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The London Stock Exchange: A History

Author(s):Michie, Ranald C.
Reviewer(s):Neal, Larry

Published by EH.NET (August 2000)

Ranald C. Michie, The London Stock Exchange: A History. Oxford: Oxford

University Press, 1999. xiii + 672 pp. $110 (cloth), ISBN: 0-19-829508-1.

Reviewed for EH.NET by Larry Neal, Department of Economics, University of


Among financial historians, it is now commonplace to regard the emergence of

today’s global capital market as a resumption of the progress that had been

made toward creating a global market in goods, labor, and capital in the period

from 1850 to 1914. Ranald Michie, the preeminent historian of the London Stock

Exchange in that bygone halcyon era, presents the story of how the London Stock

Exchange rose to preeminence in that earlier international capital market, but

then suffered through the disruptions of the international economy created by

two successive world wars and the financial crises that followed them, and is

now still struggling to retain a reputable place in the new global capital

markets that have emerged over the past thirty years. Written on the basis of

an intensive examination of the records of the London Stock Exchange, his work

will now be the standard reference on the London Stock Exchange, replacing old

classics such as E. V. Morgan and W. A. Thomas, The Stock Exchange: Its

History and Functions, (London, 1961), and even Michie’s earlier work,

The London and New York Stock Exchanges 1850-1914, (London, 1987). The

timing of its appearance is especially fortuitous as the current members of the

London Stock Exchange decide how to vote in September 2000 about the proposed

merger with the German stock exchange. Will the smaller members lose their

livelihood from the competition of the more efficient German firms? Or will the

merger preserve their incomes from the competition of electronic market makers

not constrained by the rules of a formal exchange? Or will the largest firms be

willing to buy them out on favorable terms in any event?

These are the questions today, but they have been faced in much the same terms

any number of times over the past two hundred years, as Michie documents. The

answers, though, have varied depending on both the nature of the external

competition and the nature of the internal composition of the exchange. Michie

argues that his kind of study, focusing on the decisions taken over time by the

members of the London Stock Exchange, can reveal much about the role of the

financial system in shaping the course of the real economy. It is not the

securities market in Britain as such, then, that concerns him, but rather the

specific role of the self-governing organization called the London Stock

Exchange in the securities market. This is certainly a worthy endeavor and

modern finance scholars are increasingly concerned about the implications of

what they call “market microstructure” in determining the efficiency of price

discovery processes as well as overall efficiency in financial intermediation.

For them, Michie describes and appraises the creation, operation and evolution

of the microstructure of what is still one of the world’s leading stock

exchanges and was the undisputed leader during the gold standard era. He does

not, however, deal with these arcane issues of market efficiency, to the

disappointment of some readers, but no doubt the relief of most. (The awkward

term “microstructure” never appears in the 642 pages of text.) But neither does

he entertain with stories of rascal behavior by the more opportunistic

participants of the “House,” to the disappointment of most readers and no doubt

his publisher hoping for more robust sales. Rather, he concludes each chapter

with a table showing the number and capitalization of the securities listed on

the London Stock Exchange for a benchmark date. These together show the

changing scale and scope of the exchange’s market over time. This is a solid

work of original historical research that gives the reader many interesting

insights and raises important questions for practitioners and policymakers as


Michie begins his story, “From Market to Exchange, 1693-1801,” with an overview

of the rise of an informal, unorganized, secondary market in government debt.

This begins, in his view, in 1693 with the establishment of permanent debt that

could be transferred. As the amount of debt increased with each successive war,

so did the number of investors, encouraged by the government’s ability to

continue servicing at least the regular interest payments promised on the debt

issues. Gradually, specialists arose, both brokers and jobbers, both very

important to the operation of an efficient secondary market for any set of

products. Brokers made their money from commissions they charged to their

principals, who desired to buy or sell an amount of a particular security

within a specified price range. Jobbers provided the brokers the counterparties

to their principals, offering to sell to their buyer or to buy from their

seller the particular security. They made their money on the difference between

the prices they bid or asked, and saved the broker the time and expense of

finding a specific counter party to his original client. Both made more money,

the greater the volume of transactions. Brokers made a commission charged to

their principals; jobbers made a “turn” on the bid-ask spread always intending

to buy low and sell high. By the end of the eighteenth century, the number of

investors was large and a number of specialized brokers and jobbers seemed to

be making a living from their respective trading activities. Nevertheless,

asserts Michie, this was just a market, not an organized exchange that could

affect by its own rules and enforcement decisions the way the security market

would develop in the future. In 1801, however, the informal London stock market

ceased to be shaped strictly by outside forces and henceforth could determine

in part its own destiny through the decisions taken by its governing bodies.

These were the Committee for General Purposes for the Members and the Trustees

& Managers for the Proprietors.

How they operated vis-?-vis each other to solidify the tradition and prestige

of the “House” is detailed in “From Money to Capital, 1801-1851.” Readers

familiar with Michie’s earlier comparison of the London and New York stock

exchanges, the two classic examples of financial capital marketplaces, will

find a familiar theme in his emphasis in this book upon the importance of the

governance structure of the London Stock Exchange as it coped with the

successive changes in monetary regimes, government controls and policies, new

communications technologies, and international and domestic competition.

Responding to the pressures of war finance in 1801 at the outset of the

Napoleonic Wars with France, one group of traders became the Proprietors of the

building that housed the market place for the Members engaged in actual

trading. The Proprietors, as owners of the market place, but not of the

products of the market place, were strictly interested in maintaining a large

membership paying annual subscriptions for the use of the facility while

keeping operating costs as low as possible. The Members, as users of the market

place, were concerned strictly with generating a large volume of trading while

keeping their own costs of business as low as possible. Faced with outside

competition from time to time, the Members would try to restrict access, while

the Proprietors would try to co-opt it into the House. Members, however, had

complete control over who could become a Member, although Proprietors set the

annual entrance fee that individuals had to pay to take up their membership and

determined the hours of operation and physical amenities provided. Once in

place, this method of operation proved self-sustaining and it endured through

all the travails and opportunities that ensued over the next two centuries.

In the first half century, the governance structure was challenged by two

shocks, the brief but intense interest in foreign government debt and foreign

mining shares in the early 1820s and then the longer and even more intense

investor enthusiasm for railroad securities starting in the late 1830s. In both

cases, the users of the exchange wanted to keep out competition by traders

specializing in the new securities but the owners of the exchange accommodated

them as soon as possible to prevent an alternative exchange from arising in

London. The resulting expansion of business benefited all members and

solidified their operating rules and governance procedures.

In the rest of the nineteenth century, which Michie labels “From Domestic to

International, 1850-1914,” the British success with financing domestic

railroads led to providing finance for foreign railroads and then for large

commercial and industrial firms both at home and overseas. The continued

expansion of the number and variety of securities listed on the exchange led to

enlarged memberships and increased pressure on the physical facilities of the

exchange. To finance a new building in the 1870s, the Proprietors increased

fees on the Members, who responded by demanding more voice in management. The

conflicting interests were resolved through expanding the capital stock of the

Stock Exchange by requiring all future members to become shareholders as well

as subscribers. The number of shareholders grew, as a consequence, from only

268 in 1876 to 2,366 in 1914 so that there gradually occurred an overlap

between Proprietors and Members. In his earlier work, Michie has argued that

the increasing voice of broker members in the governance of the Stock Exchange

was gradually undermining its flexibility in responding to competitive

challenges and its responsiveness to technological advances in communications.

Now, his appraisal is that the exchange was remarkably flexible and responsive,

especially, one infers, by contrast with its continued dithering over the

period 1945 to 1986, which came dangerously close to eliminating it entirely as

an organization.

What accounts for this earlier success? Internally, one factor was that dual

control by Proprietors and Members continued to be effective in offsetting

tendencies towards restricting access to the exchange; another was the

continued importance numerically of jobbers within the membership of the

exchange. Externally, the most important factor was the central role played by

the Stock Exchange in the money market of London. The ever-expanding joint

stock banks in London found that their loanable funds could be employed

profitably for short periods of time by lending to so-called money brokers who

were members of the Stock Exchange. They, in turn, could lend on security of

shares and stocks held by jobbers to allow them to settle differences at the

fortnightly settlements or to continue their positions to the next account.

Specialization in function within the Stock Exchange thus occurred that allowed

further specialization in function among the financial intermediaries of

Lombard Street. These nested specializations increased efficiency in the use of

funds by all concerned. They also allowed, however, increased efficiency within

the growing number of provincial stock exchanges, who could tap into the London

money market easily through the branches of the joint-stock banks.

Whatever the dynamics of the emerging structure of finance and industry would

have created for the future of the British economy, the impact of World War I

changed everything, and mostly for the worse in Michie’s opinion. First of all,

it eliminated the foreign business of the Stock Exchange bringing that under

the control of the Treasury, now concerned only with raising money for war

finance. Second, it eliminated the money market role of the Stock Exchange by

eliminating dealing in options and even for account. Finally, it created a

comfortable source of easy commissions by the huge increase in government debt

traded on the Stock Exchange. Wartime restrictions on membership created by

military service for younger members and expulsion of foreign, especially

German, members were formalized by rule changes when peace returned. Minimum

commissions were rigidly enforced. In short, the war changed permanently all

the external conditions that had created prosperity for the members of the

Stock Exchange before the war. But it also strengthened the rigidity of

internal rules that protected the incomes of the surviving members.

Michie then treats the interwar period in two separate chapters, “Challenges

and Opportunities, 1919-1939,” and “The Changing Market Place Between the

Wars.” The first chapter details how “the rules of the Stock Exchange, designed

to create an orderly market, were increasingly used by the membership to limit

the competitive environment within which they operated. This was true both in

terms of outside competition, with restrictions on admissions, and internally,

with minimum commissions and other controls. The end result was a lessening of

those forces for change that had forced the membership in the past to respond

to challenges and to seize opportunities” (p. 234). This is exactly the

conclusion one expects, given Michie’s earlier study. The second chapter argues

that, nevertheless, the ossification of the Stock Exchange was not the key

problem for the finance of British industry during the interwar period. Rather,

the increased rate of taxation needed to service the huge increase in

government debt, the decline of profitability of older industries, and London’s

diminished international role all limited the potential supply of finance,

irrespective of the reduced efficiency of the Stock Market in providing

financial intermediation. While researching the current book, Michie has become

more sympathetic to the efforts of the Stock Exchange as an organization and

more critical of the external forces that limited its potential service to the

British economy.

In “New Beginnings: The Second World War, 1939-1945,” the changes that the

exigencies of war finance had inflicted upon an unsuspecting and unprepared

Stock Exchange in 1914 were now adopted quickly as a matter of course. The

Stock Exchange willingly became an administrative arm of the government,

helping the Treasury to market its burgeoning debt issues and receiving in turn

the protection of the government against competitive forces in the government

debt market. Dual control was finally ended informally, as the Committee for

General Purposes for the users and the Trustees and Managers Committee for the

owners were combined into a Council, dominated by the members, or users, of the

Stock Exchange for the duration of the war. This streamlined governance

structure made the postwar Stock Exchange an effective arm of the government,

but ossified the responsiveness of the organization to the competition of

provincial exchanges and of the joint stock banks in dealing on the securities

markets in Britain. It did, however, enable the members to buy out the

proprietors and formally end dual control in 1948. Thereafter, the business of

the Stock Exchange was not to make a profit for the owners, but to render

services to the existing members. On the expense side, however, it was

committed to pay out ?160,000 annually to buy out the previous Proprietors and

committed to enlarging its salaried staff to carry out the regulatory functions

it believed the government expected of it. On the revenue side, members were

not willing to vote increased subscriptions fees, much less stock assessments,

on themselves, especially as the incomes of many firms fell after the war.

“Drifting towards Oblivion, 1950-1959,” “Failing to Adjust, 1960-1969,” and

“Prelude to Change, 1970-1979,” are the chapter titles that follow and they

convey well the encompassing malaise that overcame the Stock Exchange and most

of its members, steadily declining in number and consolidating into fewer and

fewer firms in each succeeding decade. During the 1950s, however, the London

Stock Exchange found a new role despite its hidebound governance and

administrative structure. This was serving as a market place for the rising

volume of domestic corporate shares. These were not, Michie argues, a new

source of finance, but a substitute for business debt with fixed interest,

which was increasingly unattractive to British investors in the persistently

inflationary climate of the 1950s. These didn’t match in total volume the size

of government debt, but in terms of trading commissions earned by member firms

they were just as important as those earned on placing and trading issues of

government debt. Moreover, government debt trading became increasingly

concentrated among fewer firms while corporate equities could provide niche

markets for a variety of the member firms. In the 1960s, this trend established

in the 1950s continued to the benefit of the Stock Exchange and its members.

But it also elicited increasing interest from foreign investors, whose demands

were quickly met by foreign firms, both banks and investment houses, located in

London, rather than by the Stock Exchange. Further, provincial exchanges and

non-member stockbroking firms found it easy to enter this growing market,

especially as the Stock Exchange became increasingly restrictive in its listing

requirements for corporate equities. As a quasi-regulatory arm of government,

the London Stock Exchange felt it was important to protect outside investors

from the risks of smaller firms in new industries, but this was precisely where

the largest potential profits could be made. The circumstances of the 1970s at

first confirmed the wisdom of this strategy to the leadership of the Stock

Exchange when the equities market collapsed in 1974. This led to a formal

merger with the provincial exchanges, enlarging the membership of what was now

called the International Stock Exchange within the same rigid set of rules as

before. The country jobbers were forced to become single-capacity brokers, so

they helped strengthen the support within the membership for enforcing minimum

commissions. Moreover, the Stock Exchange was now a much more effective

regulator of the British securities marketplace. But the cost of this

consolidation was that the Stock Exchange was further constrained from

responding to challenges by foreign exchanges and firms, and from initiating or

even imitating financial innovations taking place within non-member firms and

the major financial intermediaries in the City of London.

The breakthrough that eventually led to the “Big Bang” (chapter 12) in 1986,

the once for all elimination of minimum commissions and restrictions on the

size and functions of member firms, Michie argues, was the elimination by the

Thatcher government of exchange controls in 1979. Now the customers of the

brokerage houses, increasingly the banks, insurance companies, and investment

houses, could readily invest abroad with foreign exchanges and stockbroking

firms. Foreign banks and brokerage houses in London could now bypass the high

costs of the Stock Exchange without incurring the penalties imposed by exchange

controls. The response of the Stock Exchange to this challenge was delayed

until 1986, however, not because of the rigidity of the governance structure,

but because of the Thatcher government’s attack on the privileges of the Stock

Exchange brought before the Restrictive Practices Court. While this action was

on the docket, the Stock Exchange officers felt compelled to defend the entire

corpus of Rules and Regulations that had accreted over the decades, according

to Michie. Not until the case was dismissed by the government in 1983, did the

officers feel free to move forward to modernize the rules of the Stock


In the penultimate chapter, “Black Hole,” Michie begins by stating that “On 3

March 2001 the London Stock Exchange, as a formally organized securities

market, will have existed for two centuries.” That, we now know, remains to be

seen! Michie documents the difficulties faced by the venerable institution for

survival, but seems to think they stem mostly from continued hassling of the

securities market in general by government regulators. Given the City’s success

previously in attracting the business of foreign international banks, mainly to

deal in the Euro-dollar and Euro-bond market that developed outside the Stock

Exchange, the Big Bang’s removal of restrictions on membership allowed the

entry of the most innovative firms and practices from around the world. At his

most optimistic, Michie opines, “In fact, what emerged from Big Bang was akin

to the dual control which had worked so well in the past, with responsibility

now shared between the Stock Exchange, representing its members, and the

regulatory authorities, reflecting the needs of the wider financial community”

(p. 634). General readers could more easily share this optimism if they had

confidence that the regulatory authorities would reflect the needs of the

financial community rather than the needs of their political masters to be

re-elected within five years. Indeed, Michie’s final lesson that he draws from

his historical account is “that self-regulation without monopoly power has

produced the most satisfactory solution in the past. Otherwise governments

operate to their own agendas, distorting the market and destroying innovation

in the process, while self-regulating monopolies abuse their power for their

own self-interest” (p. 642). The challenge is clear; how it will be met is not!

Larry Neal is Professor of Economics at the University of Illinois at

Urbana-Champaign and Director of the European Union Center at Illinois. He is

past president of the Economic History Association and the Business History

Conference. From 1981 through 1998, he was editor of Explorations in

Economic History. He is author of The Rise of Financial Capitalism:

International Capital Markets in the Age of Reason, Cambridge University

Press, 1990 and The Economics of the European Union and the Economies of

Europe, Oxford University Press, 1998 as well as numerous articles in

American and European economic history.

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

Exchange Rate Regimes in the Twentieth Century

Author(s):Aldcroft, Derek H.
Oliver, Michael J.
Reviewer(s):Schwartz, Anna J.

Published by EH.NET (November 1999)

Derek H. Aldcroft and Michael J. Oliver, Exchange Rate Regimes in the

Twentieth Century. Cheltenham, UK, and Northampton, MA, USA: Edward Elgar,

1998. xiii + 210 pp. $85.00 (cloth), ISBN: 1 85898 320 7.

Reviewed for EH. NET by Anna J. Schwartz, National Bureau of Economic


This is a chronological historical narrative of selected features of exchange

rate regimes since the interwar period. Fully half the book is devoted to the

1920s and 1930s. The treatment of the Bretton

Woods era and its aftermath is briefer and more succinct. The penultimate

chapter that traces the evolution of the European Monetary System ends before

the date when the 11 countries judged to have met the Maastricht criteria were

qualified as EMU members

. A six and one-half page concluding chapter asks

“Do Monetary Systems Matter?”

What is distinctive about the book is first, the series of tables that

accompany the text, and second, the extraordinary number of references that are

cited for each substantive point. The tables provide data, drawn from official

and academic sources, for various time periods on nominal and real variables,

as well as chronologies of important events. The references tend to include

competing views with regard to the topic under discussion. In some cases, the

authors find merit in all the competing views. In other cases, they express

strong priors in favor of one position, without much analysis of the factors

supporting their conclusion.

Chapter 1 deals with the restoration of

monetary stability in European countries, and countries in North America,

Central and South America,

Africa, Asia, and Oceania, following the post-World War I years of floating

exchange rates and hyperinflation. The attention paid to the experience of

countries that are not usually covered in this context is a strength of the

chapter. It ends with a discussion of the costs and benefits of floating

exchange rates of the early 1920s. This is an instance when the authors convey

an impression of ambivalence in their assessment: they offer pros and cons,

without any clear conclusion.

Chapter 2 deals with the consequences of the stabilization of the pound and the

franc at inappropriate levels, one of the key differences between the prewar

gold standard and the

restored gold standard of the later 1920s.

Inherent weaknesses in the restored arrangements doomed them. Peripheral

countries ran into trouble even before the disintegration of the standard in

the center countries in the summer of 1931. At this point, the authors take a

stand on the issue of US monetary policy during the Great Depression without

much supporting detail. They assert that “the Federal Reserve allowed the

monetary base to contract for fear of being forced off gold”

(p.58). That is a highly controversial view.

Chapter 3 takes up the story with the abandonment of the gold standard in the

early 1930s by most of the countries that had re-established it in the 1920s.

The authors discuss the rise of currency blocs after 1933: the sterling area,

the gold bloc, and countries with exchange controls. They note the extensive

management of exchange rates, for which purpose exchange stabilization funds

were created, and the Tripartite Agreement was negotiated. They also compare

the recovery experience from 1929 to 1937/38 of countries classified under

different regimes. They dispute an earlier finding that Spain avoided the worst

effects of the depression because its exchange rate floated. In general, they

argue that currency changes of the 1930s did not generate trade-induced


Chapter 4 covers the well-known elements of the Bretton

Woods system and the

reasons for its decline. In the authors’ view, Triffin’s prediction of the

inevitable demise of the system was wrong on two counts: (1) he believed that

large-scale conversion of dollars into gold by central banks would reduce

outstanding US dollar liabilities, when in fact they increased; and (2) he

claimed the conversion would be deflationary by reducing the total amount of

international reserves, contrary to the facts.

I concur with the authors’ statement, ” . . . it is strange that in the quarter

century since the end of generalized fixed rates, policymakers and politicians

have sought to return to some variant of fixed rates by frequently assuming

that the Bretton Woods system was a paragon of a rules-based system” (p. 120).

Chapter 5 on the aftermath of Bretton Woods discusses two broad problems under

floating rates: (1) endogenous and exogenous shocks that disturbed currencies;

and (2) volatility of exchange rates that was greater than predicted. The

authors conclude that, despite the difficulties associated with floating rates,

it is highly unlikely that the float will be replaced by a new Bretton Woods in

the foreseeable future.

Chapt4er 6 turns to the attraction of a fixed rate system to most of Western

Europe as a way of guaranteeing the stability of intra-European trade. New to

me is the discussion in this chapter of the biggest institutional reason for

this attraction, namely, the

close connection to European exchange rate policy of the Common Agricultural

Policy (CAP). Calls for greater exchange rate stability arose because of

problems for CAP under floating rates. The authors are skeptical about the

benefits of a single European

currency They might also have been more skeptical in accepting the theory of

self-fulfilling prophecies as a “more satisfactory explanation” of the turmoil

on the foreign exchanges under the European Exchange Rate Mechanism between

July 1992 and August 19 93 (p. 165).

To Fix or not to Fix? That is the question for which this book seeks to provide

an answer from twentieth century history.

(Derek H. Aldcroft is Research Professor in Economic History at Manchester

Metropolitan University. Michael J. Oliver

is Lecturer in Economic History at the University of Leeds.)

Anna J. Schwartz is a research associate of the National Bureau of Economic

Research. She is co-author with Michael D. Bordo of a chapter, “Monetary Policy

Regimes and Economic Performance: The

Historical Record,” in Volume 1 of the Handbook of Macroeconomics, John

Taylor and Michael Woodford

(eds.), North-Holland (forthcoming).

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

Studies in the Economic History of the Pacific Rim

Author(s):Miller, Sally M.
Latham, A.J.H.
Flynn, Dennis O.
Reviewer(s):Croix, Sumner La

Published by EH.NET


Sally M. Miller, A.J.H. Latham, and Dennis O. Flynn, editors, Studies in the Economic History of the Pacific Rim. Routledge Studies in the Growth Economies of Asia. London and New York: Routledge , 1998. 253 pp. $90 (cloth), ISBN 0-415-114819-7.

Reviewed for EH.NET by Sumner La Croix, Department of Economics, University of Hawaii and Barnard College.

In the introduction to this volume, Dennis Flynn and Arturo Giraldez write that they searched “for books and articles which might provide an overview of over four centuries of Pacific Rim interchange. For years scholars around the world have given the same answer: no long-term overview of the Pacific Rim exists in any language.” Since the failure by economic historians “to acknowledge an over 420-year trade relationship covering one third of the globe’s surface seemed like a glaring omission,” the editors and the University of the Pacific decided to sponsor “the world’s first conference on Pacific Rim History” in May 1994 (p. 3). The 14 papers in this edited volume are drawn from the papers presented at that conference.

In his essay “No Empty Ocean”, Paul D’Arcy sets the tone for the volume by observing that few scholars “have attempted to construct an image of the Pacific Ocean as a coherent entity in the way that Fernand Braudel has for the Mediterranean or K.N. Chaudhuri has for the Indian Ocean” (p. 21). Anthony Reid has, however, made a notable start for a corner of the Pacific with his excellent two-volume (1988, 1993) study of trade and growth in Southeast Asia from 1450 to 1680. D’Arcy’s observation raises, however, an important question for this volume: Is building a coherent image of the “Pacific Rim” a more quixotic enterprise than those undertaken by Braudel or Chaudhuri?

These are some reasons to think so, at least prior to World War II. First, the Pacific Ocean is surely a good organizing principle for a geographic region, but economies that are part of a geographic region may not be part of the same economic region unless they are linked by significant trade, investment, or migratory flows. Yet many economies in the Pacific Rim have for long periods engaged in little foreign trade or traded only with their proximate neighbors. Japan’s government heavily restricted foreign trade during the Tokugawa period until Admiral Perry’s black ships opened Japanese ports in the 1850s. Korea had similar trade policies until Japanese military pressure along the lines of the American model forced open foreign trade in the 1870s. Before western contact in 1778, Hawaii had no regular trade with other Pacific cultures due to its geographic isolation in the North Pacific and risky maritime technologies for sailing to distant countries.

Second, several essays in this volume highlight the important diffusion of ideas, technologies, flora, fauna, and disease that brought Asia-Pacific societies into contact with one another. Until the 1760s this diffusion was often the result of sporadic or accidental contacts rather than the result of ongoing trade, investment, or migratory flows. Although these spillovers linked many societies within the Pacific Ocean in a path-dependent fashion, the lack of regular contacts often precluded the specialization, trade, and deeper cultural exchanges that serve to link societies into a larger regional economy, polity, and culture.

Third, scholarly work on trade in the Pacific Ocean can only be productive if it is founded upon historical or archaeological records of trade. A.J.H. Latham’s essay, “The Reconstruction of Hong Kong Nineteenth-Century Pacific Trade Statistics”, provides a good example of the careful research needed to construct fundamental data series. Latham’s essay highlights the under-use of colonial records for Indonesia, the Philippines, Vietnam, and Burma. The extensive efforts undertaken to document colonial data in Indonesia cry out to be undertaken for other colonial regimes. [See the 15-volume Changing Economy of Indonesia series.] While several major research projects dedicated to building historical data on critical economic variables in East and Southeast Asia are now underway, such efforts need to be much higher on the research agendas for historians and economic historians studying Pacific Rim trade.

With the lofty aim of producing a history of trade in the Pacific Rim over the last 400 years, the volume opens with eight “overview” essays summarizing various aspects of the interaction between Pacific Rim economies. Essays by Paul D’Arcy (“No Empty Ocean: Trade and Interaction across the Pacific Ocean to the Middle of the Eighteenth Century”), Lionel Frost (“Coming Full Circle: A Long-Term Perspective on the Pacific Rim”), David Chappell (“Peripheralizing the Center: An Historical Overview of Pacific Island Micro-States”), John McNeill (“From Magellan to MITI: Pacific Rim Economies and Pacific Island Ecologies Since 1521″), Arthur P. Dudden (“The American Pacific: Where the West Was Also Won”), Annick Foucrier (“The French Presence in the Pacific Ocean and California, 1700-1850″), and Douglas Daigle (“Environmental Impacts of the Pacific Rim Timber Trade: An Overview”) raise, however, questions about the intended audience for the book. While these essays provide competent, brief surveys of the existing literatures, they break little new ground and, due to their brevity and enormous scope, are not sufficiently exhaustive or critical to focus other economic historians and historians on vital research questions at the frontier of these fields. Instead, the essays seem directed to a more general readership requiring only a brief introduction to each topic.

The other seven essays are more narrowly focused on country-specific industries and institutions significantly related to international trade. Karen Clay’s creative essay (“Trade, Institutions, and Law: The Experience of Mexican California”) nicely applies Avner Greif’s theory of merchant coalitions to California merchants engaged in international trade. Tsu-yu Chen (“The Development of the Coal Mining Industry in Taiwan during the Japanese Colonial Occupation”) assembles output and export data covering Taiwan’s coal mining industry but only begins the task of relating industry behavior to Japanese government policies on energy in the 1920s and 1930s. Frank King (“British Overseas Banking on the Pacific Rim, 1830-1870″) provides a detailed essay on the development of British banking in Asia and briefly discusses how the banking institutions facilitated regional trade. David St. Clair (“California Quicksilver in the Pacific Rim Economy, 1850-90″) provides an interesting analysis of U.S. exports of quicksilver to China. And R. Bin Wong”s suggestive essay (“Chinese Views of the Money Supply and Foreign Trade, 1400-1850″) contrasts Chinese attitudes towards amassing large sums of bullion with Western attitudes and in the process raises more questions than the very brief treatment can answer.

The editors rightly suggest (p. 17) that understanding the powerful influence of China on Asia-Pacific trade should be a central focus of future research. For more than a century after 1571 China imported 50 tons of silver annually from Spanish colonies in the Americas, thereby providing ongoing linkages between China, the Americas, and Europe (if not between China and other Pacific Rim economies). The sheer magnitude of China’s silver imports reinforces new research on China’s living standards. Ken Pomeranz (1997) has recently argued that 18th century living standards in the lower Yangtze reg ion of China were roughly comparable to those observed in England and the Low Countries. With its high per capita income and high population, China’s trade with other Asia-Pacific societies is central to any discussion of Pacific Rim trade between 1500 and 1850 and needs much more careful examination by scholars.

The essays in this volume provide the interested reader with brief overviews of trade between various Asia-Pacific economies, but, as the editors acknowledge, “most of the work [on this topic] remains to be done” (p. 17). A core research agenda focused on careful assembly of fundamental data on Asia-Pacific economies from under-exploited archival and archeological sources is the key to future progress.


Pomeranz, Kenneth (1997), “Rethinking 18th Century China: A High Standard of Living and its Implications,” Unpublished paper, University of California, Irvine.

Reid, Anthony (1988, 1993), Southeast Asia in the Age of Commerce, 1450-1680. 2 vols. New Haven: Yale University Press.

Sumner La Croix’s research focuses on the economic history and development of Asia and the Pacific Islands. He is currently the Alena Wels Hirschorn Visiting Professor at Barnard College.


Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Asia
Time Period(s):General or Comparative

The Great Wave: Price Revolutions and the Rhythm of History

Author(s):Fischer, David Hackett
Reviewer(s):Munro, John H.

Published by EH.NET (February 1999)

David Hackett Fischer, The Great Wave: Price Revolutions and the Rhythm of

History. Oxford and New York: Oxford University Press, 1996. xvi + 536.

$35 (hardcover), ISBN: 019505377X. $16.95 (paperback), ISBN: 019512121X.

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


Let me begin on a positive note. This is indeed a most impressive work: a

vigorous, sweeping, grandiose, and contentious, though highly entertaining,

portrayal of European and North American economic history, from the High Middle

Ages to the present, viewed through the lens of “long-wave” secular price-

trends. Indeed its chief value may well lie in the controversies that it is

bound to provoke, particularly from economists, to inspire new avenues of

research in economic history

, especially in price history. The author contends that, over the past eight

centuries, the European economy has experienced four major “price-

revolutions,” whose inflationary forces ultimately became economically and

socially destructive, with adverse consequences that provoked various complex

reactions whose “resolutions” in turn led to more harmonious, prosperous, and

“equitable” economic and social conditions during intervening eras of “price

equilibria”. These four price-revolutions are rather too neatly set out as the

following: (1) the later- medieval, from c.1180-c.1350; (2) the far better

known 16th-Century Price-Revolution, atypically dated from c.1470 to c.1650,

(3) the inflation of the Industrial Revolution era, from c.1730 to 1815; and

(4) the 20th century price-revolution, conveniently dated from 1896 to 1996

(when he published the book).

Though I am probably more sympathetic

to the historical concept of

“long-waves” than the majority of economists, I do agree with many opponents of

this concept that such long-waves are exceptionally difficult to define and

explain in any mathematically convincing models, which are certainly not

supplied here. For reasons to be explored in the course of this review, I

cannot accept his depictions, analysis

, and explanations for any of them. This will not surprise Prof. Fischer, who

is evidently not an admirer of the economics profession. He is particularly

hostile to those of us deemed to be “monetarists,” evidently used as a

pejorative term. After rejecting not only the “monetarist” but also the


neo-Classical, agrarian, environmental, and historicist” models, for their

perceived deficiencies in explaining inflations, and after condemning

economists and historians alike for imposing rigid models in attempting to

unravel the mysteries of European and North American economic history,

Fischer himself imposes an exceptionally rigid and untenable model for all four

of his so-called price-revolutions, containing in fact selected Malthusian and

monetarist elements from these supposedly rejected models.

In essence, the Fischer model contends that all of his four long-wave

inflations manifested the following six-part consecutive chain of causal and

consequential factors, inducing new causes, etc., into the next part of the

chain. First, each inflationary long-wave began with a prosperity created from

the preceding era of price-equilibrium, one promoting a population growth that

inevitably led to an expansion in aggregate demand that in turn outstripped

aggregate supply, thus — according to his model

– causing virtually ALL prices to rise. Evidently his model presupposes that

all sectors of the economy, in all historical periods under examination, came

to suffer from Malthusian-Ricardian diminishing

returns and rising marginal costs, etc. Second, in each and every such era,

after some indefinite lapse of time, and after the general population had

become convinced that rising prices constituted a persistent and genuine trend,

the “people” demanded and

received from their governments an increase in the money supply to

“accommodate” the price rises. As Fischer specifically comments on p. 83: “in

every price-revolution, one finds evidence of frantic efforts to expand the

money supply, after people have discovered that prices are rising in a secular

way.” Third, and invariably, in his view, that subsequent and continuous growth

in the money supply served only to fuel and thus aggravate the already existing

inflation. He never explains, however, for any of

the four long-waves, why those increases in money stocks were always in excess

of the amount required “to accommodate inflation”. Fourth, with such

money-stock increases, the now accelerating inflation ultimately produced a

steadily worsening impoverishment of the masses, aggravated malnutrition,

generally deteriorating biological conditions, and a breakdown of family

structures and the social order, with increasing incidences of crime and social

violence: i.e., with a rise in consumer prices that outstripped generally

sticky wages in each and every era, and with a general transfer of wealth from

the poorer to richer strata of society. Fifth, ultimately all these negative

forces produced economic and social crises that finally brought the

inflationary forces to a halt,

producing a fall in population and thus (by his model) in prices, declines that

subsequently led to a new era of “price-equilibrium,” along with concomitant

re-transfers of wealth and income from the richer to the poorer strata of


(where such wealth presumably belonged). Sixth, after some period of economic

prosperity and social harmony, this vicious cycle would recommence, i.e., when

these favorable conditions succeeded in promoting a new round of incessant

population growth, which inevitably sparked those same inflationary forces to

produce yet another era of price-revolution, continuing until it too had run

its course.

While many economic historians, using more structured Malthusian-Ricardian type

models, have also provided a similarly bleak portrayal of

demographically-related upswings and downswings of the European economy,

most have argued that this bleak cycle was broken with the economic forces of

the modern Industrial Revolution era. Fischer evidently does not. Are we the

reforecondemned, according to his view, to suffer these never-ending bleak

cycles– economic history according to the Myth of Sisyphus, as it were?

Perhaps not, if government leaders were to listen to the various nostrums set

forth in the final chapter,

political recommendations on which I do not feel qualified to comment.

Having engaged in considerable research, over the past 35 years, on European

monetary, price, and wage histories from the 13th to 19th centuries, I am,

however, rather more qualified

to comment on Fischer’s four supposed long-waves. Out of respect for the

author’s prodigious labors in producing this magnum opus, one that is bound to

have a major impact on the historical profession, especially in covering such a

vast temporal and spatial range, I feel duty-bound to provide detailed

criticisms of his analyses of these secular price trends, with as much

statistical evidence as I can readily muster. Problematic in each is defining

their time span,

i.e., the onset and termination of inflations. If many medievalists may concur

that his first long- wave did begin in the 1180s, few would now agree that it

ended as late as the Black Death of 1348-50. On the contrary,

the preceding quarter-century (1324-49) was one of very severe deflation,

certainly in both Tuscany (Herlihy 1966) and England. In the latter, the

Phelps Brown and Hopkins “basket of consumables” price index (1451-75 =

100) fell 47%: from 165 in 1323 (having been as high as 216 in 1316, with the

Great Famine) to just 88 in 1346. Conversely, while most early-modern

historians would agree that the 16th-Century Price Revolution generally ended

in the 1650s (certainly in England), few if any would date its commencement so

early as the 1470s. To be sure, in both the Low Countries and England, a

combination of coinage debasements, civil wars, bad harvests, and other

supply-shocks did produce a short-term rise in prices from the later 1470s to

the early 1490s; but thereafter their basket-of-consumables price-indices

resumed their deflationary downward trend for another three decades (Munro

1981, 1983). In both of these regions and in Spain as well (Hamilton 1934), the

sustained rise in the general price level, lasting over a century, did not

commence until c.1520.

For Fischer’s third inflationary long-wave, of the Industrial Revolution era,

his periodization is much less contentious, though one might mark its

commencement in the late 1740s rather than the early 1730s.

The last and most recent wave is, however, by far more the most controversial

in its character. Certainly a long upswing in world prices did begin in 1896,

and lasted until the 1920s; but can we really pretend that this so neatly

defined century of 1896 to 1996 truly encompasses any form of long wave when we

consider the behavior of prices from the 1920s?

Are we to pretend that the horrendous deflation of the ensuing Great Depression

era was just a temporary if unusual aberration that deviated from this

particular century long (saeclum) secular tend? Fischer, in fact,


rarely ever discusses deflation, ignoring those of the 14th century and most

of the rest. Instead, he views the three periods intervening between his price-

revolutions as much more harmonious eras of price-equilibria: i.e. 1350-1470;

1650 – 1730; 1820 –

1896; and he suggests that we are now entering a fourth such era. In my own

investigations of price and monetary history from the 12th century, prices rise

and fall,

with varying degrees of amplitude; but they rarely if ever remain stable,

“in equilibrium”.

Certainly “equilibrium” is not a word that I would apply to the first of these

eras, from 1350 to 1470: not with the previously noted, very stark deflation of

c.1325 – 48, followed by an equally drastic inflation that ensued from the

Black Death over

the next three decades, well documented for England, Flanders (Munro 1983,

1984), France, Tuscany (Herlihy 1966),

and Aragon-Navarre (Hamilton 1936). Thus, in England, the mean quinquennial PB

& H index rose 64%: from 88 in 1340-44 to 145 in 1370-74, fal ling sharply

thereafter, by 29%, to 103 in 1405-09; after subsequent oscillations, it fell

even further to a final nadir of 87 in 1475-79 (when,

according to Fischer, the next price-revolution was now under way). For

Flanders, a similarly constructed price index of quinquennial means

(1450-74 = 100: Munro 1984), commencing only in 1350, thereafter rose 170%:

from 59 in 1350-4 to 126 in 1380-84, reflecting an inflation aggravated by

coinage debasements that England had not experienced, indeed none at all since

1351. Thereafter, the Flemish price index plunged 32%, reaching a temporary

nadir of 88 in 1400-04; but after a series of often severe price oscillations,

aggravated by warfare and more coin debasements, it rose to a peak of 138 in

1435-9; subsequent ly it fell another 31%, reaching its 15th century nadir of

95 in 1465-9 (before rising and then falling again, as noted earlier).

Implicit in these observations is the quite pertinent criticism that Fischer

has failed to use, or use properly, these and many other price

indices–especially the well-constructed Vander Wee index (1975), for the

Antwerp region, from 1400 to 1700, so important in his study; and the Rousseaux

and Gayer-Rostow-Schwarz indices for the 19th century (Mitchell &

Deane 1962). On the other hand, he has relied far too much on the dangerously

faulty d’Avenel price index (1894-1926) for medieval and early-modern France.

Space limitations, and presumably the reader’s patience, prevent me from

engaging in similar analyses of price trends

over the ensuing centuries, to indicate further disagreements with Fischer’s

analyses, except to note one more quarter-century of deflation during a

supposed era of price equilibrium: that of the so-called Great Depression era

of 1873 to 1896, at least within England, when the PB&H price index fell from

1437 to 947, a decline of 34% that was unmatched, for quarter-century periods

in English economic history, since the two stark deflations of the second and

fourth quarters of the 14th century. (The Rousseaux index fell from 42.5% from

127 in 1873 to 73 in 1893).

My criticisms of Fischer’s temporal depictions of both inflationary long-waves

and intervening eras of supposed price equilibria are central to my objections

to his anti-monetarist explanations for them, or rather to his

misrepresentation of the monetarist case, a viewpoint he admittedly shares with

a great number of other historians, especially those who have found

Malthusian-Ricardian type models to be more seductively plausible explanations


inflation. Certainly, too many of my students, in reading the economic history

literature on Europe before the Industrial Revolution era, share that beguiling

view, turning a deaf ear to the following arguments: namely, that (1) a growth

in population cannot by itself,

without complementary monetary factors, cause a rise in all prices, though

certainly it often did lead to a rise in the relative prices of grain,

timber, and other natural-resource based commodities subject to diminishing

return and supply

inelasticities; and thus (2) that these simplistic demographic models involve

a fatal confusion between a change in the relative prices of individual

commodities and a rise in the overall price-level. Some clever students have

challenged that admonition,


with graphs that seek to demonstrate, with intersecting sets of aggregate

demand and supply curves, that a rise in population is sufficient to explain

inflation. My response is the following. First, all of the historical prices

with which Fischer and my students are dealing

(1180-1750) are in terms of silver-based moneys-of-account, in the traditional

pounds, shillings, and pence, tied to the region’s currently circulating silver

penny, or similar such coin, while prices expressed in terms of the gold-based

Florentine florin behaved quite differently over the long periods of time

covered in this study. Indeed we should expect such a difference in price

behavior with a change in the bimetallic ratio from about 10:1 in 1400 to about

16:1 in 1650,

which obviously reflects the fall in the relative value or purchasing power of

silver — an issue virtually ignored in Fischer’s book. Second, the shift, in

this student graph, from the conjunction of the Aggregate Demand and Supply


from P1.Q1

and P2.Q2, requires a compensatory monetary expansion in order to achieve the

transaction values indicated for the two price levels: from 17,220,000 pounds

and 122,960,000 pounds, which increase in the volume of payments had to come

from either increased

money stocks and/or flows. Even if changes in demographic and other real

variables, shared responsibility for inflation by inducing changes in those

monetary variables, we are not permitted to ignore those variables in

explaining historical inflations.

Admittedly, from the 12th to the 18th centuries, to the modern Industrial

Revolution era, correlations between demographic and price movements are often

apparent. But why do so few historians consider the alternative proposition

that much more profound, deeper economic forces might have induced a complex

combination of general economic growth, monetary expansion, and a rise in

population, together (so that such apparent statistical relationships would

have adverse Durbin-Watson statistics to indicate significant serial

correlation)? Furthermore, if population growth is the inevitable root cause of

inflation, and population decline the purported cause of deflation, how do such

models explain why the drastic depopulations of the 14th-century Black Death


followed by three decades of severe inflation in most of western Europe?

Conversely, why did late 19th-century England experience the above-noted

deflation while its population grew from 23.41 million in 1873 (PB&H at 1437)

to 30.80 million in 1896 (PB&H

at 947)?

Nor is Fischer correct in asserting that, in each and every one of his four

price-revolutions, an increase in money supplies followed rather than preceded

or accompanied the rises in the price-level. For an individual country or

region, however

, one might argue that a rise in its own price level, as a consequence of a

transmitted rise in world or at least continental prices would have quickly —

and not after the long-time lags projected in Fischer’s analysis — produced an

increase in money supplies to satisfy the economic requirements for that rise

in national/regional prices. Fischer, however, fails to offer any theoretical

analysis of this phenomenon, and makes no reference to any of the well-known

publications on the Monetary Approach to the Balance of Payments [by Frenkel

and Johnson (1976), McCloskey and Zecher (1976), Dick and Floyd (1985, 1992);

Flynn (1978) and D. Fisher (1989), for the Price Revolution era itself]. In


and with some necessary repetition, this thesis contends:

(1) that a rise in world price levels, initially arising from increases in

world monetary stocks, is transmitted to most countries through the mechanisms

of international commerce (in commodities, services, labor) and finance

(capital flows); and (2) that monetized metallic (coin) stocks and other

elements constituting M1 will be endogenously distributed among all countries

and/or regions in order to accommodate the consequent rise in the domestic

price levels, (3) without involving those international bullion flows that the

famous Hume “price- specie flow” mechanism postulates to be the consequences of

inflation-induced changes in national trade balances.

In any event, the historical evidence clearly demonstrates that, for each of

Fischer’s European-based price-revolutions, an increase in European monetary

stocks and flows always preceded the inflations. For the first,

the price-revolution of the “long-13th century” (c.1180-c.1325), Ian Blanchard

(1996) has recently demonstrated that within England its elf,

specifically in Cumberland-Northumberland, a very major silver mining boom had

commenced much earlier, c.1135-7, peaking in the 1170s, with annual silver

outputs that were “ten times more than had been produced in the whole of

Europe” for any year in

the past seven centuries. By the 1170s,

and thus still before evident signs of general inflation or a marked

demographic upswing, an even greater silver mining boom had begun in the Harz

Mountains region of Saxony, which continued to pour out vast quantities of

silver until the early 14th century. For this same

“Commercial Revolution” era, we must also consider the accompanying financial

revolution, also evident by the 1180s, in Genoa and Lombardy; and though one

may debate the impact that their deposit-

and-transfer banking and foreign-exchange banking had upon aggregate European

money supplies,

these institutional innovations undoubtedly did at least increase the volume of

monetary flows, and near the beginning, not the middle, of this first



For the far better known 16th-Century Price Revolution, Fischer seems to pose a

much greater threat to traditional monetary explanations, especially in so

quixotically dating its commencement in the 1470s, rather than in the 1520s.

Certainly Fischer and many other critics are on solid grounds in challenging

what had been, from the time of Jean Bodin (1566-78) to Earl Hamilton

(1928-35), the traditional monetary explanation for the origins of the Price

Revolution: namely, the influx of Spanish

American treasure. But not until after European inflation was well underway,

not until the mid-1530s, were any significant amounts of gold or silver being


(via Seville); and no truly large imports of silver are recorded before the

early 1560s (a

mean of 83,374 kg in 1561-55: TePaske 1983), when the mercury amalgamation

process was just beginning to effect a revolution in Spanish-American mining.

Those undisputed facts, however, in no way undermine the so-called

“monetarist” case; for Fischer, and far too many other economic historians,

have ignored the multitude of other monetary forces in play since the 1460s.

The first and least important factor was the Portuguese export of gold from

West Africa (Sao Jorge) beginning as a trickle in the 1460s;

rising to 170 kg per annum by 1480, and peaking at 680 kg p.a. in the late

1490s (Wilks 1993). Far more important was the Central European silver mining

boom, which began in the 1460s, at the very nadir of the West European

deflation, which had thus raised the purchasing power of silver and so

increased the profit incentive to seek out new silver sources: as a

technological revolution in both mechanical and chemical engineering.

According to John Nef (1941, 1952), when this German-based mining boom reached

its peak in the mid 1530s, it had augmented Europe’s silver outputs more than

five-fold, with an annual production that ranged from a minimum of 84,200 kg

fine silver to a maximum of 91,200 kg — and thus well in excess of any amounts

pouring into Seville before the mid-1560s. My own statistical compilations,

limited to just the major mines, indicate a rise in quinquennial mean

fine-silver outputs from 12,356 kg in 1470-74 to 55,025 kg in 1534-39 (Munro

1991). In England, 25-year mean mint outputs rose

from 18,932 kg silver in 1400-24 to 33,655 kg in 1475-99 to 59,090 kg in

1500-24; and then to 305,288 kg in 1550-74 (i.e., after Henry VIII’s

“Great Debasement”); in the southern Low Countries, those means go from 54,444

kg in 1450-74 to 280,958 kg in 15 50-74 (Challis 1992; Munro 1983,


In my view, however, equally important and probably even more important was the

financial revolution that had begun in or by the 1520s with legal sanctions for

and then legislation on full negotiability, and the contemporary establishment

of effective secondary markets (especially the Antwerp Bourse) in fully

negotiable bills and rentes, i.e., heritable government annuities; and the

latter owed their universal and growing popularity, compared with other forms

of public debt, to papal bulls (1425,

1455) that had exonerated them from any taint of usury. To give just one

example of a veritable explosion in this form of public credit (which thus

reduced the relative demand for gold and silver coins), an issue that Fischer

almost completely ignores: the annual volume of transactions in Spanish

heritable juros rose from 5 million ducats (of 375 maravedis) in 1515 to 83

million ducats in the 1590s (Vander Wee 1977). Thus we need not call upon

Spanish-American bullion imp orts to explain the monetary origins of the

European Price Revolution, though their importance in aggravating and

accelerating the extent of inflation from the 1550s need hardly be questioned,

especially, as Frank Spooner (1972) has so aptly demonstrated,

even anticipated arrivals of Spanish treasure fleets would induce German and

Genoese bankers to expand credit issues by some multiples of the perceived

bullion values. Fischer, by the way, comments (p. 82) that: “the largest

proportionate increases in Spanish prices occurred during the first half of

the sixteenth century — not the second half, when American treasure had its

greatest impact.” This is simply untrue: from 1500-49, the Spanish composite

price index rose 78.5%; from 1550-99, it rose by another 92.1% (Hamilton


Changes in money stocks or other monetary variables do not, however,

provide the complete explanation for the actual extent of inflation in this or

in any other era. Even if every inflationary price trend that I have

investigate d, from the 12th to 20th centuries, has been preceded or

accompanied by some form of monetary expansion, in none was the degree of

inflation directly proportional to the observed rate of monetary expansion,

with the possible exception of the post World War I hyperinflations.

Consider this proposition in terms of the oft-maligned, conceptually limited,

but still heuristically useful monetary equation MV = Py [in which real y = Y/P

= C + I + G+ (X-M)]; or, better, in terms of the Cambridge “real cash

balances” approach: M = kPy [in which k = the proportion of real NNI (Py) that

the public chooses to hold in real cash balances, reflecting the constituent

elements of Keynesian liquidity preference]. Some Keynesian economists would

contend that an increase in M, or in the rate of growth of money stocks, would

be accompanied by some

offsetting rise in y (i.e. real NNI), whether exogenously created or

endogenously induced by related forces of monetary expansion, and also by some

decline in the income velocity of money, with a reduced need to economize on

the use of money. Since mathematically V = 1/k, they would similarly posit

that an expansion in M,

or its rate of growth, would have led, ceteris paribus — without any change in

liquidity preference, to a fall

in (nominal) interest rates, and thus, by the consequent reduction in the

opportunity costs of holding cash balances, to the necessarily corresponding

rise in k (i.e., an increase in the demand for real cash balances; see Keynes

1936, pp. 306-07). Sometimes, but only very rarely, have changes in these two

latter variables y and V (1/k) fully offset an increase in M; and thus such

increases in money stocks have also resulted, in most historical instances, in

some non-proportional degree of inflation: a rising P, as measured by some

suitable price index, such as the Phelps Brown and Hopkins

basket-of-consumables. [Other economists,

it must be noted, would contend that, in any event, the traditional Keynesian

model is really not applicable to such long-term

phenomena as Fischer’s price-revolutions.

Keynes himself, in considering “how changes in the quantity of money affect

prices… in the long run,” said, in the General Theory (1936, p. 306):

“This is a question for historical generalisation rather than for

pure theory.”]

For the 16th-century Price Revolution, therefore, the interesting question now

becomes: not why did it occur so early (i.e., before significant influxes of

Spanish American bullion); but rather why so late — so many decades after the

onset of the Central European silver-copper mining boom?

Since that boom had commenced in the 1460s, precisely when late-medieval

Europe’s population was at its nadir, perhaps 50% below the 1300 peak, and just

after the Hundred Years’ War had ended, and just

after the complex network of overland continental trade routes between Italy

and NW Europe had been successfully restored, one might contend that in such an

economy with so much “slack” in under-utilized resources, especially land, and

with elastic supplies for so many commodities, both the monetary expansion and

economic recovery of the later 15th century , preceding any dramatic

demographic recovery, permitted an increase in y proportional to the growth of

M, without the onset of diminishing returns an d without significant inflation,

before the 1520s By that decade, however, the monetary expansion had become

all the more powerful: with the peak of the Central European silver-mining

boom and with the rapid increase in the use of negotiable, transferable

credit instruments; and, furthermore, with the Ottoman conquest of the Mamluk

Sultanate (1517), which evidently diverted some considerable amounts of

Venetian silver exports from the Levant to the Antwerp market.

The role of the income-velocity of money

is far more problematic. According to Keynesian expectations, velocity should

have fallen with such increases in money stocks. Yet three eminent economic

historians — Harry Miskimin

(1975), Jack Goldstone (1984), and Peter Lindert (1985) — have sought

to explain England’s16th-century Price Revolution by a very contrary thesis:

of increased money flows (or reductions in k) that were induced by demographic

and structural economic changes, involving interalia(according to their

various models) disproportionate changes in urbanization, greater

commercialization of the rural sectors, far more complex commercial and

financial networks, changes in dependency ratios, etc. The specific

circumstances so portrayed, however, apart from the demographic, are largely

peculiar to 16th- century England and thus do not so convincingly explain the

very similar patterns of inflation in the 16th-century Low Countries, which had

undergone most of these structural economic changes far earlier. Certainly

these velocity model s cannot logically be applied to Fischer’s three other

inflationary long-waves. Indeed, in an article implicitly validating Keynesian

views, Nicholas Mayhew (1995) has contended that the income-velocity of money

has always fallen with an expansion in money stocks, from the medieval to

modern eras, with this one anomalous exception of the 16th-century Price

Revolution. Perhaps, for this one era,

we have misspecified V (or k) by misspecifiying M: i.e., by not properly

including increased issues of negotiable credit; or perhaps institutional

changes in credit (as Goldstone and Miskimin both suggest) did have as dramatic

an effect on V as on M. Furthermore, an equally radical change in the coined

money supply (certainly in England), from one that had been principally gold

to one which, precisely from the 1520s, became largely and then almost entirely

silver, may provide the solution to the velocity paradox: in that the

transactions velocity attached to small value silver coins, of 1d., is

obviously far higher

velocity than that for gold coins valued at 80d and 120d. Except for a brief

reference to Mayhew’s article in the lengthy bibliography, Fischer virtually

ignores such velocity issues

(and thus changes in the demand for real cash balances) throughout his

eight-century survey of secular price trends.

Finally, Fischer’s thesis that population growth was responsible for this the

most famous Price Revolution (and all other inflationary long waves) is hardly

credible, especially if he insists on dating its inception the 1470s. For most

economic historians (Vander Wee 1963; Blanchard 1970;

Hatcher 1977, 1986; Campbell 1981; Harvey 1993) contend that, in NW Europe,

late-medieval demographic decline continued into the early 16th-century;

and that England’s population in 1520 was no more than 2.25 million,

compared to estimates ranging from a minimum of 4.0 to a maximum of 6.0 or even

7.0 million around 1300, the upper bounds being favored by most historians. How

– even if the demographic model were to be theoretically acceptable — could

a modest population growth from such a very low level in the 1520s, reaching

perhaps 2.83 million in 1541, and peaking at 5.39 million in 1656, have been

the fundamental cause of persistent, European wide-inflation, already underway

in the 1520s?

According to Fischer, the ensuing, intervening price-equilibrium

(c.1650-c.1730) involved no discernible monetary contraction, and similarly,

his next inflationary long-wave (c.1730-1815) began well before any monetary

expansion became — in his view — manifestly evident. The monetary and price

data, suggest otherwise, however, incomplete though they may be. Thus, the data

complied by Bakewell, Cross, TePaske, and many others on silver mining at

Potosi (Peru) and Zacatecas (Mexico) indicate that their combined outputs fell

from a mean of 178,692 kg in 1636-40 to one of 101,534 kg in 1661-5, rising to

a mean of 156,497 kg in 1681-5

[partially corresponding to guesstimates of European bullion imports, which

Morineau (1985) extracted fr om Dutch gazettes]; but then sharply falling once

more, and even further, to a more meager mean of 95,842 kg in 1696-1700. During

this same era, the Viceroyalty of Peru’s domestically-

retained share of silver-based public revenues rose from 54% to 96%

(T ePaske 1981); the combined silver exports of the Dutch and English East

India Companies to Asia (Chaudhuri 1968; Gaastra 1983) increased from a

decennial mean of 17,293 kg in 1660-69 to 73,687 kg in 1700-09, while English

mint outputs in terms of fine sil ver (Challis 1992) fell from a mean of 19,400

kg in 1660-64 (but 23,781 kg in 1675-79) to one of just 430.4 kg in 1690-94,

i.e., preceding the Great Recoinage of 1696-98. From the early 18th century,

however, European silver exports to Asia were well more

than offset by a dramatic rise in Spanish-American, and especially Mexican

silver production: for the latter (with evidence from new or previously

unrecorded mines: assembled by Bakewell 1975, 1984; Garner 1980,

1987; Coatsworth 1986, and others), aggregate production more than doubled

from a mean of 129,878 kg in 1700-04 to one of 305,861 kg in 1745-49.

Possibly even more important, especially with England’s currency shift from a

silver to a gold standard, was a veritable explosion in aggregate

Latin-American gold production: from a decennial mean of just 863.90 kg in


zooming to 16,917.4 kg in 1741-50 (TePaske 1998). Within Europe itself, as

Blanchard (1989) has demonstrated, Russian silver mining outputs, ultimately

responsible for perhaps 7%

of Europe’s total stocks,

rose from virtually nothing in the late 1720s to peak at 33,000 kg per annum in

the late 1770s, falling to 18,000 kg in the early 1790s then rising to 21,000

kg per year in the later 1790s.

Finally, even though changes in annual mint outputs are not valid indicators

of changes in coined money supplies, let alone of changes in M1,

the fifty-year means of aggregate values of English mint outputs (silver and

gold: Challis 1992) do provide interesting signals of longer-term monetary

changes: a fall from an annual mean of 348,829 pounds in 1596-1645 to one of

275,403 pounds in 1646-95, followed by a rise, with more than a full recovery,

to an annual mean of 369,644 pounds in 1700-49 (thus excluding the Great

Recoinage of 1696-98). Meanwhile, if the earlier Price Revolution had indeed

peaked in 1645-49, with the quinquennial mean PB&H index at 680, falling to a

nadir of 579 in 1690-94, the fluctuations in the first half of the 18th-century

do not demonstrate any clear inflationary trend, with the mean PB&H index

(briefly peaking at 635 in 1725-9) stalled at virtually the same former level,

581, in 1745-49. Thereafter, of course,

for the second half of the 18th century, the trend is very strongly and

incessantly upward, with almost a

doubling in PB&H index, to 1093 in 1795-9.

Whatever one may wish to deduce from all these diverse data sets, we are

certainly not permitted to conclude, as does Fischer, that inflation preceded

monetary expansion, and did so consistently. Such a view becomes all the more

untenable when the radical changes in English and banking and credit

institutions, following the establishment of the Bank of England in 1694-97,

are taken into account: the consequent introduction and rapid expansion in

legal-tender paper bank note issues (with prior informal issues by London’s

Goldsmith banks), and more especially fully negotiable,

transferable, and discountable Exchequer bills, government annuities,

inland bills and promissory notes, whose veritable explosion in circulation

from the 1760s, with the proliferation of English country-banks, hardly

requires any further elaboration, even if these issues are given short shrift

in Fischer’s book. In view of such complex changes in Britain’s financial and

monetary structures,

subsequent data on coinage outputs have even more limited utility in

estimating money stocks. But we may note that aggregate mined outputs of

Mexican silver more than doubled, from a quinquennial mean of 305,861 kg in

1745-49 to 619,495 kg in 1795-99, while those of Peru more than tripled, from

34,318 kg in 1735-39 (no data for the 1740s) to 126,354 kg in 1795-99 (Garner

1980, 1987; Bakewell 1975, 1984; J.

Fisher, 1975).

Having earlier considered the so-called and misconstrued

“price-equilibrium” of 182 0-1896, let us now finally examine the inception of

the fourth and final long-wave commencing in 1896. Fischer again contends that

population growth was the “prime mover,” despite the fact that Britain’s own

intrinsic growth rate had been falling from its

1821 peak [from 1.75 to 1.31 in 1865, the last year given in Wrigley-Davies-

Oppen-Schofield (1997)]. For evidence he cites an assertion in Colin McEvedy

and Richard Jones, Atlas of World Population History (1978) to the effect that

world population, having increased by 35% from 1850 to 1900,

increased a further 53% by 1950. Are we therefore to believe that such growth

was itself responsible for a 45.2% rise in, for this era, the better structured

Rousseaux price-index [base 100 = (1865cp +1885cp)/2]: from 73 in 1896 to 106

[while the PB&H index rose from 947 in 1896 to 1021 in 1913]?

As for the role of monetary factors in the commencement of this fourth long

wave, Fischer observes (p. 184) that “the rate of growth in gold production

throughout the world was roughly the same before and after 1896.” This

undocumented assertion, about an international economy whose commerce and

finance was now based upon the gold standard, is not quite accurate.

According to assiduously calculated estimates in Eichengreen

and McLean

(1994), decennial mean world gold outputs, having fallen from 185,900 kg in

1850-9 to 135,000 kg in 1880-9 (largely accompanying the aforementioned 44%

fall in the Rousseaux composite index from 128 in 1872 to 72 in 1895),

thereafter soared to

a mean of 255,600 kg in 1890-9 — their graph of annualized data shows that

the bulk of this increased output occurred after 1896 — virtually doubling to

an annual mean of 513,900 kg in 1900-14.

World War I, of course, effectively ended the international gold-standard era,

since the Gold- Exchange Standard of 1925-6 was rather different from the older

system; and the post-war era ushered in a radically new monetary world of fiat

paper currencies, whose initial horrendous manifestation came in the hyper

inflations of Weimar Germany, Russia, and most Central European countries, in

the early 1920s. For this post-war economy, Fischer does admit that monetary

factors often had some considerable importance in influencing price trends; but

his analyses, even of the post-war radical, paper-fuelled hyperinflations, are

not likely to satisfy most economists, either for the inter-war or Post World

War II eras, up to the present day.

This review, long as it is, cannot possibly do full justice to an eight-century

study of this scope and magnitude. So far I have neglected to consider his

often fascinating analyses of the social consequences of inflation over these

many centuries, except for brief allusions in the introduction, where I

indicated his deeply hostile views to persistent inflation for its inevitably

insidious consequences: the impoverishment of the masses, growing malnutrition,

the spread of killer-diseases, increased crime and violence in general, and a

breakdown of the social order, etc.

While some of

the evidence for the latter seems plausible, I do have some concluding quarrels

with his use of real wage indices. Much of our available nominal money-wage

evidence comes from institutional sources on daily wages, which, by their very

nature, tend to be fixed over long periods of time [as Adam Smith noted in the

Wealth of Nations (Cannan ed.

1937, p. 74), “sometimes for half a century together”). Therefore, for such

wage series, real wages rose and fell with the consumer price index, as

measured by, for example, our Phelps Brown and Hopkins basket-of-consumables

index. Its chief problem (as opposed to the better constructed Vander Wee

index for Brabant) is that its components, for long periods, constitute fixed

percentages of the total composite index,

irrespective of changes in relative prices for, say, grains; and they thus do

not reflect the consumers’ ability to make cost-saving substitutions.

Secondly, they are necessarily based on daily wage rates, without any

indication of total annual money incomes; thirdly, the great majority of

money-wage earners in pre-modern Europe earned not day rates but piece-work

wages, for which evidence is extremely scant.

But more important, before the 18th century (or even later), a majority of the

European population did not live by money wages; and most wage-earners had

supplementary forms of income, especially agricultural, that helped insulate

them to some degree from sharp rises in food prices. If rising food prices hurt

many wage-earners, they also benefited ma ny peasants,

especially those with customary tenures and fixed rentals who could thereby

capture some of the economic rent accruing on their lands with such price

increases. It may be simplistic to note that there are always gainers and

losers with both inflation and deflation — but even more simplistic to focus

only on the latter in times of inflation, and especially simplistic to focus on

a real wage index based on the PB&H index. And if deflation is so beneficial

for the masses, why, during the deflationary period in later 17th and early

18th century England, do we find, along with a rise in this real-wage index, a

rise in the death rate from 23.68/1000 in 1626 to 32.14/1000 in 1681,

thereafter falling slightly but rising again to an ultimate peak of

37.00/1000 in 1725 (admittedly an era of anomalous disease-related

mortalities), when the PB&H real-wage index stood at 60 —

some 24% higher than the RWI of 36 for 1626? One of the many imponderables yet

to be considered, though one might ponder that sometimes high real wages

reflect labor shortages from dire conditions, rather than general prosperity

and more equitable wealth and income distributions, as Fischer suggests.

Finally, Fischer’s argument that inflationary price-revolutions were always

especially harmful to the lower classes by leading to rising interest rates is

sometimes but not universally true, even if rational creditors should have

raised rates to protect themselves from inflation. Thus, for the Antwerp money

market in the 16th century,

the meticulous evidence compiled by Vander Wee (1964, 1977) shows that

nominal interest rates fell over this entire period [from 20% in 1515 to 9% in

1549 to 5% in 1561; and on the riskier short term loans to the Habsburg

government, from a mean of 19.5

% in 1506-10 to one of 12.3% in 1541-45 to 9.63% in 1561-55]. In the next

price-revolution, during the later 18th century, nominal interest rates did

rise during periods of costly warfare, i.e., with an increasing risk premium;

but real interest rates actually fell because of the increasing tempo of

inflation (Turner 1984), more so than did real wages for most industrial



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pre-1914 Gold Standard,” The Economic History Review, 2nd ser., 47:2 (May



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Harry Johnson, “The Monetary Approach to Balance-of-Payments Theory,” pp.


67; Donald N. McCloskey and J. Richard Zecher, “How the Gold Standard Worked,

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1351 – 1500 (Cambridge, Massachusetts: Harvard University Press, 1936).

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(London, 1936).

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the Price Revolution in England,”

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and the Low Countries,” in John F. Richards, ed., Precious Metals in the

Medieval and Early Modern Worlds (Durham, N.C., 1983), pp. 97-158.

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the Monetary History of Asia and Europe (From Antiquity to Modern Times)

(Leuven: Leuven University Press,

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Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Between the Dollar-Sterling Gold Points: Exchange Rates, Parity, and Market Behavior

Author(s):Officer, Lawrence H.
Reviewer(s):Taylor, Alan M.

Published by EH.NET (March 1998)

Lawrence H. Officer, Between the Dollar-Sterling Gold Points: Exchange Rates, Parity, and Market Behavior. Cambridge: Cambridge University Press, 1996. xxi, 342 pp. $59.95 (cloth), ISBN: 0521365384.

Reviewed for EH.NET by Alan M. Taylor, Department of Economics, Northwestern University.

Lawrence Officer has been making influential contributions to international and monetary economics and history for many years. He is perhaps best known to economic historians for his work on exchange market arbitrage under gold (or read, metallic) standards. In a series of tightly-argued journal articles he challenged the widely accepted revisionist scholarship that had sought to depict the gold standard as inefficient and unstable, building his case on a monumental collection of primary data, careful statistical inference, and elegant theory. The present book extends and buttresses these arguments, sustaining a well-documented analysis of this monetary regime for over three hundred pages. The work focuses on the U.K.-U.S. foreign exchange market and leaves us with probably the most comprehensive and informative single treatise on this centuries-old institution. The work will be invaluable to macroeconomic historians interested in Britain and the U.S. in the late nineteenth and early twentieth centuries, and it should provide a good model for others wishing to understand similar monetary regimes at other times and places.

The introduction itself lays out the plan of the book. Officer makes his key point here that the subject is not just about whether gold points were violated, but that a complete analysis must examine the position of the exchange rate as an object of study, at all points inside and outside the gold-point boundaries. To this end, the author makes the case for getting the best possible data, at the highest frequency, for the longest time span. Finally, the key questions of market integration and efficiency (of the market and of the regime) are to be considered.

Part One of the book lays down the key historical and institutional features of the landscape from the beginning of the dollar-sterling gold standard in 1791 (when the U.S. went to a formal metallic standard) to its demise in 1931 (when Britain suspended convertibility). The laws and mechanics of coinage, minting, convertibility of paper to metal, dealings in the market and at banks, and so forth are all carefully described. The text and tables note significant legislative acts forcing regime changes for both countries in this entire time span, including changes in the metal of the standard for the U.S., and changes in parities for both countries (i.e., the metal content of the unit of account). Periods of convertibility and inconvertibility are shown.

Part Two comprises an exhaustively constructed data set to permit the study of this institution. First, the relatively simple job of computing implied parities is achieved using the information on metallic content in Part One, plus data on market prices of gold and silver (in U.S. bimetallic episodes). We find that from 1837, until 1931, after its initial wavering, the dollar-pound parity rate settled at the famous 4.8665635 point for well nigh a century. The market exchange rate was not so stable, and a long chapter discusses the sources and their quality, usefulness, and representativeness. Officer is eventually able to present data on the dollar-pound exchange rate for the entire period at quarterly frequency. In addition, monthly series are constructed for some periods: 1890-1906; 1925-1931; and, for a Bretton-Woods era comparison, 1950-66. Pre-1879 great care is taken (following Perkins, not Davis and Hughes) to adjust the bills of exchange to a uniform zero (“sight”) maturity. This ensures temporal consistency with the later cable rates; it also reflects the ultimate dominance of the sight bill as an instrument in the 1879-1914 heyday of the gold standard. An implicit sight rate is derived from the price of non-demand bills and the British interest rate. Care is also taken to find a mid-point of the buy-sell rates, using information on brokers’ commissions; and further care to correct the exchange rate for devaluations of paper during paper standard periods. This level of care exceeds previous studies, and survives testing for the consistency and homogeneity of the series. This is probably the best quality data for the dollar-sterling exchange rate we now have for the entire period; it will be an essential series for future scholars. Some interesting patterns appear just from a quick look at this series (Figure 7.1, p. 102): the volatility of the exchange rate declined dramatically in the early nineteenth century; the standard deviation in 1791-1820 was about 4-6%, but had fallen to less than 0.5% after 1871, and less than 0.2% in 1901-14.

Part Three makes the next logical step: comparing the above exchange rate series with the level of known arbitrage costs; i.e., the question is whether the exchange rate remained within the gold points. This is a point of departure for another exhaustive data-building effort. To construct gold points requires information on costs of freight, insurance, brassage, knowledge of any gold devices used by the monetary authorities, and interest costs due to the time delay of shipment across the Atlantic Ocean. All of these are put together with the same thoroughness as the exchange rate data. The care taken places these estimates on a far firmer footing than earlier estimates which had typically cut corners (cf. Clark, who had assumed ad hoc constant transaction costs). And the method is clearly far superior to any of the simpler techniques offered in other sources: taking a consensus estimate of brokers; using the terribly flawed gold flow data in a revealed preference method; using a pure max-and-min spread (violations impossible!); or using piecemeal aggregate arbitrage cost data from temporally disjoint sources. Essentially Officer proceeds with a laborious first-principles approach: each and every arbitrage cost component is individually estimated, then summed up, at each point in time. This consumes 62 pages; it is hard to imagine any improvement on these series for gold import and export points in this market, and this is the model for similar work on any other market.

The data are valuable and inform two integration tests in Part IV. The decline of gold point spreads mirrors that of the decline of exchange rate volatility, as expected. After 1880, this spread was at an all-time low level (even looking forward to 1925-1931 and Bretton Woods) of just above 1.0% for gold arbitrage. (Compare with around 5% in 1780, falling to about 2% in the 1840s). Officer sees this as improved “external” integration (external to the gold points) over time. Officer then studies whether even within the band, the exchange rate can reveal improved “internal” integration over time. Econometrically this section is less fully developed. For example, the relevant time series properties of the exchange rate series are not fully spelled out, making for some problems of inference. It is not clear whether we expect, say, a random walk between the gold points. (And what about beyond?) In a complicated nonlinear model such as this, the unconditional (raw) distribution of the exchange rate can have peculiar shapes. Officer, however, considers that a uniform distribution is “natural” (p. 189) in this zone. For the criterion of “internal integration” as Officer terms it, the focus is on whether “on average” the deviation of the exchange rate from parity is less than half the gold point spread, looking at absolute deviations. Again, by this measure, integration rapidly increases prior to the 1870s, then holds steady. A big jump is seen in the 1820s. Econometrics aside, this chapter places greater emphasis on explaining long-run tightening in the exchange rate distribution, and, especially within the band. As an explanation, Officer considers the role of the Second Bank of the United States critical in reducing dispersion in the 1820s. This trend was assisted by private agents such as the House of Brown, and, later in the nineteenth century, the New York private banks.

Part V conducts various tests for violations of market efficiency. The first test looks at gold-point violations: they are few– only four months during 1890-1906, and none in 1925-1931, for example. Far fewer than in previous studies, we should note. Thus Officer’s findings are very favorable to an efficient gold standard. Earlier work is faulted for using the wrong data (e.g., cable rates) or poor measures of arbitrage costs (bad gold point estimates). Correspondingly, Officer tests for failures of uncovered interest arbitrage (following Morgenstern), covered interest arbitrage and forward speculation for the 1925-31 period. Here there are substantial failings, with unexploited profit opportunities. These are seen as following from episodic losses of confidence in the regime. It would be interesting to see similar work on the classical gold standard regime pre-1914. However, in Part VI some comparisons are drawn and, under auxiliary assumptions about the exchange rate distribution (once more) it is shown that the interwar standard was not markedly worse than its prewar cousin. Part VII concludes.

Overall, this book offers an exhaustingly comprehensive analysis of the dollar-sterling market from the 1790s to the early post-WWII period. The data work cannot be faulted, and pushes our knowledge to a much higher plane than ever before. The empirical analysis confirms our priors concerning the convergence of this market on a high level of integration by 1880. The work leaves open some interesting doors for more sophisticated econometric analysis that could engage future scholars, but in many other respects this is the final word.

(Lawrence H. Officer is Professor of Economics at the University of Illinois, Chicago.)

Alan M. Taylor is an Assistant Professor of Economics at Northwestern University, a Faculty Research Fellow of the National Bureau of Economic Research, and a 1997-98 National Fellow at the Hoover Institution, Stanford University. His current research is in two main areas: the evolution of global capital markets, and the economic history of Argentina. He serves as co-editor of the EH.Net discussion list EH.Res.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):19th Century

Globalizing Capital: A History of the International Monetary System

Author(s):Eichengreen, Barry J.
Reviewer(s):Selgin, George

Published by EH.NET (October 1997)

Barry J. Eichengreen, Globalizing Capital: A History of the International Monetary System. Princeton: Princeton University Press, 1996. viii + 223 pp. $24.95 (cloth), ISBN: 0-691-02880-X.

Reviewed for EH.NET by George Selgin, Department of Economics, University of Georgia.

In 1892 the English economist Robert Giffen published an article entitled “Fancy Monetary Standards.” Objecting to a recent proposal for a new monetary standard aimed at stabilizing the purchasing power of money, Giffen observed that “Governments, when they meddle with money, are so apt to make blunders…that a nation which has a good money should beware of its being tampered with.” If we mess with the gold standard, in other words, “we can never tell…what confusion and mischief we may be introducing.” (1)

A generation later, the gold standard was not only tampered with, but largely dismantled. The international monetary system has been witness to a great deal of “confusion and mischief” ever since, including such “fancy” payments arrangements as the IMF, the EPU, the BIS and the EMS, elaborate multinational structures designed by international committees, and regularly shorn-up by exchange controls, stand-by arrangements, SDR’s, gold-pools, and other ad-hoc devices aimed at forestalling major devaluations.

The ultimate failure of all such arrangements, as well as the abandonment of the international gold standard itself, has led Berkeley economist Barry Eichengreen to wonder whether any system of fixed, or at least relatively stable, exchange rates can survive in a world of democratic governments. His book, Globalizing Capital: A History of the International Monetary System, supplies a negative answer. Elaborating a thesis put forth by Karl Polanyi in 1944, Eichengreen argues that modern democratic governments are bound to yield to pressures to pursue goals, such as the avoidance of cyclical unemployment, that conflict with the maintenance of fixed or pegged exchange rates. The history of the international monetary system, according to Eichengreen, is largely a history of major governments’ gradual, grudging acknowledgment of a conflict between internal and external monetary stability, and their generally unsuccessful efforts to overcome the conflict by means of international cooperation. Eichengreen’s book tells the story in four meaty but easily digested chapters (plus an introduction and conclusion, both very brief), covering the gold standard, the interwar period, the Bretton Woods System, and post-Bretton Woods developments.

Eichengreen’s general thesis offers a useful starting point for understanding the often Byzantine political economy of international monetary relations, and he is at his best when offering pithy public-choice explanations for major international monetary developments. For example, Eichengreen accounts for Germany’s seemingly self-destructive support for monetary union by noting that “Germany desired not just an integrated European market, but also deeper political integration in the context of which [it] might gain a foreign policy role. Monetary union was the quid pro quo.” Not the last word, perhaps, but as good and succinct an explanation as I’ve read so far.

Some of Eichengreen’s explanations are perhaps a little too simple, as when he attributes the dollar’s decline after the mid-1980s to the fact that an overvalued currency “imposes high costs on concentrated interests,” whereas an undervalued currency “imposes only modest costs on diffuse interests.” (Just how does America’s involvement in the Louvre Accord of 1987–a failed attempt to restrain the fall of the dollar–square with this public-choice insight? Could it be that the dollar’s decline was simply unavoidable?)

I also wonder whether Eichengreen’s main point concerning the incompatibility of democracy with stable exchange rates really gets to the root cause of the move to floating exchange rates. In some loose sense, of course, democratic pressures fueled the abandonment of the international gold standard and of later schemes for pegging exchange rates. But we should not forget the context: previous changes in domestic monetary arrangements that subjected money to government control. Of particular importance was the establishment of central banks, which removed the enforcement of the gold- standard mechanism from the hands of private, competing bankers, increasing the risk of both a suspension of payments and subsequent yielding to inflationary pressures. Twentieth-century voters might never have developed a taste for accommodative monetary policies had non-democratic governments of previous centuries not set a precedent for such policies by reshaping monetary arrangements to serve their own fiscal ends. After all, the survival of the prewar regime was not so much a reflection of governments’ “single minded pursuit of exchange rate stability” (as Eichengreen claims) as it was a largely unintentional byproduct of private financial firms’ contractual obligations to their customers.

Eichengreen also tends, in my view, to overstate the extent to which democratic nations must rely upon accommodative central bank policies, unhindered by fixed exchange rates, to avoid financial and macroeconomic turmoil. For example, in discussing the success of recent currency board-like arrangements, he argues that they have worked best where banking systems have been heavily internationalized, treating the openness of a nation’s banking system as a given. But that openness is itself to some extent at least a matter of policy. The voters may well favor demand-management approaches to structural alternatives for avoiding financial instability; but this preference has more to do with special-interest politics standing in the way of desirable structural reforms than with sound economic theory.

Nor is it altogether obvious that the international gold standard promoted internal macroeconomic instability. Although the standard proved deflationary until the mid-1890s, this deflation does not seem to have stifled economic growth. (Even Marshall, whom Eichengreen cites as a critic of gold, suggested that the deflation might actually have been beneficial.) This isn’t to deny that the nineteenth century was marked by numerous financial crises in some countries; but those crises and later ones as well had more to do with faulty financial legislation than with any shortage of gold. Thus Scotland, with its relatively free banking system, was largely untouched by the banking crises that forced English banks to seek last-resort aid while also forcing the Bank of England to increase its fiduciary issue; and during the 1907 “credit squeeze” in the United States, private Canadian banks helped make up for a shortage of U.S. currency due in large part to legal restrictions on U.S. banks. (The Canadian banks ran into legal limits themselves, which were then loosened.)

The restored gold standard of the 20s and 30s was another matter entirely. Here central banks played an active role, mainly by trying to run the gold standard on the cheap, supplementing gold reserves with holdings of foreign exchange (instead of further devaluing their currencies or enduring more deflation so as to achieve a higher, sustainable relative price of gold). This cartel-like arrangement could only work so long as creditor central banks resisted the temptation to cash in their foreign exchange holdings. It was, consequently, far more vulnerable to speculative collapse than its prewar counterpart.

In short, while Eichengreen credits “collaboration among central banks and governments” with the maintenance of the gold standard, I am inclined to think that government and central bank involvement tended to undermine the gold standard’s success. The Canadian case is again relevant here, for Canada had little difficulty maintaining its gold standard until 1914 while avoiding financial crises without the help of a central bank, even while experiencing massive capital inflows. The point is of fundamental importance, because it suggests that, notwithstanding what Keynes argued in 1941, a stable exchange rate regime might be just as “automatic” and unreliant upon the chimera of “international cooperation” as one based upon free-floating rates.

On the whole, though, I highly recommend Eichengreen’s book. It is largely compelling, thought-provoking, highly informative, and a pleasure to read.

1. Robert Giffen, “Fancy Monetary Standards,” in Economic Inquiries and Studies (London: George Bell and Sons, 1904), pp. 168-9.

George Selgin Department of Economics University of Georgia

George Selgin is an Associate Professor of Economics at the University of Georgia. His recent publications include Less Than Zero: The Case for a Falling Price Level in a Growing Economy (London: Institute of Economic Affairs, 1997) and Bank Deregulation and Monetary Order (London: Routledge, 1996).


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

The Second Bank of the United States: “Central” Banker in an Era of Nation-Building, 1816-1836

Author(s):Knodell, Jane Ellen
Reviewer(s):Brennecke, Claire

Published by EH.Net (May 2018)

Jane Ellen Knodell, The Second Bank of the United States: “Central” Banker in an Era of Nation-Building, 1816-1836. New York: Routledge, 2017. xiii + 188 pp. $110 (hardback), ISBN: 978-1-138-78662-2.

Reviewed for EH.Net by Claire Brennecke, Federal Deposit Insurance Corporation.

Many economic historians have analyzed the Second Bank of the United States through the lens of modern central banking. In The Second Bank of the United States: ‘Central’ Banker in an Era of Nation-Building, 1816-1836, Jane Knodell builds on this literature with a unique and nuanced view of the institution. Knodell argues that the Second Bank of the United States did not act as a modern central bank, as it did not provide services to state banks: the Bank did not act as a lender of last resort or issue high powered money for state banks to use as a reserve currency. But neither was the Bank purely a profit-maximizing commercial bank. The Bank acted in the national interest when it took on the role of a fiscal agent for the federal government and when it maintained monetary stability through specie market operations. Knodell draws on a variety of sources to present this case including contemporary accounts, state bank balance sheet data, and Second Bank branch geography.

Knodell begins, in the second chapter, by pointing out that the Second Bank was never intended to explicitly support state banks. Congress chartered the Bank to address specific challenges that the United States government faced in the early nineteenth century. The federal government was more concerned with the possibility of a public finance crisis rather than a banking crisis. The Second Bank was founded in order to create a uniform currency for the national government and transfer public funds around the country. The Bank placed many of its branches to help achieve this goal, as well as placing branches to provide a place to deposit custom duties. It also exploited its monopoly on interstate branching to profit by placing other branches in locations with few state banks and more growth potential.

Modern central banks produce monetary stability in part by issuing high-powered money for commercial banks to use as reserves and by acting as a lender of last resort (LOLR) for banks. Knodell uses state bank balance sheet data to show that those banks never considered Second Bank notes high-powered money. Moreover, the Bank did not even allow state banks to use the Second Bank’s large-denomination notes for interbank payments (p. 104). Neither did the Second Bank create stability by acting as a LOLR to state banks during the crisis of 1825-26.

However, the Second Bank did act to create monetary stability in ways possibly unfamiliar to scholars of modern central banking. Primarily, the Bank managed the monetary system through specie market operations. As discussed in Chapter 4, the Bank accumulated significant specie reserves through its trade in the domestic and foreign bills of exchange markets. These specie reserves allowed the Bank to conduct specie market operations that stabilized the money markets and suppressed private arbitrage. Through these operations, the Bank both earned profit and acted in the national interest.

In this book, Knodell makes a convincing case that the Second Bank of the United States was neither a conventional modern central bank nor a purely profit-motivated commercial bank. Furthermore, she makes excellent use of a variety of data sources to clearly lay out her argument. However, she misses an opportunity to discuss what the history of the Second Bank can tell us about a) the purpose of a central bank and b) the American economy in the early nineteenth century. Modern central banks affect the economy primarily through their interactions with commercial banks. However, the importance of a central bank comes from its impact on the economy, not the specific policies. The book could have gone further to consider how the Second Bank compares to modern central banks in its motives rather than just its policies. Furthermore, the policies of the Bank were specific to the early nineteenth century U.S. economy. The book could have explored what these policies reveal about how the economy functioned historically relative to how it does today. For example, the Second Bank arguably did create high-powered money for merchants even if it did not do so for banks, and so provided a useful service in creating currency for exchange. The Bank allowed non-bank members of the public, but not banks, to redeem notes for specie at par at all bank branches (p. 127). The book could have discussed the goal of the policy, what that goal tells us about central banking, and what the decision to use this policy to achieve that goal tells us about the broader economy. Overall, this book is an important contribution to the understanding of the Second Bank of the United States and an excellent point of reference for scholars of early American economic and political history.

Claire Brennecke is a financial economist with the Federal Deposit Insurance Corporation. Any opinions, findings, conclusions, and recommendations expressed above are those of the author and do not necessarily reflect the views of the Federal Deposit Insurance Corporation. She is the author of “Information Acquisition in Antebellum U.S. Credit Markets: Evidence from Nineteenth-Century Credit Reports,” FDIC Center for Financial Research Working Paper No. 2016-04.

Copyright (c) 2018 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 ( Published by EH.Net (May 2018). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):19th Century

Conflict and Commerce in Maritime East Asia: The Zheng Family and the Shaping of the Modern World, c. 1620-1720

Author(s):Hang, Xing
Reviewer(s):Gipouloux, François

Published by EH.Net (November 2017)

Xing Hang, Conflict and Commerce in Maritime East Asia: The Zheng Family and the Shaping of the Modern World, c. 1620-1720. New York: Cambridge University Press, 2017. xii + 332 pp. $100 (hardback), ISBN: 978-1-107-12184-3.

Reviewed for EH.Net by François Gipouloux, CNRS, Ecole des Hautes Etudes en Sciences Sociales.

This book by Xing Hang (assistant professor of history at Brandeis University) follows the trends of recent scholarship on maritime history. (For example, Li Kangying on Ming maritime policy, Zhao Gang on Qing relations with the seas, David Dahpon Ho on the Qing maritime frontier and Tonio Andrade on Taiwan). It is also a brilliant addition to prior work by John Wills, Patrizia Carioti on Zheng Chenggong, as well as Paola Calanca on smugglers and pirates on the Fujian coast.

The book is a contribution to the economic history of an empire’s periphery (China’s south-eastern coast and Taiwan), but at the same time offers a thoughtful view of the diplomatic and military aspects of the Ming-Qing transition. The book also covers the background of the world’s first globalization: how China interacted with other polities, how the Zhengs were able to challenge the financial power of great actors like the Dutch East India Company (VOC), and how the East Asian region began to integrate into a nascent world system.

Conflict and Commerce in Maritime East Asia is an enjoyable read. It covers four generations of the Zheng family, roughly from the early sixteenth century through to the fall of Taiwan to the Qing, in 1683. The book is divided into eight chapters. Three appendixes provide a wide range of quantitative data regarding the volume of the overseas trade managed by the Zheng clan. Appendix 3, in particular, includes very detailed figures of Zheng trade at Nagasaki, which surpassed VOC trade during the 1650-1662 period.

Hang has tapped into a large number of sources, ranging from memoirs, Zheng documents from private collections and Qing archives, along with Dutch, English, Japanese, Korean and Spanish historical records, and inscriptions collected during field work in Fujian. The merit of Hang’s work is that he gathers together a large number of previously disconnected elements in Chinese and Western scholarship, including intra-Asiatic economic changes, military issues, ideological frameworks and business techniques, and he has thus drawn a very complete picture of an autonomous polity, at the periphery of the Chinese empire during the Ming-Qing transition. This was an exuberant periphery, which grew swiftly within the context of the conflict between Ming loyalists and Qing conquerors.

In seventeenth century East Asia, there occurred simultaneously a great, structured expansion of foreign powers and a transition in China’s role in international trade. Hang guides us through a changing geopolitical environment in which the collapse of the southern Ming imposed a complete redirection of economic flows with the emergence of the Indian subcontinent as a prominent silk producer. The Zheng trading organization proved well adapted to the change China underwent in the 1650s, moving from a producer of luxury goods to an importer and processor of raw materials and setting up of a circuit involving Indian textiles and Southeast Asian raw materials in exchange for Japanese silver and Chinese gold.

For a readership focusing on economic history, Chapter 3, “Between Trade and Legitimacy,” is certainly the most thought provoking. The Zheng family amassed huge amounts of wealth that were managed by several firms operating deep in Qing controlled territory, They were able to procure silk, porcelain and other luxury products for the Xiamen warehouse, and reported to their headquarters in Hangzhou from their branches in Suzhou, Nanjing and even Beijing. These firms also served as centers for gathering intelligence on Qing military operations. The “five mountains firms” were also able to supervise the construction of commercial and military seagoing junks. Their operating area was divided, as it was during the Ming Dynasty, into Eastern and Western oceans. Official merchants (guan shang) worked under the Zheng family according to a sophisticated hierarchy consisting of, on the one hand, adopted sons of the clan’s relatives and military commanders and, on the other hand, independent merchants linked to the clan by long-term debts contracted by borrowing capital or ships to trade on behalf of the Zheng organization.

Hang claims that in the 1650s, the Zheng trading network bore all the characteristics of a maritime empire, within the limits of an intra-Asiatic area, stretching from the markets in Japan (Nagasaki), Dutch Taiwan (VOC) and Manila, with extensions to Vietnam and Ayuttaya (Siam), where they dealt with Muslim traders from Bengal and the Coromandel Coast. Within the framework of the limited autonomy of cities or territories in Asia and the impossibility for patrician communities to formalize their own legal arrangements, the patron-client relationship was the cornerstone of any successful and long-lasting business operation in China. The Zheng were no exception. Until his death in 1662, Koxinga adhered to this pattern and reshaped the framework of international relationships and rudimentary bureaucracy of the Ming Dynasty.

The pervasive role that Confucian orthodoxy and filial piety played in this arduous attempt to restore Ming legitimacy is aptly emphasized in this book. What is also striking is the economic contribution of “ideological purity” combined with hard economic realities. However, outright loyalty to the Ming Dynasty did not prevent the Zhengs from protecting their own interests. Hang also carefully analyses the merchants’ double allegiance to the Zheng clan and to European traders and the way they served as channels for communication between them. In the late 1660s, rivalry with the Dutch over silk escalated in Japan and, although merchants could trade freely in the areas under his control, Zheng Jing maintained a strict monopoly on strategic goods (silk, deerskins and sugar).

How should we interpret the integration of the first global network of trade, which brought together the demand for China’s silk and high quality goods with an insatiable thirst for silver? From Zheng Zhilong to Zheng Chenggong, the activities of the trading network evolved from a centralized piratical organization to an informal state. At the time he was consolidating his power (1650), Koxinga possessed several hundred war junks and was able to mobilize 40,000 soldiers. At the same time, he envisioned the highest possible autonomy and sought to establish control over the three south-eastern provinces of Zhejiang, Fujian and Guangdong, as well as a 13,000 km long coastline in exchange for his support of Ming restoration. Xing Hang vividly describes the long process of negotiations between the Zheng clan and the Qing, which started as early as 1653 and continued, with interspersed episodes of war, diplomacy and neutrality, until the final conquest of Taiwan in 1683.

Xing Hang’s book documents in detail the extent of Zheng Chenggong’s power at sea. He was able to set up an efficient maritime blockade on Luzon and Dutch Taiwan until the Governor General of Manila gave in and submitted. The Dutch in Taiwan were pressured to soften their position. On the mainland, Koxinga was also able to launch a military expedition (although ultimately defeated), with over a thousand junks and 100,000 soldiers, into the Yangzi River delta. Even after his unsuccessful attack on Nanjing in 1659, Koxinga still maintained control over China’s coastline, from Zhejiang to Fujian.

On the diplomatic front, Zheng Chenggong made several attempts to convince the bakufu to support his military efforts against the Qing. Koxinga’s grand military strategy was two-fold. First of all, he sought to seize the resource rich Yangzi River delta in order to solve his organization’s needs for food and supplies and, at the same time, to take control of primary production of silk and other luxuries. Secondly, he planned an invasion of Dutch Taiwan and Spanish controlled Manila (in 1670 and 1672). The invasion of Taiwan was a consequence of Koxinga’s defeat at Nanking. The takeover of Manila, although poorly defended, never occurred. This overseas expansion, if it had been successful, would have led to the foundation of a maritime China encompassing a huge trading network stretching from Japan to Southeast Asia and able to defy the continental Qing Empire.

Another merit of this book is that it sheds new light on Koxinga’s son, Zheng Jing and on how he achieved, within two decades, the Zheng organization’s transformation into a viable territorial state, with the creation of a sophisticated administration, the rationalization of the kinship networks of southern Fujian and a greater economic diversification. This efficient policy attracted refugees reduced to starvation by the Qing coastal evacuation policy. Xing Hang meticulously describes the power game which led to the ascendancy of Zheng Jing and the diplomatic and military interaction between the VOC, Shi Lang (the former commander who defected to the Qing in 1651 and head of the Qing naval command), and Japan, whose neutral stance adopted in the 1660s complicated the consolidation of the position of Ming loyalists.

The final reason for the Zheng’s failure lies more in the growing competitiveness from the Bengal and Indonesian-based Dutch, a rising East India Company and Southeast Asian trading networks to which the Zheng organisation began to lose market shares, rather than in Qing military offensives and blockades against the island of Taiwan.

François Gipouloux, Emeritus Research Director, National Centre for Scientific Research (CNRS), China, Korea, Japan Research Centre, Ecole des Hautes Etudes en Sciences Sociales, Paris, is the coordinator of the International Research Network The Globalisation’s Origins and the Great Divergence: Trading Networks and the Trajectory of Economic Institutions — Europe-Asia, 1500-2000. He is the author of The Asian Mediterranean: Port Cities and Trading Networks in China, Japan and Southeast Asia, 13th-21st century, Edward Elgar, 2011.

Copyright (c) 2017 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 ( Published by EH.Net (November 2017). All EH.Net reviews are archived at

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Asia
Time Period(s):17th Century
18th Century

The Chinese Market Economy, 1000-1500

Author(s):Liu, William Guanglin
Reviewer(s):Pomeranz, Kenneth

Published by EH.Net (June 2017)

William Guanglin Liu, The Chinese Market Economy, 1000-1500. Albany, NY: State University of New York Press, 2015.  xviii + 374 pp., $30 (paperback), ISBN: 978-1-4384-5568-6.

Reviewed for EH.Net by Kenneth Pomeranz, Department of Economics, University of Chicago.

William Guanglin Liu has written a valuable book on a big, important, topic: the general trajectory of the Chinese economy from roughly 1000-1650.  (The title says 1500, but the argument goes beyond that date.) The research is excellent, and the author comes up with some original and inventive ways to use his data.  At times, however, it frames its arguments in overly stark forms, and makes claims that go beyond what it can prove.  But despite these concerns, this is a book well worth reading, which will stimulate very useful debate on fundamental questions of Chinese economic history.

As a first approximation, Liu’s theses are hard to argue with.  The author shows that China experienced very impressive growth during the Song dynasty (ca. 960-1279), a period in which there was also a striking expansion of the role of markets in Chinese society.  He also show that the policies of Zhu Yuanzhang (r. 1368-1398), founder of the Ming Dynasty (1368-1644) dealt a major blow to China’s economy by trying to resurrect an idealized world of largely autarkic and demonetized villages.  It took a long time for China to recover from this: in contrast to many scholars who think that by 1500 China had returned to a market economy generating at least a Song level of prosperity, Liu argues that this did not happen until at least 1600, and quite likely not even then.  Moving beyond China, Liu then suggests that this historical case shows the centrality of market institutions for stimulating economic growth, beginning at a very low level of development.

The first three of these points — the marketization and relative prosperity of Song times, and the damaging effects of early Ming policies — are broadly accepted.  The first controversy concerns matters of degree: how prosperous? How marketized?  How big and lasting a blow did the early Ming inflict?  A second set of controversies centers on causation, and thus on the role of other factors.  For instance, Liu says very little about the many technological innovations during the Song — including the invention of gunpowder, the magnetic compass, paper money, and the importation (from Southeast Asia) of early-ripening rice — except to note that some of the most important innovations did not diffuse rapidly.  Some others would assign those innovations (and some that began in the Tang, such as printing) a good deal of credit for the growth that occurred in the Song, and continued into the Yuan (1279-1368) in some parts of the empire. While we will never have the data necessary to arrive at a precise allocation of growth to different factors, there is still room for further productive discussion about relative weights. Likewise, it is possible to show that the Mongol conquests of the mid-thirteenth century had a devastating impact in some places (especially North China and Sichuan), and very little elsewhere (the Middle and Lower Yangzi Valley, and in the far south); the relative weight of those different regional stories is still unsettled, and matters greatly in whether Liu is justified in placing an overwhelming emphasis on early Ming anti-market policies in explaining an apparent stagnation or decline in living standards between the eleventh and sixteenth centuries.

One of the book’s contributions is to concentrate in one place the arguments for transformational change concentrated in the Song period, and followed by a later reversal: a once popular view (e.g. Elvin 1973) that has lately given way to a tale of more gradual progress across several centuries (Smith and Von Glahn 2003).  Making the best of flawed data, Liu estimates population growth of 0.92% per year between 980 and 1109, a remarkable rate for a pre-modern society.  And drawing on a large body of secondary scholarship, he points to considerable evidence for changes in agriculture — capital deepening, especially in the form of massive investments in irrigation, and increasing use of oxen – which should, logically, have raised agricultural yields significantly, allowing a population that had more than tripled to eat as well or better than its forebears.

Unfortunately, however, we lack much good data on actual yields in the Song.  Liu notes that Dwight Perkins’ well-known estimates are (like most others for this period) inferences from agricultural rents, and that much of the land in question was land used to support schools; he further argues that school land was often rented out at below-market rates, depressing these inferred yields, and that the land which families donated to schools was often their least fertile property, anyway.  Meanwhile several of Perkins’ later data points come from agricultural handbooks, and probably represent optimal results.  Thus Liu argues, the impression of slow but steady growth across centuries that emerges from Perkins’ highly influential work may well be a statistical illusion. He prefers the older idea of a Song boom followed by little progress in subsequent dynasties.   Building on work by Zhou Shengchan, Liu tries to work backwards from data on population and average food consumption to estimate thirteenth century yields in the Lower Yangzi region; the results vary considerably among prefectures, but are generally near the high end of our range of estimates for any period before the arrival of modern farm inputs.  They would therefore leave little room for continued growth in the Yuan, Ming, or even Qing.

If verified, this would be a very important finding, but I have my doubts.  In part, my doubts come from personal experience, as adopting a similar methodology for estimating eighteenth century output of various crops led to extremely high estimates.[1]  There are also technical problems with some of this data (particularly in Table 7.8), though probably not big enough to change the results dramatically.[2]   The most we can say with strong confidence, I think, is that some Song farmers achieved yields near the pre-modern maximum, and more and more of their neighbors caught up over time — though whether this happened over decades or centuries remains very uncertain.

For most non-food items, we simply lack the data to generate serious estimates of per capita consumption in Song times; and while anecdotal evidence of rising consumption exists, Liu prefers not to rely on it.  Instead, he relies on an estimate of real wages for unskilled workers to show that living standards in the Song were as high as they ever got in China prior to the twentieth century.  Because we have not found for China any very long series of wages for privately-hired workers in a relatively standardized occupation in a particular place — like the long runs of wages for construction workers on European cathedrals and colleges, for instance — Liu constructs a long-run series of military wages, for which data are comparatively rich; and because we lack data for enough commodities to construct a long-run price index, he uses grain prices as the denominator for his series.  The resulting series peaks at its very beginning (in 1004) and fluctuates wildly while declining overall for the next roughly 170 years. It is then relatively stable until another steep drop in the early Ming, and recovers slightly in the late Ming before declining again in the early Qing (Figure E-1).

Liu has done us a considerable service by piecing this data series together, but as a proxy for the living standards of ordinary people it must be taken with a very large grain of salt.  Governments did not engage soldiers through a true labor market, nor did the institutional setting of military recruitment or the conditions of being a soldier (aside from the wage) remain constant over time.  Moreover, even if we had a reliable private sector wage series, it would not necessarily follow that this was a reliable basis for estimating popular living standards, much less per capita GDP, as Liu argues (p. 133).  Wage earners were never more than 15 percent of the labor force in late imperial China, and most farmers either owned their own land or had a relatively secure tenancy (especially in Qing times).  Consequently, they earned far more than unskilled laborers did — perhaps three times as much on average, according to preliminary estimates I have made for the eighteenth century (and for the early twentieth, where the data are better). (Among other things, this is confirmed by the fact that tenants and smallholders could support families, while unskilled laborers could rarely afford to marry. And for GDP per capita, we would also have to average in the earnings of well-to-do families.  Last but not least, if the ratio between wages and average farm earnings changed over time — as it might well have, given a gradual strengthening of tenant usufruct rights over the course of the late empire — even a much better wage series might not tell us what we want to know about general living standards.

But if Liu does not prove his most ambitious claims, he does succeed in proving many of his smaller empirical claims.  In particular, the evidence for relative prosperity in the Song and a sharp decline in the early Ming seems too much to explain away, even if one can raise doubts about each individual measurement.  The money supply contracted very sharply in early Ming times, followed by the introduction of government notes (for state payments) that soon became almost worthless; customs receipts (and presumably long-distance trade declined; and the wage decline between ca. 1050 and ca. 1400 is too big to be explained entirely by data problems.  A separate estimate, later in the book, suggests that per capita income in North China might have fallen by as much as half between 1121 (on the eve of the Song loss of the North) and 1420, though output per capita seems to have remained stable in the Yangzi Delta.  Liu also makes a strong case that Song people were freer than their early Ming counterparts, and perhaps even less unequal economically (though Song writing shows so much worry about inequality that one is tempted to believe there was fire behind so much smoke).

This brings us to the problem of explaining these differences.  Liu provides a straightforward answer: Song reliance on the market worked while the early suppression of it backfired.  Moreover, this represents a timeless truth, most recently vindicated by the sharp contrast between the Maoist and post-Maoist periods.  Here. I think, Liu lets his argument outrun his evidence, focusing too exclusively on one broad-brush contrast.

It would be hard to deny that the increased influence of market principles in the Song stimulated growth: above all, probably, the agricultural growth of the south, which required significant investment (especially for water management) that would surely have been more modest had earlier dynasties’ restrictions of private landowning remained in force; and given the surpluses that southern agriculture soon generate, and the relatively easy transportation that its rivers offered, impressive commercial and urban growth soon followed.  Since the coastline south of the Yangzi also has far more good sites for ports than the coastline north of the Yangzi, the southward shift of China’s economic center of gravity was also propitious for foreign trade, which boomed under both the Song and the (Mongol) Yuan.

Even in the south, however, the state provided essential infrastructure (though its role declined over time), and often played a very active role in foreign trade. In the north, meanwhile, both the enormous system of canals built by the Song government and the huge concentration of demand in the capital region were crucial, both for consumer markets and the growth of a precocious iron industry stimulated by unprecedented levels of military spending.   A variety of inventions also must have contributed something to the robust growth of the Song period.

Nor, I think, would many people deny that the early Ming attempt to return to local autarky had serious and lasting negative consequences. But we should bear in mind that the North, where Liu’s decline in estimated output between 1121 and 1420 was concentrated, suffered a number of  major shocks in this period, all of which bypassed or fell much more lightly on the south (except for Sichuan). These included conquests by three sets of northern invaders (including, most devastatingly, the Mongols); the prolonged turmoil that toppled the Mongols and brought the Ming to power; a civil war between supporters of two Ming heirs; and repeated, enormous, Yellow River floods, including two that dramatically shifted the river’s course (out of six such incidents in the last 4,000 years) and made it impossible to rebuild the Song-era canal system.   Ming policies certainly did great damage, too, but the relative size of these setbacks needs more detailed analysis before we can accept Liu’s almost exclusive emphasis on the Ming founder’s anti-market policies.

I would also caution against lumping all the parts of Ming anti-commercialism under the heading “command economy,” and comparing it to an ideal type of “market economy,” as Liu often does (e.g. pp. 1, 4-12, 134-136, 197, 199).  No pre-modern state could maintain the vigorous intervention needed to run a true command economy for long.  The Ming may have been more effective than most, but their massive redistribution of property and forced migration was over by about 1425, with land and labor again being exchanged in private markets;[3] the system of artisan conscription unraveled during the fifteenth century; foreign trade outside the official tribute system gradually returned; and so on.  This did not mark the end of Ming anti-commercialism as an attitude, or of its effects: among other problems, the dynasty never tried to provide the money supply that the private economy needed, saddling its subjects with costs that lingered for centuries.[4]   But even if this failure was originally part of an aggressive state’s attempt at command economy, it soon evolved into something else: the failure of a relatively weak state to undertake even those interventions that could have benefited both itself and the private economy.  The succeeding Qing dynasty (1644-1912) certainly had no dream of a command economy, and often (though not always) sought to encourage markets;  and the state’s share of GDP may have slipped as low as 2 percent, compared to at least 10 percent and perhaps as much as 20 percent at the peak of Song military-fiscalism.[5]  Yet the Qing provided the most stable bronze currency — the money used for most everyday transactions — China had ever known, while uncoined silver provided a reasonably adequate currency for big transactions; and it mobilized impressive resources for various physiocratic projects, from water control to grain price stabilization to promotion of best practices in agriculture and handicrafts. (That it spent much less, proportionately, on its military than the Song or Ming had facilitated this combination of low extraction and significant services.[6])  And for about a century and a half, they presided over impressive demographic and economic growth, Interestingly,  three prominent economic historians — Loren Brandt, Debin Ma, and Thomas Rawski, none of them remotely anti-market — have argued that the principal reason why Qing economic development was not even better was that the government was too minimalist: that a small government spread across a vast area was unable to prevent all sorts of local actors — from bandits to local elites employing private enforcers to rogue government clerks — from interfering with local markets and property rights.[7]  Such interference was clearly a problem in the late Ming as well, though it is not precisely measurable in either period.  It does, however, remind us that a simple contrast between “market economy” and “command economy” does not give us enough tools to understand the different relationships between state and market in imperial China, or anywhere else.

Nonetheless, the book does an impressive job of demonstrating how much dynamism the marketizing economy of the Song generated, and how much of those gains had been lost by the mid-Ming, at least in certain regions.  The author’s efforts to quantify trends that many others have been content to describe qualitatively are impressive; this is a book where the appendices are often as thought-provoking as the text.  The results are not as revolutionary or dispositive as the book sometimes suggests, but they will stimulate productive debates for years to come.


1. Lacking data on the acreage devoted to non-grain crops in certain areas, I decided to estimate how much land must have been devoted to non-grain crops, relying on generally accepted numbers for population, grain consumption, and imports, and then multiply the acreage left over by conservative estimates of yields for the non-grain crops.  The results came out so high that I cut them in every way I could think of — including, in one case, arbitrarily reducing the estimate of non-grain acreage by half. The results I came up with were still at the high end of the existing range of estimates, or in some cases significantly beyond it.  I am not ready to toss out those estimates completely, and would be happy to see this approach vindicated; but I am inclined to be cautious here, especially since Liu has not made the same efforts to depress his results as I did.

2. The conversions from Zhou’s numbers, which mostly use Yuan dynasty measurements, is complicated. Trying to reproduce his results for one prefecture after an email exchange with me, Prof. Liu got a figure about 1 percent lower.

3. A rare set of household-level records, for instance, shows a family with modest landholdings in Huizhou engaged in no less than 18 land purchases or sales between 1391 (not long after the Ming came to power) and 1432.  See Von Glahn 2016: 291-293.

4. Von Glahn 1996 and Kuroda 2000 suggest that this was finally addressed with moderate success in the Qing.

5. Perkins 1967: 492; Wang 1973: 133 for the Qing; Golas 1988: 93-94 comes up with 24 percent for the Song, but admits that this seems unlikely.  Hartwell 1988: 79-80 suggests a bit over 10 percent.

6. On military spending compare Hartmann 2013: 29 with Zhou 2000: 36-38.

7. Brandt Ma and Rawski 2014: 60, 76, and 79.


Brandt, Loren, Debin Ma and Thomas Rawski. 2014.  “From Divergence to Convergence: Reevaluating the History behind China’s Long Economic Boom,” Journal of Economic Literature 52(1):45-123.

Elvin, Mark. 1973.  The Pattern of the Chinese Past.  Stanford: Stanford University Press.

Goals, Peter, 1988. “The Sung Economy: How Big?”  Bulletin of Sung-Yuan Studies 20: 89-94.

Hartmann, Charles. 2013.  “Sung Government and Politics,” in John Chafee and Dennis Twitchett, eds., The Cambridge History of China, Volume V Part 2: Sung China, 960-1279 (Cambridge: Cambridge University Press):19-133.

Hartwell, Robert. 1988. The Imperial Treasuries: Finance and Power in Song China,” Bulletin of Sung-Yuan Studies 20: 18-89

Kuroda Akinobu. 2000. “Another Monetary Economy: The Case of Traditional China,” in A.J. H. Latham and Heita Kawakatsu, eds, Asia-Pacific Dynamism, 1500-2000 (London: Routledge): 187-198.

Perkins, Dwight. 1967. “Government as an Obstacle to Industrialization: The Case of Nineteenth-Century China,” Journal of Economic History 27 (4): 478–92

Perkins, Dwight. 1969. Agricultural Development in China, 1368-1968.  Chicago: Aldine Publishing.

Smith, Paul, and Richard Von Glahn, eds., 2003. The Song-Yuan-Ming Transition in Chinese History.  Cambridge:  Harvard Asia Center.

Von Glahn, Richard. 1996.  Fountain of Fortune: Money and Monetary Policy in China, 1000-1700.  Berkeley: University of California Press.

Von Glahn, Richard. 2016.  The Economic History of China: From Antiquity to the Nineteenth Century.  Cambridge: Cambridge University Press.

Wang Yeh-chien. 1973. Land Taxation in Imperial China, 1750-1911.  Cambridge, MA: Harvard University Press.

Zhou Yumin. 2000.  Wan Qing caizheng yu shehui bianqian (Late Qing Fiscal Administration and Social Change).   Shanghai: Shanghai renmin chubanshe.

Kenneth Pomeranz is University Professor of History at the University of Chicago.  His best known book is The Great Divergence: China, Europe, and the Making of the Modern World Economy (Princeton, 2000).  His most recent publication is “The Data We Have vs. the Data We Want: A Comment on the State of the Divergence Debate,” Pt. I and Pt II New Economics Papers (June 8, 2017) Forthcoming publications include “Water, Energy, and Politics: Chinese Industrial Revolutions in Global Environmental Perspective,” in Gareth Austin, ed., Economic Development and Environmental History in the Anthropocene (forthcoming, 2017: Bloomsbury Academic).

Copyright (c) 2017 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 ( Published by EH.Net (June 2017). All EH.Net reviews are archived at

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Asia
Time Period(s):Medieval
16th Century
17th Century

British Imperialism and the Making of Colonial Currency Systems

Author(s):Narsey, Wadan
Reviewer(s):Schuler, Kurt

Published by EH.Net (June 2017)

Wadan Narsey, British Imperialism and the Making of Colonial Currency Systems. Basingstoke, UK: Palgrave Macmillan, 2016. xv + 356 pp. $115 (cloth), ISBN: 978-1-137-55317-1.

Reviewed for EH.Net by Kurt Schuler, Center for Financial Stability

There must be few cases of a publication by an active scholar so long delayed as this book. Wadan Narsey wrote the bulk of it as his dissertation at Sussex University (England), completing it in 1988. That was at the beginning of his career as a university professor in his native Fiji. His retirement, hastened by the military dictatorship of which he was an outspoken critic, gave him the leisure to revisit and revise the dissertation for publication. The result is a work that has at least as much interest as when it was first written. There were many critics of the world monetary system then; there are at least as many now. It is all the more important, then, to know whether previous incarnations of the world monetary system worked better than the present one, or whether they had hitherto neglected disadvantages that should weigh against them.

The central argument of the book is that the British government arranged colonial monetary systems much more for its benefit than for that of the colonies. The British government’s ability to commandeer colonial financial reserves in London was crucial to enabling the Bank of England and the London financial market to avoid a number of crises. Among Britain’s colonies, those with a white majority or a large white minority received more advantageous treatment than majority nonwhite colonies, contributing to their faster economic development.

After an introduction laying out the author’s arguments and how they differ from conventional views, the book discusses how Britain adopted the gold standard; the general outlines of the currency policies it established for its colonies; case studies of currency policies in India, the Straits Settlements (present-day Singapore and Malaysia), West Africa, and East Africa; how Britain used colonial currency reserves to support the often weak pound sterling, especially after World War I; British government influence on economists’ debates about currency boards in the period of decolonization; differences between imperial currency policies in white and nonwhite colonies; and a conclusion. There is much more material than a brief review can cover: the introduction specifies no fewer than nineteen misconceptions that the author aims to dispel. I will therefore focus on matters closely related to the central argument.

It may be useful to begin by describing the attitude of Britain and other modern colonial powers toward currency policy in their colonies. (This paragraph is a combination of facts Narsey discusses and my own observations.) All the colonial powers considered currency policy to be a power reserved to the imperial government, not left to the choice of local officials either appointed or elected. The colonial powers jealously guarded the prerogatives of minting coins, setting the legal value of foreign coins, chartering banks, and regulating note issues. The frequent result of their centralizing impulses was shortages of currency. Colonists tried to alleviate shortages by expedients that they hoped would escape imperial attention but that usually did not. All the colonial powers used currency policy to promote imperial ties over regional ties to countries outside the empire. At least for its larger colonies, every colonial power established a note issue and often a coinage distinct from its own. Doing so created the possibility of separating colonial from metropolitan currency policy in case of war or other exigencies. Also, given that the central banks of the nineteenth century colonial powers were privately owned, separating colonial from metropolitan note issue avoided giving the central banks even more influence than they already had. None of these points is typically mentioned in textbook accounts of money or even in many historical accounts of the world monetary system.

The book touches on the British monetary debates of the early nineteenth century, but to my taste gives insufficient attention to how they influenced British colonial currency policy. The first currency board was established in New Zealand in 1847 by a governor who had absorbed the ideas of what came to be called the Currency School of British economists. In keeping with the Currency School’s dislike of multiple note issuers, he persuaded the legislature to replace private competitive note issue with a government monopoly. Similarly, James Wilson, though a member of the opposing Banking School, contended when he became the top finance official for India that note issue was no necessary part of banking, and likewise replaced private competitive issue with a government monopoly that began in 1862. After that, government monopoly of note issue gradually spread to other British colonies in accord with the largely unexamined assumption that, like the minting of coins, it was properly a prerogative of the state.

Narsey spends considerable time arguing that the coinage system of most British colonies was disadvantageous to the inhabitants because there were no local gold coins, so redemption was in fiduciary silver coins having unlimited legal tender or funds in a London bank. He claims that the British government wanted the colonies as a dumping ground for British silver coins. I am unclear why that was such a big benefit, and who it benefited. The largest producers of silver were countries outside the British Empire. If the Royal Mint were the intended beneficiary as the producer of the coins, would it not have been more profitable to issue token coins? And from some theoretical standpoints, such as Knut Wicksell’s ideal of a pure credit economy, redemption in London funds seems superior to redemption in gold coins.

Narsey is on firmer ground with his criticism of note issues. By the time of World War I, currency boards had become the standard imperial prescription for colonies where private competitive issue had never taken root or was considered desirable to replace. Narsey assembles figures and damning archival evidence showing that over time, the British Treasury increasingly required colonial currency boards to concentrate their London reserves in low-yielding assets. Over the protests of colonial administrators and the Crown Agents, a government body that managed the London reserves of many colonies, reserves formerly invested in the securities of other British colonies, British municipalities, or long-term British government securities were shifted to short-term British government securities and bank deposits earning little or no interest. There was no justification in portfolio management for such concentration in short-maturity, low-yielding assets; it was simply a way for the British government to forestall a buildup of British liabilities to the colonies that they might at some point want to redeem for foreign currency.

Although Narsey focuses his analysis of London reserves on currency boards, he explains that there were also other types of colonial funds that combined were even larger. Colonial savings banks often invested in British securities. To enforce prudent finance, colonial governments had to hold reserves in London equal to a certain percentage of average revenue. The British government also expected marketing boards and other colonial entities with surplus funds to hold a large portion in London. As with colonial currency boards, over time the British Treasury required these bodies to hold increasingly large concentrations of short-maturity, low-yielding assets. Even aside from the question whether such large London reserves were necessary in the first place, low yields significantly reduced the amounts colonial governments earned, which they might have used for spending on roads, schools, public health, or other things having high economic returns.

It is well known that after World War II the British government was quite worried about the possibility that British colonies might want to exchange their sterling reserves for U.S. dollar reserves, on such a scale that Britain would be unable to satisfy the demands for redemption. Narsey contends that even before World War I, the stability of the London financial market and the Bank of England relied heavily at times on colonial reserves and the British government’s ability to direct them into channels that did not produce the best returns for colonial governments. His evidence is provocative but, because it is outside of his main focus, necessarily incomplete. If correct, it would upend the longstanding view of the Bank of England as a pillar of stability under the pre-World War I gold standard.

The imperial government allowed more latitude for local influence on currency policy in white colonies (or colonies with a large minority white population, notably South Africa) than in nonwhite colonies. White colonies were more often allowed to have private competitive note issue; substantial local asset backing for government note issue, rather than 100 percent external assets; gold coins; and their own mints. Narsey attributes the faster economic development of white colonies in part to currency policies that required less holding of foreign assets. I am skeptical that currency was a big factor. Countries populated mainly by the descendants of British settlers are not just among the most successful colonies that have ever existed, they are among the most successful nations. They are so successful that I doubt they are the proper standard of comparison. The long-independent countries of Latin America, or the countries of Central Europe that became independent after World War I, had even more autonomy than the white British colonies, hence even more possibility for making currency policy promote economic development. Most failed miserably, suffering episodes of exchange controls and high inflation that retarded their financial systems and did nothing to promote growth in the wider economy. The same is true in most former British colonies that have replaced currency boards with central banks. What under currency boards were often one-to-one exchange rates between the local currency and sterling frequently depreciated to rates of hundreds, thousands, or, in the case of Zimbabwe, trillions of local currency units per pound sterling. Hence despite the justice of Narsey’s criticisms about overconcentration of reserves in low-yielding assets, I suspect that currency boards were probably only modestly worse than the best available option and considerably better than some options for exchange rate policy and the structure of the monetary authority.

The book is right up my alley, but even taking that into account, I have more heavily underlined it and scribbled in the margins than anything I have read in years. Read it if you are or aspire to be a scholar of the world monetary system of the nineteenth to mid-twentieth centuries; the role of sterling in the system; British imperialism; or currency boards. You may find a substantial amount that you disagree with, as I did, but it will stimulate you. Reflecting its origins as a dissertation, the prose can be dense and repetitive, but it is because the subject matter is complex and not because it is laden with jargon or passive voice.

An old joke claims that there are two kinds of people, optimists and realists. Continually asking, as Narsey does, “Who benefits?,” is one of the marks of a realist. Economists are always in need of a dose of realism to remind ourselves that there are more things in heaven and earth than are dreamt of in our textbooks.

Kurt Schuler is Senior Fellow in Financial History at the Center for Financial Stability in New York. In the 1990s his writings on currency boards, mainly with Steve Hanke of Johns Hopkins University, influenced the establishment of currency board-like systems in Estonia, Lithuania, Bosnia, and Bulgaria. His most recent book is The Bretton Woods Transcripts (with Andrew Rosenberg, 2013). These are his personal views.

Copyright (c) 2017 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 ( Published by EH.Net (June 2017). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Australia/New Zealand, incl. Pacific Islands
Time Period(s):19th Century
20th Century: Pre WWII