Any attempt to discuss the way in which railroads have promoted the rise of the American economy must assume some theory of economic evolution. The following analysis is based upon Schumpeter's theory of innovations. Briefly this theory holds that economic evolution in capitalistic society is started by innovation in some production function, that is, by new combinations of the factors in the economic process. These innovations may center in new commodities or new services, new types of machinery, new forms of organization, new firms, new resources, or new areas. As Schumpeter makes clear, this is not a general theory of economic, much less of social, change. Innovation is an internal factor operating within a given economic system while the system is also affected by external factors (many of them sociological) and by growth (which means, substantially, changes in population and in the sum total of savings made by individuals and firms). These sets of factors interact in economic change. “The changes in the economic process brought about by innovation, together with all their effects, and the response to them by the economic system” constitute economic evolution for Schumpeter.

The sixteenth-century Price Revolution in Spain induced by the gigantic stream of Mexican and Peruvian silver was followed by a century of alternate inflation and deflation resulting from wars and weak governments. But in spite of frequent, long, and unsuccessful wars, monetary stability characterized the first half of the eighteenth century. Then a sharp rise in the output of the precious metals, particularly of Mexican silver, increased the Spanish monetary stock and forced prices upward by almost one third in the next three decades of comparative peace. To finance a bitter conflict with England in 1779–83, Spain was compelled to resort to her first issues of paper money. The paper currency depreciated rapidly during the war but rose to par after the conclusion of peace and remained there throughout the Nootka Sound controversy.

By reason of the war, a report to the Social Science Research Council more extensive than any I have hitherto submitted seems appropriate. The war has affected us in several ways. Our “terms of reference” reflected the international situation, since they directed our attention to the economic history of countries embraced in the Western Hemisphere; it has steadily diminished the speed with which our research work has gone forward, until that work is now largely at a standstill; and it lately has begun to make us think and plan in terms of a more effective postwar period. Inasmuch as the Committee has definitely selected the areas of special research interest that will probably engage its full attention in the years immediately ahead and inasmuch as the period of its present appointment may extend hardly beyond the war period itself, there appears to be particular reason why I should lay before you the general scheme of its research plans, the specific projects that it has thus far sponsored within its chosen fields, and a series of outlines of what might be attempted in these general areas by research people released sooner or later from war services. In a sense, this report of mine is an effort at postwar planning.