This is a blog about economics, history, law and other things that interest me.
Saturday, November 1, 2014
Friday, October 31, 2014
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
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.
Thursday, October 30, 2014
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.
Monday, October 27, 2014
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.
Thursday, October 23, 2014
Wednesday, October 15, 2014
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.
Monday, October 13, 2014
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