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Twenty years ago Professor Frederic C. Lane recognized the close connection between economics and political history and suggested that it is impossible to understand fully the first without some understanding of the second. Relatively little work has been done in that area over the ensuing two decades. In that period both social and political historians have become more quantitative, and although their work has permitted us to discuss some alleged explanations of social and political development, it has not really produced viable alternatives. This failure is linked with the theoretical nature of the analysis. Although there does not appear to be a useful body of theory in sociology, positive political science offers such a structure for our understanding of political history.

It is necessary not only that capital be accumulated, but also that it be mobilized for productive use, if an economy is to benefit from an increase in capital per person. The classical model of resource allocation assumes that within any economy capital is perfectly mobile. It implies, therefore, that once allowance is made for uncertainty and risk, returns on investment are equal in all industries in all regions. Such a model, while logically consistent, is not very useful for analyzing the process of economic growth. In the early stages of development, because the uncertainty discounts are high, capital is not very mobile. As a result, rates of return vary widely between industries and between regions; and growth in high-interest regions is retarded. Development, in part then, takes the form of a reduction in uncertainty discounts—a reduction that makes it possible for capital to move more freely between regions and industries.

Mrs. Vatter has covered three major points in her comment on my article. She has suggested the need for further research; she has questioned the completeness of my analysis of interest rate determination; and she has suggested an alternative explanation of the apparent ceiling on interest charges. I am in complete agreement with Mrs. Vatter on the first of her points. On the second, I apologize for any lack of clarity that may have led her to misinterpret my intent. On the third, I feel that, despite her evidence, her conclusion remains, at best, unproved.

Study of ante-bellum economic development of the United States has been hampered by an acute shortage of reliable statistical data. Studies of the early capital markets are no exception to this general rule. For the years after 1856, Frederick Macaulay's excellent study provides sufficient quantitative basis for general research; but, in the earlier years, only Bigelow's single unsupported interest series provides the economic historian with statistical information on the condition of the credit market.