The Development of the American Economy

Researchers in the NBER's Program on the Development of the American Economy work primarily, but not exclusively, in the areas of labor and population, industrial organization, financial and macroeconomic history, and political economy. The group's unified goal is a better understanding of the evolution of the American economy and the roots of current policy issues. Because of the breadth of the work, I am able to highlight only two sets of research activities: one, in financial history, has been pursued actively by DAE members almost from the inception of the program; the other, in political economy, is a new initiative that will be the focus of a preconference in October 1992 and an NBER conference in May 1993. Financial History in the DAE A substantial group of NBER researchers - including Faculty Research Fellows Charles W. Calomiris and J. Bradford De Long, and Research Associates Michael D. Bordo, Lance E. Davis, Barry J. Eichengreen, Claudia Goldin, Naomi Lamoreaux, Hugh Rockoff, Christina D. Romer, Richard E. Sylla, and Eugene N. White - has been exploring the financial history of the United States. Their projects have revealed the long-run development of financial markets and institutions, as well as regulatory regimes and policy experiments of the past. Their work has explored the volatility of stock prices since the 1830s, the crash of 1929 and the Great Depression, regional differences in antebellum interest rates, bank regulations such as deposit insurance, branch banking, and free banking, the transmission of economic fluctuations, and financial intermediation in the history of savings. A major priority of this group has been the development of new time-series data on the returns to financial assets and individual-level longitudinal data on savings. Sylla, with Jack Wilson and Charles P. Jones, has compiled consistent monthly series on commercial paper rates, call money rates, and the return to corporate stocks and bonds from the 1830s to the present. They find that stock and bond markets were less volatile before 1914 than after, calling into question the efficacy of many regulations and reforms introduced in the twentieth century. They also find that, while there is a correlation between banking panics and stock market crashes, neither of the simplest hypotheses - that banking panics caused crashes, or the reverse - can explain the correlation satisfactorily. (1) Further work will be aimed at clarifying the relationships among stock market crashes, banking panics, and downturns in economic activity. They also have investigated the relationship between financial market conditions and the great merger wave in U.S. manufacturing at the turn of this century. They find that low stock prices produced increased merger activity, a result that contrasts with the findings of others for subsequent merger waves, but one they regard as consistent with investment theory. (2) De Long has focused on the determinants of major long-run bull and bear markets in the United States and in other major industrial economies. He and NBER Research Associate Robert B. Barsky have found that major swings in the stock market since 1900 were driven by investors' extrapolations of the recent past into the future. (3) Each boom saw the market rise, as investors expected it to persist indefinitely; each slump saw investors fear that America faced permanent economic stagnation. White and Peter Rappoport also have begun a large-scale exploration of the stock market in the 1920s and 1930s. Using evidence from the call loan market, and new quarterly data on dividends, they find that lenders in the call market believed that the stock market was likely to experience a large decline in 1929, evidence suggesting that there was a bubble in the market. In research currently underway using newly collected cross-sectional data, White and Rappoport find evidence of excess comovement in stock prices, or "herding" behavior, but the phenomenon was more intense in the 1930s than during 1929, a surprising conclusion that suggests rumor and panic were important in the 1930s. …