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The Transformation of American Law, 1780-1860

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

Project 2001: Significant Works in Economic History

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

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

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

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

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

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

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

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

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

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Property Law

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

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

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

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

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

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Mill Acts

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

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Eminent Domain

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

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

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

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Negligence

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

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

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

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Contract

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Conclusion

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

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

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

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

Notes:

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

References:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The History of Consumer Credit: Doctrines and Practices

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

Published by EH.NET (August 2000)

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

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

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

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

College, Rock Island, IL.

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

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

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

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

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

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

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

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

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

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

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

consumer credit continues to be blamed for everything from business recessions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

shortsighted theologians and philosophers tried to strangle credit in the noose

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

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

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

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

fundamental social gyroscope, so that lending and borrowing are increasingly

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

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

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

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

through credit-financed consumption.

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

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

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

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

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

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

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

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

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

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

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

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

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

Credit sets a new standard for defenses of consumer credit.

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

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

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

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

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

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

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

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

supposes a relatively advanced economic organization, and Calvin built his

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

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

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

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

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

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

what all the fuss over usury was really about.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

feelings!” (p. 66)

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

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

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

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

These include Scholastic theologians such as Thomas Aquinas, the Reformers

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

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

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

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

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

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

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

poor most of all while making criminals of everyone else.

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

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

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

recently that consumer credit has begun to receive from historians the

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

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

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

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

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

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

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

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

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

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

nineteenth century, while Italy only did so in 1992!

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

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

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

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

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

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

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

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

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

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

claims in this book rather suspect.

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

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

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

Carnegie Academy for the Scholarship of Teaching and Learning.

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

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

Toronto.

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

“Malthusian,

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

society

(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,

very

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

of

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,

however,

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

schedules,

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

were

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

essence,

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

documented

long-wave.

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

imported

(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,

1991).

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

1934).

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

1691-1700

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

workers.

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Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative