The Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets, 1780-1850 (review)

A decade or so ago, much of the economic and historical writing concerning the early republic focused around a debate about the "transition question" in late eighteenth- and early nineteenth- century America. At issue was nothing less than accounting for the origins of capitalism and economic development in the United States. Focusing on the period from 1780 to 1850, one camp argued for a difficult transition from noncapitalist agrarianism and a "household mode of production" to market-based manufacturing and agrarian capitalism. The other camp argued that the United States and its British colonial antecedents were capitalist from the beginning and that the changes that took place in the early years of the republic were not at all fundamental, but were simply due to the penetration of markets and market relationships into the country's rural hinterlands.

The transition question generated a great deal of scholarship, but little in the way of consensus, and by the late 1990s the debate largely died away. At base, an answer to the transition question rested on one's definition of capitalism, and the debate generated nearly as many definitions of capitalism as there were articles and books on the subject. Framed in this way, the fundamental question—whether capitalism emerged between 1780 and 1850 ormuch earlier—could never be answered in a way that would convince scholars holding opposing viewpoints and competing definitions.

Arguably the most important loss in this failed debate concerned the issue of economic development: how was it that the new United States moved so rapidly and decisively from two centuries of agrarian dependence to become a rising force in the Atlantic world of industrialization and commercial exchange by the middle of the nineteenth century? In The Wealth of Nations Rediscovered, Robert Wright offers an intriguing explanation of this transformation. Building on a set of presuppositions embedded in Adam Smith's Wealth of Nations and on recent work on the economics of finance, Wright argues that not only was British America capitalist from the beginning, but that given the extraordinary financial system created in the United States between 1780 and 1850, industrial and commercial development was all but certain. The prime mover of early American economic development—measured here by a continuously rising Gross Domestic Product (GDP)—could be found, Wright argues, not in the agrarian or commercial sectors, but in the financial system that knitted together and focused economic relationships in the new nation.

The Wealth of Nations Rediscovered draws liberally from information asymmetry theory to explain early American economic development. This theory posits that financial institutions are vital to economic development because they function to create and maintain potentially undistorted financial linkages between investors and entrepreneurs. Much like Jürgen Habermas's notion of communicative competence, information asymmetry holds as its ideal a set of interchanges that operate with maximum efficiency and minimum distortion.

Applying this to early American finance, Wright recounts the transference from Holland and England ideas and a set of legal and financial institutions—sanctity of contract, government revenue bonds, a national bank, and securities trading—that placed the newly founded United States in a strategic position to develop both its domestic and international economies. With this set of financial institutions firmly in place, banks were able to efficiently vet and monitor borrowers in ways that private lenders never could, while securities markets, which developed early in the process, were able to establish direct connections between businesses and investors. Add to this the stabilizing functions of the Bank of the United States and the U.S. Treasury, and Wright has the material in hand to argue for a finance-led explanation of early American economic growth.

The "root cause" of America's dramatic transformation from agrarian to early industrial society was, Wright argues, the rapid development...