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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.

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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

Medieval Economic Thought

Author(s):Wood, Diana
Reviewer(s):Armstrong, Lawrin

Published by EH.NET (August 2003)

Diana Wood, Medieval Economic Thought. Cambridge: Cambridge University Press, 2002. xii + 259 pp. $20.00 (paper), ISBN: 0-521-45893-5.

Reviewed for EH.NET by Lawrin Armstrong, Centre for Medieval Studies, University of Toronto.

Medieval economic thought is a daunting subject. Not only has it generated a voluminous modern literature but the primary sources on which the scholarship is based — sermons, pastoral care manuals, legal opinions and technical (and usually unedited) commentaries on the theological, philosophical and juridical texts of the medieval university curricula — are scarcely easy reading. Moreover, because scholastic thinkers preferred the abstract to the empirical even when dealing with such matters as the economy it is often difficult to see how they conceived the relationship between theory and practice. The objective of Medieval Economic Thought, a recent contribution to the Cambridge Medieval Textbook series by Diana Wood of the University of East Anglia, is to introduce students and general readers to the key concepts of medieval economics and to suggest how they related to wider developments in economy and society.

Two themes, choice and balance, structure Wood’s treatment; choice because medieval economics was above all a matter of ethics rather than description or prediction, and balance because Aristotle’s idea of virtue as a mean between extremes provided an analytical model for many of the theorists who discussed economic relations. Medieval Economic Thought reviews how theorists interpreted ethical choice and balance in relation to property, wealth and poverty, money, standards of measurement, commerce, the just price and usury. Each topic is illustrated with concrete examples of economic practice drawn mainly from English sources. The whole is supplemented by an appendix of notes on the principal writers and primary sources referred to in the text and a glossary of specialized terms.

Property represented a problem for medieval economic thinkers because both scripture and natural law sanctioned the community of goods. Wood reviews a range of responses from the mendicant and monastic exaltation of poverty and corporate ownership to various secular and ecclesiastical theories that tried to balance private rights and the common good (chapter 1).

A closely related problem was that of poverty and wealth. Medieval society was one of gross material inequalities, and most writers considered avarice an impediment to salvation, although they also maintained that the moral risks associated with wealth could be obviated by liberality. However, as Wood emphasizes, discrimination between the “deserving” poor, such as clerics and rich people declassed through material adversity, and the “undeserving,” such as beggars, the destitute and unemployed, meant that such largesse ultimately served to prop up the social order (chapter 2).

Medieval conceptions of money were strongly influenced by Aristotle, who viewed money a measure of value and a sterile medium of exchange. Money functioned as a store of value when hoarded but the sterility doctrine meant that few theorists viewed money as a commodity whose value could fluctuate like that of any other (chapter 3).

The integrity of the coinage and other metrological standards were of vital importance both to governments and to ordinary people, and theorists accordingly reserved some of their most damning criticisms for those who tampered with weights and measures or debased the coinage (chapter 4).

Medieval reflection on economic issues was prompted by the “commercial revolution,” the extraordinary growth of trade and markets and the associated monetization of the economy evident from about 1100. Wood traces changing attitudes towards the merchant from the wholesale condemnation of trade by the canonist Gratian in the twelfth century to the fifteenth-century defense of wealth proposed by the Florentine humanists (chapter 5).

Wood dedicates three chapters to the just price and the usury prohibition, the topics readers will most readily associate with medieval economics. Although Aristotle’s conception of justice required strict equality in exchange, it is now generally agreed that medieval theorists understood the just price to be nothing more than the price commanded by a thing under normal market conditions, that is, in the absence of monopolies or artificially-created scarcities. Most writers, however, accepted the right of public authorities to regulate or fix prices in the common interest. Governments periodically attempted to control the price of labor — for example, during labor shortages that resulted from the plague — but most analysts seem to have favored the principle of free bargaining over wages (chapter 6).

Usury was defined as any charge for a loan of money or fungibles, that is, things whose use necessitated their consumption, such as wine or grain. Since the borrower acquired ownership of the thing lent, such charges were interpreted as a form of theft which could be rectified only through restitution. In the West the taking of usury was prohibited to both the clergy and the laity in the ninth century, and the sanctions against usurers were intensified by a series of conciliar decrees between 1179 and 1311 (chapter 7).

There were, however, circumstances under which a creditor could claim damages, as, for example, when a debtor failed to repay on time. Compensation was termed interesse and several theorists extended the concept to include payments from the beginning of a loan in certain cases, for instance, when a merchant lent capital that he would otherwise have invested in trade. Such developments, however, were fiercely contested with the result that economic actors turned to agreements that were less exposed to censure than straightforward loans, such as bills of exchange, rentes (annuities) and various kinds of risk-sharing partnership (chapter 8).

The textbook format, as Wood admits, lends itself oversimplification. For example, not every reader will be convinced by Wood’s view that the progressive monetization of the economy, the rise of national monarchies and the development of humanism fatally undermined the ecclesiastical critique of commerce and credit. There is evidence that even if the merchant eventually achieved a measure of toleration, commerce continued to be tainted by association with usury; indeed, the later Middle Ages witnessed an intensification of anti-usury measures. From this perspective, the Protestant reformers’ virtually universal condemnation of usury was not an aberration but rather an extension of trends in late medieval economic thought. Similarly, Wood’s emphasis on Aristotle reflects her debt to the work of Odd Langholm, who has published several authoritative studies of the economic ideas of scholastic commentators on the Ethics and Politics. Greater attention, however, to legal, particularly canonistic, sources would have revealed a more complex, case-oriented approach to economics which even if it is analytically messier than that of the Aristotle commentaries is perhaps more revealing in practical terms. Limitations of space also make comprehensiveness impossible, but in several areas that Wood herself singles out as particularly crucial readers will want to supplement the bibliography with, for example, the work of Kirshner on usury and public debt in the Italian city-states, Todeschini on Franciscan economics, Grossi on concepts of property, Clavero on gift in scholastic thought, Sapori on merchants and usury, Schnapper on the theory and practice of rentes, Henderson on poverty and charity in Renaissance Florence, Spicciani on interest theory, Shatzmiller on Jewish money-lending and the work of Nicolini, Savelli and Muzzarelli on the monti di piet?.

Lawrin Armstrong is Associate Professor of Medieval Studies at the University of Toronto. Recent publications include “The Politics of Usury in Trecento Florence: The Questio de monte of Francesco da Empoli,” Mediaeval Studies 61 (1999): 1-44, and Usury and Public Debt in Early Renaissance Florence: Lorenzo Ridolfi on the Monte Comune (Toronto, 2003). He is currently editing Gerard of Siena’s quodlibetal questions on usury and restitution for the Toronto Medieval Latin Texts series.

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):Medieval

The Transformation of American Law, 1780-1860

Author(s):Horwitz, Morton J.
Reviewer(s):Rothenberg, Winifred B.

Project 2001: Significant Works in Economic History

Morton J. Horwitz, The Transformation of American Law, 1780-1860. Cambridge, MA: Harvard University Press, 1977. xvii + 356 pp.

Review Essay by Winifred B. Rothenberg, Department of Economics, Tufts University.

When the Rules Changed: A Twenty-five Year Retrospective on The Transformation of American Law, 1780-1860

“In short, the transition periods can be described as periods of controlled social and economic revolution. They are revolutions because they involve rapid changes in long-standing economic, social, and often political institutions; they are controlled in that the integrity of the societies is maintained despite prolonged internal conflicts.”(Kuznets, 1968, p. 107)

In 1926, when J. Franklin Jameson published The American Revolution Considered as a Social Movement, the American Revolution was not generally considered to have been a social movement at all. So much less wrenching than its French or Russian prototype, ours seemed to be a colonial war, not a class war; a war about “Who shall rule?” — not a revolution; for — recalling Carl Becker’s famous phrase — with respect to “Who shall rule at home?” nothing much appeared to have changed. But in the seventy-five years since Jameson, historians have compiled abundant evidence that fundamental change took place after the Revolution in virtually every economic, political and social indicator, from market integration to marital fertility, from agricultural productivity to religious affiliation, from the nature of the polity to financial markets, from literacy rates to life expectancy, and most of all in that elusive thing the French call mentalit?. Those changes constituted a ‘transformation’ beyond mere ‘change.’

‘Change’ is continuous. It is the condition of being in a world where “Whirl is King.”1 But the transformation of American private law that Morton Horwitz describes here “lifted pencil off paper.”2. After the Revolution, the legal reasoning that governed judge-made law in America could cut itself free from that ‘undiscovered country’ from which the English common law traced its origins and drew its enormous authority; from its rigid pleadings; from its “blind veneration for ancient rules, maxims, and precedents” (p. 25); from its neglect of societal consequences. More to the point, it was a discontinuity that paralleled the sudden acceleration of capitalist development and the new “era of shared ideation” that legitimated it.3

Horwitz is not alone in remarking a critical period in the law in and around the 1780s. For Roscoe Pound, the early years of the Republic were “the formative era of American law,” although he seems thoroughly to have rejected the notion, so central to Horwitz, of an ideological discontinuity at that time. “Tenacity of a taught legal tradition,” he wrote, “is much more significant in our legal history than the economic conditions of time and place”(Pound, p. 82).4 But in William E. Nelson’s telling, “The War of Independence ushered in the beginning of a new legal and social order . . . the most important element [of which] was the emergence of new legal doctrines that recognized the materialism of the age” (Nelson, p. 5). And Lawrence Friedman, author of the first general history of American law, describes a “fundamental change in the concept of law” after the Revolution, one in which “the primary function of law was … to be a utilitarian tool [protecting] property in motion or at risk rather than property secure and at rest . . . [in order] to foster growth [and] to release and harness the energy latent in the commonwealth” (Friedman, p. 100).

The Transformation of American Law became an instant classic upon its publication in 1977. Readers not already familiar with it should understand that it is a flagship work of the Critical Legal Studies movement which was born and bred in American law schools in the aftermath of the civil rights struggle, the Vietnam War, and Watergate. From that anguished, profoundly anti-institutional perspective, the book mounts a brilliant attack on the transformation of the private law of property, negligence, contract, competition, and commerce that was wrought in the state courts — quite to the exclusion, incidentally, of state legislatures. Decision by decision, treatise by treatise, state court judges of the revolutionary generation began the process of making new law and new legal rules in the form and substance of which Horwitz discerns a coherence to which he gives the name ‘instrumentalism.’

Horwitz’s use of the word “instrumental” is an important clue to his thesis. The dictionary definition of ‘instrumental’ is simply “helpful; serving as a means,” in which sense the word could apply equally well — could it not? — to the eighteenth-century English common law which just because it was based on precedent, was biased in favor of the status quo, was indifferent to social consequences and was resistant to change, was ‘instrumental’ insofar as it preserved order in a society that valued order above all things. It is clear, then, that Horwitz uses the word ‘instrumental’ in a heightened sense to mean reshaping private law so that it may serve as “a creative instrument for directing men’s energy toward social change” (p. 1). To effect social change within a common law tradition inherently biased against change required a transformation not only of legal rules but of the role of judge-made law in the society. Courts shed their passivity, to the point of assuming a quasi-legislative role. Early nineteenth century judges understood — Coase to the contrary notwithstanding — that legal rules do matter, that “different sets of legal rules would have differential effects on economic growth, depending both on the distribution of wealth they produced and the level of investment they encouraged” (p. xvii, note).


Property Law

The property-rights emphasis in the New Institutional Economic History makes knowing what property rights _are_ a matter of importance, what they _were_ a matter of greater importance, and that they are not what they were, and why, of greater importance still. The substance of Horwitz’s argument begins with property law the transformation of which ran parallel to a transformation in the conception of property itself, from an estate to be tranquilly enjoyed (in the eighteenth century), to a resource to be productively employed (in the nineteenth). The rubric of property law included riparian and other water-power rights, tenant rights, and the law of ‘waste.’ Eminent domain, nuisance, negligence, and damages fall under this rubric as well, but rules changes in those areas figured so conspicuously as subsidies to growth sectors in the economy that Horwitz treats them as such in a separate category.

Land use in the eighteenth century was constrained within two legal maxims that seem at first glance to check each other, but in fact were mutually reinforcing. On one hand stood Blackstone’s definition of private property rights as absolute: “the sole and despotic dominion which one man claims and exercises over the external things of the world in total exclusion of the rights of any other individual in the universe.” On the other stood the ancient common law principle in which property rights appear to be conditional: sic utere tuo, ut alienum non laedas, ‘so use yours that others be not harmed’. But far from mitigating the despotism of A’s dominion, sic utere extended it, for it conferred on A the power to prevent any use by B of his own land that disturbed A’s quiet enjoyment.

Property law would have to change to accommodate the nineteenth century, and it was with respect to rights in the use of water that judges, “listening to the future,” began the transformation. Two iconic cases, Merritt v. Parker (New Jersey, 1795) and Palmer v. Mulligan (New York, 1805) defined the era. Both are riparian rights cases in which a new user constructed a mill upstream or downstream of a prior user, obstructing, diverting, diminishing the flow of water or back-flooding the land. In 1795 the plaintiff won on the common law principle of aqua currit et debet currere, ‘water runs and ought to run.’ In 1805 the defendant won on efficiency grounds: that “explicit consideration of the relative efficiencies of conflicting property uses should be the paramount test of what constitutes legally justifiable injury” (p. 38). On the cusp of the new century the rules of the game had changed.

Palmer v. Mulligan may have been the tipping point that Horwitz tells us it was, but in fact it was challenged, Horwitz tells us, by other judges and by Joseph Angell in his treatise on watercourses. As late as 1827, in Tyler v. Wilkinson, the much-esteemed Justice Story of Massachusetts attacked the Palmer decision as “unjust.” His rejection of the ‘efficiency’ and ‘balancing’ standards that had been determining in Palmer “spawned a line of decisions opposed to all diversion or obstruction of water regardless of any beneficial consequences, [and] marks the nineteenth-century high point in articulating the traditional conception of property that had already come under attack” (p. 39, emphasis mine). In another watercourse case, Cary v. Daniels (1844), Chief Justice Shaw “stated a legal doctrine strikingly different from Story’s earlier formulation [in Palmer]” (p. 41). Judge Morton came down on the other side of Story on the Charles River Bridge’s claim of prescriptive rights. The reader, then, is tempted to ask which — Palmer or Tyler? Story or Angell or Morton or Story? — correctly caught the spirit of the age? Could Horwitz be accused, here and indeed throughout, of selection bias in the judicial opinions upon which he chose to hang his argument? In the age of waterpower there must have been hundreds of riparian rights cases in state courts all over the country.5 How much and how wide was the difference of opinion among sitting state court judges on each of the pivotal issues that made new law? By what process did one opinion become regnant, diffuse, and become new law? Had Horwitz wanted to construct an operationally testable hypothesis, these are the questions, I should have thought, with which he would have dealt. It is early in this review to make this point, but it should, I think, be made.

If ‘for example’ is not proof, neither is it irrelevant to a proof. If the “professional historians and other nonlegally-trained scholars” for whom The Transformation of American Law was written (p. x) are persuaded by it, it will be in large part because of the sheer weight of the evidence, the enormous amount of corroborating testimony with which Horwitz has illuminated a critical juncture in the history of ideas in America.


Mill Acts

The reinterpretation of eighteenth-century Mill Acts provided another opportunity for nineteenth-century courts to shed the neutrality with which the common law had clothed them and overtly to take sides in the “sacrifice of ‘old’ property for the benefit of the ‘new'” (p. 63). “Under the Mill Acts, an owner of a mill situated on any non-navigable stream was permitted to raise a dam and permanently flood the land of all his neighbors, without seeking prior permission” (p. 48). Mill Acts had been enacted by provincial legislatures as early as 1713 to privilege colonial gristmills on the ground that they were private enterprises exercising a public function. This gave the floodings something of the character of a taking in eminent domain. A jury set the height of the dam, the time of the flooding, and the compensation. In return for the remedies provided in the Acts, the plaintiffs relinquished their common law right to sue for trespass, for punitive damages, for nuisance, or to seek an injunction. But in 1827, the Massachusetts court extended to textile, paper, and saw mills, unaffected with any public interest, the same privileges and immunities, allowing them “virtually unlimited discretion to destroy the value of lands far in excess of any benefit they might possibly receive,” while at the same time to “escape damages entirely by showing that the irrigation benefits the plaintiff received from having his lands over-flowed more than outweighed any injury he had incurred” (pp. 50-51). A sterner lesson could be drawn from this but for the fact that the Mill Acts, in response to public outrage, were repealed in 1830.


Eminent Domain

Immediately after the Revolution, the “release of energy” that Willard Hurst would teach us to associate with the buoyant business of settling Wisconsin, could already be felt in the ambitious infrastructure projects being undertaken in the East. At such a time, “the most potent legal weapon” in the quiver of an instrumental jurisprudence is the power of eminent domain. Late in his book, Horwitz says of its potential to take and redistribute wealth that it was “the one truly explosive legal ‘time bomb’ in all antebellum law” (p. 259). That a State should have such a power inheres in the principle of sovereignty itself. Under English law, all who hold land do so at the sufferance of the Sovereign. Under U.S. law, where sovereignty resides in the whole people represented by the states, those states possess “unlimited power”(p. 65) to take private property for public use — even, in the case of railroads, to take private property for private use. The argument has gone even further: even to take private property for private use without compensation, for (argued counsel for the railroads) any limitation of the power of eminent domain is a limitation of sovereignty (p. 65). And, indeed, until the ratification of the fourteenth amendment carried the Bill of Rights to the States, the clause of the Fifth Amendment that reads, “nor shall private property be taken for any public use without just compensation” bound only the Congress. Most state constitutions had no such provision even as late as 1820.

Aware, as they always were, that the ad hoc outcomes of eminent domain cases could set precedents that would impact significantly upon the cost of future development projects across the continent, the courts became involved in eminent domain takings only when disputes arose over compensation. How, for example, should the land be valued? By the current owner’s purchase price? By its current price? By its estimated future price given the trend rate of growth of population and land prices? Or by speculating as to its value after the projected construction has secured its market access? Any one of these, even the most generous, could have a perverse outcome: in one of the many cases involving abutters injured by the diversion of water during construction of the Erie Canal, compensation was denied entirely on the ground that the “general increase in land values and access to markets” that might arise as a consequence of the Canal was sufficient remedy (p. 69).

And how should the consequential destruction of property be compensated? In the Erie Canal cases, the court exempted consequential injuries from liability, and never did make clear the grounds on which it did so. Horwitz suggests five: ? the risk of consequential damage was already discounted in the price originally paid for the land; ? the threat of appropriation by the state was already discounted in the price originally paid for the land; ? the injury was damnum absque injuria, (defined in Black’s Law Dictionary as “a loss which does not give rise to an action for damages against the person causing it,” just something to be borne “as part of the price to be paid for the advantages of the social condition”); ? the injury resulted from a breach of contract that could not have been anticipated; ? the injury was entirely predictable, but it is not clear who should bear the cost. In the event, “Landowners whose property values were impaired without compensation in effect were compelled to underwrite a portion of economic development”(p. 70).



The question of who should bear the cost also lies at the center of the negligence doctrine. The issues in negligence law have attracted considerable attention, not only because it is “the largest item of business on the civil side of the nation’s trial courts,” but also because Richard Posner’s well-known analysis of appellate-level determinations in cases of railroad and street railway accidents launched the field of Law and Economics (Posner, p. 29). In that exhaustive study, Posner tested his hypothesis that sitting justices aimed to set damage awards in such a way as to ‘make the market work'; that is, “to bring about an efficient level of accidents and safety” (Posner, p. 34). “The only recognized basis for invoking the legal process to shift an accident loss from the victim to another party is the expectation of improving the efficiency of resource use.” If, as a result of an accident, the magnitude of the loss, L, weighted by the probability or forseeability of it happening, a, is less than the cost, C, of preventing it, then economic welfare requires that the injurer not assume the costs of prevention. The injurer — it was so often the railroad — would do better, both for itself and with respect to maximizing some social welfare function, to assume liability and pay full damages to the victim rather than incur the cost of installing guard-rails, fences, gates and bells at every cross-road, automatic coupling devices, fire extinguishers, etc. to prevent further accidents. The observed behavior of judges confirmed Posner’s proposition. But his data are for the period 1875-1905, leaving room for Horwitz’s discussion of the prior history of negligence to make an important contribution.

He traces the stages in the evolution of the negligence standard from the an eighteenth-century action for nuisance in which the defendant was held strictly liable; to nonfeasance or failure to perform a duty required by law or by contract; to carelessness, as in collisions between non-contracting strangers, where the joint-ness of the act makes causation (and therefore liability) difficult to determine; to contributory negligence where the assumption of the plaintiff’s complicity can defeat his claim against the defendant; to a standard, used in railroad and bridge collapse cases, where there is a defendant at fault but no liability on the rule that “injury brought about by risk-producing activity was itself no ground for imposing legal liability” (p. 97); and finally: to the use of the negligence standard as an instrument of social change. Judges, says Horwitz, were “encouraged to regard themselves as social engineers and legislators, whose decisions to impose liability were influenced by broader considerations of social policy” (p. 88). The rule governing the outcomes in Posner’s sample would, I should think, fit here.

In order to immunize new forms of enterprise against the huge costs of strict liability, the watering-down of negligence doctrine provided a significant subsidy to the dynamic edge of the American economy.6 As in the case of tariffs on British textiles, it is fair to ask, was this subsidy necessary? If it was, it should have been done, says Horwitz, through (progressive) taxation rather than through changing legal rules — a criticism he makes throughout. There are interests of substantive justice as well as of law at stake here, and, as should be clear by now, Horwitz has taken sides. “The increasingly ruthless application of the private law negligence principle . . . became a leading means by which the dynamic and growing forces in American society were able to challenge and eventually overwhelm the weak and relatively powerless segments of the American economy” (p. 99).



Contract law may be the area respecting which the nineteenth-century transformation of American law was at once most thoroughgoing and most relevant to the concerns of modern economic history. ‘Thoroughgoing’ in that, as Horwitz tells it (and he tells it with passion and eloquence), after the Revolution contract law was torn root and branch from its origins in equitable conceptions of substantive justice, inherent fairness and objective value, and given over, entire, “to articulate the ‘will theory’ with which American doctrinal writers expressed the ideology of a market economy in the early nineteenth century” (p. 185). ‘Relevant’ in that economic historians have in recent years appropriated from contract law the whole apparatus of modern contract theory — implicit contracts, incomplete contracts, principal-agent interactions, internal labor markets, and the implications of all these for the boundaries of the firm and the transacting that takes place within them. (See for example, Hart (1995), Holmstrom and Robert (1998), and Rosen (1985).)

Evidence of the shift from “the old learning” (that contractual obligation derives “from the inherent justice or fairness of an exchange”) to the new (that contractual obligation shall reside solely in “the convergence of the wills of the contracting parties”) (p. 160) was made manifest as early as 1790 in the first legal action to acknowledge expectation damages. With the emergence of financial markets, “the function of contracts correspondingly shifted from that of simply transferring title to a specific item to that of ensuring an expected return” (p. 161, emphasis mine). Price could no longer be thought of as a stable, objective, customary, absolute measure of value when it was in the very instability of prices that gains were to be made and losses from foregone gains sustained. Henceforth the courts would acknowledge that it is “the consent of the parties alone that fixes the just price of any thing, without reference to the nature of things themselves, or to their intrinsic value” (p. 160).

It is curious to see the extent to which, in this telling, eighteenth-century legal rules are made to rest upon the foundation of intrinsic or objective value. To borrow Calvin’s devastating comment on free will: “What end could it answer to decorate a thing so diminutive with a title so superb?” There could have been little, if any, experience of price stability in the lives of this generation of judges. They had lived through the extreme price volatility of 1720-40, the simultaneous circulation of several paper currencies denominating several sets of prices with only an arbitrary relation to one another, the steady depreciation of each colony’s silver currency on the British pound sterling, and the spectacle of the Continental vanishing daily. ‘Objective value’ must have been less a ‘foundation’ than an “instrumental conception” in the service of a static social order. In light of the dominant place Horwitz gives throughout his book to this shift from objective to subjective value, one might almost say that the emergence of a market economy had a more profound impact upon the law than it had upon the real economy.

The consequential link between subjective value and the will theory of contract is nowhere more clearly illustrated than in the emergence of caveat emptor and the triumph of express over implied contracts. Whereas the most important aspect of the eighteenth-century conception of exchange had been an equitable limitation of contractual obligation if the underlying exchange were unfair, under modern will theory contractual obligation was bounded entirely by the ‘meeting of minds’ as expressed in the contract. The existence of informational asymmetries, even if establishing the inherent inequality of the parties, would no longer invalidate a contract as unfair. No provision of the contract — having been “created by it alone” (p. 182) — could be other than that expressly agreed to, even if the terms of that agreement contravened rules of law. And thus, by 1825, “the chasm” (p. 186) between express and implied contracts had emerged. The bench’s treatment of nineteenth-century labor contracts would make that chasm a bitterly contested terrain.

Applying the will theory to labor contracts The whole corpus of contract theory today is based on the recognition that it is impossible to write a complete contract. “It is simply too difficult to anticipate all the many things that may happen … [I]t is clear that revisions and renegotiations will take place. In fact, the contract is best seen as providing a suitable backdrop or starting point for such renegotiations rather than specifying the final outcome … [Both parties] are looking for a contract that will ensure that, whatever happens, each side has some protection, both against opportunistic behaviour by the other party and against bad luck” (Hart, p. 2). To interpret and enforce a contract as ‘entire’ that even under the best of circumstances is incomplete, enlists something beyond legal rules; it enlists the sympathies of the judges. Horwitz’s thesis, of course, is that the sympathies of nineteenth-century judges were, by this time, allied to commerce and industry and quite orthogonal to labor’s interests. The judicial zeitgeist, having “destroyed most substantive grounds for evaluating the justice of exchange” (p. 201), reified in its stead “the momentary intention of the parties” (p. 196).

Based on the doctrine that “an express contract bars an action in quantum meruit,” laborers who quit on a long-term contract were barred from recovering wages for time served. “In no case,” said the court in Stark v. Parker (Massachusetts 1824), “has a contract in the terms of the one under consideration been construed by practical men to give a right to demand the agreed compensation before the performance of the labor, … it would be a flagrant violation of the first principles of justice to hold it otherwise” (Karsten, p. 170). This precedent stood, with only one “solitary challenge” — Britton v. Turner (New Hampshire 1834) — until the 1870s.7 Horwitz strikingly underscores his point by presenting a parallel case: while laborers were denied recovery, building contractors who quit on an express contract were allowed to recover, both in quantum meruit for labor services and in quantum valebant for materials used (Hayward v. Leonard (Massachusetts 1828). “While the judges who adhered to the distinction between labor and building contracts never acknowledged an economic or social policy behind the distinction, it seems to be,” says Horwitz, “an important example of class bias” (p. 188).

Horwitz has been sharply taken to task for his analysis of labor contracts, and the critics have come at him from all sides, disputing both the benign class relations he attributes to the eighteenth century and the exploitative class relations he attributes to the nineteenth century. Peter Karsten (1997) and Robert J. Steinfeld (1991) are among those who have re-examined these issues in recent years. Karsten disputes Horwitz’s allegation of discrimination in the contrast between Stark v. Parker and Hayward v. Leonard. “I identified some sixty-eight ‘contractor’ cases in American courts,” he writes, “and found very little difference between the ways that courts treated ‘contractors’ and other workers. Contractors fared no better, no worse, than laborers in suits to recover in quantum meruit (and quantum valebant)” (Karsten, p. 186).

And as to the implication that the eighteenth-century common law was more equitable, more just, less punitive, and less coercive than judge-made law in the nineteenth, Karsten responds, “One searches in vain for an idyllic past in the history of British labor law” (Karsten, p. 159). Karsten and Steinfeld both sketch the sorry chronicle of over 550 years of oppressive English labor legislation and jurisprudence, from the Ordinance of Labourers (1349) to the Master-Servant law (which lasted, amended, from 1747 to 1875), during which quitting on a contract not only forfeited wages, but was prosecuted as criminal theft of the master’s property in his servant’s labor. The servant was brought before a magistrate and punished with “wage abatement, imprisonment, and whipping” (Karsten, p. 159), “and a fine largely exceeding the amount of his wages” (Steinfeld, p. 151). “As late as 1875 about two thousand agricultural laborers were still being convicted and imprisoned each year for leaving or threatening to leave their employers” (Karsten, p. 160). In his most recent book, I understand that Steinfeld has found 10,000 such prosecutions each year.

In defense of nineteenth-century American labor law, by contrast, “no one even imagined that [laborers] might be compelled to serve out their time. … Direct coercion would not be permitted, but legally sanctioned economic compulsion would. And this,” says Steinfeld, “made perfect sense. It comported with the emerging model of labor that left to the laborer the formal decision whether to stay or to go” (Steinfeld, pp.150-51).

Our interest as economic historians in the judicial enforcement of these contracts is in their labor-market consequences, for it is upon mobile resources and minimal transaction costs that the efficiency of a labor market depends. In his article on negligence theory, Posner had remarked “the affinity between economic market and common law adjudication as methods of allocating resources” (Posner, p. 75). What efficiency argument justifies the employer’s capture of the worker’s wages? The productivity-enhancing consequences of coercive discipline? But in Clark’s (1994) model of factory discipline it was enough that the worker ‘hired’ the coercive boss; he did not have to forfeit all his earnings to pay him. Then, did the employer need to be compensated by the worker for the savings he must now forgo on search costs, implicit contracting, labor hoarding, and lock-in that had motivated the annual contract in the first place? If so, the loss to the worker should vary inversely, rather than directly, with time worked.

The most plausible explanation is, of course, the deterrent effect. But in my own research on contract labor on Massachusetts farms, 1750-1865, where the quit rate was about ten percent of hires, the account books of the employing farmers showed that in no case were earnings withheld (Rothenberg, p. 207). America’s most ‘peculiar institution’ may not have been plantation slavery — after all, almost every agrarian society designs institutions to constrain the mobility of its labor force — but the genuinely free labor on New England farms.

But with this elegiac insertion from my own work I have broken the mood of Horwitz’s book, which at this point is utterly bleak. With the transformation of contract, having “neutralized” substantive justice, objective values, the power of juries, earlier protective or regulatory doctrines, and moral duties, “judges and jurists could no longer ascribe any purpose to legal obligations that were superior to the expressed ‘will’ of the parties. As contract ideology thus emasculated all prior conceptions of substantive justice, [the patently false assumption of] equal bargaining power inevitably became established as the inarticulate major premise of all legal and economic analysis. The circle was complete; the law had come simply to ratify those forms of inequality that the market system produced” (p. 210). The “affinity” between law and economics that Posner had remarked in 1875, Horwitz has found at least a generation earlier.


The Development of Commercial Law: Negotiability, Marine Insurance, Usury

While the responsibility for the transformation of most areas of private law fell upon (or was appropriated by) the state courts, the development of a body of commercial law — having to do with negotiability, usury, and marine insurance — was the preserve of the federal judiciary. Of these areas, negotiability, which lay at the heart of all commercial relations, presented the most difficult contradictions with the common law for it intruded upon the privity of contract.

Ideally, full negotiability requires that endorsed notes “should circulate as freely as money,” which, if one thinks about what money is, means that a subsequent innocent holder of the note “might depend on payment, regardless of any unknown defects in the obligation arising out of the original transaction between distant parties” (p. 213). To illustrate, following Horwitz: A, debtor to B, can be sued by C to whom B had transferred A’s note, even if no understanding had passed between A and C. And if C had endorsed the note over to D not knowing that A had defaulted, D could sue B, a prior endorser. Most crucial — and this is what distinguishes fully negotiable instruments from assignments — suppose A has already paid the note to B; the courts will protect D, an innocent purchaser of the instrument, from the assumption of any risk arising from B’s attempts to defend himself against D’s suit. It was with respect to this last particular that the state courts, particularly in Massachusetts, balked, until the federal court overruled them in 1809, thereby taking the first step in creating a general commercial law. For Horwitz this step was doubly important: it established full negotiability, and it deposited commercial disputes in the jurisdiction of the federal courts, thereby taking them from the “uncongenial anti-commercial environment often found (sic!) in state courts” (p. 252).

Marine insurance in the eighteenth century had been operated out of taverns, inns, and coffee-houses, by merchants and shipowners for their mutual protection; “it had never been intended for profit” (p. 227). Each voyage was a unique event; each transaction was personal; only extraordinary perils at sea were covered; and the underwriters held themselves strictly liable in all cases, unless it could be proved that the ship was unseaworthy, or an agent was negligent (called ‘barratry’).

Sometime during the remarkably fruitful period 1790-1820 came “the gradual acceptance of what we might call an actuarial conception of social risk … a social consciousness that comes to conceive of a greater and greater portion of activity as appropriately within the realm of chance” (p. 228). With the chartering in the 1790s of incorporated insurance companies with large pools of capital, marine insurance law — like bankruptcy and negligence law — devolved upon an actuarial conception of insurable risks. Losses were no longer unique events, but were predictable according to a probability distribution calculated on the experience of hundreds of voyages. Unseaworthiness and barratry were no longer bars to recovery against the insurance companies; moral responsibility became attenuated, and while the risks of moral hazard increased, insurance companies protected themselves by requiring a variety of warranties and representations any breach of which would defeat recovery. For example, “any deviation from the stipulated route of a marine voyage would void a policy even without a showing that it had increased the risk of loss” (p. 231).

“The ultimate triumph of a market ideology” (p. 241) was the movement to abolish usury laws. It is noteworthy, however, that by the Civil War, seven states still voided usurious contracts, penalizing them with fines and/or forfeiture of principal, and every state except California maintained some regulation over the legal rate of interest (p. 243), but by 1860, “it was no longer possible to recapture an earlier and more coherent system of premarket morality” (p. 245) in the context of which this lingering survivor of the ‘just price’ any longer made sense.



As economic historians have been made increasingly aware of legal institutions, if not by Ronald Coase then by Douglass North, no one, I think, any longer doubts that they are intimately related to economic development. But can we understand that relationship without positing a direction of causation? For Horwitz, the transformation of American law after the Revolution appears to have been so thoroughgoing, so deliberate, so willed that it is possible to read him as suggesting that the causation might actually have run counter-intuitively: from legal change to economic change, from pro-entrepreneurial judges to instrumental legal rules; from instrumental legal rules to the institutions of corporate capitalism. And now, twenty-five years after The Transformation of American Law, the theoretical work currently being done by Andrei Shleifer, Robert Vishny, Edward Glaeser, Daron Acemoglu, and other New Political Economists can be read as suggesting that such a thing is not only possible, but a direction worth pursuing in the development field. (See for example, Glaeser and Shleifer, forthcoming.)

Horwitz is not a Luddite. His target is not the process of economic development per se. It is that the courts appropriated so much of the process, and by so doing effected the transformation by obiter dicta rather than by legislation; by changing legal rules rather than by accommodating conflicting interests; by debt- and equity-financing rather than by progressive taxation. It is that, as a consequence, “growth was subsidized by victims of the process” (p. xvi).

Much of Horwitz’s argument depends on his belief that something precious was lost in the passing of the eighteenth century. Objective value, just price, equitable standards, fair contracts, symmetrical information, implied contracts, substantive justice, compensated takings, strict liability: the furniture of “the heavenly city of the eighteenth century.” It can all be compressed into one of his sentences, the belief “that unequal bargaining power was an illegitimate form of duress” (p. 184).

As the book moves through the antebellum period and the lineaments of the transformation harden in place, Horwitz’s own deeply moral commitment to humane values becomes increasingly engaged. The rhetoric grows angrier, the sarcasm more difficult to conceal. It makes this wonderful book exciting to read, but more problematic. One hates – I hate — to disagree with him.


1. Becker (1932), p. 15, quoting Aristophanes. The full quote is “Whirl is king, having deposed Zeus.” 2. The phrase is from Gerschenkron (1968). 3. The phrase is from Nelson (1975). 4. Pound goes on to say, “Today national law schools, teaching law, not laws, and teaching law in the ‘spirit of the common legal heritage of English-speaking people’, are working effectively to preserve this uniformity, against many forces of disintegration” (p. 83). 5. Riparian rights are property rights to the banks of non-navigable waterways, i.e., of waterways not subject to the ebb and flow of the tides, and to the waters up to the mid-point of the stream. 6. Subsidy? Posner replies, “It is true that if you move from a regime where railroads are strictly liable for injuries inflicted in cross accidents to one where they are liable only if negligent, the costs to the railroads of crossing accidents will be lower, and the output of railroad service probably greater as a consequence. But it does not follow that any subsidy is involved — unless it is proper usage to say that an industry is being subsidized whenever a tax levied upon it is reduced or removed” (Posner, p. 30). 7. Karsten has an extended discussion of Britton v. Turner on pp. 157-82. Apparently it was not at all a “solitary” case; it was “hotly debated” in many state courts, and “before the Civil War had ended, five states had adopted the Britton v. Turner standard” (p. 175). Others had recognized it as more equitable but so radical as to require a legislative rather than judicial initiative.


Becker, Carl L., 1932. The Heavenly City of the Eighteenth Century Philosophers, New Haven: Yale University Press.

Clark, Gregory, 1994. “Factory Discipline.” Journal of Economic History 54 (1), pp. 128-163.

Friedman, Lawrence M., 1973. A History of American Law. New York: Simon & Schuster.

Gerschenkron, Alexander, 1968. Continuity in History and Other Essays. Cambridge, MA: Harvard University Press.

Glaeser, Edward and Andrei Shleifer, forthcoming. “Legal Origins,” Quarterly Journal of Economics .

Hart, Oliver, 1995. Firms, Contracts and Financial Structure. Oxford: Oxford University Press.

Holmstrom, Bengt and John Robert, 1998. “The Boundaries of the Firm Revisited.” Journal of Economic Perspectives 12 (4), pp. 73-94.

Jameson, J. Franklin Jameson, 1926. The American Revolution Considered as a Social Movement. Princeton: Princeton University Press.

Karsten, Peter, 1997. Heart versus Head: Judge-Made Law in Nineteenth-Century America. Chapel Hill: University of North Carolina Press.

Kuznets, Simon, 1968. “Reflections on Economic Growth,” in Toward a Theory of Economic Growth. New York: W.W. Norton.

Nelson, William E., 1975. The Americanization of the Common Law: The Impact of Legal Change on Massachusetts Society, 1760-1830. Cambridge, MA: Harvard University Press.

Posner, Richard A., 1972. “A Theory of Negligence.” Journal of Legal Studies 29, pp. 29-96.

Pound, Roscoe, 1938. The Formative Era of American Law. Gloucester: Peter Smith.

Rosen, Sherwin, 1985. “Implicit Contracts: A Survey.” Journal of Economic Literature 23 (3), pp. 1144-75.

Rothenberg, Winifred, 1992. From Market-Places to a Market Economy: The Transformation of Rural Massachusetts, 1750-1850. Chicago: University of Chicago Press.

Steinfeld, Robert J., 1991. The Invention of Free Labor: The Employment Relation in English and American Law and Culture, 1350-1870. Chapel Hill: University of North Carolina Press.

Winnie Rothenberg is Associate Professor of Economics at Tufts University. She is the author of From Market-Places to a Market Economy: The Transformation of Rural Massachusetts, 1750-1850 (Chicago: University of Chicago Press, 1992), and of a number of articles in Journal of Economic History, one of which, published in 1981, won the Arthur H. Cole Prize for best article. She has served as Vice President of the Economic History Association and as a member of its Board of Trustees.

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):19th Century

The History of Consumer Credit: Doctrines and Practices

Author(s):Gelpi, Rosa-Maria
Julien-Labruyère, François Ju
Reviewer(s):Calder, Lendol G.

Published by EH.NET (August 2000)

Rosa-Maria Gelpi and Fran?ois Julien-Labruy?re, The History of Consumer

Credit: Doctrines and Practices. Translated by Mn Liam Gavin. New York: St.

Martin’s Press, 2000. xx + 190 pp. $59.95 (hardbound), ISBN 0-312-22415-X.

Reviewed for EH.NET by Lendol G. Calder, Department of History, Augustana

College, Rock Island, IL.

Is credit good for us? Dante didn’t think so. In his Inferno, we find usurers

consigned to the seventh circle of hell, doomed to “roam round and round” among

their fellow inmates, the blasphemers, murderers, sodomites, and others who

practiced violence against God and nature. Dante doesn’t say so, but he leaves

us free to speculate that moneylenders continue to practice their trade in

hell, lending money at interest to the damned. If so, it would make Visa’s

claim to be “everywhere you want to be” seem a little too modest! But enough of

this credit bashing, plead the authors of this little volume on the history of

consumer credit. According to Rosa-Maria Gelpi and Fran?ois Julien-Labruy?re,

credit is too often made to be a scapegoat during times of social and economic

crises, so that even today when we look more kindly on credit than Dante,

consumer credit continues to be blamed for everything from business recessions

to personal bankruptcies to society’s moral degeneracy. It’s enormously unfair,

argue Gelpi and Julien-Labruy?re, who invite us to accompany them on a “stroll

through history” that will reveal just how good credit really is for us. As

“the cornerstone” of economic growth (p. 84), as “one of the greatest promoters

of social mobility” (p. 171), and as the “single greatest factor of social

integration” (p. 95), they conclude that consumer credit is one of the most

reliable indicators of advanced civilization, if not an important cause of it.

But if all this is true, why has consumer credit had to battle so hard and so

long against a shameful stigma of wastefulness and wrongdoing to achieve a

moral and economic legitimacy? Gelpi and Julien-Labruy?re present their history

as a search for the origins of the cloud of bad feeling that surround this most

crucial institution of modern consumer societies. The crux of their argument is

that present day attitudes about credit-attitudes rarely stated as propositions

but that operate instead as a “mute yet active unconscious”-are outmoded and

debilitating “hangovers” from an earlier era in the history of western

societies, an era when social practices were inspired by theology and ethics

rather than by the economy of free markets, as they increasingly are today. In

other words, consumer credit struggles against a massive case of “cultural

lag.” The volume’s subtitle-“Doctrines and Practices”-neatly summarizes the

tale told in this book. Through the sixteenth century and beyond, legions of

shortsighted theologians and philosophers tried to strangle credit in the noose

of religious dogma, with the end result that credit was “more or less forbidden

but more or less practiced because more or less necessary” (p. 95). But since

the Reformation and Enlightenment, and primarily through the shining example of

the Americans, religious doctrine has been replaced by economic practice as our

fundamental social gyroscope, so that lending and borrowing are increasingly

viewed more properly as economic concepts, free of unnecessary moral baggage.

Today, in societies where economic “practice” is given primacy over moral and

religious “doctrines,” a bright future is being built on the basis of economic

growth, responsible household budgeting and greater “self-actualization”

through credit-financed consumption.

If all this sounds like a textbook case of the “Whig interpretation of

history,” well, it is, though of a refined and smartly written sort. Both

authors are high-ranking officers for Cetelem, the French personal finance

company that over the last five decades has worked to modernize European

household credit on an American model (Gelpi is also Professor of Economics at

the Free University of Lille). Given their day jobs, the authors’ spirited

defense of consumer credit is hardly surprising. Of the criticism of credit

there is no end, which means that Gelpi and Julien-Labruy?re are following a

well-worn path blazed in the United States in the 1930s by the economist Morris

Neifeld, who worked as a credit analyst for Beneficial. Neifeld, whose

Personal Finance Comes of Age (1939) resembles the work under review

here, labored tirelessly though his writings to elevate the status of his

profession. But in terms of eloquence and wit, The History of Consumer

Credit sets a new standard for defenses of consumer credit.

Still, glorifying the present at the expense of the past has its costs, and

they are manifest here. The biggest problem is that the authors never really

succeed in helping us to understand why so many otherwise smart people-from

Aristotle to Ezra Pound-opposed on principle the lending of money at interest,

or why their ideas resonated so long in the public mind. Consider the treatment

given to John Calvin, himself an innovator when it came to new thinking about

credit: “[Calvin’s] work consisted in giving a new faith to the classes who,

through their social skills, were destined to dominate the future. This

supposes a relatively advanced economic organization, and Calvin built his

moral system on such an organization” (p. 50). A page later, we are told, “For

Calvin, the only good deed was worldly success” (p. 51). Reductiveness on this

scale is not easy; one has to work hard at it. When every person and system of

belief is viewed through the narrow lens of what is good for the development of

credit, when economic progress and “social integration” into the wonders of

consumerism are the only ends that count, it becomes impossible to understand

what all the fuss over usury was really about.

If the history is whiggish, it is also mostly recycled, at least through the

first eight chapters. Gelpi and Julien-Labruy?re begin their story in

Mesopotamia, where the Code of Hammurabi (1792-1750 BC) established the first

known law defining and regulating usury. Moving briskly on, they describe the

business of credit in ancient Greece, the Roman Empire, Gothic Catalonia (where

we see the first documented case of a European pawnbroker, 1000 AD), medieval

Italy (which established the first public pawnshops, known as monts-de-pi?t?s,

in the fifteenth century), northern Europe at the time of the Reformation, and

the United States, whose experience is “central” to the history of consumer

credit because, beginning in the nineteenth century, it “offered to build the

future” on the installment plan. Based on standard secondary sources, this part

of the story involves a familiar cast of villains and heroes. Among those who

come off looking particularly stupid or close-minded is Aristotle, who,

declaring money to be sterile, decried interest as being a revolt against

nature (silly old Aristotle, who “has only value judgments to offer when it

comes to economics” (p. 8). Other villains in this tale include the Hebrews,

the first people to condemn interest-bearing loans; the Church Fathers,

especially Saint Basil, who began more than 1000 years of a total ban on

interest by the Church; Charlemagne, who declared the first secular bans on

usury; Dante, of course; the Inquisition at the time of the Councils of Lyon

(1274) and Vienne (1312); and Catholic Europe after the Reformation, which

doomed southern Europe to centuries of economic decadence, thereby offering “a

lesson in how to fail to modernize an economy, while retaining one’s guilt

feelings!” (p. 66)

Opposed to this deadwood are the heroes of modern credit, men who were smart

enough to see through Aristotle and brave enough to relativize the Scriptural

prohibitions against interest, recognizing that a new type of economy was

coming into being where wealth was created, not just plundered or commandeered.

These include Scholastic theologians such as Thomas Aquinas, the Reformers

Luther and Calvin, and greatest of all, Enlightenment champions of reason and

liberty such as Jeremy Bentham and Anne Robert Jacques Turgot. Lengthy

quotations from the latter two figures are included in the text, as Gelpi and

Julien-Labruy?re recommend that all who are interested in contemporary debates

over consumer credit can do no better than to read Bentham’s Defense of

Usury (1787) and Turgot’s Memoir (1770), which will persuade

clear-thinking persons that the strict regulation of credit markets hurt the

poor most of all while making criminals of everyone else.

Beyond the assertive and lively prose (which is marred in this English edition

by a poor job of copy editing that allows too many misspellings and missing

words), the strength of this book lies in the final two chapters. It is only

recently that consumer credit has begun to receive from historians the

attention it deserves. Part of the reason for this is that credit is a commerce

deeply cloaked in confidentiality (as Gelpi and Julien-Labruy?re point out,

until recently the guiding principle of public relations for lenders was “to

live happily you must live in secret”). What Gelpi and Julien-Labruy?re bring

to the history of consumer credit is valuable insiders’ knowledge about the

credit business in Europe over the last hundred years. Much of this information

is interesting and new. For example, I was surprised to learn just how closely

the European development of consumer credit has mirrored the history of credit

in the United States, though with significant time lags between countries.

Great Britain passed its first laws affecting consumer credit in the late

nineteenth century, while Italy only did so in 1992!

This book seems to have been written primarily to influence the opinions of

European policymakers in Brussels, who the authors would like to see taking a

hands off approach to credit markets so governments can treat the causes of

economic woes (e.g., high taxes, low investment) rather than mere symptoms

(e.g., overindebtedness). This is a defensible wish, but there are risks

involved when looking for a usable past, risks the authors seem unaware of.

When packaged with facile claims such as this-“A healthy morality always

coincides with commercial wisdom” (p. 55)-or with shaky historical claims such

as this-“The history of consumer credit in the United States is almost entirely

free of historic influences” (p. 119)-some readers will find even the credible

claims in this book rather suspect.

Lendol Calder, author of Financing the American Dream: A Cultural History

of Consumer Credit (Princeton University Press, 1999) is assistant

professor of history at Augustana College and a Carnegie Scholar with the

Carnegie Academy for the Scholarship of Teaching and Learning.

Subject(s):Household, Family and Consumer History
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative