Financial History Review http://journals.cambridge.org/FHR Additional services for Financial History Review: Email alerts: Click here Subscriptions: Click here Commercial reprints: Click here Terms of use : Click here Douglas A. Irwin and Richard Sylla (eds.), Founding Choices: American Economic Policy in the 1790s, National Bureau of Economic Research Conference Report (Chicago: University of Chicago Press, 2011, 368 pp., hardback \$110, paperback \$35) Larry Neal Financial History Review / Volume 18 / Issue 03 / December 2011, pp 357 - 360 DOI: 10.1017/S0968565011000230, Published online: 27 September 2011 Link to this article: http://journals.cambridge.org/abstract_S0968565011000230 How to cite this article: Larry Neal (2011). Financial History Review, 18, pp 357-360 doi:10.1017/S0968565011000230 Request Permissions : Click here Downloaded from http://journals.cambridge.org/FHR, IP address: 130.113.86.233 on 02 Apr 2015 Financial History Review . (), pp. –. © European Association for Banking and Financial History e.V.  BOOK REVIEWS doi:./S Douglas A. Irwin and Richard Sylla (eds.), Founding Choices: American Economic Policy in the s, National Bureau of Economic Research Conference Report (Chicago: University of Chicago Press, ,  pp., hardback $, paperback $) The Tea Party movement in the US combined nostalgic fervor for the country’s founding fathers with anger at the continued economic malaise after the financial crisis of –. In , Professors Douglas Irwin and Richard Sylla presided over a National Bureau of Economic Research Conference held at Dartmouth College in which leading American scholars examined the economic policy issues that confronted the founding fathers during the Constitutional Convention of  and how they responded. The economic problems were overwhelming for the newly independent colonies and there was no political consensus on how to deal with the issues. Through the political genius of James Madison and the economic expertise of Alexander Hamilton, however, the basic structures formulated in the written Constitution allowed the new nation to begin immediately the economic growth that has continued ever since. The introductory chapter by the two editors lays out their plan: begin with the politics, move on to the variety of policy choices that followed, and conclude with the consequences for business enterprise, land policy, labor and technology in the early national period. Notably missing are chapters dealing with the legal system and military strategies, but these aspects of the early national period have been dealt with in detail in numerous monographs. What emerges from the collected papers is a tribute to Hamilton, again and again, but bolstered each time with fresh evidence and analysis of the paths not taken. Politics. ‘The constitutional choices of  and their consequences’ by Sonia Mittal, Jack N. Rakove and Barry R. Weingast lays out the various paths that were options, while emphasizing that none was foreordained, neither by ‘common sense’ nor past experience. What the constitution provided that was so important for future economic growth was ‘a stable republican governmental structure’ that underpinned specialized investments within states while preserving a common market. These resulted in ‘market preserving federalism’, which requires:   States have power over policies with their jurisdictions, including taxation and the ability to regulate their local economies. States participate in a common market. 357    BOOK REVIEWS States face a hard budget constraint. National institutions provide incentives for national officials to honor the rules so that federalism is self-enforcing (p. ). The authors note that most modern federal systems fail to meet one or more of these conditions, which is why the ‘laboratory of the states’ in the US that fostered experimentation with alternative policies within the common market has not been replicated elsewhere. State initiatives included public schools, broader political franchises, large-scale infrastructure projects and banks. All these facilitated economic growth when other states imitated the leaders. More controversial is their argument that the Constitution provided ‘adaptive efficiency’ when confronting periodic shocks to the political arrangements that relied upon equal representation between free and slave states. The Civil War following the unresolved crisis from  to  aside, earlier crises were resolved by making the number of slave and free states equal, while the end of Reconstruction in  admitted the previous slave states back into the Union on the same terms as they had left other than the abolition of slavery, but with adverse consequences not mentioned by the authors. Policy. ‘Financial foundations’ by Richard Sylla pays tribute to the guiding genius of Alexander Hamilton, who in three years, -, as Secretary of the Treasury, put into place a national tax system, a national currency, a national bank and regular securities markets. States increased the number of their banks, corporations and securities markets in response. Hamilton’s ideas were formed in response to the ongoing problems faced by the Continental Army in obtaining the sinews of war, and his appreciation especially of the British system for financing its army and navy. A foreign loan was essential, but foreign creditors had to be assured of repayment despite lack of political voice. While Hamilton’s ideas were well-formed by a decade of experience before the Constitution, implementing them required enormous effort on his part, effort that paid off thanks to the continued support of President Washington and the increasing flow of revenue from customs revenues on a rapidly growing quantity of imported goods. Providing a secondary market of the new Federal debt issued in exchange for the wartime debts accumulated by the separate states was also crucial for his success, and Hamilton’s actions in averting the nation’s first financial crisis in  are extolled by Sylla, who has uncovered evidence that Hamilton made unauthorized loans to New York securities dealers to bail them out and maintain continued high prices for the Federal bonds. Overall, Sylla reaffirms the assessment made a century ago by Charles Beard that Hamilton was ‘the colossal genius of the new system’, the one who ‘displayed that penetrating wisdom which placed him among the great statesmen of all time’ (p. ). Hamilton’s genius is reaffirmed in the following chapters dealing with trade policy, monetary policy, banking policy and state finances. Douglas Irwin praises Hamilton’s emphasis on a revenue-based tariff rather than a protective tariff for infant industries, which was argued by Madison and Jefferson. Peter Rousseau extols the virtues of Hamilton’s coinage as the basis for a common currency, which led to monetization BOOK REVIEWS  that kept pace with population growth for the first time in the New World’s history. Financial assets grew as well and, Rousseau argues, led the way to economic growth in general. Howard Bodenhorn notes that Hamilton’s governance structure of the first Bank of the United States provided a model for the state banks that proliferated in competition, expanding the financial revolution beyond the Atlantic seaboard. John Wallis describes how the individual states then found ways to finance from their anticipated land taxes the construction of turnpikes and canals and imitated each other’s successes in order to compensate for the lack of federal financing of infrastructure projects. Business organization and the factors of production. Robert Wright begins this section by documenting the enormous increase in the number of corporations chartered by the individual states in the s. Only eight corporations had been allowed charters during the entire colonial period, and only  from  through , while another  were created by . Wright considers both the costs and benefits of the various corporations, concluding that the specific terms of the charters, combined with stockholder activism that was more effective with small numbers and local interests, created benefits far outweighing the costs of obtaining charters from state legislatures. Farley Grubb then assesses the way the individual states and new territories disposed of their land allotments in competition with Federal land sales when they occurred. Actual sales of Federal land were delayed per Hamilton’s advice, in order that the huge acreages could be seen as collateral for the Federal government debt, while rising tariff revenues provided the means to pay interest as it came due. Sudden sales of the huge tracts, by contrast, would have led to a ‘fire sale’ devaluation of the land values and jeopardized the Federal government’s long-run financial position. The unanticipated Louisiana Purchase of  more than doubled the Federal government’s assets, which continued to be administered under the policies laid down in the s and s. Land, to be useful, had to be populated and the chapter on ‘Free labor and slave labor’ by Stanley L. Engerman and Robert A. Margo makes the point that the native American population in all of North America was less in  than in any other part of the New World so all the colonies encouraged high rates of immigration. Ultimately, however, it was the exceptionally high rates of natural increase of the immigrant populations, both the free or indentured white laborers from Europe and the black slaves from Africa, which created a growing labor force. The main effect of the Constitution was to allow the Federal government to refuse convict labor from Britain and to end the transatlantic slave trade in , both measures reinforcing the importance of natural increase. Had the Constitution gone further and eliminated slavery entirely, not just the slave trade from abroad, Engerman and Margo argue that economic growth in the South would have been lower, as the productivity of free labor in cotton cultivation was lower than that of gang labor by slaves. The concluding chapter by B. Zorina Khan, ‘Looking backward: founding choices in innovation and intellectual property protection’, emphasizes the novelty of US patent law, explicitly stated in the constitution, Article , section : ‘Congress will have Power . . . To promote the Progress of  BOOK REVIEWS Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.’ Protection of both copyright and patent was assured for the first time in any nation’s constitution. Implementation of the protection in the nineteenth century was more diligent for patents than for copyrights, however, as devices were more valued than manuals then. The importance of the Constitution for facilitating continued long-run economic growth comes through clearly in each chapter. Its main virtue was to facilitate experiments and expansion rather than to prescribe hard and fast rules of governance. May the Tea Party adherents take note! University of Illinois at Urbana-Champaign LARRY NEAL doi:./S John Singleton, Central Banking in the Twentieth Century (Cambridge: Cambridge University Press, ,  pp., hardback £, $) Since the beginning of the financial crisis in , the study of central banking has witnessed something of a revival. This is no surprise, as the policy tenets commonly held by central banks before the crisis have come under scrutiny. Central banks have shared the blame for not having foreseen or prevented the crisis. At the same time, the policy responses of central banks – and governments – once the crisis did break, have been contrasted, usually favourably, to their (mis)handling of the Great Depression of the s. Negatively or positively, central banks are back in the limelight. As history looms so large in the current central banking debate, the publication of John Singleton’s Central Banking in the Twentieth Century seems perfectly timed. In  concise chapters, the author provides a systematic account of the development of central banking since the end of the classical gold standard. The book opens with a series of vignettes portraying the different types of central bankers: from Montagu Norman, man of mystery, to Ben Bernanke, the professor (and expert on the Great Depression). This is a good way to introduce the reader to the key issues in central banking, and a poignant reminder that even in monetary economics people still matter: ‘whether for good or ill, particularly in times of crisis’ (p. ). Singleton’s narrative follows the by now classical pattern. Central banking started out as a specialist branch of banking with a limited public policy role under the gold standard regime. The disastrous monetary and financial legacy of World War I propelled central banks into prominence, with the emphasis being placed on monetary orthodoxy (the return to gold) and on central bank independence from political influence. This ascendancy was short-lived. The helplessness of central banks in the face of the Great Depression led to what Singleton calls the first revolution in modern central banking. The power to set monetary policy was taken largely out of the hands of central banks. They were relegated to executing government policy, and central bankers acquired the status of civil servants. This status was