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Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Financial Markets

Author(s):Hoffman, Philip T.
Postel-Vinay, Gilles
Rosenthal, Jean-Laurent
Reviewer(s):Bodenhorn, Howard

Published by EH.NET (July 2007)

Philip T. Hoffman, Gilles Postel-Vinay and Jean-Laurent Rosenthal, Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Financial Markets. Cambridge, MA: Harvard University Press, 2007. viii + 263 pp. $28 (hardcover), ISBN: 978-0-674-02469-4.

Reviewed for EH.NET by Howard Bodenhorn, Department of Economics, Lafayette College.

Those of us who knew some financial history were not surprised by the Enron and WorldCom collapses in 2001 and 2002. We may have been taken aback by the magnitude of the losses and empathized with Enron employees who saw comfortable retirements evaporate before their eyes, but I can recall more than one dire prediction as Y2K approached and not because anyone really believed that confused computers would turn out the lights. Rather, some of us had genuine concerns that the equity market mania in 1999 resembled that of 1929 and hoped that the Fed would get it right the second time around. Optimism reigned at cocktail parties, however, and statements about unsustainably high equity prices were casually dismissed as just one more example of economists’ collectively predicting 11 of the past 10 recessions. History warned us that the collapse was not a matter of “if.” It was a matter of “when.” While this sense of inevitability now sounds like so much “I-told-you-so” hindsight, Surviving Large Losses makes a case that the then minority opinion was reasonable. The book makes the case that financial crises are inevitable. What is not inevitable is how societies respond as the pieces are picked up after the crisis.

Philip T. Hoffman (Caltech), Gilles Postel-Vinay (?cole des Hautes ?tudes en Sciences Sociales) and Jean-Laurent Rosenthal (Caltech) recognize their debts to the finance-growth literature, exemplified by Ross Levine’s many and influential cross-country studies, and the equally influential La Porta, Lopez-de-Silanes, Shleifer and Vishny (LLSV) “law and finance” literature, which holds that a country’s financial system is heavily influenced by the legal protections offered to equity and debt holders.[1] As influential as the related Levine and LLSV literatures are, cross-country analyses labor under two fundamental shortcomings. First, they ignore the powerful historical forces that shape a country’s financial institutions and infrastructure, the “colonial origins” argument at the center of LLSV notwithstanding. For a host of reasons, many of which are explored in this book, countries become prisoners of their own pasts, but the story is far more complex than colonial origins. Second, both literatures identify, but cannot explain a growth nexus, though some progress on that front has recently appeared.[2] That is, the size and structure of a country’s financial system matters for long-run growth, but the analyses fail to explain why and how they matter and, more importantly, why and how they change. If success can be had by simply copying the successful, why have so many economies failed to do so? The short answer, of course, is that institutional change is not costless. No matter how inefficient an existing financial system, its costs and benefits are capitalized by economic actors who will resist change absent some outside impetus that alters the calculus.

Surviving Large Losses provides an original and provocative hypothesis that offers an interpretation of financial reform: historically, one of the most important moving forces behind financial evolution has been the financial crisis. It is a fact that financial crises are virtually inevitable in modern economies ? a source of sleepless nights, if not outright dread, for even the most sophisticated, well-hedged investor. Despite the enormous human costs of financial crises, “they often prove to be turning points in the evolution of financial markets and long-term economic growth” (p. 2). Because crises are followed by searches for culprits and insistent calls for change, they afford politically opportune moments to reform financial institutions. In the U.S., for example, the Federal Reserve System and the Federal Deposit Insurance Corporation, two fundamental building blocks of the twentieth century U.S. banking edifice, emerged as post-crisis reforms. These reforms demonstrate that something new and functional can be built on the ashes of the old and broken.

Although the authors offer a political economy model of post-crisis financial reform, they do not arrive at their conclusions by analyzing historical data ? though they have performed such analyses elsewhere. Instead, they take a decidedly low-tech, narrative approach to appeal to the widest possible audience. After providing a verbal explanation of their political economy model, the authors rely on their extensive historical knowledge of about four centuries of financial crises to support their interpretations.

The substantive chapters of the book open with a fundamental question: Why is it that some states protect savers and investors while others plunder? Every state, no matter how wealthy or democratic is capable of plunder, but those that resist grow over the long term. What increases the probability of plunder is the size of the public debt relative to the state’s ability to service it. Countries with small debts and low taxes relative to GDP are less likely to prey on financial markets (p. 12-13). Countries mired in public debt and with already heavy tax burdens have few politically viable options during a crisis other than default or confiscation. In many societies, preying on the military or a hungry electorate instead of the rentiers is a sure ticket for a short reign (p. 14-15).

In issuing public debt the state plays a critical role at the extremes. At one extreme is the state whose issuance of debt leads to the emergence of debt markets with institutions suitable to and organizations capable of trading private claims. So long as the state restrains itself, an entrepreneurial class gains access to an expanding web of finance with positive consequences for long-term economic development.[3] At the other extreme is the state that piles up enormous debts and pays for them by preying on financial markets. To avoid the predator, investment capital hides or flees with obvious negative consequences for long-term growth.

How do crises matter in this process? Financial markets shrink during a crisis and investors call for change in the aftermath. Whether change occurs, how change is initiated, and who initiates it ? government or private actors ? are issues determined through the interaction of political economy and historical accident. Part of the answer depends on who demands post-crisis change and whether the demands for change are translated into productive and efficient institutions (the preferred outcome) or whether losers use the political system to confiscate from winners however defined (the undesirable outcome) or something in between.

Hoffman, Postel-Vinay and Rosenthal argue that the outcome turns on the behavior of three actors ? the middle class, financial intermediaries, and the government. Casual observers might think that the wealthy would be the driving force behind post-crisis reform. But, as the authors note, it is a broad, relatively egalitarian middle that drives financial development, as well as the political economy of reform. Entrepreneurs tend to emerge from the middle. The middle has collateral. The middle relies on local financial institutions. The middle is most vulnerable to crises.

Although the middle’s favored short-term post-crisis strategy might be a bailout and redistribution, enough members of the group usually recognize that institutional reforms that strengthen the financial system and insulate it from transient shocks are the preferable long-term strategy. A more vibrant, more efficient financial system benefits them directly (diversification) and indirectly (spurring macroeconomic growth). Whether the middle class realizes their calls for reform depends on its size and its political clout relative to the wealthy. Egalitarian societies with a broad middle are most likely to initiate useful reform because the benefits of confiscation are small ? mostly because the middle will be confiscating from itself ? and because the benefits of crisis-averting innovation are large.

Whether the middle succeeds depends on the objectives of the second principal player: financial intermediaries. It is in this arena that a society’s wealthy play an important role. Because the wealthy have (very nearly by definition) large portfolios, they are able to spread the fixed costs of innovative new products across a raft of customized financial products. But once financial intermediaries have designed products for the wealthy, it is only a matter of time before they are made available to consecutively less wealthy investors until they are eventually redesigned to suit the needs of the middle. A recent example of increasing regulatory concern is the growing upper-middle class fascination with hedge funds.

Crises, as Hoffman, Postel-Vinay and Rosenthal note, have many causes, including government predation, herd behavior, asymmetric information, and inadequate diversification. If intermediaries see post-crisis profit opportunities and can expect governmental or legal support for reforms and new products that reduce the negative consequences of information asymmetries (i.e., new reporting requirements imposed by stock exchanges for listing companies) and enhance diversification (i.e., mutual funds), they will push for reform.

Government is the third principal player in the drama. Government differs from private actors because a private actor must realize a profit from any innovation or it will be driven from the market. Governments face no such constraint and can, in fact, impose taxes and other regulatory costs to pursue the changes it deems appropriate. Government has a prominent role in financial markets ? from enforcing contracts to subsidizing deposit insurance to overcoming some types of market failures ? but there is a constant fear of governmental overreach, predation, and the encouragement of rent seeking. Governmental intervention is successful when the net social benefits of a proposed reform outweigh its costs and when the rents created are small relative to the benefits of resolving the market failure (p. 169).

What is the authors’ interpretation of massive state intervention in financial markets in modern Western-style economies? They argue that it was an outgrowth of the bloody and tumultuous twentieth century. Governments intervened on a modern scale during the First World War when national survival seemingly demanded planning boards, rationing and conscription of men and materiel, including middle-class savings. The Great Depression induced a second wave of massive intervention and regulation. The Second World War, post-war reconstruction and the Cold War elicited even greater government intervention. Thus, the period between 1914 and 1990 was one of massive and increasing governmental regulation.

How did the Western-style economies realize their remarkable rates of growth in the twentieth century if financial markets labored under the ever increasing weight of government regulations? The authors argue that these countries “got away with it” because, as the century opened, they already had good institutions in place and governments, while highly regulatory, were rarely predatory. Low-income and low-growth developing countries that copied, or tried to copy, the regulatory structures of the West failed because they did not begin with the same pro-growth institutions.

In the end, then, Surviving Large Losses, while more historically nuanced than the finance-growth and law-and-finance literatures from which it springs leaves us in much the same place. Political economy takes us only so far. A large part of the story of good finance is historical contingency, which makes for a less parsimonious tale than that offered by LLSV and others, but one more satisfying to economic historians. Nevertheless, we are left to wonder how the financial institutions that matter emerge and thrive. The authors’ explanation hangs mostly on the existence of a middle class but that, too, depends on a preexisting set of “good” social, political, economic and governmental institutions. Surviving Large Losses is, therefore, probably best viewed as a low-tech contribution to the literature attempting to unbundle institutions. It is certainly thought provoking and leaves as many questions as answers. Before its interpretations carry the day, however, much more theoretical and empirical work will need to be done. Although the conclusions drawn from many historical episodes will appeal to economic historians and general readers, I suspect that mainstream banking and finance types will withhold judgment until many more formal tests are provided. I look forward to seeing those tests and expect the authors of Surviving to be notable contributors.

Notes: 1. See Ross Levine, “Financial Development and Economic Growth: Views and Agenda,” Journal of Economic Literature 35:2 (June 1997), 688-726 and Ross Levine and Thorsten Beck, “Stock Markets, Banks and Growth: Panel Evidence,” Journal of Banking and Finance 28:3 (March 2004), 423-42; Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W. Vishny, “Law and Finance,” Journal of Political Economy 106:6 (December 1998), 1113-55.

2. Thorsten Beck, Asli Demirguc-Kunt, and Ross Levine, “Law and Finance: Why Does Legal Origin Matter?” Journal of Comparative Economics 31:4 (December 2003), 653-75; and Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, “What Works in Securities Laws,” Journal of Finance 61:1 (February 2006), 1-32.

3. Richard Sylla, “U.S. Securities Markets and the Banking System, 1790-1840,” Federal Reserve Bank of St. Louis Review 80:3 (May 1998), 83-98 makes the case for the early U.S.

Howard Bodenhorn, professor of economics at Lafayette College and Research Associate at NBER, has written extensively on banking history. Among his recent articles is “Usury Ceilings, Relationships and Bank Lending Behavior: Evidence from the Nineteenth Century,” Explorations in Economic History (2007).

Subject(s):Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):18th Century

Financing the First World War

Author(s):Strachan, Hew
Reviewer(s):Voth, Hans-Joachim

Published by EH.NET (January 2007)

Hew Strachan, Financing the First World War. Oxford: Oxford University Press, 2004. viii + 268 pp. $20 (paperback), ISBN: 0-19-925727-2.

Reviewed for EH.NET by Hans-Joachim Voth, Department of Economics, Universitat Pompeu Fabra, Barcelona.

Long before the trains started to roll towards the battlefields in 1914, the coming of World War I put heavy demands on other types of transport. All over the world, in late July, ships were loading unusual freight, in unusual quantities. As William Silber describes in his When Washington Shut down Wall Street [1], the cargo for the ships waiting in New York harbor came from only a few miles away. Workers at depositories stacked thousands of bars of gold in wooden kegs, covered them with saw dust to reduce abrasion, and nailed them shut. Armed transports took the crates and barrels with their precious cargo to the docks, before they were sent to the strong rooms of the waiting passenger and cargo ships.

As the risk of war grew, the soon-to-be belligerent powers sold foreign assets, and began to repatriate the proceeds in gold. Before the barbarism of the conflict became apparent to all, gold, the “barbarous relic” in the words of Keynes, started to change from currency anchor to strategic asset. Hew Strachan’s Financing the First World War is about the struggle to find the funds necessary to fight World War I — the first and the last of the major armed conflicts when all the main powers were on the gold standard when hostilities broke out. This scramble turned out to be every bit as desperate as the attempts to hoard gold in the summer months of 1914. The history of finance during World War I has often been told with a view to the hyperinflations and deflations, the booms and busts that followed — how economies coped with the large increase in money in circulation, the economic dislocation and the overhang of debt. As the introduction explains, Strachan is less concerned with the consequences of financing World War I. Instead this book aims to explain how the war was fought on the financial battlefield.

This is part of a much larger project. Strachan was commissioned to write a comprehensive replacement of Cruttwell’s (1934) A History of the Great War. Strachan’s To Arms is the first installment in what is promised to be a three-volume history of the conflict. Financing the First World War is not a self-contained book as such, written with the intention to get to the bottom of financing arrangements during the Great War. Rather, Oxford University Press is re-issuing parts of To Arms, the first volume of Strachan’s three-volume book on World War I, as separate paperbacks. In addition to this book, there are The Outbreak of the First World War, and The First World War in Africa. Strachan probably knows as much about the military, political and financial history of belligerents as any other author; he has also done an admirable job summarizing the main secondary works in German, French, Russian, and Italian. Since Strachan’s own university (Oxford) has abolished even basic language requirements (like a two modern languages and Latin) for the study of history because of alleged “elitism,” this is certainly to be welcomed. It is also in pleasing contrast with other English-language books on World War I, which often focus on the Anglo-German rivalry.

This is an ambitious and knowledgeable book. It is also poorly structured, strikingly confusing, and monumentally boring. The main problem seems to be that it has been re-assembled from the ingredients of a larger book. Like meat cuts reassembled into false filets, the book looks like the real thing, but certainly doesn’t taste like it. Chapters starts well enough, with a small, intriguing vignette — how the garbage-strewn battlefield of World War I indicates the prolific use of materiel, how a German Reichstag delegate encountered problems getting change when trying to pay for his dinner in Berlin in August 1914, etc. Yet these are rare morsels in army-style fare of dry prose and even drier numbers, cooked up without salt or spices. This reviewer thinks of himself as a bit of a chiffrephile, in Angus Maddison’s elegant phrase — someone who has a healthy appetite for figures. Yet the main account of financial questions related to the war effort in Strachan’s book is close to unreadable. The reader is treated to a constant bombardment with financial figures, without much explanation. A barrage with millions of Sterling here is followed by salvos of millions of Russian Rubles, Bulgarian Levas, German Marks and French Francs in adjacent sectors. They left this reader shell-shocked. Little or no effort is made to put them into context, nor is there much of an explanation of “how big is big” (they are certainly almost never related to something economically meaningful such as GDP). Only occasionally do we learn that the British tax increases in 1917 — after much back and forth – produced only enough additional revenue to cover the cost of five days’ fighting. A typical example reads like this:

A total of 4,460 million marks was subscribed, producing a surplus of 1,832 million over existing debt. The second, in March 1915, raised 9,060, a surplus of 1,851; the third, in September 1915, 12,101 million, a surplus of 2,410; a fourth 10,712 million, a surplus of 324 million…. The fifth loan was 2,114 million marks short of its target, the sixth (in March 1917) 6,732 million, the seventh (in September 1917) 14,578 million, and the eighth 23,970 million. The total of the last loan, issued in September 1918, fell back to 10,443 million marks, and left a shortfall of 38,971 million (p. 123).

Surely, this is why tables or graphs were invented? Yet not a single table or figure adorns the entire, 278-page book. The author apparently felt no need for such complications. This is no simple oversight, but indicative of his approach to the subject. All too often, we are simply told the sequence of minor political intrigues and major budget moves, in a blow-by-blow sequence, for one belligerent after the other.

For all its command of the minutiae, this book represents a wasted opportunity for comparative history. The book contains no insightful, analytical, systematically comparative discussion of war finances as such, other than a narrative of political maneuvers concerned with financial questions. For the most part, the discussion is strung across countries in a way that clarifies little. We are treated to very brief overviews in the introduction of topics — financial mobilization, taxation, domestic borrowing, foreign borrowing, etc. Then, quasi in subchapters, we are told how individual countries handled these issues. There is no attempt to summarize what the chapters show, nor is there even a brief section that would conclude and argue a case. If there is a guiding theme, I failed to find it. The book simply peters out with some observations on the Balfour mission to the U.S. in 1917, before moving on to suggestions for further reading.

The First Word War produced bouts of nostalgia in many. After the cessation of hostilities, Keynes wrote longingly about a world where goods from all corners of the globe could be ordered quickly, where capital flowed freely and no passports were necessary to cross borders. This book engendered a different kind of nostalgia in this reviewer — for a long-lost world where middle-aged copy editors in sensible shoes corrected spelling mistakes, editors at university presses leaned on authors to write to the best of their ability, a time when authors tried to publish books that were definitive works, not repackaged slices of a bigger volume which also contain prolific quantities of reworked secondary material; a time when charity publishers didn’t go out of their way to boost revenues by academic recycling; and one when publishing a book without a concluding chapter was unthinkable.

Note: 1. William L. Silber, When Washington Shut down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy, Princeton: Princeton University Press, 2007.

Hans-Joachim Voth is ICREA Research Professor in the Economics Department, Universitat Pompeu Fabra, Barcelona, a Research Affiliate at the Center for International Economics (CREI, Barcelona), and a Research Fellow in the CEPR International Macro Research Program. Recent publications include “Interest Rate Restrictions in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714,” Economic Journal 2007 (with Peter Temin, forthcoming), “Why England? Demographic Factors, Structural Change and Physical Capital Accumulation during the Industrial Revolution,” Journal of Economic Growth 2006 (with Nico Voigtlaender), and “Credit Rationing and Crowding Out during the Industrial Revolution: Evidence from Hoare’s Bank, 1702-1862,” Explorations in Economic History 2005 (with Peter Temin).

Subject(s):Military and War
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII

American Treasure and the Price Revolution in Spain, 1501-1650

Author(s):Hamilton, Earl J.
Reviewer(s):Munro, John

Classic Reviews in Economic History

Earl J. Hamilton, American Treasure and the Price Revolution in Spain, 1501-1650. Cambridge, MA: Harvard University Press, 1934. xii + 428 pp.

Review Essay by John Munro, Department of Economics, University of Toronto.

Hamilton and the Price Revolution: A Revindication of His Tarnished Reputation and of a Modified Quantity Theory

Hamilton and the Quantity Theory Explanation of Inflation

As Duke University’s website for the “Earl J. Hamilton Papers on the Economic History of Spain, 1351-1830″ so aptly states: Hamilton “helped to pioneer the field of quantitative economic history during a career that spanned 50 years.”[1] Certainly his most important publication in this field is the 1934 monograph that is the subject of this “classic review.” It provided the first set of concrete, reliable annual data on both the imports of gold and silver bullion from Spain’s American colonies ? principally from what is now Bolivia (Vice Royalty of Peru) and Mexico (New Spain) ? from 1503 to 1660 (when bullion registration and thus the accounts cease); and on prices (including wages) in Spain (Old and New Castile, Andalusia, Valencia), for the 150 year period from 1501 to 1650.[2] His object was to validate the Quantity Theory of Money: in seeking to demonstrate that the influx of American silver was chiefly, if not entirely, responsible for the inflation of much of the Price Revolution era, from ca. 1520 to ca. 1650: but, principally only for the specific period of ca. 1540 to ca. 1600. Many economic historians (myself included, regrettably) have misunderstood Hamilton on this point, concerning both the origins and conclusion of the Price Revolution. Of course the Quantity Theory of Money, even in its more refined modern guise, is no longer a fashionable tool in economic history; and thus only a minority of us today espouse a basically monetary explanation for the European Price Revolution (ca. 1515/20-1650) ? though no such explanation can be purely monetary.[3]

If inflations had been frequent in European economic history, from the twelfth century to the present, the Price Revolution was unique in the persistence and duration of inflation over a period of at least 130 years.[4] Furthermore, if commodity money ? i.e., gold and especially silver specie ? was not the sole monetary factor that explains the Price Revolution that commodity money certainly played a relatively much greater role than it did in the subsequent inflations (of much shorter duration) from the mid-eighteenth century to the present. The role of specie, and specifically Spanish-American silver, in “causing” the Price Revolution was a commonplace in Classical Economics and Hamilton cites Adam Smith’s statement in The Wealth of Nations (p. 191) that “the discovery of abundant mines of America seems to have been the sole cause of this diminution in the value of silver in proportion to that of corn [grain].”[5]

The Comparative Roles of Spanish-American Silver and Coinage Debasements: The Bodin Thesis

According to Hamilton (p. 283) ? and indeed to most authorities to this very day ? the very first scholar to make this quantity-theory link between the influx of American “treasure” and the Price Revolution was the renowned French philosopher Jean Bodin, in his 1568 response to a 1566 treatise by the royal councilor Jean Cherruyt de Malestroit on the explanations for the then quite evident rise in French prices over the previous several decades. Malestroit had contended that coinage debasements were the chief culprit ? as indeed they most certainly had been in the periodic inflations of the fourteenth and fifteenth centuries.[6] Bodin responded by dismissing those arguments and by contending that the growing influx of silver from the Spanish Americas was the primary cause of that inflation.[7]

Hamilton (in chapter 13) was therefore astounded to find, after voluminous and meticulous research in many Spanish treatises, letters, and other relevant documents, that no Spanish writer of the sixteenth century had voiced similar opinions, all evidently ignorant of Bodin’s views. Hamilton, however, had neglected to find (as Marjorie Grice-Hutchinson did, much later) one such Spanish treatise, produced in 1556 ? i.e., twelve years before Bodin ? in which Azpilcueta Navarra, a cleric of the Salamanca School, noted that: “even in Spain, in times when money was scarcer, saleable goods and labor were given for very much less than after the discovery of the Indies, which flooded the country with gold and silver.”[8]

Hamilton also erred, if forgivably so, in two other respects. First, in utilizing what were then, and in many cases still are, imperfect price indexes for many countries ? France, England, Germany, Italy (but not for the Low Countries) ? Hamilton (1934, pp. 205-10) concluded that the rise in the general level of prices during the Price Revolution was the greatest in Spain. In fact, more recent research, based on the Phelps Brown and Hopkins (1956) Composite Price Index for England and the Van der Wee (1975) Composite Price Index (hereafter: CPI) for Brabant, in the southern Low Countries, reveals the opposite to be true. If we adopt a common base of 1501-10 = 100, in comparing the behavior of the price levels in Spain, England, and Brabant, for the period 1511-1650, we find that the Hamilton’s CPI for Spain rose from a quinquennial mean of 98.98 in 1511-15 to one of 343.36 in 1646-50 (for silver-based prices only: a 3.47 fold rise); in southern England, the CPI rose from a quinquennial mean of 103.08 in 1511-15 to one of 697.54 (a 6.77 fold rise); and in Brabant, the CPI rose from a quinquennial mean of 114.80 in 1511-15 to one of 845.07 (a 7.36 fold rise).[9] Both the Phelps Brown and Hopkins and the Van der Wee price indexes are, it must be noted, weighted, with roughly the same weights (80 percent foodstuffs in the former and 74 percent in the latter). Hamilton, while fully admitting that “only index numbers weighted according to the expenditures of the average family accurately measure changes in the cost of living,” was forced to use a simple unweighted arithmetic mean (or equally weighted for all commodities), for he was unable to find any household expenditure budgets or any other reliable guides to produce such a weighted index.[10]

Undoubtedly, however, the principal if not the only explanation for the differences between the three sets of price indexes ? to explain why the Spanish rose the least and the Brabantine the most ? is the one offered by Malestroit: namely, coinage debasements. Spain, unlike almost all other European countries of this era, underwent no debasements of the gold and silver coinages (none from 1497 to 1686),[11] but in 1599 the new Spanish king Philip III (1598-1621) did introduce a purely copper “vellon” coinage, a topic that requires a separate and very necessary analysis. The England of Henry VIII (1509-1547) is famous ? or infamous ? for his “Great Debasement.” He had begun modestly in 1526, by debasing Edward IV’s silver coinage by 11.11% (reducing its weight and silver contents from 0.719 to 0.639 grams of fine silver); but in 1542, he debased the silver by another 23.14% (to 0.491 grams of fine silver). When the Great Debasement had reached its nadir under his successor (Northumberland, regent for Edward VI), in June 1553, the fine silver contents of the penny had been reduced (in both weight and fineness) to just 0.108 grams of fine silver: an overall reduction in the silver content of 83.1% from the 1526 coinage. In November 1560, Elizabeth restored the silver coinage to traditional sterling fineness (92.5% fine silver) and much of the weight: so that the penny now contained 0.480 grams of fine silver (i.e., 75.1% of the silver in the 1526 coinage). The English silver coinage remained untouched until July 1601, when its weight and fine silver contents were reduced by a modest 3.23%. Thereafter the English silver coinage remained untouched until 1817 (when the silver contents were reduced by another 6.06%). Thus for the entire period of the Price Revolution, from ca. 1520 to 1650, the English silver coinage lost 35.5% of its silver contents.[12] In the southern Low Countries (including Brabant), the silver coinage was debased ? in both fineness and weight ? a total of twelve times from 1521 to 1644: from 0.33 grams to 0.17 grams of fine silver in the penny, for an overall loss of 48.5%.[13]

A New Form of Debasement: The New “Fractional” Copper or Vellon Coinages in Spain and Elsewhere

In terms of the general theme of coinage debasement, a very major difference between Spain and these other two countries, from 1599, was the issue of a purely copper coinage called vellon, to which Hamilton devotes two major chapters.[14] Virtually all countries in late medieval and early modern Europe issued a series of petty or low-denomination “fractional” coins ? in various fractions of the penny, chiefly to enable the populace to buy such low-priced commodities as bread and beer (or wine). But in all later-medieval countries the issues of the petty, fractional coinage almost always accounted for a very small proportion of total mint outputs (well under 5% of the aggregate value in Flanders).[15] They were commonly known as monnaie noire (zwart geld in Flemish): i.e., black money, because they contained so much copper, a base metal. Indeed all coins? both silver and gold ? always required at least some copper content as a hardening agent, so that the coins did not suffer too much erosion or breakage in circulation.

The term “debasement” is in fact derived from the fact that the most common mechanism for reducing the silver contents of a coin had been to replace it with more and more copper, a great temptation for so many princes who often derived substantial seigniorage revenues from the increased mint outputs that debasements induced (in both reminting current coin and in attracting bullion from abroad). In this respect, England was an exception ? apart from the era of the Great Debasement (1542-1553) ? for its government virtually always maintained sterling silver fineness (92.5% silver, 7.5% copper), and reduced the silver contents for all denominations equally, by reducing the size and weight of the coin. In continental Europe, the extent of the debasement, whether by fineness or by weight, or by both together, did vary by the denomination (to compensate for the greater labor costs in minting the greater number of lower-valued coins); but the petty “black money” coins ? also known (in French) as billon, linguistically related to vellon, always contained some silver, and always suffered the same or roughly similar proportional reduction of silver as other denominations during debasements until 1543. In that year, the government of the Habsburg Netherlands was the first to break that link: in issuing Europe’s first all-copper coin. France followed suit with an all copper denier (1 d tournois) in 1577; but England did not do so until 1672.[16]

Hamilton gives the erroneous impression that Spain (i.e., Castile) was the first to do so, in issuing an all copper vellon coin in 1599. Previously, Spanish kings (at least from 1471) had issued a largely copper fractional coinage called blancas , with a nominal money-of-account value of 0.5 maraved?, but with a very small amount of silver ? to convince the public that it was indeed precious-metal “money.” The blanca issued in 1471 had a silver fineness of 10 grains or 3.47% (weighing 1.107g).[17] In 1497, that fineness was reduced to 7 grains (2.43% fine); in 1552, to 5.5 grains (1.909% fine); in 1566, to 4 grains (1.39% fine). In 1597, Philip II (1556-1598) had agreed to the issue of a maraved? coin itself, with, however, only 1 grain of silver (0.34% fine), weighing 1.576g.; but whether any were issued is not clear.[18]

Hamilton commends Philip II on his resolute stance on the issue vellon coinages: for, in “believing that it could be maintained at parity only by limitation of its quantity to that required for change and petty transactions, he was exceedingly careful to restrict the supply.”[19] That is a very prescient comment, in almost exactly stating the principle of maintaining a sound system of fractional or petty coinage that Carlo Cipolla (1956) later enunciated,[20] in turn inspiring the recent monograph on this subject by Sargent and Velde (2002).[21] But neither of them gave Hamilton (1934) any credit for this fundamentally important observation, one whose great importance Hamilton deduced from the subsequent, seventeenth-century history of copper coinages in Spain.

Thus, as indicated earlier, in the year following the accession of the aforementioned Philip III, 1599, the government issued Spain’s first purely copper coin (minted at 140 per copper marc of 230.047 g), and from 1602 at 280 per marc: i.e., reducing the weight by half from 1.643 g to 0.8216 g).[22] Certainly some of the ensuing inflation in seventeenth-century Spain, with a widening gap between nominal and silver-based prices, ranging from 4.0 percent in 1620 to 104.2 percent in 1650, has to be explained by such issues of a purely copper coinage. Indeed, in Hamilton’s very pronounced view, the principal cause of inflation in the first half of the seventeenth century lay in such vellon issues ? more of a culprit than the continuing influx of Spanish American silver.[23]

If, however, we use Hamilton’s own CPI based on the actual nominal prices produced with the circulation of the vellon copper coinage, from 1599-1600, we find that this index rose only 4.61 fold from the quinquennial mean of 1511-15 (98.98) to the mean of 1646-50 (457.07) ? again well less than the overall rise of the English and Brabant composite price indexes. Nevertheless, the differences between the silver-based and vellon-based price indexes in Spain for the first half of the seventeenth century are significant. For the former (silver), the CPI rose from a mean of 320.98 in 1596-1600 to one of 343.36 in 1646-50, an overall rise of just 6.97%. For the latter (vellon-based) index, the CPI rose to 457.09 in 1646-50, for a very substantial overall rise of 41.41%. What certainly did now differentiate Spain from the other two, and indeed almost all other European countries in this period, is that in all the latter countries the purely copper petty coinage formed such a very much smaller, indeed minuscule, proportion of the total coined money supply.[24]

The Evidence on Spanish-American Silver Mining and Silver Imports into Seville to 1600

What this discussion of the vellon coinage makes crystal clear is that Hamilton did not attribute all of the inflation of the Price Revolution era to the “abundant mines of the Americas.” Nevertheless many economic historians, after carefully examining Hamilton’s data on prices and imports of Spanish American bullion, noted ? as Hamilton himself clearly demonstrated ? that the Price Revolution had begun as early as the quinquennium 1516-20, long before, decades before, any significant amounts of Spanish American silver had reached Seville. Virtually none was imported in the 1520s; and an annual mean of only 5,090.8 kg in 1531-35.[25] The really substantial imports took place only after by far the two most important silver mines were brought into production: those of Potosi in “Peru” (modern-day Bolivia) in 1545, and Zacatecas, in Mexico, the following year, 1546. From that quinquennium of 1546-50, mean annual silver imports into Seville rose from 18,698.8 kg to 273,704.5 kg in the quinquennium of 1591-95, marking the peak of the silver imports. Between these two quinquennia, the total mined silver outputs of Potosi and Zacatecas (unknown to Hamilton) rose from an annual mean of 64,848.9 kg to one of 219,457.4 kg (indicating that silver was coming from other sources than just these two mines).[26] Even then, their production began to boom only with the application of the mercury amalgamation process (which Hamilton barely mentioned ? only on p. 16), greatly aided by abundant local supplies of mercury ? at Zacatecas, from about 1554-57, and at Potosi, from 1572.[27]

The Alternative Explanation for the Price Revolution: Population Growth

If all this evidence does indeed prove that the influx of Spanish silver was certainly not the initial cause of the European Price Revolution, surely the data should indicate that the subsequent influx of that silver, especially from the 1550s, very likely did play a significant role in fueling an ongoing inflation. But so many of the anti-monetarist historians leapt to an alternative ? and in my view ? false conclusion that population growth was the initial and the prime-mover in “causing” the Price Revolution.[28] My objections to this demographic-oriented thesis are two-fold.

In the first place, the now available evidence on demographic recovery and growth in England and the southern Low Countries (Brabant) does not at all correspond to the statistical evidence on inflation during the early phase of the Price Revolution ? in the early sixteenth century. For England the best estimate of population in the early 1520s, when the Price Revolution was already underway, is 2.25 or 2.30 million, about half of the most conservative estimate for England’s population in 1300: about 4.5 million ? an estimate still rejected by the majority of medieval economic historians, who prefer the more traditional estimate of 6.0 million.[29] If England in the early 1520s was obviously still very unpopulated, compared to its late-medieval peak, and if its population had just begun to recover, how could any such renewed growth, from such a very low level, have so immediately sparked inflation: how could it have caused a rise in the CPI (Phelps Brown and Hopkins) from a quinquennial mean of 96.70 (1451-75 = 100) in 1496-1500 to one of 146.05 in 1521-25?

We find a similar demographic situation in Brabant. From the 1437 census to the 1496 census, the number of registered households fell from 92,738 to just 75,343: a fall of 18.76 percent.[30] If we further assume that a fall in population also involved a decline in the average family or household size, the demographic decline would have been much greater than these data indicate. According to Herman Van der Wee (1963), Brabant, like England, did not commence its demographic recovery until the early sixteenth century; and his estimated average annual rate of population growth from 1496 to 1526 was 0.96%.[31] For this same period, Van der Wee’s CPI for Brabant shows a rise from 115.35 in 1496-1500 (again 1451-75 = 100) to one of 179.94 in 1521-25. How can any such renewed population growth explain that inflation?

In the second place, the arguments and analyses supplied involve faulty economics: an erroneous transfer of micro-economic analysis to macro-economics. One can well argue, for early-modern western Europe, that the effect of sustained population growth for the agrarian sector, with necessary additions of “marginal lands” that were generally inferior in fertility and more distant from markets, and without a widespread diffusion of technological changes to offset diminishing returns in this sector, inevitably led to sharply rising marginal costs. That in turn resulted in price increases for grains and other agricultural commodities (including timber) that were greater than those for non-agrarian and especially industrial commodities, certainly in both England and the southern Low Countries during the course of the sixteenth and first half of the seventeenth century.[32] But that basically micro-economic model concerning individual, relative commodity prices is, however, very different from a macro-economic model contending that population growth by itself led to an overall increase in the level of prices ? i.e., in the CPI.

We should remember that, almost 35 years ago, Donald McCloskey (1972), in a review of Ramsey (1971), responded to these demographic-oriented explanations of the Price Revolution by contending that, if both monetary variables (M and V) were held constant, then population growth (if translated into an increased T or y, in MV = Py) should have led to a fall in P, in the CPI. Nevertheless, there is some validity to the argument that population growth and changes in the demographic structures may have influenced the role of another monetary factor in the Price Revolution: namely changes in the income velocity of money, to be discussed as a separate topic later in this review.

Hamilton’s Explanations for the Origins of the Price Revolution before the Influx of Spanish Treasure: The Roles of Gold, South German Silver Mining, and Changes in Credit

How then did Hamilton ? and how do we ? explain the origins of the Spanish and indeed European-wide Price Revolution, in the early sixteenth century, i.e., for the period well before any significant influxes of American silver, and also before there was any significant population growth (at least in England and the Low Countries). Was Hamilton that ignorant of the implications of his own data? Certainly not. On p. 299, in his chapter XIII entitled “Why Prices Rose,” he stated that: “the gold imports from the Antilles significantly influenced Andalusian and New Castilian prices even in the first two decades of the sixteenth century,” without, however, elaborating that point any further.[33] More important are his observations on p. 301, where he explicitly moderates his emphasis on the role of Spanish-American treasure imports, in stating that: “Only at the beginning of the sixteenth century, when, as has been shown, colonial demand, credit expansion, and the increased output of German silver made themselves felt, and at the end of the century, when a devastating epidemic, and an over issue of vellon coinage took place, did other factors play important roles in the price upheaval [i.e., the Price Revolution].” Indeed, in his own view, the paramount role of the influxes of Spanish-American bullion apply to only, at most, 65 years of the 130 years of the Price Revolution era, i.e., to just half the era ? from ca. 1535 to 1600, though the evidence for that role seems to be more clear for just the half-century 1550-1600.

It is most regrettable that Hamilton himself failed to elaborate the role of any these factors, principally monetary, in producing inflation in early-sixteenth century Spain. Had he done so, surely he would have been spared the subsequent and really unfair criticism that he was offering a simplistic monocausal explanation of the Price Revolution, and one in the form of a very crude Quantity Theory of Money. The most important of “initial causes” that Hamilton lists was surely the question of “German silver,” or more specifically, the South-German and Central European silver-copper mining boom from about the 1460s to the 1540s. Where he derived his information is not clear, but from other footnotes it was presumably from the publications of two much earlier German economic historians, Adolf Soetbeer and Georg Wiebe. The latter was, in fact, the first to write a major monograph on the Price Revolution (Geschichte der Preisrevolution des XVI. und XVII. Jahrhunderts), and he seems to have coined (so to speak) the term.[34] The former, though a pioneer in trying to quantity both European and world supplies of precious metals, providing a significant influence on Wiebe, produced seriously defective data on German mining outputs in the later fifteenth and sixteenth centuries, greatly underestimating total outputs, as John Nef demonstrated in a seminal article published in 1941, subsequently elaborated in Nef (1952).[35] In Nef’s view, this South German mining boom may have quintupled Europe’s supply of silver by the 1530s, and thus before any major influx of Spanish-American silver.[36]

Since then a number of economic historians, me included, have published their research on this South German-Central European silver-copper mining boom.[37] These mountainous regions contained immensely rich ores bearing these two metals, which, however were largely inaccessible for two reasons: first, there was no known method of separating the two metals in smelting the argentiferous-cupric ores; and second, the ever-present danger of flooding in the regions containing these ore bodies made mined extraction very difficult and costly. In my view, the very serious deflation that Europe experienced during the second of the so-called “bullion famines,” from the 1440s to the 1460s, provided the profit incentive for the necessary technological changes to resolve these two problems. Consider that since virtually all of Europe’s money-of-account pricing system was based on, tied to, the silver coinage, deflation (low prices) ipso facto meant a corresponding rise in the real value of silver, gram per gram (just as inflation means a fall in the real value of silver, per gram). The solutions lay in innovations in both mechanical engineering and chemical engineering. The first was the development of water-powered or horse-powered piston vacuum pumps (along with slanted drainage adits in the mountain sides) to resolve the water-flooding problem. The second was the so-called Saigerh?tten process by which lead was added to the ore-bodies in smelting (also using hydraulic machinery and the new blast furnaces) ? during the smelting process the lead combined with the silver to precipitate the copper, and the silver-lead amalgam was then resmelted to remove the lead.

Both processes were certainly in operation by the 1460s; and by my very conservative estimates, certainly incomplete, the combined outputs of mines in Saxony, Thuringia, Bohemia, Slovakia, Hungary, and the Tyrol rose from a quinquennial mean of 12,973.4 kg in 1471-75 (when adequate output data can first be utilized) to a peak production in 1536-40 (thus later than Nef’s estimates), with a quinquennial mean output of 55,703.8 kg ? a 4.29-fold increase overall (i.e.. 329.36% increase) ? close enough to Nef’s five-fold estimate, given the likely lacunae in the data.[38] Consider that this output, for the late 1530s, was not exceeded by Spanish-American silver influxes until a quarter of a century later, in 1561-65, when, thanks to the recently applied mercury amalgamation process, a quinquennial mean import of 83,373.92 kg reached Seville (compared to a mean import of just 27,145.03 in 1556-60).[39]

But where did all this Central European silver go? Historically, from the mid-fourteenth century, most of the German silver-mining outputs had been sent to Venice, whose merchants re-exported most of that silver to the Levant, in exchange for Syrian cotton and Asian spices and other luxury goods. Two separate factors helped to reverse the direction of that flow, down the Rhine, to Antwerp and the Brabant Fairs. The first was Burgundian monetary policy: debasements in 1466-67, which, besides attracting silver in itself, reversed a half-century long pro-gold mint policy to a pro-silver policy, offering a relative value for silver (in gold and in goods) higher than anywhere else in Europe.[40] Thus the combined Flemish and Brabantine mint outputs, measured in kilograms of fine silver rose from nil (0) in 1461-65 to 9,341.50 kg in 1476-80 ? though much of that was recycled silver coin and bullion in quite severe debasements. But in 1496-1500, after the debasements had ceased, the mean annual output in that quinquennium was 4,872.96 kg; and in 1536-40, at the peak of the mining boom (and, again, before any substantial Spanish-American imports) the mean output was 5,364.99 kg.[41]

The second factor in altering the silver flows was increasingly severe disruptions in Venice’s Levant trade with the now major Ottoman conquests in the Balkans and the eastern Mediterranean, from the 1460s (and especially from the mid-1480s) culminating (if not ending) with the Turkish conquest of the Mamluk Levant (i.e., Egypt, Palestine, Syria) itself in 1517 (along with conquests in Arabia and the western Indian Ocean). While we have no data on silver flows, we do have data for the joint-product of the Central European mining boom ? copper, a very important export as well to the Levant. In 1491-95, 32.13% of the Central European mined copper outputs went to Venice, but only 5.22% went to Antwerp; by 1511-15, the situation was almost totally reversed: only 3.64% of the mined copper went to Venice, while 58.36% was sent to Antwerp. May we conjecture that there was a related shift in the flows of silver? By the 1530s, the copper flows to Venice, which now had more peaceful relations with the Turks, had risen to 11.07%, but 53.88% of the copper was still being sent to the Antwerp Fairs.[42] Of course, by this time the Portuguese, having made Antwerp the European staple for their recently acquired Indian Ocean spice trade (1501), were shipping significant (if unmeasurable) quantities of both copper and silver to the East Indies. Then in 1549, the Portuguese moved their staple to Seville, to gain access to the now growing imports of Spanish-American silver.

The Early Sixteenth-century “Financial Revolutions”: In Private and Public Credit

The other monetary factor that Hamilton mentioned ? but never discussed ? to help explain the rise of prices in early sixteenth-century Spain was the role of credit. Indeed, as Herman Van der Wee (1963, 1967, 1977, 2000) and others have now demonstrated, the Spanish Habsburg Netherlands experienced a veritable financial revolution involving both negotiability and organized markets for public debt instruments. As for the first, the lack of legal and institutional mechanisms to make medieval credit instruments fully negotiable had hindered their ability to counteract frequent deflationary forces; and at best, such credit instruments (such as the bill of exchange) could act only to increase ? or decrease ? the income velocity of money.[43] The first of two major institutional barriers was the refusal of courts to recognize the legal rights of the “bearer” to collect the full proceeds of a commercial bill on its stipulated redemption date: i.e., the financial and legally enforceable rights of those who had purchased or otherwise licitly acquired a commercial bill from the designated payee before that redemption date. Indeed, most medieval courts were reluctant to recognize the validity of any “holograph” bill: those that not been officially notarized and registered with civic authorities. The second barrier was the Church’s usury doctrine: for, any sale and transfer of a credit instrument to a third party before the stipulated redemption date would obviously have had to be at some rate of discount ? and that would have revealed an implicit interest payment in the transaction. Thus this financial revolution, in the realm of private credit, in the Low Countries involved the role of urban law courts (law-merchant courts), beginning with Antwerp in 1507, then most of other Netherlander towns, in guaranteeing such rights of third parties to whom these bills were sold or transferred. Finally, in the years 1539-1543, the Estates General of the Habsburg Netherlands firmly established, with national legislation, all of the legal requirements for full-fledged negotiability (as opposed to mere transferability) of all credit instruments: to protect the rights of third parties in transferable bills, so that bills obligatory and bills of exchange could circulate from hand to hand, amongst merchants, in commercial and financial transactions. One of the important acts of the Estates-General, in 1543 ? possibly reflecting the growing influence of Calvinism ? boldly rejected the long-held usury doctrine by legalizing the payment of interest, up to a maximum of 12% (so that anything above that was now “usury”).[44] England’s Protestant Parliament, under Henry VIII, followed suit two years later, in 1545, though with a legal maximum interest of 10%.[45] That provision thereby permitted the openly public discounting of commercial credit instruments, though this financial innovation was slow to spread, until accompanied, by the end of the sixteenth century, with the much more common device of written endorsements.[46]

The other major component of the early-sixteenth century “financial revolution” lay in public finance, principally in the Spanish Habsburg Netherlands, France, much of Imperial Germany, and Spain itself ? in the now growing shift from interest-bearing government loans to the sale of annuities, generally known as rentes or renten or (in Spain) juros, especially after several fifteenth-century papal bulls had firmly established, once and for all, that they were not loans (a mutuum, in both Roman and canon law), and thus not subject to the usury ban.[47] Those who bought such rentes or annuities from local, territorial, or national governments purchased an annual stream of income, either for a lifetime, or in perpetuity; and the purchaser could reclaim his capital only by finding some third party to purchase from him the rente and the attached annuity income. That, therefore, also required both the full legal and institutional establishment of negotiability, with now organized financial markets.

In 1531, Antwerp, now indisputably the commercial and financial capital of at least northern Europe, provided such an institution with the establishment of its financial exchange, commonly known as the beurse (the “purse” ? copied by Amsterdam in 1608, and London in 1695, in its Stock Exchange). Thanks to the role of the South German merchant-bankers ? the Fuggers, Welsers, H?chstetters, Herwarts, Imhofs, and Tuchers ? the Antwerp beurse played a major role in the international marketing of such government securities, during the rest of the sixteenth century, in particular the Spanish juros, whose issue expanded from 3.586 million ducats (escudos of 375 maraved?s) in 1516 to 80.040 million ducats in 1598, at the death of Philip II ? a 22.4-fold increase. Most these perpetual and fully negotiable juros were held abroad.[48] According to Herman Van der Wee (1977), this sixteenth-century “age of the Fuggers and [then] of the Genoese [merchant-bankers, who replaced the Germans] was one of spectacular growth in public finances.”[49] Finally, it is important to note the relationship between changes in money stocks and issues of credit. For, as Frank Spooner (1972) observed (and documented in his study of European money and prices in the sixteenth century), even anticipated arrivals of Spanish treasure fleets would induce these South German and Genoese merchant-bankers to expand credit issues by some multiples of the perceived bullion values.[50]

The Debate about Changes in the Income Velocity of Money (or Cambridge “k”)

The combined effect of this “revolution” in both private and public finance was to increase both the effective supply of money ? in so far as these negotiable credit instruments circulated widely, as though they were paper money ? and also, and even more so, the income velocity of money. This latter concept brings up two very important issues, one involving Hamilton’s book itself, in particular his interpretation of the causes of the Price Revolution. Most postwar (World War II) economic historians, myself included (up to now, in writing this review), have unfairly regarded Hamilton’s thesis as a very crude, simplistic version of the Quantity Theory of Money. That was based on a careless reading (mea culpa!) of pp. 301-03 in his Chapter XIII on “Why Prices Rose,” wherein he stated, first, in explaining the purpose his Chart 20,[51] that:

The extremely close correlation between the increase in the volume of [Spanish-American] treasure imports and the advance ofcommodity prices throughout the sixteenth century, particularly from 1535 on, demonstrates beyond question that the “abundant mines of America” [i.e., Adam Smith’s description] were the principal cause of the Price Revolution in Spain. We should note, first, that the “close correlation” is only a visual image from the graph, for he never computed any mathematical correlations (few did in that prewar era). Second, Ingrid Hammarstr?m was perfectly correct in noting that Hamilton’s correlation between the annual values of treasure imports (gold and silver in pesos of 450 marevedis) and the composite price index is not in accordance with the quantity theory, which seeks to establish a relationship between aggregates: i.e., the total accumulated stock of money (M) and the price level (P).[52] But that would have been an impossible task for Hamilton. For, if he had added up the annual increments from bullion exports in order to arrive at some estimate of accumulated bullion stocks, he would have had to deduct from that estimate the annual outflows of bullion, for which there are absolutely no data. Furthermore, estimates of net (remaining) bullion stocks are not the same as estimates of the coined money stock; and the coined money stock does not represent the total supply of money.[53]

Third, concerning Hamilton’s views on the Quantity Theory itself, his important monetary qualifications concerning the early sixteenth century and first half of the seventeenth century have already been noted. We should now note his further and very important qualification (p. 301), as follows: “The reader should bear in mind that a graphic verification of that crude form of the quantity theory of money which takes no account of the velocity of circulation is not the purpose of Chart 20.” He did not, however, discuss this issue any further; and it is notable that his bibliography does not list Irving Fisher’s classic 1911 monograph, which had thoroughly analyzed his own concepts of the Transactions Velocity of Money.[54]

Most economics students are familiar with Fisher’s Equation of Exchange, to explain the Quantity Theory of Money in a much better fashion than nineteenth-century Classical Economists had done: namely, MV = PT. If many continue to debate the definition of M, as high-powered money, and of P ? i.e., on how to construct a valid weighted CPI ? the most troublesome aspect is the completely amorphous and unmeasurable “T” ? as the aggregate volume of total transactions in the economy in a given year. Many have replaced T with Q: the total volume of goods and services produced each year. But the best substitute for T is “y” (lower case Y: a version attributed to Milton Friedman) ? i.e., a deflated measure of Keynesian Y, as the Net National Product = Net National Income (by definition).[55]

The variable “V” thus becomes the income velocity of money (rather than Fisher’s Transactions Velocity) ? of the unit of money in the creation of the net national income in the course of a year. It is obviously derived mathematically by this equation: V = Py/M (and Py of course equals the current nominal value of NNI). Almost entirely eschewed by students (my students, at least), but much preferred by most economists, is the Cambridge Cash Balances equation: whose modernized form would similarly be M = kPy, in which Cambridge “k” represents that share of the value of Net National Income that the public chooses to hold in real cash balances, i.e., in high-powered money (a straight tautology, as is the Fisher Equation). We should be reminded that both V and k are mathematically linked reciprocals in that: V = 1/k and thus k = 1/V. Keynesian economists would logically (and I think, rightly) contend that ceteris paribus an increase in the supply of money should lead to a reduction in V and thus to an increase in Cambridge “k.” If V represents the extent to which society collectively seeks to economize on the use of money, the necessity to do so would diminish if the money supply rises (indeed, to create an “excess”). But this result and concept is all the more clear in the Cambridge Cash Balances approach. For the opportunity cost of “k” ? of holding cash balances ? is to forgo the potential income from its alternative use, i.e., by investing those funds. If we assume that the Liquidity Preference Schedule is (in the short run) fixed ? in terms of the transactions, precautionary, and speculative motives for holding money ? then a rightward shift of the Money Supply schedule along the fixed or stationary LP schedule should have led to a fall in the real rate of interest, and thus in the opportunity cost of holding cash balances. And if that were so, then “k” should rise (exactly reflecting the fall in V).

What makes this theory so interesting for the interpretation of the causes of at least the subsequent inflations of the Price Revolution ? say from the 1550s or 1560s ? is that several very prominent economic historians have argued that an equally or even more powerful force for inflation was a continuing rise in V, the income velocity of money (i.e., and thus to a fall in “k”): in particular, Harry Miskimin (1975), Jack Goldstone (1984, 1991a, 1991b), and Peter Lindert (1985). Furthermore, all three have related this role of “V” to structural changes in the economy brought about by population growth. Their theories are too complex to be discussed here, but the most intriguing, in summary, is Goldstone’s thesis. He contended, in referring to sixteenth-century England, that its population growth was accompanied by a highly disproportionate growth in urbanization, a rapid and extensive development of commercialized agriculture, urban markets, and an explosive growth in the use of credit instruments. In such a situation, with a rapid growth “in occupationally specialized linked networks, the potential velocity of circulation of coins grows as the square of the size of the network.” Lindert’s somewhat simpler view is that demographic growth was also accompanied by a two-fold set of changes: (1) changes in relative prices ? in the aforementioned steep rise in agricultural prices, rising not only above industrial prices, but above nominal wages, thus creating severe household budget constraints; and (2) in pyramidal age structures, and thus with changes in dependency ratios (between adult producers and dependent children) that necessitated both dishoarding and a rapid reduction in Cambridge “k” ( = rise in V).

Those arguments and the apparent contradiction with traditional Keynesian theory on the relationships between M and V (or Cambridge “k”) intrigued and inspired Nicholas Mayhew (1995), a renowned British medieval and early-modern monetary historian, to investigate these propositions over a much longer period of time: from 1300 to 1700.[56] He found that in all periods of monetary expansion during these four centuries, the Keynesian interpretation of changes in V or “k” held true, with one singular anomalous exception: the sixteenth and early seventeenth-century Price Revolution. That anomaly may (or may not) be explained by the various arguments set forth by Miskimin, Goldstone, and Lindert.

The Debates about the Spanish and European Distributions of Spanish American “Treasure” and the Monetary Approach to the Balance of Payments Theorem

We may now return to Hamilton’s own considerations about the complex relationships between the influx of Spanish-American silver and its distribution in terms of various factors influencing (at least implicitly) the “V” and “y” variables, in turn influencing changes in P (the CPI). He contends first (pp. 301-02) that “the increase in the world stock of precious metals during the sixteenth century was probably more than twice ? possibly as much as four times ? as great as the advance of prices” in Spain. He speculates, first, that some proportion of this influx was hoarded or converted, not just by the Church, in ecclesiastical artifacts, but also by the Spanish nobility (thus leading to a rise in “k”), while a significantly increasing proportion was exported in trade with Asia, though mentioning only the role of the English East India Company (from 1600), surprisingly ignoring the even more prominent contemporary role of the Dutch, and the much earlier role of the Portuguese (from 1501, though the latter used principally South German silver). We now estimate that of the total value of European purchases made in Asia in late-medieval and early modern eras, about 65-70 percent were paid for in bullion and thus only 25-30 percent from the sale of European merchandise in Asia.[57] Finally, Hamilton also fairly speculated that “the enhanced production and exchange of goods which accompanied the growth of population, the substitution of monetary payments for produce rents [in kind] … and the shift from wages wholly or partially in kind to monetary remunerations for services, and the decrease of barter tended to counteract the rapid augmentation of gold and silver money:” i.e., a combination of interacting factors that affected both Cambridge “k” and Friedman’s “y.” Clearly Hamilton was no simplistic proponent of a crude Quantity Theory of Money.

From my own studies of monetary and price history over the past four decades, I offer these observations, in terms of the modernized version of Fisher’s Equation of Exchange, for the history of European prices from ca. 1100 to 1914. An increase in M virtually always resulted in some degree of inflation, but one that was usually offset by some reduction in V (increase in ” k”) and by some increase in y, especially if and when lower interest rates promoted increased investment.[58] Thus the inflationary consequences of increasing the money supply are historically indeterminate, though usually the price rise was, for these reasons, less than proportional to the increase in the monetary stock, except when excessively severe debasements created a veritable “flight from coinage,” when coined money was exchanged for durable goods (i.e., another instance in which an increase in M was accompanied by an increase in V).[59]

One of the major issues related to this debate about the Price Revolution is the extent to which the Spanish-American silver that flowed into Spain soon flowed out to other parts of Europe (i.e., apart from the aggregate European bullion exports to Asia and Russia). There is little mystery in explaining how that outflow took place. Spain, under both Charles V (I of Spain) and Philip II, ruled a vast, far-flung empire: including not only the American colonies and the Philippines, but also the entire Low Countries, and major parts of Germany and Italy, and then Portugal and its colonies from 1580 to 1640. Maintaining and defending such a vast empire inevitably led to war, almost continuous war, with Spain’s neighbors, especially France. Then, in 1568, most of the Low Countries (Habsburg Netherlands) revolted against Spanish rule, a revolt that (despite a truce from 1609 to 1621) merged into the Thirty Years War (1618-48), finally resolved by the Treaty of Westphalia. As Hamilton himself suggests (but without offering any corroborative evidence ? nor can I), vast quantities of silver (and gold) thus undoubtedly flowed from Spain into the various military theaters, in payment for wages, munitions, supplies, and diplomacy, while the German and then Genoese bankers presumably received considerable quantities of bullion (or goods so purchased) in repayment of loans.[60] Other factors that Hamilton suggested were: adverse trade balances, or simply expanding imports, especially from Italy and the Low Countries (with an increased marginal propensity to import); and operations of divergent bimetallic mint ratios. What role piracy and smuggling actually played in this international diffusion of precious metals cannot be ascertained.[61]

But Outhwaite (1969, 1982), in analyzing the monetary factors that might explain the Price Revolution in Tudor and early Stuart England, asserted (again with no evidence) that: “Spanish silver … appears to have played little or no part before 1630 and a very limited one thereafter.”[62] That statement, however, is simply untrue. For, as Challis (1975) has demonstrated, four of the five extant “Melting Books,” tabulating the sources of bullion for London’s Tower Mint, between 1561 and 1599, indicate that Spanish silver accounted for proportions of total bullion coined that ranged from a low of 75.0% (1561-62) to a high of 86.3% (1584-85). The “melting books” also indicate that almost all of the remaining foreign silver bullion brought to the Tower Mint came from the Spanish Habsburg Low Counties (the southern Netherlands, which the Spanish had quickly reconquered).[63] Furthermore, if we ignore the mint outputs during the Great Debasement (1542-1553) and during the Elizabethan Recoinage (1561-63), we find that the quantity of silver bullion coined in the English mints rose from a quinquennial mean of 1,089.012 kg in 1511-15 (at the onset of the Price Revolution) to a peak of 18,653.36 kg in 1591-95, after almost four decades of stable money: a 17.13 fold increase. Over this same period, the proportion of the total value of the aggregate mint outputs accounted for by silver rose from 12.32% to 90.35% ? and (apart from the Great Debasement era) without any significant change in the official bimetallic ratio.[64]

Those economists who favor the Monetary Approach to the Balance of Payments Theorem in explaining inflation as an international phenomenon would contend that we do not have to explain any specific bullion flows between individual countries, and certainly not in terms of a Hume-Turgot price-specie flow mechanism.[65] In essence, this theorem states that world bullion stocks (up to 1914, with a wholesale shift to fiat money) determine the overall world price level; and that individual countries, through international arbitrage and the “law of one price,” undergo the necessary adjustments in establishing a commensurate domestic price level and the requisite money supply (in part determined by changes in private and public credit) ? not just through international trade in goods and services, but especially in capital flows (exchanging assets for money) at existing exchange rates, without specifically related bullion flows.

Nevertheless, in the specific case of sixteenth century England, we are naturally led to ask: where did all this silver come from; and why did England shift from a gold-based to a silver-based economy during this century? More specifically, if Nicholas Mayhew (1995) is reasonably close in his estimates of England’s Y = Gross National Income (Table I, p. 244), from 1300 to 1700, as measured in the silver-based sterling money-of-account, that it rose from about ?3.5 million pounds sterling in 1470 (with a population of 2.3 million) to ?40.88 million pound sterling in 1670 (a population of 5.0 million) ? an 11.68-fold increase ? then we again may ask this fundamental question. Where did all these extra pounds sterling come from in maintaining that latter level of national income? Did they come from an increase in the stock of silver coinages, and/or from a vast increase in the income velocity of money? Indeed that monetary shift from gold to silver may have had some influence on the presumed increase in the income velocity of money since the lower-valued silver coins had a far greater turnover in circulation than did the very high-valued gold coins.[66]

Statistical Measurements of the Impact of Increased Silver Supplies: Bimetallic Ratios and Inflation

There are two other statistical measures to indicate the economic impact within Europe itself of the influx of South German and then Spanish American silver during the Price Revolution era, i.e., until the 1650s. The first is the bimetallic ratio. In England, despite the previously cited evidence on its relative stability in the sixteenth-century, by 1660, the official mint ratio had risen to 14.485:1 (from the low of 10.333:1 in 1464).[67] In Spain, the official bimetallic ratio had risen from 10.11:1 in 1497 to 15.45:1 in 1650; and in Amsterdam, the gold:silver mint ratio had risen from 11.21 in 1600 to 13.93:1 in 1640 to 14.56:1 in 1650.[68] These ratios indicate that silver had become relatively that much cheaper than gold from the early sixteenth to mid-seventeenth century; and also that, despite very significant European exports of silver to the Levant and to South Asia and Indonesia in the seventeenth century, Europe still remained awash with silver.[69] At the same time, it is also a valid conjecture that the greatest impact of the influx of Spanish American silver (and gold) in this era was to permit a very great expansion in European trade with Asia, indeed inaugurating a new era of globalization.

The second important indicator of the change in the relative value of silver is the rise in the price level: i.e., of inflation itself. As noted earlier, the English CPI experienced a 6.77-fold from 1511-15 to 1646-50, at the very peak of the Price Revolution; and the Brabant CPI experienced a 7.36-fold rise over the very same period (expressed in annual means per quinquennium).[70] Since these price indexes are expressed in terms of silver-based moneys-of-account, that necessarily meant that silver, gram per gram, had become that much cheaper in relation to tradable goods (as represented in the CPI) ? though, as noted earlier, the variations in the rates of change in these CPI are partly explained by differences in their respective coinage debasements.

A Comparison of the Data on Spanish-American Mining Outputs and Bullion Imports (into Seville)

Finally, how accurate are Hamilton’s data on the Spanish-American bullion imports? We can best gauge that accuracy by comparing the aggregate amount of fine silver bullion entering Seville with the now known data on the Spanish-American silver-mining outputs, for the years for which we have data for both of these variables: from 1551 to 1660.[71] One will recall that the Potosi mines were opened only in 1545; and those of Zacatecas in 1546; and recall, furthermore, that production at both began to boom only with the subsequent application of the mercury amalgamation process (not fully applied until the 1570s). The comparative results are surprisingly close. In that 110-year period permitting this comparison, total imports of fine silver, according to Hamilton, amounted to 16,886,815.3 kg; and the combined outputs from the Potosi and Zacatecas mines was very close to that figure: 17,057,938.2 kg.[72] It is also worth noting that the outputs from the Spanish-American mines and the silver imports both peak in the same quinquennium: 1591-95, when the annual mean mined silver output was 219,457.4 kg and the annual mean silver import was 272,704.5 kg. By 1626-30, the mean annual mined output had fallen 18.7% to 178,490.0 kg and the mean annual import had fallen even further, by 24.7%, to 206,045.26 kg (both sets of data indicate that the silver imports for these years were not based just on these two mines). Thereafter, the fall in imports is much more precipitous: declining by 86.4%, to an annual mean import of just 27,965.33 kg in the final quinquennium of recorded import data, in 1656-60. The combined mined output of the Potosi and Zacatecas mines also fell during this very same period, but not by as much: declining by 27.1%, with a mean output of 130,084.23 kg in 1656-60: i.e., a mean output that was 4.65 times more than the mean silver imports into Seville in that quinquennium.

The decline in the Spanish-American mining outputs of silver can be largely attributed to the expected rate of diminishing returns in a natural-resource industry without further technological changes. The differences between the two sets of data, on output and imports, were actually suggested by Hamilton himself (even though he lacked any knowledge of the Spanish-American production figures for this era): a higher proportion of the silver was being retained in the Spanish Americas for colonial economic development, and also for export (from Acapulco, in Mexico) across the Pacific to the Philippines and China, principally for the silk trades. Indeed, as TePaske (1983) subsequently demonstrated, the share of pubic revenues of the Viceroyalty of Peru retained for domestic development rose from 40.8% in 1591-1600 to a peak of 98.9% in 1681-90. We have no comparable statistics for the much less wealthy Mexico (in New Spain); but TePaske also supplies data on its silver exports to the Philippines. Those exports rose from an annual mean of 1,191.2 kg in 1591-1600 (4.8% of Mexican total silver outputs) to a peak of 9,388.2 kg in 1631-40 (29.6% of the total silver outputs). Though declining somewhat thereafter, such exports then recovered to 4,990.0 kg in 1681-90 (29.0% of the total silver outputs).[73]

The Morineau Challenge to Hamilton’s Data: Speculations on Post-1660 Bullion Imports and Deflation

Hamilton’s research on Spanish-American bullion imports into Seville ceased with the year, 1660, because that latter date marked “the termination of compulsory registration of treasure” at Seville.[74] Subsequently, the French economic historian Michel Morineau (1968, 1985) sought to remedy the post-1660 lacuna of bullion import data by extrapolating statistics from Dutch gazettes and newspapers. In doing so, contended that Spanish-American bullion imports strongly revived after the 1660s, a view that most historians have uncritically accepted.[75] But his two publications on this issue present a number of serious problems. First, there is the problem of comparing Spanish apples (actual data on bullion imports) with Dutch oranges (newspaper reports, many being speculations). Second, the statistics in the two publications differ strongly from each other. Third, except for one difficult-to-decipher semi-logarithmic graph, they do not provide specific data that allow us to distinguish clearly between gold and silver imports, either by weight or value.[76] Fourth, the statistics on bullion imports are vastly larger in kilograms of metal than those recorded for Spanish American mining outputs, and also differ radically in the trends recorded for the Spanish-American mining output data.[77]

Nevertheless, these Spanish American mining output data do indicate some considerable recovery in production in the later seventeenth century. Thus, while the output of the Potosi mines continued to fall in the later seventeenth century (to a mean of 56,884.9 kg in 1696-1700, and to one of just 30,990.86 kg in 1711-15), those at Zacatecas recovered from the low of 26,373.4 kg in 1656-60 to more than double, reaching an unprecedented peak of 64,139.87 kg in 1676-80. Then, shortly after, a new and very important Mexican silver mine was developed at Sombrerete, producing an annual mean output of 30,492.83 kg in 1681-85. Thus the aggregate (known) Spanish-American mining output rose from a low 101,533.96 kg in 1661-65 (mean annual output) to a high of 143,212.93 kg in 1686-90: a 1.41-fold increase.[78]

Whatever are the actual figures for the imports of Spanish-American silver between the 1660s and the 1690s, we are in fact better informed about the export of precious metals, primarily silver, by the two East India Companies: in those four decades, the two companies exported a total of 1,3345,342.0 kg of fine silver to Asia.[79] An indication of some relative West European scarcity of coined silver money, from the 1660s to the 1690s, can be found in the Consumer Price Indexes for both England and Brabant. In England, the quinquennial mean CPI (1451-75=100) fell from the Price Revolution peak of 734.39 in 1646-50 to a low of 547.58 in 1686-90: a fairly dramatic fall of 25.43%. By that time, however, the London Goldsmiths’ development of deposit and transfer banking, with fully negotiable promissory notes and rudimentary paper bank notes, was providing a financial remedy for any such monetary scarcity ? as did the subsequent vast imports of gold from Brazil.[80] Similarly, in Brabant, the quinquennial mean CPI (1451-75=100) fell from the aforementioned peak of 1015.138 in 1646-50 to a low of 652.217 ? an even greater fall of 35.8% ? similarly in 1686-90. In Spain (New Castile), the deflation commenced somewhat later, according to Hamilton (1947), who, for this period, used a CPI whose base is 1671-80=100. From a quinquennial mean peak of 103.5 in 1676-80 (perhaps reflecting the ongoing vellon inflation), the CPI fell to a low 59.0 in 1686-90 (an even more drastic fall of 43.0%): i.e., the very same period for deflationary nadir experienced in both England and Brabant.

These data are presented in Hamilton’s third major monograph (1947), which appeared thirteen years later, shortly after World War II, covering the period 1651-1800: in Table 5, p. 119. In between these two, Hamilton (1936), published his second monograph: covering the period 1351-1500 (but excluding Castile) One might thus be encouraged to believe that, thanks to Hamilton, we should possess a continuous “Spanish” price index from 1351-1800. Alas, that is not the case, for Hamilton kept shifting his price-index base for each half century over this period, without providing any overlapping price indexes or even similar sets of prices (in the maraved?s money-of-account) to permit (without exhaustive labor) the compilation of such a continuous price index.[81] That, perhaps, is my most serious criticism of Hamilton’s scholarship in these three volumes (though not of his journal articles), even if he has provided an enormous wealth of price data for a large number of commodities over these four and one-half centuries (and also voluminous wage data).[82]

Supplementary Criticisms of Hamilton’s Data on Gold and Silver Imports

One of the criticisms leveled against Morineau’s monetary data ? that they do not allow us to distinguish between the influxes of gold and silver ? can also be made, in part, against Hamilton’s 1934 monograph. The actual registrations of Spanish American bullion imports into Seville, from 1503 to 1660, were by the aggregate value of both gold and silver, in money-of-account pesos that were worth 450 marevedis, each of which represented 42.29 grams pure silver (for the entire period concerned, in which, as noted earlier, no silver debasements took place). Those amounts, for both public and private bullion imports, are recorded in Table 1 (p. 34), in quinquennial means. His Table 2 (p. 40) provides his estimates ? or speculations ? of the percentage distribution of gold and silver imports, by decade, but by weight alone: indicating that from the 1530s to the 1550s, about 86% was in silver, and thereafter, to 1660, from 97% to 99% of the total was consistently always in silver.[83] His table 3 (p. 42) provides his estimate of total decennial imports of silver and gold in grams. What is lacking, however, is the distribution by value, in money-of-account terms, whether in maraved?s, pesos, or ducats (worth 375 maraved?s). Since these money-of-account values remained unchanged from 1497 to 1598, and with only a few changes in gold thereafter (to 1686), Hamilton should have calculated these values as well, utilizing as well his Table 4 gold:silver bimetallic ratios (p. 71). Perhaps this is a task that I should undertake ? but not now, for this review. A more challenging task to be explored is to analyze the impact of gold inflows, especially of Brazilian gold from the 1690s, on prices that are expressed almost everywhere in Europe in terms of a silver-based money of account (e.g., the pound sterling). Obviously one important consequence of increased gold inflows was the liberation of silver to be employed elsewhere in the economy: i.e., effectively to increase the supply of silver for the economy.

At the same time, we should realize that the typical dichotomy of the role of the two metals, so often given in economic history literature ? that gold was the medium of international trade while silver was the medium of domestic trade ? is historically false, especially when we view Europe’s commercial relations with the Baltic, Russia, the Levant, and most of Asia.[84]


EH.Net’s Classic Reviews Selection Committee was certainly justified in selecting Hamilton’s American Treasure and the Price Revolution in Spain, 1501-1650 as one of the “classics” of economic history produced in the twentieth century; and Duke University’s website (see note 1) was also fully justified in declaring that Hamilton was one of the pioneers of quantitative economy history. In his preface, Hamilton noted (p. xii) that he and his wife spent 30,750 hours in collecting and processing this vast amount of quantitative data on Spanish bullion imports and prices and wages, “entirely from manuscript material,” with another 12,500 hours of labor rendered by hired research assistants ? all of this work, about three million computations, done without electronic calcula

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):17th Century

A Free Nation Deep in Debt: The Financial Roots of Democracy

Author(s):Macdonald, James
Reviewer(s):Wright, Robert E.

Published by EH.NET (May 2006)

James Macdonald, A Free Nation Deep in Debt: The Financial Roots of Democracy. Princeton: Princeton University Press, 2006. ix + 564 pp. $20 (paperback), ISBN: 0-691-12632-1.

Reviewed for EH.NET by Robert E. Wright, Stern School of Business, New York University.

Storied trade publishing house Farrar, Straus and Giroux (FSG) published A Free Nation Deep in Debt in cloth in 2003 but did not see fit to send a copy to EH.Net for review. Princeton University Press, the publisher of the new paperback edition technically reviewed here, is taking closer aim at the scholarly market. That is likely a good call. Though ably written, this book is closer in tone, density, and substance to a scholarly tome than a bookstore blockbuster. Likely, FSG was attracted to the book’s Niall Ferguson-esque Big Thesis: Democracies eventually defeat autocracies because “countries with representative institutions are able to borrow more cheaply than those with autocratic governments” (p. 4). Bond markets also strengthen democracies internally by giving citizens some of the proverbial power of the purse and by aligning their interests with those of their governments. Heady, important stuff.

To prove his thesis, James Macdonald, a British investment banker and independent scholar, has written a wide-ranging survey of the co-evolution of representative governments and public debt markets. He starts with the Old Testament, which he uses as a primary source to explicate the transition of societies from a Lockean state of nature to autocracy. Small family groups that highly valued leisure were subsumed or slaughtered by larger and more powerfully organized autocracies that forced their subjects through taxation to create economic surpluses. Autocracies soon came to control much of the ancient world but found it impossible to control the vast expanses of Asia, the forests and fjords of Northern Europe, or the jungles of Africa. A few small city states, often strengthened by alliances with other nearby cities, also managed to hold off the imperial advance for a time.

The ancient autocracies financed wars from savings, their legendary “treasure troves,” and equity contracts that divided the spoils of war. The democratic city states, by contrast, borrowed to fund resistance to imperial encroachments. “The picture that emerges,” however, was “not of a regular system of public finance, but of a series of improvised reactions to fiscal emergencies” (p. 36). The ancient Greeks, for example, moved toward modern public credit but never explicitly connected “the principle of voluntary contribution to the public funds and the principle of distribution of surplus assets” (p. 36). The result was a dizzying array of debt instruments, some forced and some voluntary, some paying interest and others not, most short-term but some in the form of life annuities. The Greeks sometimes found it difficult to honor their obligations but the extant documentation is too sparse to say anything more definitive about their creditworthiness.

Modern public finance had to await the emergence of a different group of city states some 1,500 years later in the northern Italian peninsula. There emerged, for the first time since the fall of Carthage, a group of states run by merchants instead of soldiers. Desperate to maintain their freedom from regional despots, the representative governments of Venice, Florence, and Genoa hit upon the notion of repayable taxes, levies upon which interest would be paid if the government’s finances allowed. To evade the Church’s then stringent usury prohibition, repayment of the principal sum was left at the pleasure of the government. The Venetians circumvented that inconvenience by making the right to receive the tax repayments transferable to third parties, which quickly led to the creation of a secondary market. “They had invented the bond market” (p. 77) as Macdonald writes, but the Italian city states did not regularly pay interest on their repayable taxes, the market prices of which spiraled downward. City states in northern Europe eventually improved upon the Italian model by avoiding forced loans and repayable taxes and religiously servicing their debts. The Dutch Republic was the major innovator here.

Medieval and Early Modern European autocrats also borrowed but almost invariably eventually defaulted. Unsurprisingly, they could not borrow as much or as cheaply as the Dutch, who won their independence by wearing down the once mighty Hapsburg Empire. By the end of the 80-year struggle, a majority of Dutch households were creditors to their government. Default, rebellion, or large scale tax evasion became unthinkable because the interests of the government and the citizenry were thoroughly intertwined.

After revolutions of their own in 1688 and 1776, the British and the Americans adopted Dutch-style finance, funding their wars in large measure by selling bonds to citizen creditors rather than resorting to punitive levels of taxation, ruinous inflation, or physical coercion. The democracies thrived, while autocracies in France, Germany, Russia, and elsewhere lost wars and rebellions. By World War II, however, government wartime financial techniques, including financial repression, rationing, and payroll deduction, had become so powerful that the great patriotic bond drives of earlier wars lost much of their importance. The wartime financial system of that greatest of autocrats, Adolf Hitler, looked eerily similar to that of the United States.

If Macdonald is right — and there is more than a little truth in this book — then adherents of the English “Country” and American Jeffersonian Republican traditions exaggerated the negative aspects of national debts. Far from endangering democracies, national debts bolstered them by enabling them to defeat powerful external and internal foes. Eternal interest was as much the price of liberty as eternal vigilance.

Authors who dare proffer such a Big Thesis confront numerous tradeoffs, the most important of which is that between depth and breadth. A twenty-page bibliography is always impressive, but less so for a book that covers several millennia of finance, government, and politics. Specialists will likely be disappointed with the treatment of their areas of expertise. (I cringed at several points in his discussion of the early U.S. monetary and financial systems.) But readers should concentrate on the forest rather than the trees and judge this ambitious and important book on its panoramic vision.

Robert E. Wright teaches business, economic, and financial history at the Stern School of Business, New York University. His most recent books include The First Wall Street: Chestnut Street, Philadelphia, and the Birth of American Finance (Chicago, 2005) and Financial Founding Fathers: The Men Who Made America Rich (Chicago, 2006, with David J. Cowen). He is currently working on a book tentatively titled Financing Freedom that will describe how the entire financial system, not just the government securities market, enabled America to vanquish its most dangerous enemies at home and abroad.

Subject(s):Military and War
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

The Black Death in Egypt and England: A Comparative Study

Author(s):Borsch, Stuart J.
Reviewer(s):Munro, John

Published by EH.NET (March 2006)

Stuart J. Borsch, The Black Death in Egypt and England: A Comparative Study. Austin: University of Texas Press, 2005. xii + 195 pp. $35 (cloth), ISBN: 0-292-70617-0.

Reviewed for EH.NET by John Munro, Department of Economics, University of Toronto.

Certainly for my university students no topic in European economic history has proved to be more fascinating and engaging than that of the Black Death, especially with its late-medieval consequences. Its more general popularity is indicated by the recent spate of books on the Black Death, all of which are, of course, Eurocentric (cited below). This book, by Stuart Borsch, an Assistant Professor of History at Assumption College in Worcester, Massachusetts, will likely attract considerable interest by providing a comparative history of the demographic consequences in Mamluk Egypt, whose economic history certainly deserves to be far better known, and England, as the most obvious paradigm for such a comparison. On these grounds alone, his book should be a major contribution to the economic history literature; and despite the criticisms that follow, he has indeed supplied some valuable and most interesting new historical evidence.

Inspired by Robert Brenner’s observation (1976, 1982, 1985) that ‘different [economic and social] outcomes proceeded from similar demographic trends at different times and in different areas of Europe,’ Borsch seeks to demonstrate that the demographic consequences of the Black Death produced almost diametrically opposite results in these two countries (by ca. 1520). In England, the results, according to the author (p. 16), were that: ‘the scarcity of labor in England destroyed the remnants of the manorial system, which was replaced by [non-servile] tenant farming. Wages rose, rents and grain prices dropped, unemployment decreased, per capita incomes rose, and the economy fully recovered by the 1500.’ Except for the final observation, his conclusions are thus fully in accordance with the standard Ricardo model, which, oddly enough, is never mentioned in this book. He goes even further to contend that ‘England’s economy epitomized the most positive economic transformations that took place in Western Europe in the wake of the plagues. The impact of the plague was the antithesis of that in Egypt,’ where the economy suffered drastic and long-term contraction, rising grain prices, stable or rising rents, falling real wages and per capita incomes. Alas, I do not believe that his evidence and analyses justify these stark conclusions.

Organized in seven chapters, this study discusses the following topics: (1) the nature of the plague (bubonic), and methodological problems of demographic analyses; (2) mortality, irrigation, and landholders in Mamluk Egypt; (3) the impact of the plagues on the rural economy of Egypt; (4) the impact of the plagues on the rural economy of England; (5) the Dinar Jayshi money-of-account and agrarian output in Egypt, which is then compared to England’s contemporary agrarian outputs; (6) a re-evaluation of estimates of prices and wages in both countries; and then (7) a summary of his major conclusions (with a supplemental appendix on marginal productivity models).

Comparative history thus offers us the prospects of insights into the nature of basic historical problems that might well be ignored by a focus on one just one country or region. It has, however, the inherent disadvantage that it defies, so to speak, the law of comparative advantage: in that few historians can be masters of more than one field in order to provide the insights from specialization. Borsch, who devoted two years to archival research in Egypt, has acquired a wealth of knowledge whose results, for Mamluk Egypt, I cannot properly judge, while I must disagree with many of his conclusions about the economy of late medieval England, and thus with some of the essential comparisons that he had presented. He has, to be sure, compiled an impressive bibliography on late-medieval England, but with some curious lacuna (he is aware of my earlier but not later publications) — leaving me with a possibly unfair impression that he has cherry-picked his sources and evidence to sustain his often provocative theses.

Yet even with his own statistics, Borsch’s statement that England’s ‘economy [had] fully recovered by 1500′ cannot be taken seriously. First, in citing Mayhew (1995a), he indicates that England’s population had fallen from about 6.0 million ca. 1300 to about 2.25 million in the early 1520s. While the latter estimate is now generally accepted (see Cornwall 1970, Blanchard 1970, Campbell 1981), the former estimate of 6.0 million for 1300, which originated with several studies by Michael Postan (1950, 1959, 1966) — especially in his attack on the more modest estimates of Russell (1966) — is now in much dispute, even if it still does prevail as the majority opinion. Recent studies, devoted to the ‘Feeding the City [of London] Project’ (Campbell, Galloway, Keene and Murphy 1993, Nightingale 1996), have convinced me that the population of England ca. 1300 could not have exceeded 4.75 million, and was probably much closer to 4.0 million. Note that a modest compromise estimate of 4.5 million is still double the size of the English population in the early 1520s. If we were to entertain the higher if still conventional estimate of 6.0 million, can we seriously believe that England lost almost two-thirds of its population in the ensuing two centuries — a vastly greater demographic loss than that experienced by any other region of Europe? Can we believe that England, despite very extensive economic development in the ensuing centuries, was unable to regain that medieval level of population until the very eve of the Industrial Revolution era (with an estimated population of 6.15 million in 1756)? That 6.0 million figure is also used to estimate England’s GDP in 1300 — thus rendering this estimate highly suspect, as is the comparison with Egypt’s population, also supposedly about 6.0 million at the time of the Mamluk land survey of 1315. His admissions that ‘we do not have exact figures for Egypt’s population’ (p. 90), nor indeed any estimates for that population in the early sixteenth century, provide an even more serious problem, to be considered later.

If England’s population in the 1520s was only half (rather than just a third) of that sustained in 1300, how can anyone speak of economic recovery? The retort may be that per capita incomes had risen since the Black Death, a contention discussed below, when we must differentiate the issues of rising real incomes for those fully dependent on wages, a small minority, from the question of per capita income for society as a whole. To be sure, economists and historians continue to debate whether or not we should measure economic growth in aggregate or per capita terms. A more modern example is the debate about the comparative economic performance of France and the United Kingdom during the nineteenth century. From 1800 to 1910, the population of the UK rose almost four-fold, from 10.7 to 40.9 million (+282.2%), while France’s population rose only 45.1%, from 27.3 to 39.6 million. Defenders of the French contend that, from the 1850s, its per capita income rose at a faster rate (overall: 207% vs. 197%) — ignoring the fact that in 1910 the French per capita income was only 67.8% of the British (Crafts 1983). The more important question — for both the modern and medieval periods — is the view, held by many, that genuine economic growth is almost always accompanied by and manifested by population growth. As Ralph Davis (1973, p. 16) once reminded us, ‘the economy of modern Europe would never have come into existence on the basis of population decline.’

There are other data to refute the notion of England’s supposedly ‘complete’ economic recovery by ca. 1500, specifically concerning the woolen textile industry, whose rapid post-Plague rise Borsch cites as major evidence for English economic growth in the later Middle Ages. But he never bothers to explain why England underwent this transformation from being principally a raw material exporter (wool) to a manufacturing exporter (cloth). The answer, in fact, lies in the totally unintended, inadvertent consequences of English fiscal policies, in financing the Hundred Years War from its very outset (1337-1453): the exorbitant taxation of England’s most lucrative export and most important agricultural commodity, wool, with a ‘specific’ tax (customs and subsidy) that reached 50% of the value of wool exports by the 1390s; and the crown’s re-organization of the wool trade through a mercantile cartel (Merchants of the Calais Staple) that was designed to pass the tax incidence from domestic growers to foreign buyers — principally the woolen cloth industries of the Low Countries and Italy (for whom that tax-burdened wool accounted for over 70% of production costs). Cloth exports, on the other hand, could not be organized in such a cartelized fashion; and thus export taxes, commencing only in 1347 (and thereafter fixed until 1558), amounted to no more than 3% of cloth export values. Consequently it became economically far more advantageous to export wool in the form of manufactured cloth. Using the ratio of 4.333 broadcloths (24 yards by 1.75 yards) to one woolsack (364 lb = 165.23 kg), I have calculated that the total volume of wool exports (wool and cloth combined) fell from a mean of 154,614 sacks in 1301-10 to a mean of 142,894 sacks in 1351-60, and finally to a mean of just 93,764 sacks in 1491-1500 — a fall of 40% by volume.

One may retort that domestic wools converted into cloth exports were that much more valuable (even though wool accounted for more than 50% of the value of the cloth, even in England). Over this same period, the value of wool exports fell from a mean of ?222,051 sterling in 1301-10 to one of ?152,608 in 1351-60 to just ?43,284 in 1491-1500 — a fall of 72%, while the value of cloth exports (unrecorded before 1347) rose from a mean of ?11,160.7 in 1351-60 to ?152,179.7 in 1491-1500. That means that the combined value of exports fell from a mean of ?222,052 in 1301-10 to one of ?134,641 in 1401-10, but, while rising thereafter, had reached only a mean of ?195,464 in 1491-00 (a net decline, in nominal terms, of 12%). Since, however, Borsch prefers to measure values in terms of kilograms of pure silver, we must note that the combined value of these exports, over these two centuries, fell from 70,984.34 kg to 33,741.80 kg — a fall of 53%. In other words, to explain the difference between nominal and ‘real’ values, we must note that the pound sterling had experienced a devaluation (debasement) of 46.0% over these two centuries. Finally, in view of the obvious importance of this taxation for aggregate government revenues — the most important single source — we must note that the total value of the combined export customs on wool and cloth fell from a mean of ?65,820 in 1351-60 to one of just ?20,958 in 1491-1500 — a dramatic fall of 68%; and that is just in nominal money-of-account terms. So much for the evidence on economic growth in late-medieval England.

The author is, however, cognizant of the ongoing debate about the late-medieval economic contraction, which is often if misleadingly called the ‘great depression.’ He asks (p. 65) how anyone ‘could characterize the 1350-1500 period as a true economic depression,’ when such a phenomenon ‘entails more than a drop in total agrarian (or commercial) output because of a drop in population.’ In his rebuttal of this notion, he is evidently unaware of recent critical studies by Hatcher (1996), Nightingale (1997), and Bois (2000), all of which provide substantial evidence and analyses of regional ‘slumps’ or ‘depressions’ for the fifteenth century (if not the entire period, for all of Europe). He might have defended that proposition by citing Bannock’s Penguin Dictionary of Economics (1984, pp. 118, 373), which notes that ‘there is no official quantitative definition of a depression, as is the case with recession’ [‘a downturn in the business cycle characterised by two successive quarters of negative rates of growth in the real gross national product’]. Unfortunately Borsch then states that ‘a real economic depression includes across-the-board, not merely sectoral (i.e. grain price) deflation,’ revealing his ignorance of two prolonged periods of deflation in both England and the Low Countries: ca. 1375 – ca. 1425 (in England, a fall of 31% in the Consumer Price Index), and ca. 1440-1480 (in England, again a fall of 32% in the CPI). That ignorance is evidently explained by the complete absence of any reference to the well known and so widely used Phelps Brown and Hopkins [PBH] ‘Basket of Consumables’ Index and of their corresponding Real Wage Index (1956, 1957). Their subsequent publication (1981) of the price series for six commodity groups clearly reveals that the decline in prices during these two periods, if not exactly in tandem, was general, and certainly not confined to grains (analyzed with revised data in Munro 2005).

This leads me to my most serious criticism of the book: Borsch’s comparative analyses of real outputs (GDP) and real wages in the late-medieval English and Egyptian economies. As indicated earlier, his comparisons involve the use of prices, values, and outputs expressed in grams of pure silver. To be sure, there may be cases in comparative economic history when there is no alternative to their use — certainly we cannot compare levels in the nominal values of two entirely different moneys-of-account, all the more so when their changes within Egypt itself have not been fully explored and explained. The author is also aware of controversies concerning the use of silver values, but he does not take full account of two other major objections: (1) that in seeking to compensate for the effects of coinage debasements, the use of silver-gram values distort the changes by two false assumptions: (a) that the expansion of the money supply is directly proportional (though inversely so) to the percentage change in the silver contents of the coinage; and that (b) any ensuing rise in prices (inflation) is directly proportional to the increase in the money supply — i.e., implicitly adopting the fallacy of the crude quantity theory of money; and (2) that the purchasing power of silver remains constant over long periods of time, when in fact it often changed radically (in terms of gold:silver ratios, from: 12:1 in the 1270s to 16:1 in the 1320s, falling to 9:1 in the 1380s, then rising to 12:1 by the 1450s, and to 15 or 16:1 by the 1660s).

The author’s most interesting and certainly most original statistical calculations are for Egypt’s gross domestic product in two years, virtually two centuries apart: those for 1315 (from a cadastral survey undertaken by the Mamluk Sultan al-Nasir Muhammad) and for 1517 (estimates made by Ibn Iyas, just following the Ottoman conquest of Mamluk Egypt). These intricate calculations based on a wide variety of evidence, involving extrapolations from later documents (1597 and nineteenth century), occupy a central portion of the book, and rightly so. Borsch states that, in making these comparisons, his major contribution was in ascertaining the true value of the dinar jayshi unit of account, which he reckons to be equal to 13.333 dirhams nuqra (evidently containing 26.4 grams of fine silver); but I have to note that the connection between his source, a document dated 1169, and the 1317 cadastral survey seems tenuous. For this 1317 survey, he estimates that the total value of aggregate agrarian output was 1,009,568.5 kg of silver (or 108,350.1 kg of gold); and that of the entire GDP (if agrarian output accounted for 75%) was 1,346, 091.5 kg of silver (144,467.1 kg of gold). For the second economic survey, in 1517, he does not dare to provide estimates of the Egyptian GDP but only the values of total agrarian output: whose valued is calculated to be 489,514.1 kg of silver or 42,120.6 kg of gold. At least implicitly concerned about the problem of changes in the relative values (bimetallic ratios) and purchasing power of the two metals, he offers an alternative comparison in terms of a grain unit called the ardabb (= 165 liters): an output of 38,337,056 ardabbs (= 63,256,142 hectoliters) in 1315; and one of 15,993,603 ardabbs in 1517 — or so he tells us. Unfortunately, however, that latter calculation involves a very major blunder. For he first calculates the value of the aggregate agrarian output in the gold-based money of account, the dinar ashrafi (3.45g of fine gold), providing an estimate of 12,208,857.1 dinars. Then, estimating that the mean value of the three principal grains (wheat, barley, broad beans) was 1.31 dinars, he calculates the total output in ardabbs of these grains by multiplying the two figures. Of course, he should have divided 12,208,857.1 dinars ashrafi by 1.31 to get the proper estimate: 9,326,858.0 ardabbs (= 15,389,315.7 hectoliters of grain). Next, in this exercise, but using values only in terms of gold and ardabbs, he informs us that the overall decline in total agrarian output, from 1315 to 1517, was the following: 61% in terms of gold and 58% in terms of grain ardabbs (Tables 5.14-15, p. 83). The comforting closeness of these two percentages naturally convinces Borsch that his complicated methodology has been fully vindicated. Unhappily, the opposite is true when we realize how different the percentage changes in these three variables are: in terms of silver kilograms (which he ignores), a decline of 51.1%; in terms of gold, 61.1%; and in terms of actual ardabbs 76.7%.

To make matters even worse, he then compares these estimates of agrarian output in 1517 with those of the later Ottoman survey of 1596-97. The data from the latter are as follows: 17,299,090 ardabbs of grain (28,543, 498.5 hectoliters) — for an increase of 85.5% (not the 8% increase stated in his text, on p. 87); 294,085.0 kg of fine silver — for a decline of 39.9%; and 16,388.0 kg of fine gold — for a decline of 61.2%. Even accounting for the price changes and changes in bimetallic ratios that accompanied the massive increases in precious metals (from South Germany, the Americas, and Africa) during the inflationary Price Revolution era, we would have great difficulties in explaining why these statistics — for grain units and the two precious metals — differ so radically.

His major comparison is, of course, with GDP estimates for England, in two years: 1300 and 1526, specifically chosen because relevant data had been supplied in Mayhew’s aforementioned article (1995a). Mayhew had speculated — with no real evidence supplied — that England’s GDP in 1300 could be valued at ?4.66 million sterling; and as Mayhew himself admitted, his estimate is based ‘on the assumption that population stood at about 6 million in 1300, [and] perhaps 2.3 million in 1526,’ for which year he estimates a GDP value of ?5.0 million, when the Price Revolution was underway, to ‘allow for that price rise and permit a modest improvement in per capita living standards’ (Mayhew 1995a, pp. 248, 250). Thus if, in the light of the previous discussion on the demographic controversy, we were to reduce the GDP for 1300 by one third, i.e., for a revised population estimate of 4.0 million, would we also have to change the GDP estimate for 1526? Mayhew (followed by Borsch), however, provides a somewhat less speculative estimate of the GDP for 1470 – at ?3.437 million sterling (based on Mayhew 1995b and Dyer 1989) — with the further assumption that England’s population was then also 2.3 million. One may comment that these data provide too weak a foundation to make comparisons with the Egyptian data on GDP; but neither Borsch nor anyone else has alternative data to work with. Beggars cannot be choosers in medieval economic history, as my mentor (Robert Lopez) once told me.

In view of Borsch’s persistent insistence on using silver values, we might assume that he would compare the changes in the English GDP, between 1300 and 1526, in terms of precious metals. Instead, he accepts Mayhew’s estimate of the ‘deflated’ value of the GDP for 1526 — and, in terms of Mayhew’s use of the Fisher Identity (M x V = P x y, for which ‘y’ is real GDP), the price index (P) used is, of course, the Phelps Brown and Hopkins index (for which the mean of prices in the basket for 1451-75 = 100, as the base). Mayhew has not, however, used the price index for the specific years concerned but rather an arithmetic mean of the ten years ending in the specified year (i.e., 1291-1300, and 1517-26). In view of the often significant fluctuations in the annual price index — especially around 1300 — the value for the P-deflator can vary widely according to the years chosen for the mean. Indeed why not choose the five years before and after the years concerned to calculate the mean value for P? If that method had been chosen, the P value for 1300, for example, would have been 97.64 (or, 96.16 by my revised, corrected version of the PBH index), instead of Mayhew’s (and Borsch’s) value of 104.8. By the Mayhew method, the deflated value of the GDP for 1526 (when the P value is given as 135.1) is ?3.88 million — and that indicates a decline of 16.9% from the value of ?4.66 million in 1300.

Thus, according to Borsch, the English experience compares very favorably with the Egyptian economy, which had suffered such severe decline, over about the same period: a view based Borsch’s miscalculated estimate of 58% for grain outputs — or the alternative ones of 51.5%, for silver values; or 61.3%, for gold; or the true one of 75.7%, for grain volumes. Suppose that we now calculate the changes in the GDP values in terms of precious metals. This time we must do so in silver, because England had been monometallic in 1300, striking its first gold coins only in 1344 (if we ignore Henry III’s abortive gold penny of 1257). Borsch provides estimates of the 1300 GDP in those terms (Table 5.11, p. 80): 1,487,472 kg of silver (1,489,685.1 is the true figure) and 114,421 kg of gold based on an estimated contemporary bimetallic ratio of 13:1 (Spufford, 1986). He does not, however, do so for 1526, when we may calculate that the estimated ?5.0 million GDP was then equivalent to just 767,219.8 kg of silver (or 68,758.9 kg of gold). In terms of silver kg, that means an overall decline, from 1300 to 1526, of 48.5%; and that is in accordance with the estimated decline of 51.5% for the Egyptian GDP over this same period, when also measured in silver kg (a comparison not involving changes in purchasing power, except for regional differences in the bimetallic ratio). In other words, the much vaunted contrast in the two countries’ overall economic fortunes, i.e., in the declines of their aggregate outputs (agrarian only for Egypt), now disappears.

Borsch is, however, on a much stronger ground in comparing prices, wages, and living standards — at least the real incomes for those totally dependent on money wages (a very small minority in both countries) — over these two centuries. Indeed, his major and much valued contribution lies in providing Egyptian wheat prices for the periods 1300-1346 and 1440-1487 (Tables 6.1-2, pp. 93-95), and of wages (for custodians, doorkeepers, water-carriers, and readers, though for very few years: Tables 6.10-12, pp. 106-07). They are provided in terms of both moneys-of-account (dirhams and dinars) and in grams of silver and gold. If much of the data come from already published sources — Ashtor’s publications (1949, 1969) being particularly important — a considerable amount comes from primary Arabic sources, and indeed from his own archival research. Certainly most readers will be quite unfamiliar with these data. The English prices — grain prices only — and wages of building craftsmen come primarily from Farmer (1991; but Farmer’s publications of 1957, 1983, and 1988 are surprisingly not cited), a problematic source. For unfortunately Farmer provides annual means based on manorial data from a variety of regions; and his wage data also suffer from a ‘compositional fallacy’ (as do the data in Beveridge 1936, 1955) in that wages for craftsmen of different skills are averaged, producing spurious fluctuations — readily observable in Farmer’s tables — that are based on changes in the composition and location of the workforce. He should have adopted the wage data for building craftsmen that Phelps Brown and Hopkins (1955) had produced: principally for one region — small towns in southeastern England — using the prevailing standard wage for senior master craftsmen and their laborers (at Oxford, an unchanging daily wage of 6d, for masters, and 4d for journeymen, from 1363 to 1536). But, as noted earlier, he seems to be unaware of their publications and thus of their price, wage, and real-wage indexes, for the period 1264-1954.

While the PBH data therefore are urban, Farmer’s data are not just rural, but manorial (providing other inherent problems); and undoubtedly we now need a proper survey of both sets of wages, with comparisons for London from the 1360s. There is, it must be noted, a very compelling reason why our analysis of real-wage changes is based on the experiences of European building craftsmen. For they are one of the very few groups that have left us with fairly continuous evidence of money wages paid for time-work — by the day or week; for most wage earners in medieval and early modern Europe were paid by piece-work, a far more difficult measure, even when some continuous evidence exists.

Borsch’s long term view, and comparisons of prices and wages in the two countries, when based on ‘snapshots’ of the early fourteenth and the late fifteenth centuries, is basically correct: grain prices in England had fallen, while those in Egypt had risen; and conversely, real wages in England had risen, while those for Egypt had fallen. He may also be correct in his assumption that agricultural land rents had also finally fallen in England (though many individual landlords were clearly better off), while remaining stable in Egypt.

His methods of calculation, however, leave much to be desired, especially for England, for which better alternative methods are available. Thus, in comparing the mean wages for English carpenters for the two periods 1300-1347 and 1440-90, he shows an 80% rise in nominal terms — from 3.068d to 5.516d; but, when those wages are measured in grams of silver, they show a decline of 3% (from 1021.64 g to 994.95g). Surely that should reveal the folly of measuring price and wages changes in silver grams; for indisputably their real wages had indeed risen.

To be fair, Borsch does, of course, fully realize that the proper measure of real wages is the purchasing power of the money wage in terms of the artisan’s standard consumer goods. But he makes his calculations only in terms of liters of wheat, for both Egypt and England, for the two periods 1300-50 and 1440-90. For English building craftsmen, his Table 6.15 (p.108) shows an overall rise of 102%, but a fall of 80% for the above-named Egyptian wage-earners. As one may well observe, ‘man lives not by bread alone.’ The great advantage of the Phelps Brown and Hopkins ‘basket of consumables’ composite price index is its weighting, based on consumption patterns in late-medieval household accounts: in which grains (wheat, rye, barley, peas) account for 20%; meat and fish, for 25%; dairy products, for 12.5%; drink, for 22.5%; textiles, for 12.5%; and fuel, for 7.5%. Van der Wee (1966, 1975) has found that these weights correspond to his evidence for household consumption in early-modern Brabant and has thus modeled his price index on this model, as have I for Flanders (Munro 2003, 2005). These price indexes for the Low Countries also permit us to compute the money-of-account value of the total basket of goods, year by year, and thus the number of baskets that master building craftsmen and their laborers could purchase with a year’s money wage income (based on 210 days of employment, for reasons given in our publications — while Borsch chooses a work-year of 250 days).

Phelps Brown and Hopkins, however, presented their data only in disembodied index numbers (1451-75 = 100); and they calculated the real wage index by the standard, almost universal formula: Real Wage Index = Nominal Wage Index/ Composite Price Index (RWI = NWI/CPI). Having acquired access to the complete set of working papers (Archives, British Library of Political and Economic Science), and the detailed calculations used in the construction of the Phelps Brown and Hopkins price index, I computed the value of each component in their basket (22 commodities) and thus the total value of the basket, in silver pence sterling, for every year from 1264 to 1700. Those calculations thus allowed me to compute the real wage in the same fashion: i.e., the number of such baskets that masters and journeymen could purchase each year (with 210 days of money-wage income).

When examined on an annual and on a quinquennial (five-year) basis, these real-wage data reveal a number of surprises — which do not support the standard Ricardo-based view, nor, therefore, Borsch’s view, on what happened to prices and wages in England following the Black Death. First, comparing mean prices for the 25-year periods before the Black Death (1323-1347) and after (1348-1372), we find that they rose, not fell. The mean value of the bread-grain component of the PBH basket rose by 26.25% (from a mean of 22.298d sterling to one of 28.152d); but most of this rise was inflation, for the value of the total PBH basket rose by 25.59%: from a mean of 114.386d (CPI: 101.41) to one of 143.657d (CPI: 127.35). Thus some portion of the grain-price rise was ‘real': and its share of the PBH basket rose slightly from 19.49% to 19.60%. The even more striking behavior of prices took place in the next quarter century, from 1373 to 1397: when grain prices, in nominal terms, plummeted by 29.70%, from a mean of 28.152d to one of 21.706d. Again, some of change was due to monetary factors; for there was general deflation: a 29.4% fall from the peak CPI of 134.95 in 1376 to the trough of 95.25 in 1395. But since, in our two 25-year comparison periods (1348-1372 and 1373-1397), the mean value of the PBH basket fell only 17.23% — from a mean value of 143.657d (CPI: 127.35) to one of 122.540d (CPI: 108.63), the much steeper fall in grain prices had a considerable ‘real’ component. Thus the grain component of the total consumer basket fell from 19.60% to 17.71%, over this same 50-year period. Similar declines in real prices can be shown for other agrarian commodities, especially for wool.

The behavior of these prices, both nominal and ‘real’ (or deflated), may help us to understand better the seemingly perplexing behavior of real wages. Certainly nominal wages did rise after the Black Death, but the rise of those for building craftsmen was relatively greater in urban than in rural (manorial) areas; and for both, the nominal wage increases failed to keep pace with inflation, until the mid-1370s. For such master building craftsmen, in Oxford, Cambridge, and other small towns of southeastern England, mean annual real wage incomes, when measured in PBH ‘baskets of consumables’ fell from a peak of 7.482 baskets in 1336-40 (RWI = 66.9, when 1451-75 = 100) to a low of 5.200 baskets in 1351-55 (RWI = 46.55) : i.e., real wages for such building craftsmen were falling both before and after the Black Death; and despite some subsequent recovery, real wages were still below the earlier peak as late as 1371-75: with a mean of just 7.310 baskets (RWI = 65.44). Thereafter real wages, in these terms, did rise sharply to reach a late-medieval peak of 12.066 baskets in 1441-45 (RWI = 108.02) — a 132.0% rise over the post-Plague nadir; in 1496-1500, the annual mean was still quite high, at 11.336 baskets).

The rise, over this same period, in the real wages of their journeymen laborers was even more striking: a rise of 209.38%: from the nadir of 2.600 baskets in 1351-55 to the peak of 8.044 baskets in 1441?-45. For indeed, in these small English towns, the average journeymen’s daily wage rose from just one half to two-thirds of the master’s wage over this period (4d vs. 6d daily for most of the fifteenth century) — a change not observed in Flanders where the journeymen’s money wage remained at one half of the master’s (Munro 2005). Borsch, in noting the peculiar rise of an English thatcher’s helper (journeymen) is evidently unaware of this more general, if peculiarly English, phenomenon.

Not all laborers, however, enjoyed such a change into prosperity. Thus on the Bishop of Winchester’s Taunton manor, senior hired day laborers, while enjoying a tripling in their nominal wage, from 1.0d in 1348 to 3.0d in 1354, subsequently saw that rate fall back to 1.0d per day in 1364, where it generally remained until this wage series ends in 1415. Their real wage thus fell sharply with the continuing inflation, until the mid 1370s, and while experiencing some recovery with the ensuing deflation, their real wage in the early fifteenth century (to 1415) was only about 35-40% of that then enjoyed by the small-town journeymen laborers in the construction trades (see Munro 2003).

Borsch’s explanation for the rise in real wages for English building craftsmen, though based on just a comparison of two ‘snapshots’ for the early fourteenth and the later fifteenth centuries, is a standard one that will command almost universal support: namely, a steep rise in labor productivity, as the obvious and seemingly inevitable consequence of radical depopulation and the consequent alteration of the land: labor ratio — if we assume that England was still overpopulated on the eve of the Black Death. As Keynes (1936, p. 5) has reminded us, a basic postulate of Classical Economics is that ‘the wage is equal to the marginal product of labor’ — though it is more accurate to define that equality as the marginal revenue product of labor. One problem thus arises: if the marginal productivity of agricultural labor rose but the marginal revenue product declined, with falling grain prices, would the result for wage determination be a wash?

There is yet another problem: for several recent studies — by Farmer (1996), Raftis (1996), and Stone (1997, 2001, 2003) — indicate that the marginal productivity of labor in the arable economy fell, while the marginal of labor in pastoral farming (especially for sheep) rose significantly. In recent publications (Munro 1983, 2003, 2005), in seeking to explain the behavior of prices and wages described above, I have called into question the marginal-productivity of labor theory to explain changes in real-wages. For, to argue, in micro-economics, that a rational profit-seeking employer will hire labor to the point that its marginal revenue product equals the prevailing wage is different from a more macro-economic explanation for wages that prevail across an entire economic sector.

My observation, in those two recent studies, was that the rise in real wages for building craftsmen in both late-medieval England and the southern Low Countries was a phenomenon that is generally — if not fully — explained by a combination of institutional wage-stickiness and a deflation induced chiefly by monetary factors: i.e., that nominal wages (in silver coin), having risen, though not in tandem the post-Plague inflation, then remained rigid while the cost of living fell. Phelps Brown and Hopkins (1956) also observed that, calling it the ‘ratchet effect,’ while correctly noting that in England nominal money wages, having fallen by 25% during the later 1330s and early 1340s (but less so than did prices), never again fell, over the ensuing six centuries, until the post-WWI depression, in 1921. There is no space to discuss this complex issue further in this review, other than to note that often rapid oscillations in real wage measures and indices — almost always accompanying oscillations in the price level — cannot logically be explained by any such sudden shifts in the marginal productivity of labor. Yet, in making regional comparisons of changes in real wages over long periods of time we may have to call upon a broader concept of productivity: namely, changes in total factor productivity (land, labor, capital), particularly in so far as those changes may explain changes in real commodity prices, especially those involved in a wage-earner’s cost of living index.

Finally, I must also make another major observation in comparing the behavior of real wages for building craftsmen in late medieval England and the very much more limited group of Egyptian tradesmen: namely the fact that, at least from the later fourteenth century (but not after the Plague), agricultural prices and thus the cost of living fell in England while such prices and costs rose in Egypt. Of course, we would like to know why; but Borsch does not provide such a full explanation (other than one based on falling productivity in agriculture, with perhaps limited foreign trade) — and probably no one else can adequately explain why the real cost of foodstuffs did experience such a significant rise in fifteenth-century Mamluk Egypt.

The relative behavior of agricultural prices and wages (and interest rates, if we had the evidence) has one more point of relevance for this review. Borsch attributes the decay of English manorialism and serfdom, from the later fourteenth century, in much the same way as does Brenner (1976, 1982): as a victory of communal open-field peasants who, when feudal landlords became economically and politically weaker, especially in losing support from the monarchy, were finally able to exercise a greater degree of market power in bidding down rents and bidding up wages. But a more complete explanation should involve economic rationality on the part of such landlords, who in now experiencing adverse changes in both falling agricultural prices (both grains and wool) and in rising costs gave up their former reliance on Gutsherrschaft: i.e., a manorial regime with a significant income component from market-oriented domain production of these commodities. Some historians (Holmes 1957, pp. 85-120; Britnell 1990) contend that during the post-Plague era of high agricultural prices, gentry and feudal landlords may have increased their share of the national income (though evidence on rents and profits is very thin). Thus, from the later 1370s to the 1440s, we find an increasing manorial shift to Grundsherrschaft: i.e., a manorial regime far more based on peasant rental incomes. In carving up their already shrunken domains into peasant leaseholds, thereby also dispensing with whatever labor services and other servile obligations that had remained, English landlords probably did improve the position of some peasants — especially those with enough capital to work their extra lands. At the same time, of course, many such landlords benefited in the sense that these leasehold provided a more stable rental incomes, when agricultural prices and profits were falling; and thus with deflation, their real values rose. At the same time, however, as Campbell (2005) has recently demonstrated, Borsch, along with many other historians, has exaggerated the extent and burden of servile obligations imposed on the English peasantry before the Black Death.

Where does the Black Death itself enter this book and the review? Borsch has really very little new to say about the Plague itself, whose actual and direct consequences in Egypt still remain unknown. Furthermore, the timing of his publication is unfortunate in that three major and very important books on the Black Death have just recently appeared: those by Cohn (2003), Benedictow (2004), and Kelly (2005). Cohn has contended, with a massive amount of evidence, that the Black Death, the so-called Second Pandemic (1347-1720), was vastly different from the bubonic plague that was experienced in Asia during the so-called Third Pandemic (1894-c.1947): that the medieval Black Death spread with far, far greater rapidity, and was so much more virulent and lethal, killing a far higher proportion of the afflicted populations in Asia and Europe. If the mortality from the Black Death (initial onslaught) was perhaps 40% or more, the twentieth century mortality was no more than 5% in afflicted regions. Therefore, Cohn concludes that it could not have been bubonic plague, i.e., Yersinia pestis, the bacillus now spread by rodent fleas, according to the now standard view, and one uncritically repeated by Benedictow (2004). But Cohn does not compare it with the First Pandemic, the so-called Justinian Plague (sixth to ninth centuries), so well described as ‘bubonic’ (????”?????????) plague by Procopius, historian of Emperor Justinian (r. 527-65) and his Constantinople Prefect (see the Dewing edition 1961); nor can Cohn even suggest what this disease really was.

Borsch, if evidently unaware of Cohn’s book, nevertheless is cognizant of the problems posed by comparisons of the Second and Third Pandemics. He credibly suggests that the Second Pandemic was a manifestation of a possibly mutant, certainly peculiar and extremely virulent form of Yersinia pestis, as does, most recently, Kelly (2005). Yet neither can adequately explain how the Black Death literally ‘spread like wildfire,’ especially given Cohn’s cogent arguments as to why such a medieval transmission by rat fleas (if they could not survive without their rat hosts) was virtually impossible; but Borsch, citing Biraben (1975-76), does suggest that the human flea (Pulex irritans) may have been the prime medieval (if not modern) vector.

For Mamluk Egypt itself, apart from some fascinating anecdotal commentaries, Borsch is unable — given the paucity of evidence — to analyze the actual economic and social consequences of the Black Death. He does, however, offer a cogent and interesting thesis. Emphasizing that agricultural prosperity in Egypt had depended on a costly and complex irrigation system, based on networks of dikes, sluice-gates, and canals fed by the Blue and White Nile river systems — with very large amounts of fixed capital and land stocks, Borsch contends that depopulation from the Black Death ultimately led to severe and destructive shortages of labor — and to severe reductions in the marginal productivity of labor (i.e., proceeding in a backward direction on the ascending slope of the marginal product curve). Consequently, over ensuing decades, the required dredging, repairs, and general maintenance of this irrigation system could not be maintained, with disastrous results for Mamluk Egypt’s agricultural production.

That plight has to be understood in the context of Mamluk social structures and landholding; for the Mamluks, a military aristocracy who were, by origin, imported Asian slaves, were totally unlike that of medieval England: a non-hereditary fluid social caste, with very insecure ties to their landed estates, with rapid property turnovers, dependent on rendering service and maintaining military-political alliances; a military aristocracy that chiefly lived in towns, apart from their estates, rarely speaking the Arabic language of their peasant tenants, and caring little about their welfare. Furthermore, as indicated earlier, Borsch believes that so many of these peasants were victims of steadily declining productivity and outputs, and thus of falling real incomes, while forced by the state-supported Mamluk military aristocracy to pay even higher rents; and thus they were unable to contribute to the maintenance of the irrigation system (which also had some classic ‘free rider’ problems). To cite Borsch’s summary (p. 52): ‘By the mid fifteenth century, Egypt’s agrarian system had been badly damaged. The irrigation system was functioning poorly in many areas and lay in ruins in others. Badly damaged systems were overrun by Bedouin tribes: large sections of Upper Egypt [by far the more fertile region] and the eastern and western sections of the delta lay in Bedouin hands.’ The documentation of the drastic fall in outputs, from 1315 to 1517, has been discussed above. As also noted earlier, however, the greatest difficulty that Borsch and other historians of Mamluk Egypt have faced is the lack of any reliable demographic statistics. While one may assume, from the experience of the Black Death elsewhere, a possibly drastic fall in population, are we to believe that the combination of labor scarcity and the structure of Mamluk landholding provide the only explanation? What roles, for examples, may Mamluk fiscal policies, the nature and changes in taxation, public and private investment in agriculture, etc., have played during the later fourteenth and fifteenth centuries? Perhaps those questions cannot be answered, though they should be posed to suggest a possible framework of alternative models.

As one of my colleagues, an economic historian of Mamluk Egypt, and one who has read this book as well, has commented to me: Borsch ‘tries to break out of the mold and offer a new insight. The Mamluk period is the only one which offers any hope of computation, but as you can see, it is difficult to carve out any solid evidence.’ The author does deserve, despite the criticisms in this review, to be commended for the very considerable and arduous research devoted to this study, handicapped of course, in comparison to historians of medieval England, with such paucity of reliable evidence. If this form of comparative economic history did not prove to be the author’s strong suit, nevertheless his dedicated scholarship and contributions in particular to Mamluk economic history (which others may judge better than I) are to be commended.

List of References:

Eliyahu Ashtor, ‘Prix et salaires ? l’?poque mamlouke: une ?tude sur l’?tat ?conomique de l’Egypte et de la Syrie ? la fin du Moyen Age,’ Revue des ?tudes islamiques, 17 (1949), 49-94.

Eliyahu Ashtor, Histoire des prix et des salaires dans l’Orient m?dievale (Paris: SEVPEN, 1969).

G. Bannock, R. E. Baxter, and R. Rees, The Penguin Dictionary of Economics, third edition (London: Penguin Books, 1984).

Ole J. Benedictow, The Black Death, 1346-1353: The Complete History (New York: Boydell Press, 2004).

William Beveridge, ‘Wages in the Winchester Manors,’ Economic History Review, 1st ser., 7 (1936-37), 22-43.

William Beveridge, ‘Westminster Wages in the Manorial Era,’ Economic History Review, 2nd ser., 8 (1955-56), 18-35.

J.N. Biraben, Les hommes et la peste en France et dans les pays europ?ens et m?diterran?es, 2 volumes (Paris and The Hague, 1975-76).

Ian Blanchard, ‘Population Change, Enclosure, and the Early Tudor Economy,’ Economic History Review, 2nd ser., 23:3 (December 1970), 427-45.

Guy Bois, La grande d?pression m?di?vale: XIVe-XVe si?cles: le pr?c?dent d’une crise syst?mique, Actuel Marx Confontation (Paris: Presses Universitaires de France, 2000).

Robert Brenner, ‘Agrarian Class Structure and Economic Development in Pre-Industrial Europe,’ Past and Present, no. 70 (February 1976), pp. 30-74,

Robert Brenner, ‘Agrarian Class Structure and Economic Development in Pre-Industrial Europe: The Agrarian Roots of European Capitalism,’ Past and Present, no. 97 (Nov. l982), 16-113, which is a very lengthy reply to all of his critics. Both are reprinted in T. H. Aston and C. H. E. Philpin, eds. The Brenner Debate: Agrarian Class Structure and Economic Development in Pre-Industrial Europe (Cambridge, 1985), pp. 10-63 and 213-27.

Richard H. Britnell, ‘Feudal Reaction after the Black Death in the Palatinate of Durham,’ Past and Present, no. 128 (August 1990), pp. 28-47.

Bruce M. S. Campbell, ‘The Population of Early Tudor England: A Re-evaluation of the 1522 Muster Returns and the 1524 and 1525 Lay Subsidies,’ Journal of Historical Geography, 7 (1981), 145-54.

Bruce M.S. Campbell, ‘Matching Supply to Demand: Crop Production and Disposal by English Demesnes in the Century of the Black Death,’ Journal of Economic History, 57: 4 (December 1997), 827-58.

Bruce M.S. Campbell, ‘The Agrarian Problem in the Early Fourteenth Century,’ Past and Present, no. 188 (August 2005), pp. 3-70.

Bruce M.S. Campbell, James A. Galloway, Derek Keene, and Margaret Murphy, A Medieval Capital and Its Grain Supply: Agrarian Production and Distribution in the London Region c. 1300, Institute of British Geographers, Historical Geography Research Series no. 30 (London, 1993).

Samuel Cohn, Jr., The Black Death Transformed: Disease and Culture in Early Renaissance Europe (London: Arnold, 2002; New York: Oxford University Press, 2003).

Julian Cornwall, ‘English Population in the Early Sixteenth Century,’ Economic History Review, 2nd ser. 23:1 (April 1970), 32-44.

Nicholas Crafts, ‘Gross National Product in Europe, 1870-1910: Some New Estimates,’ Explorations in Economic History, 20 (October 1983), 387-401.

Ralph Davis, The Rise of the Atlantic Economies (London: Weidenfeld and Nicholson, 1973).

H.B. Dewing, ed., Procopius: History of the Wars, Books I and II, in Greek and English translation (Cambridge: Harvard University Press, 1961), pp. 450-73.

Christopher Dyer, Standards of Living in the Later Middle Ages (Cambridge, 1989).

David L. Farmer, ‘Some Grain Price Movements in Thirteenth-Century England,’ Economic History Review, 2nd ser. 10 (1957), 207-20.

David L. Farmer, ‘Crop Yields, Prices and Wages in Medieval England,’ Studies in Medieval and Renaissance History, new series, 6 (1983), 115-55.

David L. Farmer, ‘Prices and Wages,’ in H. E. Hallam, ed., The Agrarian History of England and Wales, Vol. II: 1042-1350 (Cambridge, 1988), pp. 715-817.

David L. Farmer, ‘Prices and Wages, 1350-1500,’ in Edward Miller, ed., The Agrarian History of England and Wales, Vol. III: 1348-1500 (Cambridge, 1991), pp. 431-525.

David L. Farmer, ‘The Famuli in the Later Middle Ages,’ in Richard Britnell and John Hatcher, eds., Progress and Problems in Medieval England: Essays in Honour of Edward Miller (Cambridge and New York: Cambridge University Press, 1996), pp. 207-36

H. E. Hallam, ‘Population Movements in England, 1086-1350,’ and ‘Rural England and Wales, 1042 ?1350,’ in H. E. Hallam, ed., The Agrarian History of England and Wales, II: 1042-1350 (Cambridge University Press, 1988), pp. 508-93, and 966-1008.

John Hatcher, “The Great Slump of the Mid-Fifteenth Century,” in Richard Britnell and John Hatcher, eds., Progress and Problems in Medieval England (Cambridge and New York: Cambridge University Press, 1996), pp. 237-72.

G.A. Holmes, The Estates of the Higher Nobility in Fourteenth-Century England (Cambridge, 1957).

John Kelly, The Great Mortality: An Intimate History of the Black Death, the Most Devastating Plague of All Time (New York: Harper Collins, 2005).

John Maynard Keynes, The General Theory of Employment, Interest and Money (London, 1936)

Nicholas J. Mayhew, ‘Modelling Medieval Monetisation,’ in Bruce M.S. Campbell and Richard Britnell, eds., A Commercialising Economy: England, 1086-1300 (Manchester, 1995), pp. 55-77.

Nicholas J. Mayhew, ‘Population, Money Supply, and the Velocity of Circulation in England, 1300-1700,’ Economic History Review, 2nd ser., 48:2 (May 1995), 238-57.

John Munro, ‘Bullion Flows and Monetary Contraction in Late-Medieval England and the Low Countries,’ in John F. Richards, ed., Precious Metals in the Later Medieval and Early Modern Worlds (Durham, North Carolina: Carolina Academic Press, 1983), pp. 97-158. Reprinted in the following:

John Munro, Bullion Flows and Monetary Policies in England and the Low Countries, 1350 – 1500, Variorum Collected Studies series CS 355 (Aldershot, Hampshire; and Brookfield, Vermont: Ashgate Publishing Ltd., 1992)

John Munro, ‘Wage Stickiness, Monetary Changes, and Real Incomes in Late-Medieval England and the Low Countries, 1300-1500: Did Money Matter?’ Research in Economic History, 21 (2003), 185-297.

John Munro, ‘Builders’ Wages in Southern England and the Southern Low Countries, 1346 -1500: A Comparative Study of Trends in and Levels of Real Incomes,’ in Simonetta Caviococchi, ed., L’Edilizia prima della rivoluzione industriale, secc. XIII-XVIII, Atti delle “Settimana di Studi” e altri convegni, no. 36, Istituto Internazionale di Storia Economica “Francesco Datini” (Florence, 2005), pp. 1013-76.

Pamela Nightingale, ‘The Growth of London in the Medieval English Economy,’ in Richard Britnell and John Hatcher, eds., Progress and Problems in Medieval England (Cambridge and New York: Cambridge University Press, 1996), pp. 89-106.

Pamela Nightingale, ‘England and the European Depression of the Mid-Fifteenth Century,’ Journal of European Economic History, 26: 3 (Winter 1997), 631-56.

Pamela Nightingale, ‘Some New Evidence of Crises and Trends of Mortality in Late Medieval England,’ Past and Present, no. 187 (May 2005), pp. 33-68.

E. H. Phelps Brown, and Sheila V. Hopkins, ‘Seven Centuries of Building Wages,’ Economica, 22:87 (August 1955), 195-206: reprinted in E.M. Carus-Wilson, ed., Essays in Economic History, 3 vols. (London, 1954-62), II, 168-78, 179-96, and in E.H. Phelps Brown and Sheila V. Hopkins, A Perspective of Wages and Prices (London, 1981), pp. 1-12.

E. H. Phelps Brown, and Sheila V. Hopkins, ‘Seven Centuries of the Prices of Consumables, Compared with Builders’ Wage Rates,’ Economica, 23:92 (November 1956), 296-314: reprinted in E.M. Carus-Wilson, ed., Essays in Economic History, 3 vols. (London, 1954-62), II, 168-78, 179-96, and in E.H. Phelps Brown and Sheila V. Hopkins, A Perspective of Wages and Prices (London, 1981), pp. 13-59 (with commodity price indexes not in the original publication).

Michael Postan, ‘Some Economic Evidence of Declining Population in the Later Middle Ages,’ Economic History Review, 2nd ser. 2 (1950), 130-67; reprinted in his Essays on Medieval Agriculture and General Problems of the Medieval Economy (Cambridge, 1973), pp.186-213 (the latter, with the revised title of ‘Some Agrarian Evidence of Declining Population in the Later Middle Ages.’)

Michael Postan and J.Z. Titow, ‘Heriots and Prices on Winchester Manors,’ Economic History Review, 2nd ser. 11 (1959); reprinted in Michael Postan, Essays on Medieval Agriculture (Cambridge, 1973), pp. 150-85.

Michael Postan, ‘Medieval Agrarian Society: England,’ in Cambridge Economic History, Vol. I: The Agrarian Life of the Middle Ages, ed. M. M. Postan (2nd rev. edn. 1966), 560-70.

Ambrose Raftis, ‘Peasants and the Collapse of the Manorial Economy on Some Ramsey Abbey Estates,’ in Richard Britnell and John Hatcher, eds., Progress and Problems in Medieval England: Essays in Honour of Edward Miller (Cambridge and New York: Cambridge University Press, 1996), 191-206.

J.C. Russell, ‘The Pre-Plague Population of England,’ Journal of British Studies, 5 (1966), 1-21.

Peter Spufford, Handbook of Medieval Exchange (London: Royal Historical Society, 1986).

David Stone, ‘The Productivity of Hired and Customary Labour: Evidence from Wisbech Barton in the Fourteenth Century,’ Economic History Review, 2nd ser., 50:4 (November 1997), 640-56.

David Stone, ‘Medieval Farm Management and Technological Mentalities: Hinderclay Before the Black Death,’ Economic History Review, 2nd ser., 54:4 (November 2001), 612-38.

David Stone, ‘The Productivity and Management of Sheep in Late Medieval England,’ Agricultural History Review, 51: I (2003), 1-22.

Herman Van der Wee, ‘Voeding en dieet in het Ancien R?gime,’ Spiegel Historiael, 1 (1966), 94-101, republished in translation as ‘Nutrition and Diet in the Ancien R?gime’ in Herman Van der Wee, The Low Countries in the Early Modern World , trans. by Lizabeth Fackelman (Cambridge and New York: Cambridge University Press and Variorum, 1993), pp. 279-87.

Herman Van der Wee, ‘Prijzen en lonen als ontwikkelingsvariabelen: Een vergelijkend onderzoek tussen Engeland en de Zuidelijke Nederlanden, 1400-1700,’ in Album aangeboden aan Charles Verlinden ter gelegenheid van zijn dertig jaar professoraat (Wetteren: Universum, 1975), pp. 413-47; reissued in English translation (without the tables) as ‘Prices and Wages as Development Variables: A Comparison between England and the Southern Netherlands, 1400-1700,’ Acta Historiae Neerlandicae, 10 (1978), 58-78; republished in Herman Van der Wee, The Low Countries in the Early Modern World, trans. by Lizabeth Fackelman (Cambridge and New York: Cambridge University Press and Variorum, 1993), pp. 223-41. Only the original Dutch-language version contains the statistical tables.

John Munro is Professor Emeritus of Economics at the University of Toronto (where he still teaches). He is currently an elected member of the Royal Flemish Academy of Belgium for Science and the Arts; and of the Comitato Scientifico, Istituto Internazionale di Storia Economica ‘Francesco Datini da Prato,’ for which he has helped organize the May 2006 conference on ‘Europe’s Economic Relations with the Islamic World, 13th and 18th Centuries.’ He was the medieval area editor for The Oxford Encyclopedia of Economic History, edited by Joel Mokyr (New York: Oxford University Press), 2003. Among his recent publications are: ‘Wage Stickiness, Monetary Changes, and Real Incomes in Late-Medieval England and the Low Countries, 1300-1500: Did Money Matter?’ Research in Economic History (2003); ‘The Medieval Origins of the Financial Revolution: Usury, Rentes, and Negotiability,’ International History Review (2003); and ‘Spanish Merino Wools and the Nouvelles Draperies: an Industrial Transformation in the Late-Medieval Low Countries,’ Economic History Review (2005).

Subject(s):Markets and Institutions
Geographic Area(s):Middle East
Time Period(s):Medieval

The History of Foreign Exchange

Author(s):Einzig, Paul
Reviewer(s):Officer, Lawrence H.

Published by EH.NET (January 2006)

Classic Reviews in Economic History

Paul Einzig, The History of Foreign Exchange. London: Macmillan, 1962. xvi + 319 pp. (second edition, 1970, xxi + 362 pp.)

Review Essay by Lawrence H. Officer, Department of Economics, University of Illinois at Chicago.

The History of Foreign Exchange: A Provocative Classic

Paul Einzig (1897-1973) was both a financial journalist and an author of scholarly works. (A brief, excellent biography of Einzig is Tether, 1986.) Einzig was a prolific writer in both the popular press and academic realms. For two decades, he contributed a regular, ?Lombard Street,? column for the Financial News (London). Later, he provided a weekly column in the Commercial and Financial Chronicle (New York). Because of his popular writings, academic economists have a tendency to discount Einzig?s contributions to economics as a discipline. This reviewer feels compelled to refute that tendency.

Using a strict definition of ?book? — excluding pamphlets, revised editions, works with similar titles, translations from English into other languages, volumes written solely in a non-English language, reports to governments or commissions, working papers, works that are in only a handful of libraries, and unpublished manuscripts — this reviewer counted carefully (from the WorldCat database) that Einzig was the author of fifty-seven different books — a phenomenal number. Of this total, one is Einzig?s autobiography and at most a half-dozen could be construed as political treatises (judging by title). This leaves fifty volumes as primarily economic in content. No doubt, some of these volumes were written in haste and some are not particularly technical. On the other side, Einzig?s books contain only his own writings; not one is an edited volume.

It is instructive to count also the number of books produced by the seven other authors of 2006 Classic Reviews series. Allowing for edited as well as authored volumes (but excluding works edited by others, and to which the author of interest merely contributed one or more chapters), the number of books attributed to each of the eight authors is listed below.

Number of Books Attributed to Author


Source: WorldCat. See text.

Certainly, Einzig?s total number of books is phenomenal in comparison to any of the other authors. In fact, incredibly, Einzig?s number of books exceeds even the total number of the other seven authors. True, the table is purely quantitative, not qualitative, in nature. And, true, unlike the other authors Einzig was strictly a writer by profession. Nevertheless, by any standard, Einzig was a prolific book author indeed.

Further, Einzig published articles in professional economics journals, even though he was not an academic economist. The JSTOR database lists nineteen articles authored by Einzig — eighteen in the Economic Journal and one in the Journal of Finance. These numbers are exclusive of book reviews; JSTOR lists twelve by Einzig, of which six are in the Economic Journal and one in the Economic History Review.

The point of the above discussion is that, although Einzig was neither an academic professor nor a government economist, he should be taken seriously as an astute observer of contemporary economic events, as an applied-economic theoretician, and as an economic historian. One of his best books in the first category is International Gold Movements (1929, 1931) — invaluable to historians of the interwar gold standard. His best work in the second category is The Theory of Forward Exchange (1937), still useful to researchers of interest-rate parity. Among other virtues, that book contains an excellent discussion of selection of variables to test the theory, as well as data still used in scholarly studies. In the third category, paramount is The History of Foreign Exchange, the anatomy (including publication history) of which is shown in Table 2.

Anatomy of The History of Foreign Exchange

St. Martin?s Press

St. Martin?s Press


Listing edition in catalogue. Source: WorldCat.

a Reprint, with alterations.

b Japanese translation, by Asao Ono and Shunzo Muraoka.

Einzig states, in the preface to the first edition of the History, that his purpose is to produce ?a single book … that would cover the entire history of Foreign Exchange in all its main aspects from its origins to our days? (p. xi in the second edition — all references in this review are to that edition). He remarks that nobody before had produced such a treatise. It is fair to say that neither has anybody since done so. There have been many books on the entire history of money as such, rather than of foreign exchange, and a variety of books on foreign exchange for particular currencies over a lengthy period of time or for a variety of currencies over a particular era — but no one other than Einzig has produced a history of the foreign-exchange characteristic of currencies for purportedly all currencies (of interest) and for all eras. From probable international bills of exchange in Babylonia (twenty-first century B.C.), to U.S. borrowing in the Eurodollar market (late 1960s), Einzig succeeds admirably in conveying the flavor of foreign exchange.

To cover systematically experience of such breadth, Einzig divides his book into chronologically based sections, as shown in Table 2. Part I deals with the Ancient Period (primarily Greece and Rome, though also earlier civilizations), Part II the Medieval Period, Part III the Early Modern Period (sixteenth to eighteenth centuries), Part IV the Nineteenth Century (to World War I), Part V 1914-1960, and Part VI (added in the second edition) the 1960s. To provide breadth systematically for each of these six eras, Einzig instills discipline on his research and writing by dividing each Part into four chapters: (1) foreign-exchange markets and practices, (2) exchange rates, including crises and trends, (3) foreign-exchange theory, and (4) exchange-rate policy. This schema greatly enhances the value of the volume as a reference work. Part I includes an introductory chapter, on the origins of foreign exchange; and the book includes a general introduction and a general conclusion (the latter largely rewritten in the second edition).

Each chapter in Parts I-V (but not Part VI) contains endnotes, which are purely bibliographical. There is also an excellent bibliographical essay, termed ?a selected bibliography? — and, in the second edition, this bibliography is extended to incorporate the 1960s. Again the book is presented excellently as a reference volume. This characteristic is helped by a good ?index of names,? but the subject index could have been more extensive.

The author?s ambitious and unique goal, the tremendous research effort (aided by the author?s proficiency in several languages), and the systematic presentation of the research results all make The History of Foreign Exchange a classic in economic history. The caliber of the journals that reviewed the History is indicative of that judgment. Of the five top general journals in economics 1960s vintage (American Economic Review, Economic Journal, Journal of Political Economy, Quarterly Journal of Economics, and Review of Economics and Statistics), the three that reviewed books (the first three stated) did in fact review the History. Two of the top three journals in economic history at the time (Journal of Economic History, and Economic History Review) reviewed the book. It is not surprising that the third, Explorations in Entrepreneurial History (the predecessor of Explorations in Economic History), did not review the History, because of the then-narrow orientation of the journal. (As for the Journal of European Economic History, it did not commence publication until 1972.) Among major economics journals that engaged in book reviews, only Kyklos elected not to review the History. On the other side, American Historical Review, perhaps the top general-history journal, did conduct a review.

These reviews, together with several others in outlets not specializing in history, are listed and summarized in Table 3. The caliber of some reviewers is unusually high: the economic historians J. R. T. Hughes, L. S. Pressnell, and Raymond de Roover; and the international-economics specialist Arthur I. Bloomfield. Most reviewers had very positive things to say about the History; but they did not withhold criticism.

Reviews of The History of Foreign Exchange

Note: All reviews are of the first edition, except the 1971 Choice review.

The most negative evaluation is that of L. S. Pressnell, whose positive assessments are few, and even these are negative assessments in disguise. Einzig did not hesitate to respond to reviewers? criticisms that he viewed as unfair or based on incorrect facts. He had written a rejoinder to a review of his Primitive Money (1949), this review appearing in the anthropological journal Man. The editor of the journal published Einzig?s (1949) rejoinder in condensed form, and, incredibly, wrote a reply to Einzig?s rejoinder (rather than having the reviewer reply)!

Einzig responded to Pressnell?s criticisms, in the preface to the second edition of the History, stating, quite correctly, that Pressnell?s review ?amounted to little more than a list of attacks, wasting very little time or space on trying to justify, explain or illustrate his criticisms? (p. viii). Einzig gleefully, and again correctly, castigates Pressnell for associating paper credit with inflation/deflation in Ancient Rome, whereas in fact there was no paper money and inflation took the form of coinage debasement. Einzig then writes:

Long-suffering authors have seldom the opportunity to answer their critics, which is a pity because, by drawing attention to flagrant instances of ill-informed criticisms such as the one denounced above, they might be able to raise the standard of criticism. Being a hard-hitting critic myself it is not for me to object to being hit hard — provided my critic knows what he is talking about.

In fairness to Einzig, he did meet the criticism of some reviewers that ?the chapters dealing with modern developments were ?too sketchy?? (p. vii), by producing a second edition with the addition of Part VI. However, Einzig disagreed with the criticism that ?the chapters dealing with earlier periods were unnecessarily long,? and therefore did not condense these chapters (or otherwise alter them substantively) in the second edition. The present reviewer agrees with this decision; for the existing literature on foreign exchange is heavily oriented to recent periods. Einzig?s work on earlier periods fills a definite void.

Turning to this reviewer?s impressions of the History, consider each Part in order. For the Ancient Period, there is lack of everything: data, writings on theory, definitive information about markets and about rationales for policy. Einzig acknowledges that he has ?to make bricks with very little straw? (p. 7). There is much conjecture on Einzig?s part, albeit his presentation generally makes sense. He shows knowledge of both the classical literature and modern treatises on these times, and does as much as he can with snippets of information.

Einzig?s definition of a true foreign-exchange transaction (involving coins of both domestic and foreign parties) is acceptance by tale rather than by weight. He suggests that this first occurred in the fifth or sixth century B.C. As for the use of bills of exchange in foreign-exchange transactions, Einzig speculates that this could have arisen even earlier. There is discussion of depreciation and debasement of coinage, including the observation that the debasement of Roman coins had the effect of India ceasing to accept them. Einzig emphasizes that foreign trade was inflexible and, in particular, inelastic with respect to the exchange rate. He notes that exchange-rate information for this era is not only scarce but also complicated, due to the existence of trimetallism (three monetary metals: copper, silver, gold) and symmetallism (electrum: gold/silver alloyed coins).

Einzig is careful not to overstate the role of foreign exchange in theory and policy. Debasement of coinage in Rome was generally done to finance budget deficits rather than to correct balance-of-payments deficits. The same is true for Greek devaluations and debasements. The purchasing-power-parity (PPP) theory of exchange rates cannot be discerned in Ancient writing. The reason given again is the inelasticity of foreign trade, with tremendous differences in prices of goods across countries (due to both high transport costs and high profit margins). On the other side, exchange control was the policy of Sparta and of Egypt (under Ptolemaic and Roman rule), with Plato the intellectual champion of such a policy. Exchange control existed in the Roman Empire in connection with the accumulation of exchange as tribute to be transferred to Rome.

Considering the Medieval Period, Einzig observes that ?manual exchange? (exchange of domestic for foreign coin) began to give way to bills of exchange in an evolutionary process. He makes much of the fact that international bills (because they involved exchange risk) were a means of circumventing the anti-usury laws of the Church. He is impressed with medieval foreign-exchange theorizing, which arose in the context of whether exchange rates concealed interest, and discerns a variety of theories (or harbingers of theories) of exchange-rate determination in the Scholastic writings: demand and supply, exchange risk, cost-of-production, money-supply, balance-of-payments, and PPP. Exchange control over bills was less strict and less pervasive than over coins, because the Church required freedom of transferring funds emanating from Papal collections.

For the Early Modern Period (sixteenth-eighteenth centuries), Einzig provides a good discussion of the gradual transition from medieval to modern practices. He notes that Thomas Gresham (of ?Gresham?s Law? fame) made the first known computation of a specie point (the English gold-import point from Flanders) in 1558. Einzig outlines the history of the British, French, Dutch, German, Spanish, Swedish and Russian exchange rates (each relative to other currencies) during this period. The Early Modern Period witnessed the first true exchange-rate theorizing, meaning ?a deliberate analysis of cause and effects of Foreign Exchange movements and the role of Foreign Exchange in the economic system? (p. 138). Salamancan (Spanish) writers of the sixteenth and seventeenth centuries are credited with the money-supply theory and the purchasing-power theory of the exchange rate; but (as Einzig states) it is unclear whether they meant the entire money supply (coinage) in circulation or the supply merely in the foreign-exchange market for the purchase of foreign bills. The Salamancans did not develop the balance-of-payments (or trade-balance) theory of the exchange rate; this was done by English writers, such as Gresham and Mun.

The Malynes-Misselden-Mun controversy is judged to be ?one of the most important controversies in the history of Foreign Exchange theory? (p. 142); but only one page is devoted to this controversy. Malynes, who here had a speculation theory of the exchange rate, lost the debate; Mun?s view that the exchange rate and specie flows depended on the trade balance became preeminent. Yet elsewhere Malynes theorized the price specie-flow mechanism, but Einzig does not acknowledge this accomplishment. Nor does Einzig mention that ?Malynes has all the ingredients for the PPP theory and comes ever so close to exhibiting the theory for both fixed and floating rates? (Officer, 1982, p. 258). Schumpeter (1954, p. 737) also judges that ?Purchasing-Power Parity theory, or some rudimentary form of it … can … certainly be attributed to Malynes.?

Regarding policy in the Early Modern Period, Einzig mentions various alternatives to exchange control:

1. A uniform tax on exchange transactions — temporarily imposed in England in 1586, after exchange control was abandoned. Not noted by Einzig, the idea was resurrected (but not implemented) during the period of ?dollar surplus? in the 1960s.

2. Official pegging of exchange rates. This was done by fixing the price of foreign coins in domestic coins. The pegging was adjustable, that is, the price was changed periodically.

3. Official intervention in the foreign-exchange market, for example, by requiring exporters to sell their foreign exchange to the government at unfavorable rates. This is actually a form of exchange control. Creation of an exchange equalization account, that would have enabled intervention similar to the Bretton Woods system and the managed float that followed it, was advocated by Gresham and others, but did not occur.

4. Altering mint parities. This was often done to induce a net inflow of specie, rather than to affect exchange rates as such.

5. Changing or suspending seigniorage on coinage. This affected specie points and therefore the exchange-rate spread. Once seigniorage was abolished (as in England in 1666), this policy lost its mechanism.

Regarding the Nineteenth Century, Einzig writes that ?the advanced paper currency inflation in France during the Revolution and the fluctuation of the inconvertible pound during the period of suspension may be regarded as the first meaningful experience in Foreign Exchange movements under inconvertible paper currency systems? (p. 171). This statement is incorrect on two counts:

First, nothing is said about the experience of China, where paper was invented and paper money first issued. At times, paper money circulated together with coined money, and at times the paper money was inconvertible. It is known that Chinese coins circulated in foreign countries in the fifteenth century and probably earlier (see, for example, Bernholz, 2003, p. 56). There must have been implications for exchange rates, if only for ?manual exchange? (domestic for foreign coin). True, little if any information on such foreign exchange exists. Yet that deficiency did not stop Einzig from making conjectures about foreign exchange in the Ancient Period!

Second, several pages are devoted to the Bank Restriction Period (the inconvertible pound in 1797-1821, also called ?the bullionist period?), in both empirical (exchange value of the pound) and theoretical (bullionist-controversy) aspects. Indeed, Einzig writes: ?the so-called ?bullionist? controversy … was probably the most important Foreign Exchange controversy for all time? (p., 202). However, he makes no reference at all to an earlier ?bullionist period,? the Swedish inconvertible paper currency and floating exchange rate of 1745-1776. China was the first country to introduce paper money; but Sweden was the first to issue banknotes. In fairness to Einzig, the Swedish experience was not generally known until ?rediscovered? by Eagly (1963, 1968, 1971). Nevertheless, Einzig could have incorporated this important experience in the second edition of the History, but he chose not to do so.

This reviewer also takes exception to Einzig?s view that ?technical devices? to discourage the outflow or encourage the inflow of gold were undertaken predominantly by countries (such as France and Germany) other than the three (Britain, the United States, Holland) that ?with really narrow gold points were … on a really effective gold standard? (p. 173). Regarding the latter three countries, Einzig states only that the Bank of England adopted such devices during the Boer War, and mentions nothing about U.S. use of these policies. In fact, both the Bank of England and U.S. Treasury engaged in extensive ?direct manipulation? of gold points for much of the classical gold-standard period (see Clark 1984; Officer 1986, 1996, chapter 9).

For the period 1914-1960, Einzig reports the great change in foreign-exchange policy: from minimal government interference with free foreign-exchange markets over the century since the end of the Napoleonic Wars, to official intervention the rule rather than the exception. Exchange control, which had lapsed into disuse, was resurrected. Correspondingly, PPP theory had been almost entirely forgotten during the century of relative stability of the major exchange rates. Now the theory was restated, with great vigor and dogmatism, by Gustav Cassel. Supported by major economists, such as John Maynard Keynes (who later withdrew his support) and A. C. Pigou, the theory would never again be ignored.

Discussion of the 1960s, reluctantly included by Einzig as an additional part in the second edition of the History, is not particularly impressive, in part because a single decade does not warrant the space given to it in a study stretching over several millennia. Einzig compares the only occasional and isolated foreign-exchange crises of the 1815-1914 century to the multitude of crises decade after decade since. The prevalence of foreign-exchange crises continues to this day!

In his concluding chapter, Einzig predicts that an abandonment of the fixed-rate system of Bretton Woods (which was often discussed in the literature, but had not yet happened at the time of his writing) would only be temporary. ?It would not take very long for most Governments to realise the grave disadvantages of the currency chaos resulting from their ill-advised decisions to de-stabilise their exchanges. Sooner or later they would return to the system of stability, as their forerunners did each time they were forced to abandon it in the past? (p. 348). Einzig expresses that view from the perspective of four thousand years of exchange rates! The creation of the euro — fixed exchange rates par excellence, which replaced multiple national currencies with one supranational currency — provides partial validation of Einzig’s prediction. Time will tell whether the present float, or rather managed float, between the various currencies of the developed world (euro, dollar, yen, pound, etc.) will also be succeeded by a renewed fixity of exchange rates. That event would make Einzig’s prediction impressive indeed. Einzig was well-known as a proponent of fixed as distinct from floating exchange rates; but his prediction that any lapse from fixed rates would only be temporary is a positive statement, not a normative one.

Einzig was well-known as a proponent of fixed as distinct from floating exchange rates; but his prediction that any lapse from fixed rates would only be temporary is a positive statement, not a normative one.

Einzig observes, with disdain, the ?obscurantist presentation? of modern foreign-exchange theory and the widening gap of this theory from foreign-exchange policy. He writes: ?No contribution to Foreign Exchange Theory expressed in terms of mathematical economics has added anything of substance to the subject that could not have been added to it without the use of mathematics? (p. 322). This statement is not quite the same as the more-common view that ?any legitimate theory that is expressed mathematically can also be exposited verbally.? Einzig is consistent, for there is not one mathematical symbol in the History!

If there is any general weakness of the History, it is the absence of tables and charts of exchange rates, mint parities, and specie points. Einzig is aware of this limitation; he writes:

There is everything to be said for compiling continuous series of exchange rates for all the important exchanges in the principal Foreign Exchange markets, at least from the 16th century, but preferably also for the late Medieval Period. The material is there, in public records and business archives. But to make it accessible is a task that only some well-endowed research department could undertake. (p. xii)

It is fair to say that economic historians have performed much work of this nature since the publication of the History.

The History of Foreign Exchange has great limitations as well as great strengths. It is an impressive, but also a controversial and provocative, work. Undoubtedly, though, it deserves to be called a classic.


Bernholz, Peter. Monetary Regimes and Inflation: History, Economic, and Political Relationships. Cheltenham: Edward Elgar, 2003.

Clark, Truman A. ?Violations of the Gold Points, 1890-1908.? Journal of Political Economy 92 (October 1984): 791-823.

Eagly, Robert V. ?Money, Employment and Prices: A Swedish View, 1761.? Quarterly Journal of Economics 77 (November 1963): 626-36.

Eagly, Robert V. ?The Swedish and English Bullionist Controversies.? In Robert V. Eagly, ed., Events, Ideology and Economic Theory. Detroit: Wayne State University Press, 1968: 13-31.

Eagly, Robert V., editor, The Swedish Bullionist Controversy. Philadelphia: American Philosophical Society, 1971.

Einzig, Paul. International Gold Movements. London: Macmillan, first edition, 1929, second edition, 1931.

Einzig, Paul. Primitive Money in Its Ethnological, Historical and Economic Aspects. London: Eyre and Spottiswoode, 1949.

Einzig, Paul. ?Primitive Money: A Rejoinder? (with Editor?s Reply). Man 49 (November 1949): 132.

Einzig, Paul. The Theory of Forward Exchange. London: Macmillan, 1937.

Officer, Lawrence H. ?The Purchasing-Power-Parity Theory of Gerrard de Malynes.? History of Political Economy 14 (Summer 1982): 256-59.

Officer, Lawrence H. ?The Efficiency of the Dollar-Sterling Gold Standard, 1890-1908.? Journal of Political Economy 94 (October 1986): 1038-73.

Officer, Lawrence H. Between the Dollar-Sterling Gold Points: Exchange Rates, Parity, and Market Behavior. Cambridge: Cambridge University Press, 1996.

Schumpeter, Joseph A. A History of Economic Analysis. New York: Oxford University Press, 1954.

Tether, C. Gordon. ?Einzig, Paul.? In Lord Blake and C. S. Nicholls, eds., The Dictionary of National Biography. Oxford: Oxford University Press, 1986.

Lawrence H. Officer is Professor of Economics at the University of Illinois at Chicago and Editor, Special Projects, EH.Net. He is a specialist in international economics and monetary history. His recent journal publications include ?The U.S. Specie Standard, 1792-1932: Some Monetarist Arithmetic,? Explorations in Economic History (2002) and ?The Quantity Theory in New England, 1703-1749: New Data to Analyze an Old

Question,? Explorations in Economic History (2005). Officer is a recurrent contributor to the ?How Much Is That?? section of EH.Net.

Copyright (c) 2006 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (; Telephone: 513-529-2229). Published by EH.Net (January 2006). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Theories of Financial Disturbance: An Examination of Critical Theories of Finance from Adam Smith to the Present Day

Author(s):Toporowski, Jan
Reviewer(s):O'Driscoll Jr., Gerald P.

Published by EH.NET (November 2005)

Jan Toporowski, Theories of Financial Disturbance: An Examination of Critical Theories of Finance from Adam Smith to the Present Day. Cheltenham, UK: Edward Elgar, 2005. viii + 195 pp. $90 (cloth), ISBN: 1-84376-477-6.

Reviewed for EH.NET by Gerald P. O’Driscoll, Jr., Cato Institute.

Jan Toporowski presents us with an eclectic treatment of heterodox theories of financial disturbance, beginning with Adam Smith and ending with Hyman Minsky. In between, a diverse cast of characters appears on stage, including, among others, Rosa Luxembourg, Ralph Hawtrey, Irving Fisher, and, in a leading role, John Maynard Keynes. Toporowski himself stays mainly in the background, but is very much in charge.

The economists have been selected for their contributions to the tradition of “critical finance,” a view that sees finance as a force “systematically” disturbing “the functioning of the modern capitalist economy” and aggravating economic fluctuations (p. 3). Toporowski observes that critical finance is defined more by contrast with “reflective finance,” which views “financial markets as being determined by circumstances in the real economy, that is, outside the financial sector” (p. 2). He identifies Joseph Schumpeter as an early exponent of reflective finance in his Theory of Economic Development.

More generally, the efficient market hypothesis and like-minded stock pricing models are the modern-day examples of the reflective approach to finance. In Toporowski’s view, they all maintain that any instability in financial markets is temporary and affirm that a new equilibrium will be established, one reflecting underlying changes in the real economy (p.3). He does not view modern finance as being Walrasian, that is, a theory of mutual determination of markets, real and financial. Indeed, he contrasts reflective theory with such a view (p. 2).

Readers will search in vain for any formal modeling in this book. It is a book that relies on the insights of (mostly) dead economists and historical examples to make its points. That approach will delight some readers as it frustrates others. The book will likely appeal to practitioners of critical finance, who want better to understand its history. The book may also serve as an overview of a subset of heterodox theories of finance for those wanting a basic understanding of them. Mainstream theorists of finance are unlikely to be convinced by the arguments against orthodoxy presented in the book.

The book is not history: the author treats historical episodes anecdotally rather than systematically. Nor is the book history of thought. What can one make of an author who admits that he has “not done full justice to the totality of the ideas of many of the writers discussed here”; and who acknowledges “my willful distortion of the works of these great writers [which is] compounded by several omissions” (p. 5)? That is both a shame and unnecessary. Toporowski evidences a keen understanding of the central ideas of many of the writers he discusses. In that regard, I particularly commend his chapter on Ralph Hawtrey (pp. 61-74). One can only wish he had been more systematic in his treatment of both ideas and facts. Instead, he is tendentious in both his selection and presentation of them.

Many readers will wonder at Toporowski’s decision to begin with Adam Smith. That choice was sensible, however, given his plot for the book. Smith’s case against usury has always seemed a strange lapse in his general case for prices and markets. Smith argued that those willing to pay higher rates of interest would crowd out borrowers unable to do so. For Smith, that would mean that capital would flow to “prodigals and projectors,” rather than to “sober people” (quoted at p. 16).

In Toporowski’s financial topography, Smith becomes a precursor of modern theories of the inherent instability of finance. It is not clear, however, that Smith’s views fit neatly into a macroeconomic theory of financial instability. They likely reflect Smith’s distinction between productive and unproductive labor. Nonetheless, Toporowski gets the reader’s attention by linking his ideas to the father of classical economics. And that was probably his goal.

As one gets closer to the present, the more familiar the ground gets. The treatment of Keynes is good. Toporowski quite correctly identifies the “ambiguity at the heart of his work,” the tension between a disequilibrium theory presented in equilibrium terms (p. 88). Toporowski introduces the reader to some unrecognized Polish theorists of the interwar years. And he focuses on the importance of Michael Kalecki in the evolution of Post-Keynesian thought.

As noted above, Toporowski is highly selective in his choice of economists to highlight and in his choice of what part of their ideas to present to the reader. That results in distorted view of the evolution of both orthodox and heterodox theory. Consider the following observation, made after a lengthy quotation from Minsky. “The reference to time and expectations here is clear evidence of Minsky’s studies of the works of Keynes and Shackle” (p. 145). If emphasis on time and expectations is a defining characteristic, then there are an embarrassingly large number of antecedents. They would include, among others, the Austrians (Mises, Hayek, et al.); the Swedes (Wicksell, Myrdal, et al.); and a diverse group of individuals, among whom Frank Knight would be notable.

Just about every interwar theorist worth his salt was focused on the issues of time and expectations. The interesting question is why some were led to theories of endogenous financial instability and others, like Hayek, identified policy not institutions as the source of economic fluctuations. Answering that question would have been a genuine contribution.

The issues in this book are truly important and the discussion of them often interesting. The heterodox views presented are generally worthy of presentation. One can only wish that issues, discussions, and ideas had been presented more systematically. The great failing of the book is in what it could have been but is not.

Gerald P. O’Driscoll, Jr. is a senior fellow at the Cato Institute and recently authored a review essay on “The Puzzle of Hayek” for The Independent Review (Fall 2004): 271-81.


Subject(s):History of Economic Thought; Methodology
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Taxation Under the Early Tudors, 1485-1547

Author(s):Schofield, Roger
Reviewer(s):Munro, John

Published by EH.NET (June 2005)

Roger Schofield, Taxation Under the Early Tudors, 1485-1547. Oxford: Blackwell Publishing, 2004. xvi + 297 pp. $74.95 (cloth), ISBN: 0-631-15231-8.

Reviewed for EH.NET by John Munro, Department of Economics, University of Toronto

The origin of this book was a doctoral dissertation, on “Parliamentary Lay Taxation, 1485-1547,” submitted to and accepted by Cambridge University many years ago (no date given). Since then Roger Schofield has obtained well-deserved international renown for his work and publications with the Cambridge Group for the History of Population and Social Structure, in particular in close association with Anthony Wrigley. The scholarly world is thus greatly indebted to his decision (at the urging of his now late mentor, Geoffrey Elton) to publish this important study on Tudor taxation under Henry VII and Henry VIII. His very considerable achievement, and indeed most important academic contribution, is to demonstrate how and why “taxation based on direct assessments of each individual was revived,” during the reign of Henry VIII, “after having been abandoned as unworkable in the fourteenth century” (p. 201). During the 150 years that preceded the accession of the first Tudor, the standard mode of parliamentary taxation had been the “fifteenth and tenth” [6.67% and 10.00%], as “the grant of a specified sum of money, fixed in 1334, and little altered thereafter, from every ‘vill’ and urban ward in the country;” it was “a very simple tax, of fixed yield … levied in the first instance,” on lands and moveables, “on communities rather than on individuals.” This study examines the continuation of this mode of parliamentary taxation under the early Tudors; but the chief focus of the book is on the new “subsidies,” as a radical fiscal innovation by which taxes were imposed on and collected from individuals, based on periodic assessments of not only their properties and moveables, but also their financial incomes from rents, profits, fees, annuities and — most surprisingly for this era — from wages as well (in many of the subsidies, at least). As Schofield demonstrates, Parliament granted such taxes — in both forms — only periodically and chiefly to finance the crown’s military requirements: thus, such taxes were levied in only 27 years or 43% of the regnal years for both monarchs.

Following a rather too brief introduction, chapter 2 analyzes the role and functions of Parliament in granting these taxes; chapter 3 analyzes the grants, levying, and collection of the “fifteenth and tenth,” based on local assessments of lands, goods, and chattels, demonstrating the inequities that had arisen in the preceding 150 years, without any adequate regional reassessments of wealth distributions among England’s 39 counties, and demonstrating, as well, the difficulties or inequities involved in determining how individuals were to contribute in fulfilling quotas assigned to the various “vills” and towns, and attendant problems of collecting these property taxes. Chapter 4 analyzes the “evolution of the directly assessed subsidy,” beginning with the poll tax on aliens (from 1488), and continuing with the initial failure (or partial failure) of the first major subsidy, in 1489 (but based on a parliamentary grant of 1472).

Finally, in 1513, Parliament was successful in establishing the final form of the directly assessed subsidy, i.e., based on individuals and not communities; and chapter 5 continues with the analysis of the “directly assessed subsidies, 1513-1547″: their administration, exemptions, objects and modes of assessment, rates of payments, and tax collections — especially in terms of the time allowed for levying and collecting the subsidies, given the exigencies of war finance. In many respects the 1513 subsidy — “the first major extension of the incidence of taxation since 1380″ — established a fiscal ideal not always replicated in subsequent grants, as demonstrated in Table 5.7 (pp. 106-07). Three modes of graduated or “progressive” taxation were stipulated: (1) a tax on moveable goods, ranging from 1s 0d for assessments of ?2 to ?10 to sums of 53s 4d for assessments of ?800 and more; (2) taxes on non-wage annual incomes (commercial-financial), varying from 2s for a range of ?2 to ?10 to a maximum of 20s for incomes assessed at ?40 and more; and, as the most novel, (3) taxes on wages (for males over 15 years) ranging from a minimum of 4d on annual wages of just ?1 (240d) to a maximum of 1s or 12d on annual wage incomes of ?2 and over. It is worth noting here (and Schofield does not do so) that in this year an estimated annual wage income for a master mason or carpenter in Cambridge would have been ?5.25 (6d for 210 days) and ?7.00 in London (8d for 210 days).

The subsequent subsidies, from 1514 to 1542, did not, however, replicate this structure; and those from 1514 to 1525 set merely a flat rate of 6d per ?2 of moveable goods, and 6 per ?1 of both annual commercial/financial incomes and annual wages. In subsequent subsidies, to 1542, the minimum assessments were set at ?20 or even ?50 (1527), without taxing wage incomes (and only alien non-wage incomes). Finally, Henry VIII’s last parliamentary subsidies, in the years 1544-47, did restore basically the same structure provided in the 1513 subsidy (with somewhat different rates). Schofield estimates that when the assessments were set at such high minimum rates (in 1525-42) only about 0.15% to 1.40% of the adult population was subject to taxes, and that in the other subsidies from one-third to one-half (averaging 40%) of the population was exempt from taxes.

The following chapters, though necessary for a complete understanding of the mechanics for and records of parliamentary taxation, will generally prove to be less interesting for most readers: chapter 6, on the procedures and records of the Exchequer; chapter 7, on the yield of taxes; chapter 8, on the efficiencies in collection, and popular opposition — only very rarely in the form of violent public protests (1489, 1497, 1536, and then only regional); and the concluding chapter 9, on “taxation and the political limits of the Tudor state,” which, along with chapter 7, are the most important in the second half of the book.

Particularly interesting are Schofield’s comparisons of the net tax yields from the old system of the “fifteenth and tenth” and the new system of subsidies: the former, producing generally stable yields, varied from ?27,700 in 1492 to ?35,800 in 1537 (an average of ?31,100); the latter, produced often wildly fluctuating yields varying from the extreme low of just ?700 in 1488 and a low of ?5,700 in 1526, to far higher yields of ?64,800 in 1525, ?74,600 in 1544, and the highest of all, ?109,000 in 1545-46. Some incomplete valuations of Tudor tax receipts had been published earlier; but Schofield corrects most of them, and, equally important, clearly distinguishes (in Table 7.1, pp. 170-72) between gross and net yields, after collection costs and exemptions (about 4.2%).

As a minor criticism, one might have wished more comparative evidence, in particular to compare the significance of these tax yields with other sources of crown or state revenues under the first two Tudors. The major such example is, of course, the Henrician Great Debasement of 1544 to 1551, which, according to Christopher Challis [The Tudor Coinage, Manchester, 1978, Table 6, p. 255], produced a net seigniorage profit of ?1,270,684.1, or an annual average of ?181,526 — well in excess of the most productive subsidies.

The most interesting feature of the concluding chapter goes beyond Schofield’s actual research, and thus beyond the reign of Henry VIII. He contends that, in the reign of Elizabeth I, the value of the assessments declined in both nominal and thus significantly in real terms, with the increased inflation of the later Price Revolution era. Furthermore, tax collections under Elizabeth ranged from just 25% to 51% of independent assessment valuations, compared to an average of 68% under Henry VIII. The chief cause of this discrepancy was a grossly unfair under-assessment of the peerage and upper classes, from “a combination of personal self-interest and the exigencies of patronage politics” that “conspired to undermine the directly assessed subsidy as a viable form of taxation under the later Tudors” (p. 217). If most historians consider Elizabeth to have been the much more enlightened monarch, Schofield contends that, in terms at least of parliamentary taxation, Henry VIII’s reign was the most remarkable of all the Tudors — and Stuarts — “for its sophistication and attention to the principle of distributive justice” — in essence, for its fairness; and that indeed his system of direct subsidies “was several centuries ahead of its time,” with this very short-lived partnership between a more enlightened upper class and the crown. Subsequently, Schofield observes (p. 201), “direct assessment was to be abandoned again in the mid seventeenth century, after decades of complaints over evasion and under-assessments [of upper-class incomes], and would not be revived until the very end of the eighteenth century,” during the Napoleonic Wars, and then only very briefly. The modern income tax was reintroduced, now on a permanent basis, only in 1842, with the Tory regime of Robert Peel: at the modest and flat rate of 7d per pound sterling, or 2.92%. A progressive income tax, on Henry VIII’s 1513 model, would not be achieved in Britain until the early twentieth century.

John Munro, Professor Emeritus of Economics at the University of Toronto, was the medieval area editor of the Oxford Encyclopedia of Economic History , edited by Joel Mokyr (5 volumes, New York, 2004); and his recent publications include “The Medieval Origins of the Financial Revolution: Usury, Rentes, and Negotiablity,” The International History Review, 25:3 (September 2003), 505-62; and “Spanish Merino Wools and the Nouvelles Draperies: An Industrial Transformation in the Late-Medieval Low Countries,” Economic History Review, second series, 58:3 (August 2005), 431-84.

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):Europe
Time Period(s):Medieval

Money and the Rise of the Modern Papacy: Financing the Vatican, 1850-1950

Author(s):Pollard, Stephen F.
Reviewer(s):Hayes, Patrick J.

Published by EH.NET (June 2005)

Stephen F. Pollard, Money and the Rise of the Modern Papacy: Financing the Vatican, 1850-1950. New York: Cambridge University Press, 2005. xx + 263 pp. $85 (cloth), ISBN: 0-521-81204-6.

Reviewed for EH.NET by Patrick J. Hayes, Department of Theology/Philosophy, Marymount College of Fordham University.

Someone once let it slip to Yves Congar, the influential Dominican friar and peritus at the Second Vatican Council (1961-1965), that the cost of the conciliar proceedings to the Holy See amounted every year to 1,400,000 lire (about $2,250,000).[1] This does not include travel by the bishops and their experts, the costs of which were mainly borne by the national episcopal conferences. One can imagine the sum for the First Vatican Council (1870) when the financial resources of the Holy See were all the more meager, and when there were only a handful of organized episcopal conferences.

However, imagining such costs is now made considerably clearer by Stephen Pollard, a Fellow at Trinity Hall, Cambridge University. This historian of Italian fascism and biographer of Pope Benedict XV (1914-1922) has prepared a study on Vatican financial institutions that sheds light on the emergence of the modern papacy in its ecclesial and international affairs. In both instances, money is the common denominator. The Church’s mission is not served without recourse to Peter’s Pence. The Vatican’s relationship with foreign states, particularly Italy, depends in part for its diplomatic leverage on the investments it keeps abroad. Pollard follows a vast money trail over three continents and even peeks into the popes’ desk drawer or under his bed where, legend has it, varying sums of petty cash were stored and only to be used in the event of an emergency or a pontiff’s death.

It should not be assumed that the popes were wheeler-dealers. In fact, Pollard makes his case that they were more often hemmed by their ignorance of financial markets and that whatever success the Holy See demonstrated in remaining in the black could be traced to the heads of the Amministrazione per i Beni Santa Sede before 1929 or its successor agencies. Thus, while Pollard’s book is about the papacy, it is more often about the managers of the pope’s finances, a highly select group of ecclesiastics and lay people well disposed toward keeping the Vatican solvent. They are a fascinating lot, in part because they hold the ear of those who occupy the chair of Peter unlike any other bureaucrat excepting the Secretary of State. In at least one instance, the pope’s chief financier and the Secretary of State were one and the same: Giacomo Antonelli, who oversaw the Papal Treasury from 1850-1876. Described by one author as the Italian Richelieu, not only was Antonelli one of the main architects of the Holy See’s intransigence over nationalism, liberalism, and modernity, he attempted a massive reorganization of the budget for the Papal States.[2] His efforts at balancing the budget depended upon borrowing from the Rothschild’s banking house which, though many saw it as unseemly to accept Jewish lending practices, seemed to fit the needs of the Vatican quite well. The relationship gives a first instance of selective amnesia on the part of Church officials, who seemed nonplussed by usury, or even the rights of labor or the common good — staples of the Church’s emerging social ethic.

The book moves in chronological order beginning with the reign of Pius IX, whose early “liberal” period gives way, in 1850, to a series of measures designed to solidify papal power. It proceeds in due course through the reigns of Leo XIII (1878-1903), Pius X (1903-1914), Benedict XV (1914-1922), Pius XI (1922-1939) which is marked by an excurses on the fallout from the Wall Street crash (1929) before moving into the penultimate chapter on Pius XII (1939-1959). After Italian unification in 1870, income could have jumped if only the Vatican had acquiesced and accepted the subsidy promised by the Italian government. But on principle, the Holy See refused such overtures and still maintained the spiritual and temporal trappings of pope-kings — a burgeoning papal household staff and their pensions, ceremonial spectacles, and increasingly generous grants to relief and development programs around the world and at home.

The intermingling of political, economic, and ecclesial policies became more pronounced in the years after Pio Nono, but the capabilities of the Vatican’s money managers was, in the main, equal to the task. Under Leo, the appointment of Monsignor Enrico Folchi dedicated one person to administering the income generated from the Vatican property holdings. He was also placed in charge of investing the surplus from Peter’s Pence. A model of caution, Folchi was replaced by a layman, Ernesto Pacelli, whose family would assist in the negotiation of the Lateran Pacts of 1929 (a windfall for the Vatican) and produce the future Pope Pius XII. With Pacelli, Leo had a confidant and a willing capitalist. Funds were moved off Italian shores and diversified in properties and companies throughout Europe. However, by the time of Pius X’s death, Pacelli’s interests in the Banco di Roma (of which he was a co-founder) would seriously jeopardize the solvency of the Holy See’s portfolio. Under Benedict, who Pollard and other writers view as a shrewd politician and churchman, but a hapless financial manager, the Vatican’s income declined precipitously. Doubtless, the war years (Italy declared war in May 1915) contributed to this, given the virtual absence of large numbers of faithful able to attend papal audiences and the inability of bishops to make their ad limina visits and so carry the funds from Peter’s Pence from their home diocese to the pope. A series of losses as a result of collapsed banks or poor stock investments, suggests Pollard, meant that “Benedict did not leave the Vatican with a cash reserve at the end of his reign” (125). Increasingly, the ensuing decades found the popes turning to the American Church for assistance in meeting its shortfalls, especially the sees in Boston, New York, and Chicago. America was no longer the backwater that it was once considered in Roman circles. It soon became the cavalry for near monthly setbacks, brought on by repeated deficits run by Vatican Radio and L’Osservatore Romano. Profits from the sale of Vatican stamps could hardly be expected to offset these cost overruns.

Both Pius XI and Pius XII had pontificates that built upon the concordats begun under Benedict. The diplomatic front was the future of the Vatican’s economic gains and the outreach carried on by the Holy See in those nations where emergency contributions were disbursed, were often motivated by a return of future good will by those countries. The most tangible expression of the return on this investment was a government’s swift, and often bloody, crackdown on communism. Fascist governments were tolerated and used toward entrepreneurial means and ends, which included policies of non-interference in the Vatican’s banking, investment, or building projects abroad. By the 1930s, a web of such projects extended throughout Europe, the financial centers in the United States and South America. Profits were quickly used to construct a number of new buildings in and around the Vatican. New infusions of cash from America and a softening of relations with Italy allowed for further improvements, including the completion of several construction projects (e.g., the Railway Station and the Ethiopian College), and later the restructuring of the Via Conciliazione, the Roman thoroughfare leading from the tips of the Bernini colonnade in the Vatican to the Tiber River. “After sixty years of uncertainty and difficulty, the papacy would never be poor again” (148).

Pollard points to the influence of Bernardino Nogara as the principal agent in this transformation. Nogara was the first non-Roman to assume control of the Vatican’s finances. This son of Milan came to the job with a number of international contacts and continued to view the diplomatic and economic spheres as one and the same. The Vatican was the center of a global Church. It should thrive in financial markets worldwide. Nogara’s commercial activity has several hallmarks: the appointment of family to key posts in Vatican offices (his brother Bartolomeo ran the Vatican Museums); the installation of Milanese colleagues on boards of corporations where the Vatican had a significant or controlling stake (especially in South America); and the handling of sensitive information through use of the diplomatic pouch, a procedure that proved to be useless during the Second World War, when allied intercepts were routine. For his Italian loyalties during the war, Nogara was often placed in a precarious position with Pius XII, to say nothing of the allied forces, who tracked his activities with great vigilance. Pollard notes that Nogara’s impact on Vatican financial matters has had the unavoidable stamp of his successes for all future achievements. “The ‘wind from the North,’ as Italians describe influences from Milan and the other financial centers, had brought about a permanent change in Vatican financial culture and practice that would survive even Nogara’s death in 1958. Nogara had finally inserted the Church into the structures of international capitalism” (215).

This is quite a claim and one that will be borne out or refuted only in the coming decades. The last thirty years of Pollard’s study is seriously handicapped by not having access to the archives for those offices dealing with the papal finances since 1870 and other Vatican archives after 1922. Nevertheless, Pollard is to be credited with providing a conservative reading of the many journalistic or popular accounts of the Holy See’s economic state, such as George Seldes’ book The Vatican: Yesterday, Today, and Tomorrow.[3] Pollard frequently supplements his analysis of these works through published diaries or archival materials from countries other than the Vatican.

Such synthetic skills are, however, often marred by several typographical errors or noticeable errors of fact. For instance, St. Thomas Aquinas did not live in the fourteenth century but in the thirteenth (75), the motu proprio Sapienti Consiglio of June 1908 would not have appeared in the Acta Apostolicae Sedis for the year 1900 (83, n. 17; the AAS begins its run in 1909), Pollard misspells the name of former America editor Thomas Reese, SJ, on a number of occasions (e.g., 83, n. 18 and in the bibliography) and misspells Berkeley, California (104, n. 140), and so on. I find that Pollard lacks a certain sensitivity toward the Church in America for the period of his study, particularly from the nineteenth century. Much more could be said, for instance, about the Knights of Columbus (whose archives in New Haven, Connecticut, are woefully under-utilized, especially those materials related to Count Enrico Galeazzi and the administration of Vatican City) or about the links between the American sees, the Austrian Leopoldine Society, and the Congregation of the Propaganda.

Yet, for its main purposes, the present study does supply a realistic picture of how the Vatican economy remains viable, despite its occasional scandals, fickle global markets, political unrest, and the Church’s own social teaching. As one Vatican pictorial put it years ago: “Questions concerning the finances of the Holy See are met with the cold answer: ‘The Holy Father does not publish a budget.’ And it is true that there are not a half-dozen men in the world who know how much the Vatican has or where it goes.”[4] John Pollard widens the circle.


1. Cf. Joseph Komonchak, citing Congar’s journal, in Giuseppe Alberigo and Joseph Komonchak, eds., History of Vatican II (Maryknoll and Leuven: Orbis and Peeters Press, 2003), IV: 1 n. 1.

2. Cf. Carlo Falconi, Il cardinale Antonelli: vita e carriera del Richelieu italiano nella Chiesa di Pio IX (Milan: A. Mondadori, 1983). For more on Antonelli, Frank Coppa, Cardinal Giacomo Antonelli and Papal Politics in European Affairs (Albany: SUNY Press, 1990).

3. Cf. George Seldes, The Vatican: Yesterday, Today, and Tomorrow (New York: Harper and Brothers, 1934). More recent studies, from which Pollard frequently borrows, include Benny Lai’s Finanze e finanzieri vaticani tra l’Ottocento e il Novecento, da Pio IX a Benedetto XV, 2 vols. (Milan: A. Mondadori, 1979) and Carlo Crocella, “Augusta miseria.” Aspetti della finanza vaticana nell’et? del capitalismo (Milan: Nuovo istituto editoriale italiano, 1982).

4. Cf. Ann Carnahan, The Vatican: Behind the Scenes in the Holy City (New York: Farrar, Straus, and Co., 1949), 127.

Patrick Hayes teaches theology at Marymount College of Fordham University in Tarrrytown, NY and is a co-director of Passing on the Faith/Passing on the Church, a three-year project sponsored by the Curran Center for American Catholic Studies at Fordham. He has written numerous articles for the New Catholic Encyclopedia on the Roman Curia and for Catholic News Service on the papacy. He is also the Review Editor for H-Catholic.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

The First Crash: Lessons from the South Sea Bubble

Author(s):Dale, Richard
Reviewer(s):Neal, Larry

Published by EH.NET (March 2005)

Richard Dale, The First Crash: Lessons from the South Sea Bubble. Princeton: Princeton University Press, 2004. ix + 198 pp. $29.95 (cloth), ISBN: 0-691-11971-6.

Reviewed for EH.NET by Larry Neal, Department of Economics, University of Illinois at Urbana-Champaign.

Many of us are still licking our wounds from the collapse of the “ bubble” in March 2000. The NASDAQ index, weighted by the market capitalization of all the stocks it lists, soared from a low of 333 in October 1990 to 5,048 on March 10, 2000. The electronic trading system added hundreds of new technology companies purporting to reap network economies from “new new” applications of information technology on the world-wide web and all of them tried to expand their public equity at the behest of their venture capital backers. By the end of 2000, however, the NASDAQ had lost half its value and continued to lose another half before reaching bottom in October 2002.[1] This was the latest financial crash, but it was just one of many other that have occurred since the existence of organized secondary markets in financial assets. After each crash, one can be sure that references will crop up to the South Sea Bubble of 1720, the granddaddy of them all. The explicit sub-text of these works is always, “People often act like damn fools;” or, more soberly, we are all subject to occasional bouts of irrational exuberance. The implicit sub-text, often made explicit, is that stock markets should be regulated closely and access to them limited, mainly to protect people from the consequences of these recurrent bouts of mass madness.

It is not surprising then that Richard Dale, Professor Emeritus of Finance at Southampton University, should take advantage of the opportunity to repeat this oft-repeated lesson of history and make explicit comparisons between the original stock market crash and the most recent one. What he contributes is an effort to validate the approach of behavioral finance as applied to the events of 1720, as well as to the more recent crash. Moreover, he argues that sound financial analysis of fundamentals was available and widely disseminated even in 1720, but that it was ignored by the masses who flocked to their fleecing at the behest of the charlatans in control of the South Sea Company. Throughout, he draws analogies with the analysis of the companies and the frauds perpetrated by the directors of Enron and WorldCom in the recent NASDAQ crash. As icing on the cake, he takes to task previous historians of the South Sea Bubble (including this reviewer) for overlooking the work of a sound financial analyst who disseminated his results publicly at the time, but to no avail against the forces of irrational herd-like behavior. Finally, he uses quantitative evidence also overlooked by previous historians on the erratic pricing of subscriptions to the new issues of South Sea stock issued at various times and various prices during the course of the South Sea Bubble, which he takes as direct evidence of market irrationality.

Dale builds his argument first by setting the scene for irrational exuberance in the coffee houses of London (chapter 1). There, subject to the intoxicating fumes of the exotic bean, people regularly lost their senses and fell prey to constant streams of misinformation produced by an untrammeled and unregulated press. In these coffee houses and the narrow confines of Exchange Alley abutting the Royal Exchange, where legitimate and regulated trade was carried on, a free-wheeling, unregulated stock market arose (chapter 2). It quickly was dominated by a few manipulative entrepreneurs, as aptly described by Daniel Defoe in his Anatomy of Exchange-Alley. Among them were the projectors of the South Sea Company, created in 1711 to help the government refinance much of the huge debt it had incurred over the course of the War of the Spanish Succession (1702-1713) (chapter 3). No recapitulation of the South Sea Bubble is complete without reference to the comparable scheme begun earlier in France by the expatriate Scot, John Law. Chapter 4 briefly describes the innovations in marketing expanded issues of capital stock that, according to Dale, imitated earlier South Sea innovations — installment payments on new shares, options, and interventions by Law to first run up the price of Mississippi stock and then to stabilize it. The crowd spirit incited by Law’s machinations then spilled back across the Channel to whip Londoners into comparable frenzies. Chapter 5 takes us back to the South Sea Bubble proper and lays out the mechanics of the scheme, while introducing us to Archibald Hutcheson, the one voice of reason who explained, again and again, in the clearest terms possible, why the scheme was fated to fail. Dale notes explicitly that many of the flaws in the scheme were repeated once again in the bubble of the 1990s.

The South Sea bubble, nevertheless, unfolded quickly after Parliament approved it in February 1720 and the sheer momentum of the crowd’s frenzy kept it going well into July 1720. On the timing of the bubble, Dale takes sharp issue with previous analysts of the bubble who claimed that the peak occurred just before the Company closed its books in early June to prepare the summer dividends. He dismisses explicitly my argument that a severe payments crisis had hit the European economy at this time, even though he describes the currency manipulations of John Law that caused the payments crisis in his chapter on Law. Apparently, he believes that only animal spirits flowed across the Channel then, not actual means of payment.

Dale’s focus on frenzy rather than finance at this time is consistent with that of Archibald Hutcheson as well. Hutcheson was the very archetype of the mercantilist “little Englander” later derided by the Scotsman, Adam Smith. Hutcheson’s main policy recommendation was to create perpetual annuities that were obligations of the state that could be held permanently by the British citizens. One great advantage would be that foreigners would have no claims against the state, which was proving increasingly to be the case with Dutch investors and even Scottish investors who came into London in the train of William III after the Glorious Revolution of 1689. Naturally, Hutcheson’s overall goals were anathema to the Scottish supporters of the Hanoverians, and not welcome to the directors of the Bank of England and the East India Company with their strong ties to the Dutch. As early as March 1720, Hutcheson sounded the alarm against the scheme of the South Sea directors with fiery rhetoric that they threatened the very bases of English liberties and urged his fellow Parliamentarians to take preventive action against the Company so that “our Weekly Bills of Mortality may not be filled with large Articles of unhappy People, who have hang’d, drown’d or shot themselves”! (Hutcheson, p. 8, from his March 1720 pamphlet.) It may be that Hutcheson’s analysis of the frailty of the scheme was ignored not so much due to the frenzy of his audience but more because of the excesses of his rhetoric. From the beginning of his many pamphlets on the public debt, Hutcheson made it clear that he desired nothing else than a complete repayment of the national debt, including that held by the Bank of England, the East India Company, and the South Sea Company. This implied, of course, ending those companies when their current charters expired. No wonder his counsel held little charm for the thousands of shareholders in said companies!

In his “Bubble” chapter, Dale also gives the main quantitative evidence for irrational behavior lasting through the summer of 1720. These are the highest weekly prices of the three South Sea subscriptions that had been issued by mid-June. These peak at various times but well into July, implying according to Dale that the frenzy had not yet abated. He dismisses my argument that the bubble had already been pierced with a contraction of liquidity in the mercantile payments system in early June by asserting that interest rates remained remarkably stable throughout 1720, basically close to 5 percent annually. (Usury limits of 5 percent set the maximum interest rate legally offered by any company at this time.) Dale offers proof in the East India Company’s 5 percent bonds, whose prices remained fairly stable until the last quarter of 1720 (after the Sword Blade Company, which provided banking services for the South Sea Company, had failed). These India bonds were short-term bills with expiry dates of less than a year, with rollovers occurring quarterly. As they would be redeemed at par within a year, their price could not rise above par unless they were especially useful as means of payment; and if they did fall below par it could only be because the company issuing them was suspected of not being capable of redeeming all the bills as they expired. Thomas Mortimer in his classic guide to the eighteenth century stock market, Every Man His Own Broker, tells us that sellers made out the terms of sale for the India bonds, asking the par value plus the accumulated interest and then adding the market premium or discount on the basis of a ?100 bond. This premium averaged around 2 pounds through August, when increasing concerns that the troubles of the South Sea Company might spread to the East India Company drove their bonds to ever larger discounts, reaching 6 pounds at the depths of the crash. South Sea short-term bonds were even more deeply discounted by then. As Dale notes, there was no fiat money in England, unlike the situation then being attempted in France. Neither the Bank of England, the East India Company, nor the South Sea Company could create means of payment. The best they could do was to recycle idle balances more rapidly, which they had all begun to do in May 1720. This meant that the supply of India bonds could not be expanded at will to meet scrambles for liquidity. Their prices were tightly constrained by the short term of their existence and therefore the implied interest rates also tightly confined.

Goldsmith bankers and merchant bankers operating in the City of London at the time found that short term credit was very tight in the summer of 1720, which proved to be the case throughout mercantile Europe. George Middleton, John Law’s banker in London, reported that money could only be had for 50 percent per month in June 1720, which coincidentally was when the effects of Law’s fiat devaluations and revaluations at the end of May were disrupting the mercantile payments throughout Europe (Neal, 1994). Also coincidentally, that was the forward premium I calculated from the forward prices of the South Sea stock when the transfer books were closed in June (Neal, 1990). Dale regards that figure as unrealistically high, but one of the most knowledgeable and active goldsmith bankers operating in London at the time reported that it was the case. Even earlier in 1720, Archibald Hutcheson noted that borrowers had to pay very high interest rates at the outset of the bubble. (Hutcheson, April 1720, p. 25, refers to “the borrowing of Money, at the rate of 10l. per Cent. Per Mensem; and even at 20 s. per Cent. Per Diem?”)

The issue of the appropriate interest rate comes into play again in Dale’s final chapter, “Lessons from the South Sea Bubble.” There, Dale argues that each subscription issued by the South Sea Company on an installment basis should, rationally, have been priced at the current price of a fully paid up share. To calculate this, one should take the amount already paid in and then add the discounted present value of the future calls on the subscription. Dale does this with a discount rate of 5 percent (which I argue is far too low for the customers buying the subscriptions) and finds what he regards as two anomalies. First, the calculated values of the subscriptions are consistently higher than the current price of the fully paid up shares of South Sea stock; and second, the various subscriptions, especially the third subscription, vary erratically relative to each other. The two findings together lead him to conclude that the market for South Sea stock was increasingly irrational from June 1720 to the end of 1720, by which time the entire scheme had collapsed, the King was recalled from Hanover, and Parliament, with the ever-helpful Archibald Hutcheson playing a leading role, was investigating the entire affair. The affair was wound up, as Dale describes in chapter 7, with a complete re-organization of the Company, the Directors removed and penalized with loss of the bulk of their estates judged to be ill-gotten, part of the Company’s stock was engrafted onto the capital of the Bank of England, and the remaining stock divided into half.

It was clear to investors at the time, however, as it would be for investors in the London capital market for centuries after, that the subscriptions had a greater value than the current full shares for two reasons. One reason, elaborated in chapter 4 of Thomas Mortimer’s handbook was that they enabled speculators in the stock to leverage their investments, gaining the rise in the price of the full share on a partially paid up subscription for a new share. A second reason, certainly understood by the infamous stockjobbers crowding the coffee houses of Exchange Alley, was the option value of defaulting on future installments in case the stock began to lose value in the market. Share warrants, as they were later named formally, always priced higher than the regular shares. Finally, if the option value varied among the three subscriptions, and they certainly did as the value of defaulting on future installments rose sharply with the Third Subscription, we should expect differences in the prices of the subscription shares to emerge, and more so as the regular stock began its precipitous decline in August 1720.

So, what are the lessons to be learned? A previous writer has suggested that the entire affair “appears to be a tale less about the perpetual folly of mankind and more about the continual difficulties of the adjustments of financial markets to an array of innovations.” After reading Dale’s efforts to revivify the tenets of behavioral finance to comprehend the significance of the South Sea bubble, I confess that statement seemed so reasonable an assessment that I wish I had made it. Checking Dale’s footnote, I was gratified to find that I had (Neal, 1990, p. 90)!

Note: 1. Later financial historians will wonder, as did most financial journalists and academic observers in the late 1990s, why it didn’t collapse earlier, and in October 1997, 1998, or 1999 rather than March 2000. Possible answers might be in the extraordinary steps taken by the U.S. monetary authority to expand liquidity after the Asian crises in 1997, the Russian bankruptcy in 1998, and the “Y2000″ fear in late 1999.


Daniel Defoe (1719), Anatomy of Exchange Alley, London: E. Smith.

Archibald Hutcheson (1721), A Collection of Treatises Relating to the National Debts & Funds, London.

Thomas Mortimer (1765), Everyman His Own Broker, sixth edition, London.

Larry Neal (1990), The Rise of Financial Capitalism: International Capital Markets in the Age of Reason, Cambridge: Cambridge University Press.

Larry Neal (1994) “‘For God’s Sake, Remitt Me': The Adventures of John Law’s Goldsmith-Banker in London, 1712-1729,” Business and Economic History, 23:2, pp. 27-60.

Larry Neal is past president of the Economic History Association and the Business History Conference and former editor of Explorations in Economic History.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):18th Century