What is Capital? Part 1: Bank Capital

 

This is from The New York Times article Why Big Banks (and Some Odd Allies) Oppose a Plan to Protect Banks:

“Regulators are calling for an increase in the amount of capital — cash-like assets — that banks have to hold to tide them over in an emergency to avoid needing a taxpayer-funded bailout like the one in the 2008 financial crisis.”

 

No! No! No! No! No!

Bank capital is not “cash like assets.” Those are reserves. Reserves are money that banks keep either as cash or as deposits with other banks. They are cash like assets. And there are reserve requirements regarding the percentage of deposits that have to be kept as cash like assets, but those are not capital requirements.

A bank's capital is just the difference between the value of the bank’s assets and its liabilities. In other words, it is the equity the owners (shareholders) have in the bank. Capital requirements regulate the size of the capital. The most basic capital requirement is a leverage ratio, requiring that capital be equal to a certain percentage of assets.

Capital requirements are intended to deal with the threat of insolvency. A bank becomes insolvent when the value of its assets falls below the value of its liabilities, primarily the money it owes to depositors.

Why would the value of assets fall? The investments banks make are risky. The prices of securities that they buy, stocks or bonds, can go up, but they can also go down. If the bank owns stocks and bonds and the prices of those securities fall, the value of the bank’s assets falls. Part of the problem faced by Silicon Valley Bank was that it purchased a lot of long term bonds before interest rates started to increase, and as interest rates rose the price of those bonds fell. The loans banks make can also decrease in value. If the bank loans money to a person or a business and they do not repay the loan, the value of that asset (the loan) falls. In U.S. history, bank runs, (people racing to the bank to withdraw their money) tended to occur during economic downturns when falling security prices and failing businesses meant that the value of bank assets were declining. Under these circumstances people had greater reason to fear that some banks might become insolvent and not be able to repay their deposits. Capital helps protect against insolvency and banking crises.

Capital helps protect against insolvency by providing a cushion when asset prices fall. Assume you have $100,000 in assets, $80,000 in deposits and $20,000 capital, if the value of your assets falls by $15,000, you still have more than enough to cover all of your deposits. On the other hand, if you had $100,000 in assets, $90,000 in deposits and $10,000 capital, a decrease in value of $15,000 would leave the bank insolvent. In addition, it can be argued that banks have less incentive to take excessive risk when they have more of their own money at stake. They have more skin in the game.

Financial institutions, including banks, generally recognize the benefits of capital. I have written a lot about the history of New York City trust companies and one of the things they were most likely to mention in advertisements was the size of their capital. They called it capital and surplus, but it meant what we mean when we talk about a bank’s capital today. They used their capital to signal their strength and stability.

            There is, however, also a cost of higher capital: a lower rate of return. A higher capital requirement means that you have to rely more on bank owner’s money and less on borrowed funds (deposits). The extent to which you rely upon borrowed funds is called leverage. To see how leverage affects return on investment consider this example. You know of an investment that will return 10%. You have $100 you can invest. You do so and end up with $110, earning that 10% rate of return. Now imagine you can borrow another $100 from someone else at 5%. You now use their $100 and your investment of $100 for a total of $200. You get back the $200 plus 10% of 200, $220. You have to give the person you borrowed from $105, leaving you with $115. Your $100 investment now earned $15 for a 15% rate of return. That is the power of leverage. Of course if that investment you made doesn’t pay off we are back to worrying about insolvency. You still owe $105.

            So what is the story in the New York Times actually about. Its really about how complicated capital requirements can get. Toward the end of the article they point out that some suggested regulations could decrease certain kinds of lending. This is because capital requirements are no longer set based upon a simple leverage ratio that applies to everyone. Modern capital requirements recognize that not all investments are equal. Some are riskier than others. So regulations assign different risk assessments to different assets and then provide a risk weighted capital requirement. More risky assets, more capital. The argument of opponents of increased capital requirements is that these risk assessments could discourage banks from making some kinds of loans that we actually want to promote. In other words, it could get harder to get a mortgage to buy a home or take out a loan to start a business.

            I’m not going to try to answer which side is right. This isn’t about whether banks should have capital requirements, its about how much capital is enough. That is a hard question. My objective here has been to clarify what people are talking about when they are discussing banks and refer to capital. The post is titled part 1 because this is not the only meaning of capital. In other contexts, the meaning of capital is very different, and I plan to discuss that in the future. Who knows, eventually I might even take on the meaning of capitalism.

Richard Thaler and Behavioral Economics

 

I was listening to a recent episode of Hidden Brain the other day about anomalies, specifically things that are supposedly anomalies in economic theory. The guest was Richard Thaler, who is famous as a behavioral economist and Nobel Prize winner. The discussion reminded me of some of the problems that I have with some work that is described as behavioral economics. One of the stories he told was about Richard Rosett, a professor of his when he was in graduate school at the University of Rochester. Rosett collected wine. He wouldn’t spend more than $20 or $30 on a bottle, but sometimes a bottle he had purchased would increase in price to as much as $200. There was a wine shop in Rochester that would have purchased these valuable bottles from him, yet he would serve them rather than sell them, despite the fact that he would not spend $200 on a bottle. Thaler regards this as an anomaly that contradicts economic theory. The claim is that economic theory says that cost is the value of the foregone opportunity. It doesn’t matter whether you paid $200 for the bottle you are serving or gave up the opportunity to sell the bottle for $200. Either way the cost is $200. That’s all well and good, but it is ignoring the value of the story, which is odd because Thaler claims stories are his thing.

I assume Thaler knows this story because Rosett told it to him. Serving a $200 bottle that you paid $20 for is a very different story than the story you tell when you serve a $200 bottle that you just bought. The first is about your skill in purchasing good wines, the second is bragging about your wealth. Everyone can enjoy the first story. You shouldn’t tell the second story. The other possibility is to sell the $200 bottle and buy more $20 bottles to serve. Again, this isn’t such a great story: “I had a $200 bottle of wine, but I sold it and bought some less expensive wine to serve you.” Following Thaler’s notion of economics would have cost Rosett the pleasure he gained from telling the story to people like Thaler.  Economists assume that people try to maximize their utility not their wealth. I am inclined to believe that Rosett was in fact behaving exactly as economic theory would predict he was maximizing his utility.

I think part of the problem with the wine story comes from not appreciating the many ways in which people can get satisfaction (utility). This showed up later in their discussion of tipping. From the standpoint of economic theory there is nothing anomalous about leaving a tip. If you believe that leaving a server $20 will give you more satisfaction than alternative uses of that $20, that is what you should do. One of the silliest notions that some people try to attribute to economics is that economists think people only care about their own material gain. Yet nothing could be further from the truth. Don’t take my word for it. Here is University of Chicago economist and Nobel Prize Winner Gary Becker:

“One basic query is: What is meant by rational behavior? Consider first what is not meant. Certainly not that people are necessarily selfish, “economic men” solely concerned with their own well being. This would rule out charity and love for children, spouses, relatives or anyone else, and a model of rational behavior could not be so grossly inconsistent with actual behavior and still be useful.”

Economic theory doesn’t say what people should and should not get satisfaction from. It just says that whatever people get satisfaction from their choices will tend to respond to changes in the constraints they face.

I’m not saying there is no value in behavioral economics, but far too much attention is given to these little stories that supposedly contradict economic theory when in fact they do no such thing.

P.S. I should mention that I also knew Rosett, though I’m sure Thaler spent far more time with him than I did. Rosett was a Dean and Professor of Economics at Wash U when I started the Ph.D. program there. I only knew him because he was friends with Doug North and came to the Economic History Lunch every Friday. The man I met did seem to enjoy a good story.

History's Replication Crisis

 

Anton Howes recently asked Does History Have a Replication Crisis?  The question is one that Howes has been concerned with for some time, but the immediate impetus for the essay was the publication of Jenny Bulstrode’s Black metallurgists and the making of the industrial revolution published in the journal History & Technology. Bulstrode claims that,

“Between 1783 and 1784, British financier turned ironmaster, Henry Cort, patented a process of rendering scrap metal into valuable bar iron that has been celebrated as one of the most important innovations in the making of the modern world. Here, the concern is the 76 Black metallurgists in Jamaica, who developed the process for which Cort took credit.”

Howes describes the innovation as a process “to more easily convert scrap iron into new bar or wrought iron — a higher-quality iron that had had various impurities beaten out of it with hammers — by bundling the scrap together, heating it, and then passing it through grooved rollers, rather than the more usual flat ones, stretching and smoothing the sides and edges of the heated metal so that the resulting bars became “perfectly welded at the edges and throughout” and “completely welded at the sides, without a crack, into one mass, perfectly sound to the centre”.” Not surprisingly, the discovery that a famous inventor of an important process had in fact stolen his invention from enslaved people spread quickly.

On NPR you can listen to How Henry Cort stole his iron innovation from Black metallurgists in Jamaica

In the Guardian you can read about how Industrial Revolution iron method ‘was taken from Jamaica by Briton’

At The World you can hear how Historian uncovers the Jamaican metal workers behind Industrial Revolution

At New Scientist you can read about how English industrialist stole iron technique from Black metallurgists

     Howes, however, was skeptical of the claim ( The Cort Case) suggesting that the evidence presented in the paper did not warrant the conclusion that the innovation in question had been developed by enslaved workers and then stolen by Cort. Oliver Jelf (The origin of Henry Cort’s iron-rolling process: assessing the evidence) looked at the sources cited by Bulstrode and concluded that there was a more fundamental problem. The sources simply did not say what Bulstrode claimed they did. For instance,

 

Jelf did not simply claim that the sources do not support Bulstrode’s argument, he transcribed and presented the sources in the paper, leading Howes to state that “What I simply cannot fathom, now that I’ve read her sources thanks to Jelf’s transcriptions, is how Bulstrode arrived at her narrative at all (Does History Have a Replication Crisis?).”

Ian Leslie (Stories are bad for your intelligence: How Historians (and Others) Make Themselves Stupid) has theory for how Bulstrode came to the narrative. He traces it to problems with stories and  story telling. Leslie says that,

I doubt that Bulstrode set out to deceive. My guess is that she came across a few suggestive fragments in her reading (the ‘cousin’ of Cort travelling from Jamaica to England) and wanted so badly to make them into a story which fitted her ideologically determined prior - that the British stole ideas from those they enslaved - that she got carried away, fabricating causes and effects where none existed.”

He thinks more of the blame should fall on the peer reviewers. Leslie suggests that,

It’s one thing for a young and passionate academic to make mistakes; it’s quite another for a series of experienced academics to let her make them. The paper had two anonymous peer-reviewers (Bulstrode thanks other historians in an endnote, though they may not have read the paper). Even to an ignorant reader like me, the paper just smells funny - it has the aroma of the fantastical. How on earth did these experts read it without becoming suspicious? Why didn’t they double-check its remarkable claims?

I can’t agree with Leslie’s argument. I don’t think that stories or peer-reviewers are the fundamental problem here. 

We need to tell stories. Often the answer to “Why did this happen?” is a sequence of events, a story about how it came to happen. Nor can the blame for misleadingly citing sources be pushed on to the referees. Although I am an economist, I have probably written more referee reports for books and papers written by historians than economists. I will note it in my report if I think an author incorrectly uses a source that I am familiar with.  But I can’t check every citation. I can’t even check the citations to crucial claims if it requires a trip to the archive. Experts in the field should be familiar with important secondary sources, but you can’t know every primary source. You certainly can’t run off to check on every novel primary sources that someone has discovered. You have to be able to trust the author to honestly report what is in the sources that that they cite.

Leslie’s concern about the siren song of stories makes him overly generous with Bulstrode. A professional historian should not get carried away with enthusiasm to the point that they try to support claims with references to sources that do not actually provide any support for those claims. Actually, amateur historians and undergraduate students shouldn't do that either. Historians must tell stories, but they must tell stories that are constrained by the sources. If you do not want your story telling to be constrained by the historical evidence you should be forthcoming and admit that your genre is historical fiction, not history.

I have frequently said that I think honesty is the most important trait for a historian. In economics and other quantitative social sciences I can say “Send me your data.” Many journals require making the data available. But a historian might cite documents that I would have to travel to multiple cities, states, or even countries to access. To be of any use to me I need to be able to trust that you have honestly represented the sources that you cite. Once you have lost my trust you are worthless to me as a historian. Even if I can point to things that you got right, I can’t be sure about anything that I don’t already know. I can’t learn anything from you.

Anton Howes suggests making history more like quantitative social sciences. Try to make copies of relevant sources available. Now that so many people have digital images of the primary sources they use this is at least imaginable. Still, it is not a panacea, as demonstrated by recent revelations on honesty research (see datacolada.org.) Nevertheless, to the extent that it can be done, it would be great, both for the credibility of current research as well as a resource for future research.

But there should also be repercussions. Sadly, I doubt that there will be. Anton Howes notes other historical myths that seem immune to revision in response to evidence. I and others have written a great deal about one historian who in an influential book did not honestly represent what was in primary or secondary sources, going well beyond honest mistakes driven by youthful enthusiasm. As best I can tell there were absolutely no repercussions for him. Other historians still cite the book and praise the author. 

I hope that I am wrong; I hope that many historians read Howes' Does History Have a Replication Crisis? and take the question seriously.

Economic and Business History Seminars

Some have not yet been updated for the current academic year. Let me know of any that should be added.

Yale Economic History Workshop

Harvard Seminar in Economic History

Hagley Research Seminars

Northwestern Seminar in Economic History

Newberry History of Capitalism Seminars

Harvard Business School Business History Seminar

Princeton Economic History Workshop

Washington Area Economic History Seminar

NYU Stern Economic History Seminar

Queen’s University Centre for Economic History

LSE Economic History Seminars

Economic and Social History at Cambridge

Some thoughts on a liberal arts education

 

I recently listened to an episode of the Podcast Word on Fire in which Bishop Robert Barron and Brandon Vogt discussed Why Liberal Arts Matter. Although I agreed with their conclusions regarding the need to support the humanities, I disagreed with their overall interpretation of a liberal arts education.

Bishop Barron defines liberal arts by going back to the root of the word liberal in the Latin word liber, which means free. He argues that in the context of  liberal arts, free refers to disciplines that are free from utility. He provides as examples of liberal arts English and Philosophy, which he claims do not have practical utility, but are higher sciences because they are simply good in themselves. Vogt notes that the liberal arts are “sometimes called the humanities.” I think the notion that the liberal arts and the humanities are synonymous is actually fairly common. Leaving aside the claim that the humanities do not have utility, I don’t think that making liberal arts and humanities synonymous is supported by the traditional use of the term liberal arts, and I do not think it is a useful definition for the present.

The traditional understanding of the liberal arts was that it referred to the education appropriate to a free person, a person who was fully eligible to participate in society.  One traditional view held that there were seven liberal arts: grammar, logic, rhetoric, astronomy, arithmetic, geometry, and music.  These clearly do not coincide with what we now regard as the humanities. They suggest, instead, that a free person needed a broad set of skills and knowledge, including critical thinking, clarity of expression, and an understanding of the world they lived in.

Barron’s view suggests that there are disciplines that are liberal arts and disciplines that are not. You could, for instance, obtain a liberal arts education by studying only English, or only Philosophy, or somewhat more broadly, only the Humanities. If on the other hand, if you think of a liberal arts education as an education that prepares someone to fully participate in society, studying only the Humanities would not qualify as a liberal arts education. A liberal arts education in terms of the original definition, the education appropriate to a free person, refers to the totality of the education rather than specific disciplines. It requires an education that promotes critical thinking, clarity of expression and breadth of knowledge associated with the original conception of a liberal arts education. An education only in the humanities will not achieve this goal.

Things have changed since the Classical World in which the idea of a liberal education was developed. In general, we no longer think of free people as a subcategory of the population. But it is still reasonable to ask what sort of education will prepare people to fully participate in society. Students do need to study the humanities, but they also need to study the social and natural sciences, and mathematics. The sort of disciplines that Barron would contrast with the liberal arts, such as engineering, computer science, and business are subjects that people increasingly need some knowledge of to be informed citizens. One could even argue that education that leads directly to an income is now an essential part of a liberal arts education. Unlike the past a free person is less likely to able to depend upon their inherited wealth and status for their livelihood.

In other words, I don’t think it is particularly productive to divide disciplines into those that are liberal arts and those that are not. Instead, we should think of a liberal arts education as one that includes numerous disciplines, giving students a wide array of skills and the breadth of knowledge to live successful and fulfilling lives and make valuable contributions to society.

 

Some Economic History of Media and the Spread of Hate

 

Tianyi Wang, “Media, Pulpit, and Populist Persuasion: Evidence from Father Coughlin”

American Economic Review VOL. 111, NO. 9, SEPTEMBER 2021 (pp. 3064-92)

Or listen to

Demagoguery on the Airwaves with Tianyi Wang at the AEA Research Highlights Podcast.

 

Desmond Ang, “The Birth of a Nation: Media and Racial Hate,” American Economic Review VOL. 113, NO. 6, JUNE 2023 ungated version

(pp. 1424-60)

 

Or listen to 

Tracing the Impact of Early Popular Media on Racial Hate in the U.S. with Desmond Ang

At the Econofact Chat Podcast.

 

Elena Esposito, Tiziano Rotesi, Alessandro Saia, Mathias Thoenig. “Reconciliation Narratives: The Birth of a Nation after the US Civil War,” American Economic Review VOL. 113, NO. 6, JUNE 2023 (pp. 1461-1504) ungated version

I don't know of a podcast to go with this one yet

A Couple of Podcasts I've Been Listening To

The best news in podcasting is that my favorite podcast, The Economic History Podcast , is back after more than a year. In a new episode, Sean Kenny talks to Peter Lindert about Making Social Spending Work. 

I have also been listening to Promises, Promises with Tess Wilkerson-Ryan and Dave Hoffman. Promises, Promises is about contract law and in each episode they discuss a particular case. I believe they did the podcast for their law students during lockdown, and they always address what a student should take a way from the case in terms of answering law school exam questions. Although it is directed toward law school students I think the cases should be of interest to anyone who wants to understand how market economies actually work. Moreover, they have so much fun discussing the cases I almost wish I had gone to law school. 

The Economics Major as the Path to Law School

 One of the things that Gary Hoover talked to Kennedy Owen about in in this video was the things that an economics major prepares students for. He mentioned that many of his students have gone on to law school and noted that Econ was the major that tended to do the best on the LSAT.

This is from the Law School Admissions Council. 

You can see that Economics majors have the highest mean and median LSAT scores as well as one of the highest admission rates.

More Time to Speak Econ

Kennedy Owen produces interviews at a pretty rapid pace. She has posted several new ones since I blogged about Time to Speak Econ a few days ago, including this one with Gary Hoover.

Time to Speak on Econ

 I received an email yesterday from Kennedy Owen, who is currently a junior in high school, telling me about Time to Speak on Econ a series of interviews she has done with economists. I checked them out and noticed there was one with the economic historian Josh Rosenbloom. I listened to the interview with Rosenbloom and then a couple of others. I like them. She asks questions about the education and careers of each person from the perspective of a young person who is considering studying economics in college. She has one of my favorite qualities in an interviewer: she asks relatively broad questions and then just lets the interviewee talk. 

I hope other people find them useful and enjoyable.

Recent NBER Meetings

 

Yes, NBER charges for downloads of working papers, but you can watch some recent meetings for free. By the way, it has also been my experience that you can usually find ungated versions of most NBER working papers if you look around.

 

I think both the Race and Stratification Economics and the Development of the American Economy meetings should be of interest to readers of this blog.

 

The final presentation at the Race and Stratification meeting is University of Mary Washington economics alum Lavar Edmonds, who is currently working on a Ph.D. in economics at Stanford, presenting his research on the impact of HBCU trained teachers.

 

I also liked that the Race and Stratification meeting about how one could incorporate race and stratification economics into introductory economics courses.

 

NBER Race and Stratification Working Group on YouTube

 

https://www.nber.org/conferences/race-and-stratification-working-group-spring-2023

 

Caste-based and Racial Wealth Inequality in India and the United States

Ishan Anand, Indian Institute of Technology Delhi

 

Discussants:

Ellora Derenoncourt, Princeton University and NBER

Ashwini Deshpande, Ashoka University

 

Perceptions of Racial Gaps, their Causes, and Ways to Reduce Them

Matteo F. Ferroni, Boston University

Stefanie Stantcheva, Harvard University and NBER

 

Discussants:

Michael Kraus, Yale University

Candis Watts Smith, Duke University

 

Unequal Gradients: Sex, Skin Tone, and Intergenerational Economic Mobility

Luis A. Monroy-Gómez-Franco, University of Massachusetts, Amherst

Roberto Vélez-Grajales, Centro de Estudios Espinosa Yglesias

Gastón Yalonetzky, Leeds University

 

Discussants:

Art Goldsmith, Washington and Lee University

Chantal Smith, Washington and Lee University

 

Teaching Discrimination in Introductory Economics: An Approach Incorporating Stratification Economics

Jorgen M. Harris, Occidental College

Mary Lopez, Occidental College

 

Complementary Investments Over the Life Course and the Black-White Earnings Gap

Sonia R. Bhalotra, University of Warwick

Damian Clarke, Universidad de Chile

Atheendar Venkataramani, University of Pennsylvania and NBER

 

Estimating Disenfranchisement in U.S. Elections, 1870-1970

Jeffery A. Jenkins, University of Southern California

Thomas R. Gray, University of Texas at Dallas

 

The Determinants and Impacts of Historical Treaty-Making in Canada

Donn. L. Feir, University of Victoria

Rob Gillezeau, University of Toronto

Maggie E.C. Jones, Emory University and NBER

 

A Simple Model of Group Conflict, Inequality and Stratification

Daniele Tavani, Colorado State University

Brendan Brundage, Colorado State University

 

Discussants:

Pablo Beramendi, Duke University

Patrick L. Mason, University of Massachusetts Amherst

 

Racial Disparities in the Tax Treatment of Marriage

Janet Holtzblatt, Tax Policy Center

Swati Joshi, Brookings Institution

Nora R. Cahill, Brookings Institution

William Gale, Brookings Institution

 

Not so Black and White: Uncovering Racial Bias from Systematically Misreported Trooper Reports

Elizabeth Luh, University of Michigan

 

Economic Inequality and Stratification after a Natural Disaster

Anita Alves Pena, Colorado State University

 

Role Models Revisited: HBCUs, Same-Race Teacher Effects, and Black Student Achievement

Lavar C. Edmonds, Stanford University

Discussant:

Michael Gottfried, University of Pennsylvania

Karolyn Tyson, Georgetown University

 

 

NBER Development of the American Economy Program meeting on YouTube

 

https://www.nber.org/conferences/development-american-economy-program-meeting-spring-2023

 

A Penny for Your Thoughts

Walker Hanlon, Northwestern University and NBER

Stephan Heblich, University of Toronto and NBER

Ferdinando Monte, Georgetown University and NBER

Martin B. Schmitz, Vanderbilt University

 

Legal Activism, State Policy, and Racial Inequality in Teacher Salaries and Educational Attainment in the Mid-Century American South

Elizabeth U. Cascio, Dartmouth College and NBER

Ethan G. Lewis, Dartmouth College and NBER

This paper was distributed as Working Paper 30631, where an updated version may be available.

 

US Educational Mobility in the Early Twentieth Century

Martha J. Bailey, University of California, Los Angeles and NBER

Abdul Raheem Shariq Mohammed, Northeastern University

Paul Mohnen, University of Pennsylvania

 

The Value of Ratings: Evidence from their Introduction in Securities Markets

Asaf Bernstein, University of Colorado at Boulder and NBER

Carola Frydman, Northwestern University and NBER

Eric Hilt, Wellesley College and NBER

This paper was distributed as Working Paper 31064, where an updated version may be available.

 

Germ Theory at Home: The Role of Private Action in Reducing Child Mortality during the Epidemiological Transition

James J. Feigenbaum, Boston University and NBER

Lauren Hoehn-Velasco, Georgia State University

Sophie Li, Boston University

 

“Muddling Through or Tunnelling Through?”: UK Monetary and Fiscal Exceptionalism during the Great Inflation

Michael D. Bordo, Rutgers University and NBER

Oliver Bush, Bank of England

Ryland Thomas, Bank of England

Economic History in The American Historical Review

 

Everyday Economic Justice: Mediating Small Claims in Mexico City, 1813–1863

Louise E. Walker

Abstract

This article examines economic justice in nineteenth-century Mexico City through analysis of small-claims conflicts—juicios verbales. After the promulgation of the 1812 Cádiz Constitution, this centuries-old tradition of judicial arbitration was shaped by liberal constitutionalism. A new class of officials, the alcaldes constitucionales, were elected by residents to decide cases. Cádiz liberalism inaugurated a new world. What happened when people faced a classic problem, when they did not pay their debts? Microeconomic history—the quantitative and qualitative study of the economic relationships, decisions, and actions of individuals, households, and small enterprises—exposes the workings of economic justice. From 1813 to 1863, tens of thousands of residents pressed their claims before magistrates. As this article shows, justice grounded in Cádiz liberalism was relatively effective for ordinary people and evinced a gender fairness. These small-claims conflicts might seem a petty world of negligible amounts and narrow-minded disputes, but analyzed together, they challenge conventional interpretations about institutional deficiency and historical underdevelopment. Cádiz liberalism established a judicial institution to protect property rights, especially for creditors, that enjoyed broad legitimacy.

 

When Hay Was King: Energy History and Economic Nationalism in the Nineteenth-Century United States

Ariel Ron

Hay was a linchpin of the early industrial energy regime. It was the primary fodder for working horses, who became more rather than less important over the 1800s. Though largely ignored by historians, hay was of comparable value to cotton and wheat in the nineteenth-century United States. The crop’s historiographical invisibility is partly due to its relatively informal and decidedly subglobal production and exchange patterns. Whereas cotton and wheat exports passed through customhouses and institutionalized exchanges that carefully recorded trade volumes, hay was almost never exported and often underwent no market transaction at all, instead being used as an intermediate good on farms. Only when the US federal government added a detailed agricultural census in 1850 did the magnitude and importance of hay production become publicly legible. At that point, hay was drafted into a wide-ranging debate about economic development between Northern antislavery nationalists and Southern proslavery free traders, with “King Hay” emerging as a foil for “King Cotton.” King Hay thus urges historians to pay more attention to the trade patterns, developmental policies, and economic ideologies that generated distinctly national, as opposed to global, economic spaces within nineteenth-century capitalism.

Economics and History

 I have argued numerous times that the differences between economic and history tend to be exagerated, usually by economists who want to criticize history or historians who want to criticize economics. So, I really liked this paper by Sheilagh Ogilvie that reviews research on serfdom by both historians and economists and makes the case that the differences are exagerated and that the diferences that do exist make the fields complements, not substitues.

Economics and History: Analyzing Serfdom

Economics and history are often regarded as antithetical. This paper argues the opposite. It builds its case by showing how economics and history provide complementary approaches to analyzing a fundamental historical institution: serfdom. The paper scrutinizes three questions: how serfdom shaped peasant choices, how it constrained those choices, and how it affected entire societies. By working together, economics and history have generated better answers to these questions than either discipline could have achieved in isolation. Economic and historical approaches, the paper concludes, are not substitutes but complements.

Bruce Carruthers' Economy of Promises: Trust, Power, and Credit in America

 

There are many good books on various aspects of the history of credit: Rowena Olegario’s A Culture of Credit: Embedding Trust and Transparency in American Business, Josh Lauer’s Creditworthy A History of Consumer Surveillance and Financial Identity in America , Louis Hyman, Debtor Nation: A History of America in Red Ink, Anne Fleming’s City of Debtors: A Century of Fringe Finance, Judge Glock’s The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts, 1913–1939. I can also point to some good books on law and credit, particularly bankruptcy law: Bruce Mann’s Republic of Debtors: Bankruptcy in the Age of American Independence, Edward Balleisen’s Navigating Failure: Bankruptcy and Commercial Society in Antebellum America, David Skeel’s Debts Dominion: A History of Bankruptcy Law in America, and our own Bankrupt in America: a history of debtors, their creditors, and the law in the twentieth century (Mary Eschelbach Hansen and Bradley A. Hansen). In addition, there are many excellent books on the history of banking. On the other hand, I have always had hard time pointing to a big picture book on the history of credit that I can recommend. Most are not as bad as David Graeber’s Debt, but they tend to have the same problem as Graeber. They try to cover so much ground that they get in over their head and glaring factual errors start to pile up.

 

Now I have a book I can recommend. Bruce Carruthers' Economy of Promises: Trust Power, and Credit in America provides a history of credit in the American economy that covers everything from the local storekeeper allowing customers to pay later, to retail trade credit, to bank lending, to corporate and government bonds, to mortgages, to credit cards, to student loans. He weaves these developments into a single over arching story and he does so without the sort of glaring factual errors that have afflicted other attempts to cover this much ground.

The overarching story is built around the idea that credit is a specific kind of promise: I promise to pay you in the future. Focus on this promise leads to a question: whom to trust? How do we tell which promises are credible. During the colonial era and early Republic, most people made such promises to people they knew. They were able to base their decisions about whom to trust on their extensive knowledge of the people in their community. Trusting people beyond this community required the creation of substitutes for this local knowledge. Caruthers first examines the expansion of trade credit. After the Panic of 1837 mercantile agencies began to collect and sell to merchants such local knowledge, making it possible for manufacturers and wholesalers to evaluate the credibility of merchants who lived far from them, merchants they did not know personally. Over time their assessments of the trustworthiness of merchants became professionalized and routinized, based on data rather than just ad hoc impressions. The process of formalizing the evaluation of debtors spread to other types of credit. People who specialized in determining who to trust developed ratings for the riskiness of trade creditors, corporations, municipalities, home buyers, and consumer credits.

In telling this story, Carruthers highlights one of the most important trends in modern business history, the transformation of activities that depended on the tacit knowledge of individuals into processes that could be made explicit and replicated on a large scale. He also gives attention to the role that the government has played in credit, helping to provide institutions that facilitate credible promises, but also promoting or impeding access to credit to achieve other objectives.

Economy of Promises is also a model for other work in social science history. Carruthers is a sociologist who values the work not just of other sociologists but of economists, political scientists, historians, and legal scholars. Consequently, he can tell a story that covers the traditional economic issues of credit but also blends them with concerns about the relationship between credit and issues of power.

In short, Economy of Promises is the best place to start if you want to understand the role of credit in the American economy.

More How I Built This and Business History

 

This is the second post on the podcast How I Built This and academic research on business history and entrepreneurship.

Danny  Meyer founded some of the most highly regarded restaurants in New York: Eleven Madison Park, Union Square Café, and Gramercy Tavern. He is also the founder of Shake Shack, which generates over $400 million in revenue a year. When he decided that he wanted to get into the restaurant business rather than go to law school a college friend got him an interview that led to his first restaurant job. Later he was able to use his father’s connections in the travel business to work with chefs in France and Italy. Another friend, who happened to be Bryan Miller, the food writer for the New York Times, who helped him make contacts with people in the New York food scene. When he found the perfect place to open his first restaurant, Union Square Café, he was able to obtain the lease for about $240,000 and spend another $500,000 building out the restaurant thanks to loans from his mother, aunt and uncle. This aspect of Meyer’s story is not that unique. Many of the stories on How I Built This involve getting loans of tens or even hundreds of thousands of dollars from relatives.  The mother of Daymond John, the founder of FUBU, borrowed $100,000 on her house to put into his business and then let him use the house as his factory. The founders of Whole Foods, Supergoop, Chipotle, MM La Fleur, Tempurpedic, and Crate and Barrel all received large loans or investments from family members.  

Help doesn’t always come from family. Holly Thaggard was able to get a chemist to help her develop the product and she was able to get a PR firm to take her on because of a phone call from Roxanne Quimby, founder of Burt’s Bees, who had befriended Thaggard at a trade show.

These stories reminded me of one of my favorite business history books, Pull: Networking and Success since Benjamin Franklin by Pamela Walker Laird. In the book Laird challenged the notion of the entrepreneur as a self-made man or woman by highlighting the role of connections in stories of business success. This is from the introduction

 

 

 

 

Far from being the self-made men or woman of entrepreneurial mythology, one of the common characteristics of successful business founders appears to be the ability to recognize when they need help and the willingness to go get it.