A Failure of Regulation: Reinterpreting the Panic of 1907

The Autumn 2014 issue of Business History Review is out now. It contains my paper on New York city trust companies during the panic of 1907.

This is the abstract for the paper

                 Financial Regulation and the Panic of 1907

 

Lax regulation enabled trust companies to take excessive risks, according to previous studies of the Panic of 1907, leading to a loss of confidence and massive runs. These studies have, however, given relatively little attention to the historical development of trust companies. This article argues that a more historical perspective can lead to a better understanding of the institutional framework and the actions of trust companies. Depositors did not lose confidence because of inadequate regulation; depositors lost confidence in specific trust companies because of false rumors, and diversity among trust companies hindered cooperation to halt the Panic.

The Back of Ed Baptist's Envelope

I have finally had a chance to read some more of Edward Baptist’s The Half Has Never Been Told.

A central claim of the book is that slavery was not just an important institution in American economic growth but that “the returns from the cotton monopoly powered the modernization of the rest of the American economy.” Baptist provides a back of the envelope accounting of the impact of slave produced cotton.

 

Baptist The Half has Never Been Told (page 321-2)

 

“But here’s a back- of- the –envelope accounting of cotton’s role in the US economy in the era of slavery expansion. In 1836, the total amount of economic activity―the value of all the goods and services produced―in the United States was about $1.5 billion. Of this, the value of the cotton crop itself, total pounds multiplied by average price per pound―$77 million―was about 5 percent of that entire gross domestic product. This percentage might seem small, but after subsistence agriculture, cotton sales were the largest single source of value in the American economy. Even this number, however, barely begins to measure the goods and services directly generated by cotton production. The freight of cotton to Liverpool by sea, insurance and interest paid on commercial credit―all would bring the total to more than $100 million (see Table 4.1).

                Next come the second- order effects that comprised the goods and services necessary to produce cotton. There was the purchase of slaves―perhaps $40 million in 1836 alone, a year that made many memories of long marches forced on stolen people. Then there was the purchase of land, the cost of credit for such purchases, the pork and the corn bought at the river landings, the axes that the slaves used to clear land and the cloth they wore, even the luxury goods and other spending by the slaveholding families. All of that probably added up to about $100 million more.

                Third order effects, the hardest to calculate, included the money spent by millworkers and Illinois hog farmers, the wages paid to steamboat workers, and the revenues yielded by investments made with the profits of the merchants, manufacturers, and slave traders who derived some or all of their income either directly or indirectly from the southwestern fields. These third order effects would also include the dollars spent and spent again in communities where cotton related trades made a significant impact another category of these effects is the value of foreign goods imported on credit  sustained the opposite flow of cotton. All these goods and services might have added up to $200 million. Given the short term of most commercial credit in 1836, each dollar “imported” for cotton would be turned over about twice a year: $400 million. All told more than $600 million, or almost half of the economic activity in the United States in 1836, derived directly or indirectly from cotton produced by the million odd slaves― 6 percent of the total US population―who in that year toiled in labor camps on slavery’s frontier.”

 

Where do I begin? The approach is fundamentally flawed. Baptist begins with gross domestic product (GDP), the value of all the final goods and services produced in the country during the year. He refers to this as a measure of the total economic activity. He notes that the value of cotton production equaled about 5 % percent of GDP. No problems so far. But he then adds the cost of the inputs to the production of cotton. Anyone who has taken Principles of Macroeconomics knows that you can’t do this; it is referred to as double counting. If I buy $1000 worth of wood and then make it into a table that I sell for $1,500, we do not add $1,000 and $1,500 because the value of the wood is included in the value of the table, the final good. If he is going to engage in double counting for cotton he would need to engage in double counting for all other goods. He then adds the costs of transportation and insurance; these only count toward US GDP to the extent that they are produced by Americans. He also adds the sales of assets: land and slaves. Again, the sales of assets are not counted in GDP. GDP only counts the value of final goods and services produced during the year. Not all purchases are counted as part of GDP. Only purchases of newly produced goods and services are counted in GDP.  Comparing his calculation of economic activity related to cotton to GDP is meaningless.

 

There is, however, an even deeper problem with this back of the envelope accounting:

perhaps $40 million

probably added up to about $100 million

might have added up to $200 million

 

Baptist is simply pulling numbers out of thin air, or a hat, or wherever it is that he gets them. Back of the envelope calculations tend to involve simplifying assumptions. Baptist seems to understand the term to mean that he can just make things up. The only reference provided is to Table 4.1. Table 4.1 does not provide, as one might assume, information about shipping and insurance. It does not even have any information at all for the year 1836.

Both historians and authors of fiction tell stories, but the stories that historians tell are distinguished from fiction by their grounding in the sources. Historians are constrained to tell stories that they can support with evidence from their sources. Baptist has thrown off this constraint and set himself free to simply make up numbers (or events). This really is a new history of capitalism.

Economic History's Many Muses

Many of the papers from the the Library Company of Phildelphia Program on Early American Economy and Society's conference on Economic History's Many muses are available here. 

predatory publishing: letter to the editor version

http://jimromenesko.com/2014/10/22/want-your-letter-to-the-editor-published-in-the-watch-youll-have-to-pay-up/

More Slavery and the History of Capitalism

The September 2014 Journal of American History has an Interchange on the History of Capitalism. In the Interchange Scott Marler states that

 

“The problem arises when historians assert that the slave South was “a flexible, highly developed form of capitalism” (as Robert Fogel does). The evidence for such characterizations is thin and usually hinges on questionable interpretations. For example, some will emphasize the careful attention given to profit among that minority of big planter–slave owners, despite the facts that the majority of slaves were held on small units, using roughly five or fewer slaves, and that three-fourths of white households held no slaves on the eve of the Civil War. This is why definitions of capitalism matter. The relationship between master and slave was, at bottom, a nonmarket relationship, redolent of precapitalist relations between lords and serfs—not an economic one, as with the qualitative changes apparent in fast-growing wage-labor societies elsewhere.”

 

 

I am not going to get into the issue of whether slavery in the United States was capitalist or not, but Marler bases his conclusion on “the facts that the majority of slaves were held on small units, using roughly five or fewer slaves, and that three-fourths of white households held no slaves on the eve of the Civil War.” All of the sources I know of do indicate that the vast majority of southern families did not own slaves. On the other hand, Gavin Wright estimated that the majority of slaves (nearly 80 percent in the Cotton South in 1860) lived on plantations with 16 or more slaves.  Marler cites Kolchin’s American Slavery as a reliable source on the demographics of southern slavery. Kolchin (Appendix Table 4) claims that about 70 percent of slaves lived on farms with 10 or more slaves in the South as a whole; the figure was 80 percent for the Deep South. The majority (about 75 percent) lived on plantations with less than 50 slaves. Overall, the estimates in Wright and Kolchin are pretty consistent.

 

The availalbe evidence does suggest that the majority of slaveholders had five or fewer slaves, but that is not the same as saying that the majority of slaves lived on farms with five or fewer slaves. In other words, the typical southern farm owner would have looked around his farm and seen few if any slaves. The typical slave, on the other hand, would have looked around the farm he worked on and seen more than a dozen other slaves.

2014 Nobel

Jean Tirole

Tyler Cowen has an overview of Tirole's work.

et tu Foner?

There is a myth about historians and the Great Depression that some economists have tried to peddle over the years. The myth is that historians think Hoover was an opponent of government action and that the New Deal brought the country out of the Depression. They then act like they have made a great discovery if they show that Hoover tried to intervene in markets and that the economy continued to operate well under potential throughout the 1930s. The only problem is that this story is a complete misrepresentation of what most historians knew about the Great Depression. Listen to David Kennedy's Econ Talk with Russ Roberts for a discussion of what historians actually tended to think.

Some historians are now trying to peddle their own myth that before the "new history of capitalism" historians all believed that slavery was unprofitable and did not appreciate the economic importance of slavery, especially cotton production, to the development of the American economy.

In his New York Times review of Edward Baptist's book Eric Foner seems to join this crowd. He  writes that

"For residents of the world’s pre-­eminent capitalist nation, American historians have produced remarkably few studies of capitalism in the United States. This situation was exacerbated in the 1970s, when economic history began to migrate from history to economics departments, where it too often became an exercise in scouring the past for numerical data to plug into computerized models of the economy." 

He goes on to state that

"For decades, historians depicted the institution as unprofitable and on its way to extinction before the Civil War (a conflict that was therefore unnecessary). Recently, historians like Sven Beckert, Robin Blackburn and Walter Johnson have emphasized that cotton, the raw material of the early Industrial Revolution, was by far the most important commodity in 19th-century international trade and that capital accumulated through slave labor flowed into the coffers of Northern and British bankers, merchants and manufacturers. And far from being economically backward, slave owners pioneered advances in modern accounting and finance."

As with the Great Depression story, the problem is that this story is not true. It is true that "for decades, historians depicted the institution as unprofitable and on its way to extinction," but these were decades after 1918 when Ullrich B. Philllips published his American Negro Slavery. By the 1960s, however, evidence was beginning to pile up that slave owners received high rates of return on their investment, managed their plantations with an eye on profits, achieved high levels of productivity, and were increasing productivity over time.  The economic historians who produced this evidence did not keep their work secret. Someone taking an intro to American history class was likely to know about it. In George Brown Tindall's America: A Narative History we find that "More often than not the successful planter was a driving newcomer bent on maximizing profits." and "in recent years economic historians have reached the conclusion that slaves on the average supplied about a 10 percent return." (Tindall 1988:571)This is was written nearly three decades ago. Suggesting to people that before the new history of capitalism everybody thought that slavery was unprofitable is either dishonest or incompetent.

Foner's snarky comment about economists turning economic history into an exercise in scouring the past for numerical data is particulalry ironic since Baptist's argument is based on the work of economic historians who scoured the past for numerical data. His book is based on an increase in productivity in cotton production. It turns out this can only be demonstrated with numerical data that Alan Olmstead and Paul Rhode scoured the past to obtain.

What happened to historians like Herbert Gutman and Kenneth Stampp who were willing to challenge economists head on when they disagreed with their work on slavery.

What I'm Listening To

A really interesting Junto Cast on Bernard Bailyn's The Ideological Origins of the American Revolution.