 at George Washington University. It is short, crisp, and clear, with only five footnotes and no references.? The four chapters are called ?lectures? and the prose is written in a conversational style reflecting the original form of delivery. Indeed, the unedited lectures are also available for free on the web. They could easily be absorbed while driving one?s car, though this reviewer does not necessarily endorse that form of consumption, nor would one expect that to be the Fed?s official position. Since the original audience consisted largely of undergraduates, concepts are kept simple throughout, largely at an introductory level of economics. Student questions from the lectures are included at the end of each chapter.

Not often does one get to read a book that articulates the beliefs and actions of an incumbent policymaker, let alone one who was charged with conducting monetary policy during a severe financial crisis unless, of course, one is reading sworn testimony given to a public agency, but that is an altogether different exercise than what is undertaken here. The value of this book is that it allows one to observe how the Chairman of the Federal Reserve reacted to the events of 2007-2009 and how that response is justified. What makes it especially delightful to read or listen to is that Chairman Bernanke puts his decision making in a long-run context, describing the particular ?lessons? from the Fed?s history that he drew on during the crisis period. It thus provides a shining example of how policymakers use history in formulating economic policy.

It probably comes as no surprise to those familiar with his academic research on central bank transparency that Chairman Bernanke is the first standing Fed Chairman to write a book while in office. That said, one must keep expectations in check while reading the book. Although he is not afraid to discuss mistakes that the Fed made in its past nor to acknowledge that it could have possibly done more prior to the recent crisis, the chairman presents the official rationale of the most controversial decisions. Some economists, such as Alan Blinder (2013), have drawn attention to differences between the rationale policymakers provided to the President, Congress, and the American public and their actual motivations during the crisis.

Lecture 1 provides a review of the history of the founding of the Federal Reserve System and discusses the tools that central banks have at their disposal for maintaining financial stability and limiting the size and duration of aggregate fluctuations. It covers themes that will be very familiar to most readers of this review: the origins of central banking, the advantages and disadvantages of the gold standard, nineteenth-century banking panics, and ?Bagehot?s Rule.? This lecture and the subsequent one serve the purpose of providing the historical and institutional context for the lessons that Chairman Bernanke applied during the financial crisis that peaked in 2008-2009. They also lay out a case for the Fed?s learning process: the Fed made a variety of mistakes in the 1930s and 1970s, for example, which it subsequently drew on in formulating later policies. In this lecture, Chairman Bernanke acknowledges that the Fed failed with respect to monetary policy and financial stability during the Great Depression, as witnessed by the severity of the banking crisis and the depth and duration of the economic decline. He suggests that FDR?s abandonment of the gold standard and the enactment of federal deposit insurance were actions taken to offset policy errors. Detailing the Fed?s policy mistakes of the 1930s allows him to later contrast the Fed?s policy response to the recent financial crisis.

Lecture 2 continues the examination of the Fed?s history, focusing on the post-World War II period. The first part of it is devoted to the Great Inflation and the associated policy mistakes (overconfidence in the ability to fine tune the economy and loose fiscal and monetary policy) as well as the Great Moderation, with substantial credit given to Paul Volcker and Alan Greenspan?s stewardship of the monetary policy. An omission from this period of policymaking is a discussion of the S&L crisis. Although savings and loans were outside the Fed?s regulatory domain, the episode might have been one that the Fed could have learned from, at least with respect to the idea that it could have refocused the Fed?s attention on ensuring financial stability. (An interesting theme throughout the book is that the Fed?s role of providing financial stability fell into neglect until the recent crisis hit.)

The second half of lecture 2 presents his views on what factors led to the intensity of the financial crisis of 2008-2009, which he casts as a ?classic financial panic? that took place in a broader institutional context (multiple financial markets rather than just banks). He provides a laundry list of weaknesses in the financial system that likely transformed a modest recession into a more severe crisis. For example, he points to household leveraging (driven partly by a decline in the standards for mortgage underwriting and exotic mortgage products), inadequate risk management by banks, short-term funding exposure of banks, and the use of CDS and other exotic derivatives as private-sector catalysts. With respect to public sector vulnerabilities, he suggests that supervision of insurance companies, investment banks, and GSEs was inadequate and that the economy lacked a systemic regulator that could oversee risks across different types of financial institutions. It is unsurprising that he places little stock in the view that the Fed set rates too low early in the 2000s, citing cross-country evidence of other housing booms, the timing of the bubble, and the size of the house price increases relative to changes in monetary policy as evidence against this argument. However, he does acknowledge that the Fed did not fully anticipate how large of an effect a decline in house prices could have on the overall economy.

Lecture 3 provides a description of the Fed?s response to the recent financial crisis and a sense of the real-time decision making that was required during the peak period of the crisis when problems in different sectors of the financial system were springing up on an almost daily basis. This is where it is entertaining for the reader to play armchair central banker, and think whether one?s own policy choices would have deviated that far from the path that the Fed actually took. Important for his description of the Fed?s response to the crisis is the fact that, even though the total losses due to subprime mortgages were not very big, they were spread out across different financial markets, making the size of the losses and the bearers of those losses uncertain. Because many financial firms were using wholesale funding, the uncertainty over losses created the potential for short-term funding to dry up as lenders re-assessed the health of borrowers. Firms in need of short-term funding faced fire sales of assets and runs rippled through the financial system. In response, the Fed provided liquidity to illiquid banks via the discount window and to other financial firms like broker-dealers through special liquidity and credit facilities. Interestingly, although he does not state that the Fed could have done more to save Lehman Brothers (arguing it was an investment bank and the Fed and Treasury tried to find either a buyer or more capital), he does seem to acknowledge that its failure was systemically important (p. 75), and he goes on to describe the effects its failure had on money market mutual funds such as Reserve Primary Fund. Finally, he discusses the coordinated international response of central banks to the financial crisis, contrasting it with the lack of coordination of the 1930s.

The last lecture provides a discussion of what the Fed has been doing in the wake of the crisis, how it is working to implement Dodd-Frank, and what that law means for future Fed conduct. This lecture includes a cogent discussion of the Fed?s quantitative easing policies, which are aimed at influencing long-term interest rates and stimulating the housing sector, and it discusses its continued effort to satisfy its dual mandate by focusing on the persistently weak labor market conditions. Since this lecture provides a detailed description of the expansion of the Fed?s balance sheet and the piling up of reserves by Fed member banks, it would have been nice to see this discussion connected more directly to the continued low levels of bank lending.

This book will be particularly useful for those teaching a class in either macroeconomics or economic history of the twentieth century at the undergraduate level, as these lectures provide a succinct and accessible account of U.S. macro policymaking over the last hundred years. Companion questions, written by Stephen Buckles of Vanderbilt and referencing the video presentation, are also available on the Fed?s website.

Reference:
Alan Blinder, After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead, New York: Penguin, 2013.

Kris James Mitchener is professor of economics at the University of Warwick and Research Associate at NBER and CAGE. Recent publications include ?Globalization, Trade and Wages: What Does History Tell Us about China?? (with Se Yan) International Economic Review (February 2014) and ?Shadowy Banks and Financial Contagion during the Great Depression: A Retrospective on Friedman and Schwartz? (with Gary Richardson) American Economic Review (May 2013).
?
Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

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

Shaping Medieval Markets: The Organisation of Commodity Markets in Holland, c. 1200 – c. 1450

Author(s):Dijkman, Jessica
Reviewer(s):McCants, Anne E.C.

Published by EH.Net (August 2013)

Jessica Dijkman, Shaping Medieval Markets: The Organisation of Commodity Markets in Holland, c. 1200 – c. 1450.? Leiden: Brill, 2011. xvi + 447 pp. $172 (hardcover), ISBN: 978-90-20148-4.

Reviewed for EH.Net by Anne E.C. McCants, Department of History, Massachusetts Institute of Technology.

In a growing body of scholarship that explores the medieval origins of the early modern Dutch economy, many economic historians now expound the thesis that the prosperity of the ?golden age? was presaged, or even made possible, by the fortuitous resource allocations and resulting market conditions that date back to the early settlement of the reclaimed marshy land that would in time become Holland. Much of the detailed archival work that stands behind this literature has been published in Dutch, but increasingly works of broader synthesis are appearing in English.? Jessica Dijkman?s new contribution to this literature fits squarely within this basic framework.

Her study adds to the tradition of regional inquiry, however, by offering up a serious engagement with another currently fashionable project, that is the documentation of the so-called ?institutional origins? of a given economic outcome, in this case a highly successful one.? Dijkman defines the terms of her study from the outset as a response to the oft-cited work of Acemoglu, Johnson, and Robinson (2001), but with the explicit acknowledgement that we must actually explain where the much-touted ?good institutions? came from, and how they are situated in time.? That is, she sets for herself the explicitly historical task of explaining origins and change, and not just the social scientific task of identifying and categorizing states of being.? To do this, she borrows from Acemoglu, Johnson, and Robinson what she calls the ?social conflict view? (p. 18).? Institutions arise, she argues, not just (or perhaps not even usually) as the most efficient response to a set of circumstances, but as the most advantageous to those who wield the political power necessary to enforce them.? Unlike Acemoglu, Johnson, and Robinson though she places a greater emphasis on exogenous forces that shape that political process rather than relying so overwhelmingly on endogenous factors alone (p. 20).?

Dijkman?s argument draws on one other older theoretical tradition, namely that immortalized by Adam Smith in The Wealth of Nations ? the idea that commercialization (the widening and deepening of markets for commodities in particular, but with spin-off effects in markets for labor and land) can be found at the root of what we now think of as modern economic growth.? As she puts it at the outset of her study, her ?aim is to discover whether favourable commodity market institutions rooted in Holland?s specific social and political structure contributed to the remarkable economic development Holland experienced in the late Middle Ages? (p. 15).? From the literature on institutions she defines the relevant markets as ?sets of institutions: rules, customs, and practices that structure the exchange of goods? (p. 15).? But her question, and her method of probing it, are fundamentally historical in nature, namely to ascertain if the specific timing of Holland?s geographical emergence from previously uninhabited swampland was critical to the formation of one set of institutions and not another; and to execute that investigation by means of a comparative analysis with Flanders and England, both places that shared a range of important characteristics with Holland, but also differed from Holland in critical, and easily distinguishable, ways.

A major strength of the book is the detailed historical work that is both carried out directly and distilled from the research of others.? The first part of the book, titled ?The Institutional Framework: Trade Venues,? reviews the actual places where trade took place: fairs, rural markets, urban attempts to control rural trade, and successful small urban staple markets.? Here the main advantage enjoyed by Holland relative to either Flanders or England appears to have been the absence of a feudal past.? Because of the relatively late start date for land reclamation in the northern Low Countries, feudalism never had time to put down sturdy roots in this region.? Neither did any one urban place manage to exert strong control over rural production as had been the case with the major Flemish cloth towns to her south, bolstered as they were by large scale urban industry as well as noble power.

Part II, ?The Institutional Framework: Rules and Practices,? shifts gears to examine the actual practices that facilitated trade.? Here the emphasis is on the emergence of agreed-upon weights and measures which were not as standardized as they were officially in England, but were not so loose as to stifle trade since both Dutch towns and the counts exercised more effective control than it might appear on a first glance at the evidence.? Moreover, the early development of international trade demanded a fair degree of conformity in any event (p. 235).? Similarly, the other great test for the Institutional explanation for economic success, reliable contract enforcement, again finds Holland lagging behind England (with her royal courts) and Flanders (with her few large and dominating cities).? Here Dijkman suggests that the enduring strength of local courts in every town and village was the ?Achilles? Heel of Holland?s system of debt litigation? (p. 267).? Yet once again, this factor proves not to have been ?decisive? ? because in ?medieval Holland a solid foundation for a locally-based system of contract enforcement grounded on individual responsibility was laid at an early stage? (p. 271).

Part III, ?Market Performance: Quantitative Tests,? is where the rubber really hits the road as it were.? It is in Dijkman?s quantitative tests of both price convergence and market density that Holland really begins to outshine its neighbors across the Channel or south of the great rivers.? Holland demonstrates a remarkably well-integrated price system (for wheat) vis-a-vis international markets from a very early stage.? This does not mean that prices were not volatile; but they did track developments on the international trade circuit very closely.? Dijkman attributes this to the very poor land quality for wheat agriculture in the north, leaving no hope of sustaining the local population.? This forced Holland into international grain markets with an unusual precocity.? England by contrast had a relatively self-contained grain market so prices varied much more by distance than in Holland (pp. 306-07).? But dependence on imports still left Holland vulnerable in times of dearth as ?export restrictions in the producing regions could cause acute problems in Holland? (p. 311).?

Finally, her most remarkable finding is the incredibly high level of market orientation in Holland from a relatively early date, with already 60 to 66 percent of the population involved in the market for their sustenance by the mid-fourteenth century rising to around 90 percent by 1500 (p. 325).? Market participation in Flanders had been somewhat higher (at approximately 70 percent of the population in the early fourteenth century) but it had been entirely eclipsed by 1500 (p. 332).? Meanwhile, market density in England never even came close.? In the early fourteenth century its population involved in the marketplace ranged around 50 percent and that number had only edged up towards 65 percent by 1500 (p. 338).

How can we account for these incredibly high levels of market penetration already in the years prior to the Black Death? Or for that matter, for the perhaps even more amazing feat of increasing market saturation in the period of population collapse following?? Dijkman has this to say: ?Returning to Holland, we can conclude that the strong growth of market orientation between 1350 and 1500 would not have been possible without the support of an efficient organization of commodity markets? (p. 342).? Nonetheless, she goes on to argue that Holland?s favorable institutions did not generate high levels of commercialization of their own accord: the process was ultimately triggered by non-institutional forces.? But the contribution of the institutional framework was still essential: it facilitated and supported flexible adaptation to changing circumstances.

So where does this leave her readers interested in testing the theoretical usefulness of the institutional approach?? This reader remains somewhat uncertain.? In the final analysis Dijkman gives us a well-nuanced ?just-so story? ? her strongest explanation is ?the absence of a truly feudal past? ? in the formulation of De Vries and Van der Woude (1997), coupled with ?the near absence of urban coercion over the countryside? (p. 374).? Or as she argues elsewhere ?the weakness of both vertical ties (constraints ensuing from the exertion of lordly power) and horizontal ties (constraints ensuing from collectivities such as guilds)? account for Holland?s unique experience (p. 351).? But of course, for anyone wanting to use the Dutch case as a guide for best practice, this conclusion is not terribly helpful.

Nonetheless, I am not satisfied to end this review on that critical note.? Just-so stories are often actually very good history ? even if they don?t meet the abstractness criterion of best-practice social science.? The historian?s primary task is, of course, to explain how things came to be, not how to alter the future.? In our future-besotted present this may not seem worth much.? But understanding how things came to be is a worthy enterprise in its own right.? There is yet much to learn from the ever-more-clearly delineated medieval origins of the early modern Dutch economy.?? Prosperity often has long roots ? understanding that can indeed help us make wiser assessments in the present, and hopefully, offer more people better opportunities for the future.

References:?

Daron Acemoglu, Simon Johnson and James A. Robinson, ?The Colonial Origins of Comparative Development: An Empirical Investigation,? American Economic Review, 91: 1369-1401 (December 2001).

Jan de Vries and Ad van der Woude, The First Modern Economy: Success, Failure, and Perseverance of the Dutch Economy, 1500-1815, Cambridge University Press (1997).

Anne McCants has research and teaching interests in the economic and social history of the Middle Ages and Early Modern Europe, as well as in the application of social science research methods across the disciplines.? Her work has appeared in the Economic History Review, Explorations in Economic History, Family History, Historical Methods, the Journal of Economic History, the Journal of Interdisciplinary History, the Journal of World History, and Social Science History.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2013). All EH.Net reviews are archived at http://www.eh.net/BookRevie

Subject(s):Economywide Country Studies and Comparative History
Markets and Institutions
Geographic Area(s):Europe
Time Period(s):Medieval

History and Financial Crises: Lessons from the 20th Century

Reviewer(s):Moen, Jon

Published by EH.Net (August 2013)

Christopher Kobrak and Mira Wilkins, editors, History and Financial Crises: Lessons from the 20th Century.? New York: Routledge, 2013. x + 138 pp. $140 (cloth), ISBN: 978-0-415-62297-4.

Reviewed for EH.Net by Jon Moen, Department of Economics, University of Mississippi.

This book is a collection of six papers that were originally published as a special issue of Business History (Volume 53, Issue 2, April 2011).? It includes a new summary chapter on the use of history in understanding modern financial crises.? Two themes tied the original collection together: the roles of globalization and regulation in financial crises.? Because of the five papers chosen, the collection focuses on the 1920s and 30s.? The papers cover the experiences of the German, Swedish, British, Canadian, and U.S. financial and banking sectors just before and during the Great Depression.? Individually, the five papers draw useful lessons from historical episodes of financial crises, and I enjoyed reading them.? Because they were subject to careful peer-review, I will not review them individually.? Instead, I will review the effectiveness of the collection as a whole.

The original introductory essay and the new concluding essay distract from the five papers; they do not clearly make a case for why I should read them as a collection.? The introductory essay by Christopher Kobrak and Mira Wilkins starts with an extended discussion on the definition of a financial crisis.? It acknowledges Charles Kindleberger?s (2011) self-confessed inability to define a crisis and notes attempts to define a crisis on the basis of sudden movements in interest rates or the money supply.? Yet it ends quite unsatisfyingly with ?no absolute definition of either financial or economic crisis? (p. 5).? Later the essay apologizes for ultimately choosing a set of papers that are limited to the twentieth century, with an emphasis on the Great Depression (p. 10).? That is not bad, but the apology diminishes what the five essays do offer, as noted carefully in the next few pages.? One important point that the essay points out, however, is that not all crises covered in the special issue resulted in a collapse in demand and prices (p. 15).? Why crises do not inevitably lead to recessions or worse could be examined more.

The new, concluding essay by Christopher Kobrak is problematic.? As a stand-alone essay, I found it to be a potentially compelling survey of the relationship between financial and banking panics and the perils of making casual historical comparisons.? In particular, highlighting the relevance of the banking crises of the early 1930s rather than the spectacular stock market crash of 1929 helps in making historical comparisons with the crisis that started in 2008.? But then the essay veers off into topics that are again distracting, like musing on the loss of governmental discipline from the collapse of the Bretton Woods Agreement (p. 119).? This is odd, as the introductory essay indicates that the paper by Mark Billings and Forrest Capie emphasizes the benefits of flexible exchange rates.? The author then regrets not having an essay or more discussion of the Bank Panic of 1907, stating that it gets ?little press in financial histories? (p. 120) and then proceeds to write several pages on the Panic.? I have found quite a bit about 1907 in financial histories by Milton Friedman and Anna Schwartz (1963), Gary Gorton (2010), Richard Timberlake (1993), and Elmus Wicker (2000), just to name a few.? I may have contributed something myself.? The section on regulation (p. 123) starts out well, noting how historically regulation has always been trying to play catch-up to financial innovation.? But the subsequent discussion of the breakdown in Bretton Woods again doesn?t seem closely related to the papers of the special issue.? The discussion of ?Good Financial Crises? argues that crises that were successfully averted rarely get examined.? Wicker clearly points out that the New York Clearing House successfully dealt with the Panic of 1873, and he refers to the reactions to the Panics of 1884 and 1890 as success stories from the point of view of the Clearing House.? I mention this because there is a lot of historical analysis of specific panics out there that could have been tied into this essay.

The conclusion to the essay left me a bit puzzled.? Certainly financial markets are much more complicated today than, say, in 1907.? But is this the result of an increasing lack of social responsibility on the part of financiers today?? We are asked to compare today?s leaders with those of 1907, who ?stepped in to save a system from problems they themselves had created? (p. 131).? Whatever those problems were, I have a hard time imagining that saving his own skin was not first and foremost in J.P. Morgan?s mind, an incentive that just happened to be compatible with that of New York?s financial market in general.? Nevertheless, read the special issue or the book for the all of the essays.? Just do not expect to find a lot of lessons.

References:

Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton, NJ: University Press, 1963.

Gorton, Gary.? Slapped by the Invisible Hand: The Panic of 2007.? Oxford: Oxford University Press, 2010.

Kindleberger, Charles.? Manias, Panics, and Crashes: A History of Financial Crises, 6th edition. New York: Palgrave Macmillan, 2011.

Timberlake, Richard.? Monetary Policy in the United States: An Intellectual and Institutional History. Chicago: University of Chicago Press, 1993.

Wicker, Elmus.? Banking Panics of the Gilded Age.? Cambridge: Cambridge University Press, 2000.
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Jon Moen is an Associate Professor in the Department of Economics at the University of Mississippi.? He has studied retirement in the United States in addition to his research on the Panic of 1907.? He is currently working on a project with Ellis Tallman of Oberlin College and the Cleveland Federal Reserve Bank on the effectiveness of the New York Clearing House in the late nineteenth and early twentieth centuries.??
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Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

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

Translating Empire: Emulation and the Origins of Political Economy

Author(s):Reinert, Sophus A.
Reviewer(s):Nakhimovsky, Isaac

Published by EH.Net (July 2013)
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Sophus A. Reinert, Translating Empire: Emulation and the Origins of Political Economy. Cambridge, MA: Harvard University Press, 2011. xiii + 438 pp. $55 (hardcover), ISBN: 978-0-674-06151-4.

Reviewed for EH.Net by Isaac Nakhimovsky, Faculty of History, University of Cambridge.

This prize-winning book presents an important new account of the emergence of political economy as a discipline in the eighteenth century. It mounts a strong challenge to histories of economic thought that limit their attention to highly abstract treatises on political economy, particularly those that seek to trace the emergence of principled arguments for free trade. Reinert shows that intensifying competition between states formed the backdrop for eighteenth-century reflection on political economy. The book draws attention to a wide-ranging practical literature that focused on the imperatives of economic survival in a hostile international environment. The claim Reinert develops is that the process by which such practical economic knowledge began to be formalized and institutionalized cannot be understood without appreciating the significance of interstate rivalry. Reinert shows that this process can be illuminated by tracking eighteenth-century translations of publications on political economy. As he vividly shows, such translations were much more than mere renderings in foreign languages: understood as creative vehicles for the transmission, evaluation, and appropriation of economic knowledge, these translations themselves represent an important facet of international competition. They were among the means by which France sought to catch up to Britain, and by which lesser powers across Europe sought to avoid becoming the victims of economic imperialism. The formalization and institutionalization of political economy, Reinert?s book suggests, took place in this politically charged and mediated fashion.

An expansive introductory chapter illustrates the potential of this approach to the history of political economy through a statistical analysis of translations in the magnificent Kress Collection (covering economic literature before 1850) at the Baker Library of Harvard Business School, where Reinert is an Assistant Professor. The heart of the book, however, is an elegantly framed narrative revealing how, over the course of the eighteenth century, John Cary?s 1695 Essay on the State of England was thoroughly transformed by its French, Italian, and German translators. The 1745 English edition of Cary?s slim essay became a two volume French treatise published in 1755 by Georges-Marie Butel-Dumont, an associate of Vincent de Gournay; this in turn became a three volume work by the famed Neapolitan professor Antonio Genovesi in 1757-58; and finally, elements of all three of these editions were recombined in truncated form in a German edition of 1788, prepared at the instigation of a former Danish official by a Saxon political economist named Christian August Wichmann. As Reinert shows to great effect, Cary?s essay was vastly expanded and systematized over the course of its ?grand tour? to Paris, Naples and Leipzig, and in the process what began as a Bristol merchant?s ?primer of economic imperialism? was transformed into a ?general guidebook for escaping de facto colonial dependencies? (p. 203).

Cary?s essay, long cited as a classic statement of mercantilism, is revealed by Reinert to be a practical guide for how England could secure its urban manufacturing base as the engine of its economic development. Cary?s aim was to explain how England could remain at war with France without destroying the foundations of its wealth. Resisting the threat of Catholic absolutism, according to Cary, required England to have an economy powered by export-oriented manufacturing, even if this meant brutally suppressing the industrialization of potential low-wage competitors in Ireland as well as on the continent. Cary?s debate over Ireland with William Molyneux already prompted him to attempt giving his essay a more scientific cast. However, this process began in earnest when Butel-Dumont injected his revised and updated version of Cary?s essay into 1750s French debates about how to respond to England?s economic success. In the spirit of Gournay?s project to build up public knowledge of political economy in France, Butel-Dumont provided the essay with an impressive new bibliographic apparatus, but the most ambitious conceptual transformation of Cary?s essay was undertaken in Naples. From Genovesi?s perspective, Cary?s Anglican republican vision of an ?honest hive? was indistinguishable from Mandevillian atheism. It pointed to a historical model of cyclical decline and fall, which would condemn Naples to becoming an English colonial dependency. For Genovesi, avoiding this result required reworking Cary?s theoretical starting point and equipping his conjectural history of society with a stronger providential purpose. The final reformatting of Cary?s essay by Wichmann was intended for a Cameralist audience, whom Reinert compellingly places in a new light, describing Cameralism as fundamentally concerned with the problem of how to respond to the rise of maritime empires despite not having access to their superior imperial technologies.

Reinert draws two far-reaching conclusions from this impressively erudite investigation into the fate of Cary?s essay. The first has to do with the importance of manufacturing for England?s rise, which Reinert develops into a full-throated attack on ?the equality assumption? of neo-classical economics. Against James Buchanan?s assumption of ?constant returns to scale of production over all ranges of output,? (p. 82) Reinert claims that manufacturing industry enjoyed increasing returns to scale that could not be matched by agriculture. He traces this insight back to a pioneering early-seventeenth-century treatise by Antonio Serra that Genovesi later studied and that Reinert has recently translated into English. Cary?s eighteenth-century translators had no doubt that England?s great success was the product of an ?exceedingly conscious policy? favoring industrialization (p. 202). To forego such a policy was to submit to a fate of colonial dependency; perhaps the most provocative suggestion in Reinert?s book is that the rise of free-trade doctrines and their subsequent canonization can be attributed to English efforts to suppress foreign competition. Reinert?s fundamental point is that a history of doctrines of free trade yields at best na?ve dogmas and may even serve as a mask for economic imperialism. A more realistic political economy for our own times, in his view, requires a more realistic historical vision.

At the same time, Reinert draws out a second major insight from his history of Cary?s essay: all of Cary?s translators strove to purge his essay of what they regarded as his toxic variety of patriotism. Cary had equated English prosperity with the defeat and impoverishment of its rivals. His translators sought to substitute this ?jealousy of trade? with a more cosmopolitan vision that allowed for the possibility of ?emulation? or ?noble competition,? but without resorting to an agrarian utopianism. In eighteenth-century terms, they were for Colbertism without Machiavellism (p. 176): they entertained a vision of how a world of competitively industrializing states could be stabilized. In addition to mounting a powerful realist critique of free trade dogma, then, Reinert also advances recent reinterpretations of Enlightenment optimism in terms of a search for non-lethal forms of competition, and opens up a fascinating new prospect on the development of the discipline of political economy. His account goes a long way toward explaining why it was that the transformation of English practical economic experience into a systematic theory of political economy initially took place not in England itself, but in Ireland, Scotland, and continental Europe.

Isaac Nakhimovsky is author of The Closed Commercial State: Perpetual Peace and Commercial Society from Rousseau to Fichte (Princeton, NJ: Princeton University Press, 2011).

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):17th Century
18th Century

The Charleston Orphan House: Children?s Lives in the First Public Orphan House in America

Author(s):Murray, John E.
Reviewer(s):Rothenberg, Winifred B.

Published by EH.Net (July 2013)
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John E. Murray, The Charleston Orphan House: Children?s Lives in the First Public Orphan House in America. Chicago: University of Chicago Press, 2013.? xx + 268 pp. (hardcover), $30 (hardcover), ISBN: 978-0-226-92409-0.

Reviewed for EH.Net by Winifred B. Rothenberg, Department of Economics, Tufts University.

The first public orphanage in America was founded not in Boston, citadel of civic virtue, but in Charleston, South Carolina. Because it was the first, it is not unreasonable to assume that it became the blueprint after which all other municipal orphanages were modeled ? which is to say, it set the dimensions of the ?great confinement? within which forsaken children would live for generations to come. Sufficient reason, then, for the Charleston Orphan House to have attracted the attention of John E. Murray, whose previous publications on orphans, paupers, child labor, charity, literacy, epidemic disease, a Shaker community, and the history of health insurance in America testify to a tender and enduring concern for ?the least of these.? Scholars less tender-hearted than Murray may wonder why a book on one southern orphanage should be of interest to economic historians, to which Murray can reply that charity ? or, more accurately, altruism ? has engaged the likes of Arrow, Debreu, Sen, Kahneman, and innumerable others in arcane conversations around rational expectations, decision theory, social welfare functions, intergenerational wealth transfers, the theory of the firm, and the specification of a Happiness GNP measure.

The narrative density of Murray?s book comes from his exhaustive research in the Orphan House archives. He has managed to link at least 500 children by name to their life-cycle events, allowing him to track at least a quarter of the 2,000 children who passed through the orphanage. Beyond that, it appears that he has found every donor, every Commissioners? report, every repair bill, contract, bill of sale, loan application, housekeeping account, public health inspection, doctor?s order, teacher?s diary, minister?s sermon, church attendance record, and the testimony of every impoverished and widowed parent on behalf of his child at risk. Murray calls this archive ?the single greatest collection of first-person reports on work and family lives of the [white, that?s important] poor anywhere in the United States? (p. 4).

First in the course of his ten chapters are the conditions in the House. They are Dickensian. Visitors found it ?miserable,? ?extremely comfortless,? ?appalling,? ?swathed in darkness,? ?beds drenched with water when it rained,? without light, without sheets, without beds or bedsteads, waste water leaking into the drinking wells, one toilet for 100 children, privies in the vegetable garden. ?Yet many children hoped to enter the institution? (p. 66). It improved over time, and Murray moves on to devote a chapter each to the financing, management, diet, discipline, education, training, and medical care offered to the children. In chapters 8 and 9 where Murray follows the young people into apprenticeships and beyond, he opens the orphanage up and out to the urban, industrial, and export-driven economy of the Charleston that will have to absorb them. The book ends with an Epilogue, and it is there, as I read him, that Murray relaxes the courtesies that have constrained him thus far, and ?tells it like it is.? It is there that he undertakes to answer the question: what really motivated the Commissioners to fund a public orphanage in Charleston? But more about that later.
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For this reviewer, the gold standard for a project like Murray?s is Civic Charity in a Golden Age by Anne E.C. McCants (1997), a magisterial study of the Municipal Orphanage of Amsterdam from its founding in 1578 to its demise in 1815. I have adapted from that book and applied to Murray?s a list of six large questions which project these two institutions onto a wide and consequential canvas. I want to use these questions as a heuristic device upon which to hang the balance of this review.

1. What impulse motivated the founding of the public orphanage?
2. In what sense was the public orphanage ?public??
3. What role did state, county, and city government play?
4. Why did the charitable impulse take institutional form? In the case of abandoned children, was there no other solution?
5. Or was the choice of an institutional solution dictated in some way by the consilience (E.O.Wilson?s term: ?accordance of two or more lines of induction drawn from different sets of phenomena?) of capitalism, urbanization, secularism, and the nuclear family that emerged in America at the end of the eighteenth century?
6. Did the orphanage effect genuine redistribution, or was it rather ?an elaborate ploy? to perpetuate the inequality that had motivated it? This last will not be discussed in this review, which is already too long, but will remain as a question ? if only to tease the righteous.

McCants?s book does not appear in Murray?s bibliography, but these questions are the nuts and bolts, the What, When, Who, Where, and Why of his story no less than of hers. And while some are dealt with implicitly in his text, until the Epilogue none of them is discussed explicitly, and I wish they had been.

When the orphanage was founded in 1790, there were 8,089 white persons in Charleston, and 8,270 black persons, and of the blacks 7,684 were slaves, and 586 were freed blacks. Complicating things was the revolution in Haiti the following year. The uneasy equilibrium in Charleston was overwhelmed by a wave Haitian ?migr?s, of the white elite, yes, but mostly by a new population of slaves, free blacks, and mulatto refugees. Complicating things further was that as the number of freed blacks in the city increased, so did the share that were mulatto. White anxiety about mulattoes would reach such a level by 1848 that Charleston would require by law that all freed people wear a tag identifying them as black, and carry proof of manumission, at risk being re-enslaved.

In this climate it will come as no surprise to learn that the Charleston Orphan House and the Free School associated with it admitted only white children; not just white but who, while certifiably poor, were not very poor, in fact whose homes were decent enough to pass an inspection.? Thus defended, the orphanage played an important part in forging a race-based ?alliance of whites? against blacks that cut across, was orthogonal to and subversive of the class-based alliance that a new industrial working class was trying to build against capital. ?It is this link between civic society and racial unity that helps explain the puzzling question, why the first (and for many years the only) large-scale public orphanage in America should have been built in Charleston? (p. 199). ?Charleston was unique in the early republic in creating the charitable orphan house because in no other city did the elite need to make common cause with the white poor and working class against the potential common black enemy? (p. 201). ?Webs of white cooperation reached across class lines, as if the other half of Charleston?s population weren?t there at all? (p. 204).

Amsterdam?s public orphanage was also restricted: open only to citizens of Amsterdam, tax payers, members of the Dutch Reform (Calvinist) church, wealth-holders, of the ?middling classes.? If the Charleston orphanage was an oasis of white unity, and the Amsterdam orphanage was an oasis of middling unity, then in what sense were they ?public??

To answer that, begin with the meaning of “private”: how do we understand “private”? Sir William Blackstone, the great eighteenth century jurist, defined private property for the ages. It is, he wrote, ?that despotic dominion which one man claims and exercises over the things of this world in total exclusion of the rights of any other individual in the universe.?

If ?private? is the right to exclude, then is ?public? the obligation to include?? It doesn?t appear so. Public swimming pools, public housing, public schools, public water fountains, public transportation, public lands, public access to the Internet … all of these masquerade as forms of Commons but they have all, at one time or another, been ?restricted? against some portion of the public: against unmarried couples, single women, families with children, families with pets, against smokers, blacks, Asians, Jews, Latinos, and on and on ? that sorry history is too well known. We are no closer to discovering the meaning of ?public.?

The Oxford English Dictionary makes short shrift of a definition: “of or provided by the state rather than an independent, commercial company”; “ordinary people in general”; “done, perceived or existing in open view.” Of these the only relevant definition for our purposes is the first: “of or provided by the State.” The Charleston orphanage, even if not of the State, was provided by the State.? Then how can it assert a privacy right to exclude?

There were three sources of funds for the orphanage: donations, income from the institution?s own assets, support from all levels of government. Accounting for (in the sense of keeping account of) the donations will always be problematical to the extent that it is a non-market transaction. Gift-giving is driven not by reciprocity but ?by the pursuit of ?regard?: the approbation of others? (Avner Offer, ?Between the Gift and the Market,? Economic History Review, 1997).? To keep account of a gift is a small desecration of a private benevolence. But inevitably the charitable impulse would have waned as the increasing pace of commercial development both of the port and of the city would have lured private wealth into emerging capital markets and land speculation.

Market sources of income, however, were built into the endowment of the institution by design. The orphanage earned income on its holdings of B.U.S. bonds; and by law the value of all escheated estates in South Carolina (the estates of those who died intestate and without heirs) automatically reverted to the orphanage, along with ?small bits of wealth belonging to the children? (p. 24).

But eventually the institution needed to depend ?heavily? for its ongoing expenses on contributions from what we now call the public sector. To the extent that the ?public? orphanage was supported by the public, where did the city, county, or state get the money?? Were these pay-outs opportunistic, or were they funded? And if funded, was it supported from taxes or bond issues? If taxes, what kind: property taxes? A poor tax? Port duties? Excise taxes? If so, on what? I found this discussion to be the thinnest in the book, but on the answers to these sorts of questions depends the question we asked above, by what right does a public institution assert a privacy right to exclude?

What was left unsaid about the sources of government funding in the Charleston book is sharpened by the contrast with how much it is possible to say about it in the Amsterdam book. Unlike every level of government in the U.S., the city of Amsterdam appears to have faced no inhibitions on its power to tax income and spending directly. Every ?foreigner? applying for citizenship of the city was obliged to pay a fee in support of the orphanage. Additional support came from taxes levied on burials and marriages; real property was taxed; taxes were levied on all who worked for wages; and excise taxes were levied on all consumption. In addition, graduates of the orphanage were expected to ?give back? to support its upkeep; revenue was earned from the sale of the girls? needlework. Most significant were the assets bequeathed to the children and held in fiduciary trust for them until their maturity, which assets were prudently invested by the orphanage in real estate, commercial property, commercial paper, and annuities, such that by 1790, private donations accounted for only 8% of the income of the Amsterdam Burgerweeshuis.

Institutionalizing orphaned children is so bad an idea that one wonders if some other solution could not have been found. Why did institutional care prevail over alternatives like foster care, adoption, and government support to extended families?
a) Was institutionalization motivated by a rational calculation of its relative efficiency? Were there in fact economies of scale in warehousing children as there are in warehousing, say, Amazon?s inventory of CDs?
b) Or should we look to a moment in time, say 1780-1810 ? the consilience of the Four Modernizations: capitalism, urbanization, secularism, and the nuclear family ? to provide the clue? There are American historians (I among them) who see the decade of the 1780s as an ?Axial Moment? in American history ? ?the most critical moment in the entire history of America,? wrote Gordon Wood in The New York Review of Books (1994) ? in which, in the midst of ?Deep Change? in almost everything else, family responsibility for the intimate care of the aged, the young, the crippled, the alcoholic, the violent, the developmentally challenged, the homeless, the (oops!) pregnant, and the insane were professionalized and transferred to institutions.
c) Or was institutionalization motivated by the nature of institutions themselves which, in the language of the New Institutional Economics, ?provide incentives to agents to work through formal and informal rules and their enforcement? (John Nye, 2003). In the case of the Orphan House ? ?a white island in a sea of blacks? (p. 199) ? what Nye calls ?the institutions-rules nexus? must have provided a measure of security to the increasingly anxious people of Charleston in whom, says Murray, was lurking always the fear of a slave rebellion in the city at large. An ?institutions-rules nexus? to suppress any disorder in the orphan house would have been projected outward to repress any disorder in the society at large.

??The Orphan House was an integral part of the city?s collection of institutions that maintained the prevailing social order the foundation of which was white unity… [It] was at once an integral part of the most repressive social order in America and the most humane and progressive child-care institution in America, and it remained both for decades? (p. 12).
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John Murray?s book has turned out to be provocative and utterly absorbing.

Winifred B. Rothenberg?s publications include From Market Places to a Market Economy: The Transformation of Rural Massachusetts, 1750-1850 (University of Chicago Press, 1992).?
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Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):18th Century
19th Century