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Recent transgressions in financial markets have underscored the fact that one can hardly overstate the importance of reputation in a market economy. To be sure, a market economy requires a structure of formal rules--for example, a law of contracts, bankruptcy statutes, a code of shareholder rights. But rules cannot substitute for character. In virtually all transactions, whether with customers or with colleagues, we rely on the word of those with whom we do business. If we could not do so, goods and services could not be exchanged efficiently. The trillions of dollars of assets that are priced and traded daily in our financial markets before legal confirmation illustrate the critical role of trust. Even when followed to the letter, rules guide only a few of the day-to-day decisions required of business and financial managers. The rest are governed by whatever personal code of values that managers bring to the table.
Market transactions are inhibited if we cannot trust the reliability of counterparties' information. The ability to rely on the word of a stranger is integral to any sophisticated economy. A reputation for honest dealings within a business or financial corporation is critical for effective corporate governance. Even more important is the way outsiders view the corporation itself. The reputation of a corporation is an exceptionally important market value that in principle is capitalized on a balance sheet as goodwill.
Reputation and trust were valued assets in freewheeling nineteenth-century America. Throughout much of that century, laissez-faire reigned, and caveat emptor was the prevailing prescription for guarding against wide-open trading practices. A reputation for honest dealing was thus particularly valued. Even those inclined to be less than scrupulous in their private dealings had to adhere to a more ethical standard in their market transactions, or they risked being driven out of business.
To be sure, the history of business is strewn with Fisks, Goulds, and numerous others treading on, or over, the edge of legality. But they were a distinct minority. If the situation had been otherwise, the United States at the end of the nineteenth century would never have been poised to displace Great Britain as the world's leading economy.
Reputation was especially important to early U.S. bankers. It is not by chance that many bankers in the nineteenth century could effectively issue non-interest-bearing liabilities in the form of currency. They worked hard to develop and maintain a reputation that their word was their bond. For these institutions to succeed and prosper, people had to trust their promise to redeem banknotes in specie. The notion that "wildcat banking" was rampant before the Civil War is an exaggeration. Certainly, crooks existed in banking as in every business. Some banks that issued currency made redemption inconvenient, if not impossible. But these banks were fly-by-night operators and rarely endured beyond the first swindle.
In fact, most bankers, especially on Wall Street, competed vigorously for reputation. Those who had a history of redeeming their banknotes in specie, at par, were able to issue substantial quantities, effectively financing their balance sheets with zero-interest debt. J.P. Morgan marshaled immense power on Wall Street in large part because of his widespread reputation for fulfilling his promises.
Over the past half century, the American public has embraced the protections of the myriad federal agencies that have largely substituted government financial guarantees and implied certifications of integrity for business reputation. As a consequence, the market value of trust so prominent in the nineteenth century seemed unnecessary and by the 1990s appeared to have faded to a fraction of its earlier level.
Presumably, we are better protected and, accordingly, better off as a consequence of these governmental protections. But corporate scandals of recent years have clearly shown that the plethora of laws of the past century have not eliminated the less-savory side of human behavior.
We should not be surprised then to see a re-emergence of the market value placed on trust and personal reputation in business practice. After the revelations of corporate malfeasance, the market punished the stock prices of those corporations whose behaviors had cast doubt on the reliability of their reputations. Recent allegations on Wall Street of breaches of trust or even legality, if true, could begin to undermine the very basis on which the world's greatest financial markets thrive. Guilty parties should be expeditiously punished. Some practices and rules have outlived their usefulness and require updating. But in so doing we need to be careful not to undermine the paradigm that has so effectively governed voluntary trade. Rewriting rules that have served us well is fraught with the possibility for collateral damage.
I hope and anticipate that trust and integrity again will be amply rewarded in the marketplace as they were in earlier generations. There is no better antidote for the business and financial transgressions of recent years.
e research programs on the use of natural predators for many insect pests.
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Overall productivity gains in the United States following World War I reflected the ongoing shift of our workforce from farms, where the level of output per hour was low, to rapidly expanding high-value-added manufacturing. But with cheap farm land rapidly dwindling after 1935, intensive cultivation accelerated, increasing earnings per acre that were rapidly capitalized into land values. The value per acre of farm land adjusted for inflation has tripled since 1940.
But as land values have risen, intensive cultivation is also rapidly closing the gap between productivity on farms and ranches and productivity of nonfarm business establishments. Indeed, over the past half-century, agricultural productivity rose at an annual rate of 5 percent, more than twice the rate for nonfarm business firms.
The surge in farm productivity has had profound implications for the size of the farm population and the structure of rural communities. The sharp rise in output per worker created excess supplies of agricultural labor and led to a huge migration of farmers and farm workers from agriculture to other industries, generally in urban areas. The farm population in the United States peaked at 33 million in 1916, held stable through the 1940s, but declined thereafter. Today only a few million people live on farms. Moreover, as rural workers declined in number, some of the smaller villages and trade centers that had formed when earlier, more labor-intensive technologies prevailed were no longer viable as commercial centers. In addition, declining farm populations in some communities in the Great Plains strained social institutions such as schools, county services, and hospitals that tend to require a "critical mass" of population to operate effectively.
Despite the migration of farm populations towards cities, the nonfarm population and the level of employment in rural America as a whole have increased substantially over time and have more than offset the declines in populations involved in farming and other resource-based industries. After World War II, growth in manufacturing created many jobs in rural areas, and more recently, many rural places have become home to service-based industries. For all counties that are labeled nonmetropolitan by current definitions, the population is about one-fourth larger than it was in 1960, and that finding does not take into account the very rapid growth in counties that were rural in 1960 but have since become part of expanding metropolitan areas. Recent surveys by the Department of Agriculture show rapid population gains in communities close to metropolitan areas, but strong growth has also occurred in many other rural areas, especially those with attractive lifestyles and other amenities that are much in demand among today's workers.
The growing tendency of workers today to migrate to rural areas also reflects space-reducing innovations in transportation, infrastructure, and communications, such as satellite television, that have helped to lessen the physical remoteness of many rural places.
What does this brief sketch of American agricultural history imply about global agricultural development? First, many of the countries where agricultural output is growing most rapidly still report yields that are considerably below those in the United States. For instance, according to Agriculture Department estimates, since the mid-1990s, yields per acre of corn in Argentina have been roughly one-third less than those in the United States, and in China they have been about one-half. Such lower yields suggest that these countries have yet to implement fully the intensive cultivation technologies available to today's farmers and instead depend on a relatively higher input of land and labor. However, average yields in these countries are advancing rapidly, and we can reasonably expect that, just as in the United States, higher farm returns should come along with the yield improvements.
A second vital feature in the development of American agriculture was the importance of unfettered trade. Of course, initially much of the exchange of agricultural commodities occurred within the United States, but as output expanded, exports became increasingly important. Today, our nation's farmers are highly dependent on exports to absorb their remarkable productivity, and their ability to compete internationally depends on lowering unit costs faster than producers in other countries are lowering costs. Given the institutions that our nation has developed for maintaining rapid agricultural innovation and for quickly disseminating the new techniques through the farm economy, U.S. producers are well positioned in this regard. However, foreign producers are adopting farming innovations rapidly as well, and efforts to increase the openness of world markets will need to be maintained and intensified so that the full benefits of farm productivity gains can raise standards of living worldwide.
To sum up, the phenomenal gains in U.S. agricultural productivity of the past century brought profound benefits to all consumers, regardless of their connection to a farm, in the form of lower prices, better quality, and more choices at retail outlets. But those gains also have been associated with dislocations in many rural areas, largely in the form of a migration of farm workers to more urban areas and the resulting eclipse of many small towns and villages. Although dislocations are bound to accompany economic growth, we should rise to the challenges that come with innovation because innovation brings great improvements in material well-being.
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