Abstract
I am a big fan of Sarah Quinn’s earlier work on secondary life insurance markets, and I eagerly agreed to review the present book even though some of the terrain this project covers—nineteenth-century farmers’ credit—gave me pause. What became clear from the first pages of the introductory chapter of American Bonds: How Credit Markets Shaped a Nation is that this is Quinn at her best: an astute observer and a superb writer who clarifies the complex and confusing and illuminates the opaque. The book is full of instantly quotable passages that will surely make it a favorite among scholars of finance: “Finance is always social. It is social not just because it distributes profits and risks among people, but also because those profits and risks are distributed on the basis of understandings, usually unspoken, of what people can imagine owing and sharing with one another” (p. 1). Or this: “As a time machine, credit carries more than economic value across decades. The later gains and repayments that accompany it bring the inequalities of the past into the present and will help carry today’s inequities into the future” (p. 202).
In a nutshell, American Bonds is about American credit policies that lie at the heart of domestic statecraft. In particular, the book illuminates a surprising fact: despite its reputation for laissez-fair-style governance, the United States has always pursued a strongly developmental trajectory—with federal credit programs and securitization as its two broad policy tools—as it faced pressure to effectively govern its vast territory while providing widespread economic opportunities but avoiding redistributing wealth. This ambitious book provides an astounding amount of detail (contained in more than 60 pages of endnotes) to cover almost 200 years of American history, from the early post-Revolutionary years to the late 1960s. Although it ends with a discussion of the rise of securitization of the 1960s, it could be considered a prequel to the 2008 global financial crisis as it helps readers understand the historical evolution of the U.S. government’s land and housing credit policies.
Historically, America was built on credit—most notably business credit, housing credit, and farm credit. Except for short periods leading to speculative bubbles, the need for credit has typically outpaced the supply. Long-term credit in particular is risky for lenders, and collateralizing it is difficult if land and real estate prices are volatile. Moving money from eastern centers into the hands of farmers and homeowners in the West and South has been a big challenge, and it is dealt with in the first part of the book (Chapters 2, 3, and 4) dedicated to finance in the nineteenth century.
Chapter Two covers the early mortgage market and credit programs intended to respond to periodic crises and urgent needs, such as the debts accrued during the Revolutionary War or financial backing for the railways. Chapter Three deals with the political fallout from the inability to assure adequate credit provision where it was needed the most and illustrates how different proposals on the table reflected different political visions. Chapter Four talks about the Progressives’ push to put farm credit back on the political agenda and to use the European experience to frame credit allocation as “a way for the central government to help people help themselves” (p. 20) instead of relying on handouts. A result of this political struggle was the creation of the federal farm loan system, which became a blueprint for future credit-related policies.
The second part of the book (Chapters 5, 6, 7, 8, and 9) is focused on the explosive growth in mortgage and federal credit in the twentieth century. Chapter Five follows a transition from farm to mortgage finance as the main center of gravity in the U.S. financial system. It traces the process that managed to firmly establish homeownership as the moral core of American citizenship, in both the political economy and the public imagination, as a measure of independence, success, and virtue.
Chapter Six, one of the most interesting chapters in the book, is focused on a little-known post-World War I story of a mass finance market for mortgage bonds that were made up of small shares of large mortgages for commercial buildings like the early skyscrapers. The market heated up during the Roaring Twenties as lenders aggressively marketed mortgage bonds to individuals and households—part of the process that historian Julia Ott in her study of First World War bond drives calls “shareholder democracy,” when investing in bonds was perceived as a “patriotic duty” and “a ritual of national belonging” (p. 113).
The mortgage bond market came crashing down in the early 1930s ($8 billion out of an estimated $10 billion of the nation’s mortgage bonds defaulted), leaving 4 million investors holding worthless papers and leading to sweeping prohibitions against purchases of mortgage bonds by small investors in the future. But before it crashed, the financial exuberance resembled very much the phenomenon of household financialization that we usually associate with the 1990s and 2000s, down to its core idea, promoted by Wall Street, that “middle-class American families should be investors, an identity previously thought to be appropriate only for a much smaller group of elites” (p. 108).
Moreover, Wall Street also endorsed the position that these markets should be left unregulated. Lack of government regulation was seen as contributing to the idea that Americans ought to help themselves not through handouts from the state, but by being given a hand up by a laissez-faire market. After all, bonds were promoted as “a safe option for the new investor” and “more adjusted to the needs of the inexperienced investor than stocks” (p. 113). Relative safety notwithstanding, in the absence of real government oversight small investors were left vulnerable. So strong was the subsequent recoil that the head of the Federal Housing Administration declared in 1935 that mortgages were “a synonym for nightmare” (p. 122). It is notable that mortgages completely restored their moral and cultural allure in the second half of the twentieth century, to the extent of becoming the crown jewel of the celebrated American Dream.
Chapter Seven follows the story of the creation of Fannie Mae and the more expansive use of credit in government policy because of what Quinn calls “the ideological and fiscal lightness of credit.” What does she mean by this? Credit offered a politically pragmatic and expedient solution to extend economic opportunities and assure growth, while avoiding political conflict and thorny discussions of open redistribution of wealth. Economic and development goals could be achieved by growing the whole pie, not by cutting the existing pie differently. The ideological lightness of credit meant that politicians of many different ideological stripes could get behind this idea. Besides, credit as a government policy is cheap—it does not appear on government budget sheets. It is the size and complexity of the United States as a nation and its fractured and fragmented political landscape that encouraged the use of credit as a political tool. In other words, credit allowed American policy-makers to pursue a lot of important development goals without resorting to heavy-handed European-style policies of income redistribution and government planning.
Chapters Eight and Nine are dedicated to the post-World War II development of housing credit and, eventually, securitization. The concluding chapter, aptly titled “What We Owe One Another,” is a recap but also an invitation to think more broadly about the role of credit in government policy-making and the role of both credit and government intervention in our lives. “What we owe one another” and what we can expect from the government are about distributing profits and risks in a financial system: it is not just the question of who is expected and eligible to borrow (i.e., an average American household relies on loans to finance college education for their children or a mortgage to finance their house), but also what happens when these debts cannot be repaid. Which debts are restructured or forgiven? Who is penalized? In the end, who has to pay for whom?
The title of the book, American Bonds, is wonderfully multilayered and a reference to the point that “finance is always social.” On the one hand, it may literally mean bonds as financial instruments, for instance those short-lived mortgage bonds described in Chapter Six. On the other, it can mean promises of obligation that are part and parcel of credit contracts. And in the most basic, general sense, American bonds are the ones that inescapably tie individuals together into what we call society—imagined communities with a shared past and common destiny.
While those readers not familiar with U.S. political and economic history may find some of the detailed narratives in the substantive chapters of the book somewhat dense, to Quinn’s credit she never takes her eyes off the big picture. All the chapters (and, sometimes, individual sections) are accompanied by summary narratives not only reminding readers of the book’s general itinerary—where we came from and where we are going next—but also providing reflections of a more general kind that can be used as those “sticky” and quotable take-home lessons.
Do I wish that Quinn took us all the way into the 2000s? Yes, but it is hardly fair to ask this from a book that starts its narrative in the 1770s. I would also like to see a chapter dedicated entirely to exploring the “credit as a time-machine” idea and the role of financial policy in amplifying future economic and racial inequalities. Finally, I would like the book to make a stronger case for how the argument can be relevant to scholars of finance or government policy outside the United States, perhaps those studying Europe or Latin America.
The most remarkable lesson of the book for me is that despite the seeming dominance of American anti-statist and laissez-faire ideology, the United States has a robust developmental state, albeit one that looks very different from the more directly interventionist ones in European and Asian economies. While the general consensus is that the United States has a weak welfare state, in Quinn’s assessment it is a “credit- and housing-heavy welfare state.” Not weak, but different from what one expects. But how can we reconcile this with how the United States is commonly perceived domestically and internationally as exceptional in its love of markets and distrust of the central government? Drawing on Polanyi, Quinn argues that laissez-faire and free market ideology are nothing more than a “rhetorical device” that businesses use pragmatically to push against legislation they do not like while quietly asking for and gladly accepting government support when they need to (one may just recall the 2008 bailout of financial institutions). Quinn convincingly though provocatively declares: “If the United States is the most capitalist of countries, the most frequently thought of as laissez-faire, it is perhaps because no other nation has so successfully managed this contradiction of having extensive government involvement in markets while also generally dismissing the importance of those policies for market development so well” (p. 203). Is this ideological smoke screen of a minimally interventionist state so persuasive because it aligns particularly well with traditional American values of independence and self-reliance? Perhaps so. In any case, the strength and insidiousness of this ideology are clear to anyone who is familiar with the history of U.S. health care policy: the widespread belief in the virtue of minimal government intervention has been one of the obstacles to instituting a universal health care system in the United States in the twentieth century.
What are the consequences of relying on credit while maintaining the myth of minimal government? Credit is useful because it gives policy-makers an opportunity (and an incentive) to frame various problems as financial ones—in other words, technical problems for which a number of financial solutions can be found. This creativity, notes Quinn, enables political action where it otherwise could have stalled. But this reliance on credit as the central element of governance has a number of downsides, not least of which is the lack of transparency and democratic accountability, as well as a nontrivial risk of financial instability, which can bring further political troubles. Moreover, policies that avoid direct wealth redistribution in favor of redistribution of risk via financial policy have a profound effect on long-term patterns of wealth accumulation. In particular, excluding families of color from federal housing programs limited their long-term opportunities to build wealth in the period of robust economic growth and growing real estate values.
Why do we always seem to go down the same path of resorting to credit as a policy tool while maintaining the myth of a detached and uninvolved American state? Why does the government not take, well, more credit for its role in economic development? Giving credit where credit is due—publicly accounting for the government role in a transparent manner—could change many ongoing public debates centered on perceived resistance to greater government intervention and regulation (for instance, in health care provision or pharmaceutical drug pricing). But that would most likely deprive credit of its perceived ideological lightness, and the government of its time-tested methods.
It is also possible that current levels of economic inequality and the COVID-19-induced recession will create significant pressures to re-politicize financial policy and ignite broad public debates about what we truly owe one another, especially as younger voters have been eagerly embracing democratic socialism and openly calling for the redistribution of wealth.
Whatever the future may bring, this thoroughly researched and superbly written landmark study is a major contribution to our understanding of the role of credit and finance in U.S. policy-making of the last two centuries. It is a must-read for scholars and advanced students of political economy, economic and historical sociology, and the sociology of finance.