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The Chinese Market Economy, 1000-1500

Author(s):Liu, William Guanglin
Reviewer(s):Pomeranz, Kenneth

Published by EH.Net (June 2017)

William Guanglin Liu, The Chinese Market Economy, 1000-1500. Albany, NY: State University of New York Press, 2015.  xviii + 374 pp., $30 (paperback), ISBN: 978-1-4384-5568-6.

Reviewed for EH.Net by Kenneth Pomeranz, Department of Economics, University of Chicago.

William Guanglin Liu has written a valuable book on a big, important, topic: the general trajectory of the Chinese economy from roughly 1000-1650.  (The title says 1500, but the argument goes beyond that date.) The research is excellent, and the author comes up with some original and inventive ways to use his data.  At times, however, it frames its arguments in overly stark forms, and makes claims that go beyond what it can prove.  But despite these concerns, this is a book well worth reading, which will stimulate very useful debate on fundamental questions of Chinese economic history.

As a first approximation, Liu’s theses are hard to argue with.  The author shows that China experienced very impressive growth during the Song dynasty (ca. 960-1279), a period in which there was also a striking expansion of the role of markets in Chinese society.  He also show that the policies of Zhu Yuanzhang (r. 1368-1398), founder of the Ming Dynasty (1368-1644) dealt a major blow to China’s economy by trying to resurrect an idealized world of largely autarkic and demonetized villages.  It took a long time for China to recover from this: in contrast to many scholars who think that by 1500 China had returned to a market economy generating at least a Song level of prosperity, Liu argues that this did not happen until at least 1600, and quite likely not even then.  Moving beyond China, Liu then suggests that this historical case shows the centrality of market institutions for stimulating economic growth, beginning at a very low level of development.

The first three of these points — the marketization and relative prosperity of Song times, and the damaging effects of early Ming policies — are broadly accepted.  The first controversy concerns matters of degree: how prosperous? How marketized?  How big and lasting a blow did the early Ming inflict?  A second set of controversies centers on causation, and thus on the role of other factors.  For instance, Liu says very little about the many technological innovations during the Song — including the invention of gunpowder, the magnetic compass, paper money, and the importation (from Southeast Asia) of early-ripening rice — except to note that some of the most important innovations did not diffuse rapidly.  Some others would assign those innovations (and some that began in the Tang, such as printing) a good deal of credit for the growth that occurred in the Song, and continued into the Yuan (1279-1368) in some parts of the empire. While we will never have the data necessary to arrive at a precise allocation of growth to different factors, there is still room for further productive discussion about relative weights. Likewise, it is possible to show that the Mongol conquests of the mid-thirteenth century had a devastating impact in some places (especially North China and Sichuan), and very little elsewhere (the Middle and Lower Yangzi Valley, and in the far south); the relative weight of those different regional stories is still unsettled, and matters greatly in whether Liu is justified in placing an overwhelming emphasis on early Ming anti-market policies in explaining an apparent stagnation or decline in living standards between the eleventh and sixteenth centuries.

One of the book’s contributions is to concentrate in one place the arguments for transformational change concentrated in the Song period, and followed by a later reversal: a once popular view (e.g. Elvin 1973) that has lately given way to a tale of more gradual progress across several centuries (Smith and Von Glahn 2003).  Making the best of flawed data, Liu estimates population growth of 0.92% per year between 980 and 1109, a remarkable rate for a pre-modern society.  And drawing on a large body of secondary scholarship, he points to considerable evidence for changes in agriculture — capital deepening, especially in the form of massive investments in irrigation, and increasing use of oxen – which should, logically, have raised agricultural yields significantly, allowing a population that had more than tripled to eat as well or better than its forebears.

Unfortunately, however, we lack much good data on actual yields in the Song.  Liu notes that Dwight Perkins’ well-known estimates are (like most others for this period) inferences from agricultural rents, and that much of the land in question was land used to support schools; he further argues that school land was often rented out at below-market rates, depressing these inferred yields, and that the land which families donated to schools was often their least fertile property, anyway.  Meanwhile several of Perkins’ later data points come from agricultural handbooks, and probably represent optimal results.  Thus Liu argues, the impression of slow but steady growth across centuries that emerges from Perkins’ highly influential work may well be a statistical illusion. He prefers the older idea of a Song boom followed by little progress in subsequent dynasties.   Building on work by Zhou Shengchan, Liu tries to work backwards from data on population and average food consumption to estimate thirteenth century yields in the Lower Yangzi region; the results vary considerably among prefectures, but are generally near the high end of our range of estimates for any period before the arrival of modern farm inputs.  They would therefore leave little room for continued growth in the Yuan, Ming, or even Qing.

If verified, this would be a very important finding, but I have my doubts.  In part, my doubts come from personal experience, as adopting a similar methodology for estimating eighteenth century output of various crops led to extremely high estimates.[1]  There are also technical problems with some of this data (particularly in Table 7.8), though probably not big enough to change the results dramatically.[2]   The most we can say with strong confidence, I think, is that some Song farmers achieved yields near the pre-modern maximum, and more and more of their neighbors caught up over time — though whether this happened over decades or centuries remains very uncertain.

For most non-food items, we simply lack the data to generate serious estimates of per capita consumption in Song times; and while anecdotal evidence of rising consumption exists, Liu prefers not to rely on it.  Instead, he relies on an estimate of real wages for unskilled workers to show that living standards in the Song were as high as they ever got in China prior to the twentieth century.  Because we have not found for China any very long series of wages for privately-hired workers in a relatively standardized occupation in a particular place — like the long runs of wages for construction workers on European cathedrals and colleges, for instance — Liu constructs a long-run series of military wages, for which data are comparatively rich; and because we lack data for enough commodities to construct a long-run price index, he uses grain prices as the denominator for his series.  The resulting series peaks at its very beginning (in 1004) and fluctuates wildly while declining overall for the next roughly 170 years. It is then relatively stable until another steep drop in the early Ming, and recovers slightly in the late Ming before declining again in the early Qing (Figure E-1).

Liu has done us a considerable service by piecing this data series together, but as a proxy for the living standards of ordinary people it must be taken with a very large grain of salt.  Governments did not engage soldiers through a true labor market, nor did the institutional setting of military recruitment or the conditions of being a soldier (aside from the wage) remain constant over time.  Moreover, even if we had a reliable private sector wage series, it would not necessarily follow that this was a reliable basis for estimating popular living standards, much less per capita GDP, as Liu argues (p. 133).  Wage earners were never more than 15 percent of the labor force in late imperial China, and most farmers either owned their own land or had a relatively secure tenancy (especially in Qing times).  Consequently, they earned far more than unskilled laborers did — perhaps three times as much on average, according to preliminary estimates I have made for the eighteenth century (and for the early twentieth, where the data are better). (Among other things, this is confirmed by the fact that tenants and smallholders could support families, while unskilled laborers could rarely afford to marry. And for GDP per capita, we would also have to average in the earnings of well-to-do families.  Last but not least, if the ratio between wages and average farm earnings changed over time — as it might well have, given a gradual strengthening of tenant usufruct rights over the course of the late empire — even a much better wage series might not tell us what we want to know about general living standards.

But if Liu does not prove his most ambitious claims, he does succeed in proving many of his smaller empirical claims.  In particular, the evidence for relative prosperity in the Song and a sharp decline in the early Ming seems too much to explain away, even if one can raise doubts about each individual measurement.  The money supply contracted very sharply in early Ming times, followed by the introduction of government notes (for state payments) that soon became almost worthless; customs receipts (and presumably long-distance trade declined; and the wage decline between ca. 1050 and ca. 1400 is too big to be explained entirely by data problems.  A separate estimate, later in the book, suggests that per capita income in North China might have fallen by as much as half between 1121 (on the eve of the Song loss of the North) and 1420, though output per capita seems to have remained stable in the Yangzi Delta.  Liu also makes a strong case that Song people were freer than their early Ming counterparts, and perhaps even less unequal economically (though Song writing shows so much worry about inequality that one is tempted to believe there was fire behind so much smoke).

This brings us to the problem of explaining these differences.  Liu provides a straightforward answer: Song reliance on the market worked while the early suppression of it backfired.  Moreover, this represents a timeless truth, most recently vindicated by the sharp contrast between the Maoist and post-Maoist periods.  Here. I think, Liu lets his argument outrun his evidence, focusing too exclusively on one broad-brush contrast.

It would be hard to deny that the increased influence of market principles in the Song stimulated growth: above all, probably, the agricultural growth of the south, which required significant investment (especially for water management) that would surely have been more modest had earlier dynasties’ restrictions of private landowning remained in force; and given the surpluses that southern agriculture soon generate, and the relatively easy transportation that its rivers offered, impressive commercial and urban growth soon followed.  Since the coastline south of the Yangzi also has far more good sites for ports than the coastline north of the Yangzi, the southward shift of China’s economic center of gravity was also propitious for foreign trade, which boomed under both the Song and the (Mongol) Yuan.

Even in the south, however, the state provided essential infrastructure (though its role declined over time), and often played a very active role in foreign trade. In the north, meanwhile, both the enormous system of canals built by the Song government and the huge concentration of demand in the capital region were crucial, both for consumer markets and the growth of a precocious iron industry stimulated by unprecedented levels of military spending.   A variety of inventions also must have contributed something to the robust growth of the Song period.

Nor, I think, would many people deny that the early Ming attempt to return to local autarky had serious and lasting negative consequences. But we should bear in mind that the North, where Liu’s decline in estimated output between 1121 and 1420 was concentrated, suffered a number of  major shocks in this period, all of which bypassed or fell much more lightly on the south (except for Sichuan). These included conquests by three sets of northern invaders (including, most devastatingly, the Mongols); the prolonged turmoil that toppled the Mongols and brought the Ming to power; a civil war between supporters of two Ming heirs; and repeated, enormous, Yellow River floods, including two that dramatically shifted the river’s course (out of six such incidents in the last 4,000 years) and made it impossible to rebuild the Song-era canal system.   Ming policies certainly did great damage, too, but the relative size of these setbacks needs more detailed analysis before we can accept Liu’s almost exclusive emphasis on the Ming founder’s anti-market policies.

I would also caution against lumping all the parts of Ming anti-commercialism under the heading “command economy,” and comparing it to an ideal type of “market economy,” as Liu often does (e.g. pp. 1, 4-12, 134-136, 197, 199).  No pre-modern state could maintain the vigorous intervention needed to run a true command economy for long.  The Ming may have been more effective than most, but their massive redistribution of property and forced migration was over by about 1425, with land and labor again being exchanged in private markets;[3] the system of artisan conscription unraveled during the fifteenth century; foreign trade outside the official tribute system gradually returned; and so on.  This did not mark the end of Ming anti-commercialism as an attitude, or of its effects: among other problems, the dynasty never tried to provide the money supply that the private economy needed, saddling its subjects with costs that lingered for centuries.[4]   But even if this failure was originally part of an aggressive state’s attempt at command economy, it soon evolved into something else: the failure of a relatively weak state to undertake even those interventions that could have benefited both itself and the private economy.  The succeeding Qing dynasty (1644-1912) certainly had no dream of a command economy, and often (though not always) sought to encourage markets;  and the state’s share of GDP may have slipped as low as 2 percent, compared to at least 10 percent and perhaps as much as 20 percent at the peak of Song military-fiscalism.[5]  Yet the Qing provided the most stable bronze currency — the money used for most everyday transactions — China had ever known, while uncoined silver provided a reasonably adequate currency for big transactions; and it mobilized impressive resources for various physiocratic projects, from water control to grain price stabilization to promotion of best practices in agriculture and handicrafts. (That it spent much less, proportionately, on its military than the Song or Ming had facilitated this combination of low extraction and significant services.[6])  And for about a century and a half, they presided over impressive demographic and economic growth, Interestingly,  three prominent economic historians — Loren Brandt, Debin Ma, and Thomas Rawski, none of them remotely anti-market — have argued that the principal reason why Qing economic development was not even better was that the government was too minimalist: that a small government spread across a vast area was unable to prevent all sorts of local actors — from bandits to local elites employing private enforcers to rogue government clerks — from interfering with local markets and property rights.[7]  Such interference was clearly a problem in the late Ming as well, though it is not precisely measurable in either period.  It does, however, remind us that a simple contrast between “market economy” and “command economy” does not give us enough tools to understand the different relationships between state and market in imperial China, or anywhere else.

Nonetheless, the book does an impressive job of demonstrating how much dynamism the marketizing economy of the Song generated, and how much of those gains had been lost by the mid-Ming, at least in certain regions.  The author’s efforts to quantify trends that many others have been content to describe qualitatively are impressive; this is a book where the appendices are often as thought-provoking as the text.  The results are not as revolutionary or dispositive as the book sometimes suggests, but they will stimulate productive debates for years to come.


1. Lacking data on the acreage devoted to non-grain crops in certain areas, I decided to estimate how much land must have been devoted to non-grain crops, relying on generally accepted numbers for population, grain consumption, and imports, and then multiply the acreage left over by conservative estimates of yields for the non-grain crops.  The results came out so high that I cut them in every way I could think of — including, in one case, arbitrarily reducing the estimate of non-grain acreage by half. The results I came up with were still at the high end of the existing range of estimates, or in some cases significantly beyond it.  I am not ready to toss out those estimates completely, and would be happy to see this approach vindicated; but I am inclined to be cautious here, especially since Liu has not made the same efforts to depress his results as I did.

2. The conversions from Zhou’s numbers, which mostly use Yuan dynasty measurements, is complicated. Trying to reproduce his results for one prefecture after an email exchange with me, Prof. Liu got a figure about 1 percent lower.

3. A rare set of household-level records, for instance, shows a family with modest landholdings in Huizhou engaged in no less than 18 land purchases or sales between 1391 (not long after the Ming came to power) and 1432.  See Von Glahn 2016: 291-293.

4. Von Glahn 1996 and Kuroda 2000 suggest that this was finally addressed with moderate success in the Qing.

5. Perkins 1967: 492; Wang 1973: 133 for the Qing; Golas 1988: 93-94 comes up with 24 percent for the Song, but admits that this seems unlikely.  Hartwell 1988: 79-80 suggests a bit over 10 percent.

6. On military spending compare Hartmann 2013: 29 with Zhou 2000: 36-38.

7. Brandt Ma and Rawski 2014: 60, 76, and 79.


Brandt, Loren, Debin Ma and Thomas Rawski. 2014.  “From Divergence to Convergence: Reevaluating the History behind China’s Long Economic Boom,” Journal of Economic Literature 52(1):45-123.

Elvin, Mark. 1973.  The Pattern of the Chinese Past.  Stanford: Stanford University Press.

Goals, Peter, 1988. “The Sung Economy: How Big?”  Bulletin of Sung-Yuan Studies 20: 89-94.

Hartmann, Charles. 2013.  “Sung Government and Politics,” in John Chafee and Dennis Twitchett, eds., The Cambridge History of China, Volume V Part 2: Sung China, 960-1279 (Cambridge: Cambridge University Press):19-133.

Hartwell, Robert. 1988. The Imperial Treasuries: Finance and Power in Song China,” Bulletin of Sung-Yuan Studies 20: 18-89

Kuroda Akinobu. 2000. “Another Monetary Economy: The Case of Traditional China,” in A.J. H. Latham and Heita Kawakatsu, eds, Asia-Pacific Dynamism, 1500-2000 (London: Routledge): 187-198.

Perkins, Dwight. 1967. “Government as an Obstacle to Industrialization: The Case of Nineteenth-Century China,” Journal of Economic History 27 (4): 478–92

Perkins, Dwight. 1969. Agricultural Development in China, 1368-1968.  Chicago: Aldine Publishing.

Smith, Paul, and Richard Von Glahn, eds., 2003. The Song-Yuan-Ming Transition in Chinese History.  Cambridge:  Harvard Asia Center.

Von Glahn, Richard. 1996.  Fountain of Fortune: Money and Monetary Policy in China, 1000-1700.  Berkeley: University of California Press.

Von Glahn, Richard. 2016.  The Economic History of China: From Antiquity to the Nineteenth Century.  Cambridge: Cambridge University Press.

Wang Yeh-chien. 1973. Land Taxation in Imperial China, 1750-1911.  Cambridge, MA: Harvard University Press.

Zhou Yumin. 2000.  Wan Qing caizheng yu shehui bianqian (Late Qing Fiscal Administration and Social Change).   Shanghai: Shanghai renmin chubanshe.

Kenneth Pomeranz is University Professor of History at the University of Chicago.  His best known book is The Great Divergence: China, Europe, and the Making of the Modern World Economy (Princeton, 2000).  His most recent publication is “The Data We Have vs. the Data We Want: A Comment on the State of the Divergence Debate,” Pt. I and Pt II New Economics Papers (June 8, 2017) Forthcoming publications include “Water, Energy, and Politics: Chinese Industrial Revolutions in Global Environmental Perspective,” in Gareth Austin, ed., Economic Development and Environmental History in the Anthropocene (forthcoming, 2017: Bloomsbury Academic).

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (June 2017). All EH.Net reviews are archived at

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Asia
Time Period(s):Medieval
16th Century
17th Century

British Imperialism and the Making of Colonial Currency Systems

Author(s):Narsey, Wadan
Reviewer(s):Schuler, Kurt

Published by EH.Net (June 2017)

Wadan Narsey, British Imperialism and the Making of Colonial Currency Systems. Basingstoke, UK: Palgrave Macmillan, 2016. xv + 356 pp. $115 (cloth), ISBN: 978-1-137-55317-1.

Reviewed for EH.Net by Kurt Schuler, Center for Financial Stability

There must be few cases of a publication by an active scholar so long delayed as this book. Wadan Narsey wrote the bulk of it as his dissertation at Sussex University (England), completing it in 1988. That was at the beginning of his career as a university professor in his native Fiji. His retirement, hastened by the military dictatorship of which he was an outspoken critic, gave him the leisure to revisit and revise the dissertation for publication. The result is a work that has at least as much interest as when it was first written. There were many critics of the world monetary system then; there are at least as many now. It is all the more important, then, to know whether previous incarnations of the world monetary system worked better than the present one, or whether they had hitherto neglected disadvantages that should weigh against them.

The central argument of the book is that the British government arranged colonial monetary systems much more for its benefit than for that of the colonies. The British government’s ability to commandeer colonial financial reserves in London was crucial to enabling the Bank of England and the London financial market to avoid a number of crises. Among Britain’s colonies, those with a white majority or a large white minority received more advantageous treatment than majority nonwhite colonies, contributing to their faster economic development.

After an introduction laying out the author’s arguments and how they differ from conventional views, the book discusses how Britain adopted the gold standard; the general outlines of the currency policies it established for its colonies; case studies of currency policies in India, the Straits Settlements (present-day Singapore and Malaysia), West Africa, and East Africa; how Britain used colonial currency reserves to support the often weak pound sterling, especially after World War I; British government influence on economists’ debates about currency boards in the period of decolonization; differences between imperial currency policies in white and nonwhite colonies; and a conclusion. There is much more material than a brief review can cover: the introduction specifies no fewer than nineteen misconceptions that the author aims to dispel. I will therefore focus on matters closely related to the central argument.

It may be useful to begin by describing the attitude of Britain and other modern colonial powers toward currency policy in their colonies. (This paragraph is a combination of facts Narsey discusses and my own observations.) All the colonial powers considered currency policy to be a power reserved to the imperial government, not left to the choice of local officials either appointed or elected. The colonial powers jealously guarded the prerogatives of minting coins, setting the legal value of foreign coins, chartering banks, and regulating note issues. The frequent result of their centralizing impulses was shortages of currency. Colonists tried to alleviate shortages by expedients that they hoped would escape imperial attention but that usually did not. All the colonial powers used currency policy to promote imperial ties over regional ties to countries outside the empire. At least for its larger colonies, every colonial power established a note issue and often a coinage distinct from its own. Doing so created the possibility of separating colonial from metropolitan currency policy in case of war or other exigencies. Also, given that the central banks of the nineteenth century colonial powers were privately owned, separating colonial from metropolitan note issue avoided giving the central banks even more influence than they already had. None of these points is typically mentioned in textbook accounts of money or even in many historical accounts of the world monetary system.

The book touches on the British monetary debates of the early nineteenth century, but to my taste gives insufficient attention to how they influenced British colonial currency policy. The first currency board was established in New Zealand in 1847 by a governor who had absorbed the ideas of what came to be called the Currency School of British economists. In keeping with the Currency School’s dislike of multiple note issuers, he persuaded the legislature to replace private competitive note issue with a government monopoly. Similarly, James Wilson, though a member of the opposing Banking School, contended when he became the top finance official for India that note issue was no necessary part of banking, and likewise replaced private competitive issue with a government monopoly that began in 1862. After that, government monopoly of note issue gradually spread to other British colonies in accord with the largely unexamined assumption that, like the minting of coins, it was properly a prerogative of the state.

Narsey spends considerable time arguing that the coinage system of most British colonies was disadvantageous to the inhabitants because there were no local gold coins, so redemption was in fiduciary silver coins having unlimited legal tender or funds in a London bank. He claims that the British government wanted the colonies as a dumping ground for British silver coins. I am unclear why that was such a big benefit, and who it benefited. The largest producers of silver were countries outside the British Empire. If the Royal Mint were the intended beneficiary as the producer of the coins, would it not have been more profitable to issue token coins? And from some theoretical standpoints, such as Knut Wicksell’s ideal of a pure credit economy, redemption in London funds seems superior to redemption in gold coins.

Narsey is on firmer ground with his criticism of note issues. By the time of World War I, currency boards had become the standard imperial prescription for colonies where private competitive issue had never taken root or was considered desirable to replace. Narsey assembles figures and damning archival evidence showing that over time, the British Treasury increasingly required colonial currency boards to concentrate their London reserves in low-yielding assets. Over the protests of colonial administrators and the Crown Agents, a government body that managed the London reserves of many colonies, reserves formerly invested in the securities of other British colonies, British municipalities, or long-term British government securities were shifted to short-term British government securities and bank deposits earning little or no interest. There was no justification in portfolio management for such concentration in short-maturity, low-yielding assets; it was simply a way for the British government to forestall a buildup of British liabilities to the colonies that they might at some point want to redeem for foreign currency.

Although Narsey focuses his analysis of London reserves on currency boards, he explains that there were also other types of colonial funds that combined were even larger. Colonial savings banks often invested in British securities. To enforce prudent finance, colonial governments had to hold reserves in London equal to a certain percentage of average revenue. The British government also expected marketing boards and other colonial entities with surplus funds to hold a large portion in London. As with colonial currency boards, over time the British Treasury required these bodies to hold increasingly large concentrations of short-maturity, low-yielding assets. Even aside from the question whether such large London reserves were necessary in the first place, low yields significantly reduced the amounts colonial governments earned, which they might have used for spending on roads, schools, public health, or other things having high economic returns.

It is well known that after World War II the British government was quite worried about the possibility that British colonies might want to exchange their sterling reserves for U.S. dollar reserves, on such a scale that Britain would be unable to satisfy the demands for redemption. Narsey contends that even before World War I, the stability of the London financial market and the Bank of England relied heavily at times on colonial reserves and the British government’s ability to direct them into channels that did not produce the best returns for colonial governments. His evidence is provocative but, because it is outside of his main focus, necessarily incomplete. If correct, it would upend the longstanding view of the Bank of England as a pillar of stability under the pre-World War I gold standard.

The imperial government allowed more latitude for local influence on currency policy in white colonies (or colonies with a large minority white population, notably South Africa) than in nonwhite colonies. White colonies were more often allowed to have private competitive note issue; substantial local asset backing for government note issue, rather than 100 percent external assets; gold coins; and their own mints. Narsey attributes the faster economic development of white colonies in part to currency policies that required less holding of foreign assets. I am skeptical that currency was a big factor. Countries populated mainly by the descendants of British settlers are not just among the most successful colonies that have ever existed, they are among the most successful nations. They are so successful that I doubt they are the proper standard of comparison. The long-independent countries of Latin America, or the countries of Central Europe that became independent after World War I, had even more autonomy than the white British colonies, hence even more possibility for making currency policy promote economic development. Most failed miserably, suffering episodes of exchange controls and high inflation that retarded their financial systems and did nothing to promote growth in the wider economy. The same is true in most former British colonies that have replaced currency boards with central banks. What under currency boards were often one-to-one exchange rates between the local currency and sterling frequently depreciated to rates of hundreds, thousands, or, in the case of Zimbabwe, trillions of local currency units per pound sterling. Hence despite the justice of Narsey’s criticisms about overconcentration of reserves in low-yielding assets, I suspect that currency boards were probably only modestly worse than the best available option and considerably better than some options for exchange rate policy and the structure of the monetary authority.

The book is right up my alley, but even taking that into account, I have more heavily underlined it and scribbled in the margins than anything I have read in years. Read it if you are or aspire to be a scholar of the world monetary system of the nineteenth to mid-twentieth centuries; the role of sterling in the system; British imperialism; or currency boards. You may find a substantial amount that you disagree with, as I did, but it will stimulate you. Reflecting its origins as a dissertation, the prose can be dense and repetitive, but it is because the subject matter is complex and not because it is laden with jargon or passive voice.

An old joke claims that there are two kinds of people, optimists and realists. Continually asking, as Narsey does, “Who benefits?,” is one of the marks of a realist. Economists are always in need of a dose of realism to remind ourselves that there are more things in heaven and earth than are dreamt of in our textbooks.

Kurt Schuler is Senior Fellow in Financial History at the Center for Financial Stability in New York. In the 1990s his writings on currency boards, mainly with Steve Hanke of Johns Hopkins University, influenced the establishment of currency board-like systems in Estonia, Lithuania, Bosnia, and Bulgaria. His most recent book is The Bretton Woods Transcripts (with Andrew Rosenberg, 2013). These are his personal views.

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (June 2017). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Australia/New Zealand, incl. Pacific Islands
Time Period(s):19th Century
20th Century: Pre WWII

An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy

Author(s):Levinson, Marc
Reviewer(s):Field, Alexander J.

Published by EH.Net (January 2017)

Marc Levinson, An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy.  New York: Basic Books, 2016. vii + 326 pp.  $28 (cloth), ISBN: 978-0-465-06198-3.

Reviewed for EH.Net by Alexander J. Field, Department of Economics, Santa Clara University.

The period from 1948 to 1973 has long been considered the golden age of the U.S. economy.  For a quarter century, the growth of total factor productivity (TFP) remained strong by any standard of comparison other than that enjoyed between 1929 and 1941.  Labor productivity growth benefited as well from the revival of private sector accumulation which had gone negative and then recovered but did not on balance grow over the depression years and was then repressed and distorted by the demands of the war economy.  On the income side during the golden age the percentage gains were almost uniformly enjoyed by the various quintiles of the income distribution.

And then it fell apart.  TFP growth in the United States, except for a modest revival between 1995 and 2005, experienced retardation.  Labor productivity and the material standard of living grew more slowly, with almost all of the gains going to the top.  Consumption was sustained by rising women’s labor force participation and increasing household debt levels.  Financial crises, including in developed countries, became more frequent.  And governments and all their economic advisors seemed largely powerless to change this reality.

Marc Levinson provides a well written narrative of the descent from the golden age into what has become the new ordinary.  Levinson is a former finance and economics editor at the Economist, and the author of an excellent history of containerization.  Although not an academic economist or historian, he has been performing yeoman service contributing to the economic history of the twentieth century, something we need more of.

The book has many strengths. First, the narrative is based in part on original archival research, which enables the author to provide fresh perspectives on many events, along with colorful biographical vignettes of some of the main players in different countries. Second, it can be thought of as a G-7 book, with discussion not only of what happened in the United States and Canada, but also Germany, France, the UK, Italy and Japan, along with tangential treatment of the developing world including petroleum exporters.  Even if familiar with the course of events in one or two countries, the reader will find that the juxtaposition of narratives from different states reveals differences but also the worldwide incidence of a sea change in the developed world starting in the 1970s. Finally, Levinson’s assessments of policy regimes and policy initiatives are data driven and balanced.  The book could well be used as supplementary reading in a course on twentieth-century economic history or even a course in intermediate macroeconomics.

There are, however, several instances in which Levinson does not quite get on top of important conceptual or accounting distinctions that would be more familiar to academic economists or economic historians.  The frequency with which this occurs is much less than is common among authors writing principally for a popular audience. But they do deserve note.

First, the very minor:  it is of course the Employment Act of 1946, not the Full Employment Act (p. 25).  Second, and more important, Levinson (along with many others) doesn’t understand the distinction in bank regulation between liquidity and capital requirements. He writes that “a bank’s capital cannot be lent out to customers: it sits idly in the form of cash and short term securities just in case it is needed” (pp. 95-96).  In fact, bank capital represents the portion of the asset side of the portfolio financed by owner’s equity rather than debt, which in a retail bank would include customer deposits.  A bank could have a great capital cushion (be largely equity financed), and also be completely illiquid on its asset side, holding no cash or easily saleable securities. Bank capital protects an institution from insolvency should its assets lose value; it does not provide protection against illiquidity.

Third, Levinson’s discussion of why labor’s share has declined is something of a mish-mash.  The main cause, he suggests (p. 142) “was most likely a speedup in the rate of technological change.”  But all the data that Levinson reviews shows that the drop in labor’s share coincided with the drop in TFP growth that marked the post-1973 period.  It’s possible that if the bias of technological change altered — if it became more labor saving — it served to weaken labor’s bargaining position, and Levinson seems to be making that argument as well.

He also claims (p. 142) that “greater competition pressured firms’ profits, making it tougher for unions and workers to bargain for higher wages.”  If increased competition were compressing profits, would this necessarily be consistent with a rising capital share, the complement to a decline in labor’s share?  Why labor’s share declined is a very important question, particularly in understanding growing income inequality.  Levinson probably has some of the pieces of an answer here, but they are not arranged in a compelling fashion.  A related confusion pops up on p. 155, where he observes that politicians, in the face of the sea change, continued to offer programs devoted “to dividing up the fruits of plenty, not to reviving productivity growth and adjusting to a world of rapid technological change.”  It is difficult to imagine an economy simultaneously experiencing both declining productivity growth and an accelerating rate of technological change.

Finally, Levinson is not quite on top of the details of balance of payments accounting: “Statistically, the flow of money into and out of a country shows up in a measure called the current account” (p. 232).   This statement ignores what used to be called the capital account and is now called the financial account.  The capital account books sources and uses of foreign exchange resulting from the purchase or sale of assets, real or financial, as opposed to currently produced goods and services.

My noting of these issues should not discourage academic economists from reading this book.   You will find, inter alia, useful and balanced treatments of privatization, of job growth under Reagan and Clinton, of monetary experiments, and an excellent discussion of the barely avoided financial crisis of the early 1980s, which resulted from private sector bank loans to sovereigns in the developing world.   If you are old enough to have lived through the golden age and the subsequent slowdown this will to some extent be a trip down memory lane.  If you are younger, the book provides a welcome introduction to very important chapters in twentieth century economic history.

Alex Field is the Michel and Mary Orradre Professor of Economics at Santa Clara University, and the author of A Great Leap Forward: 1930s Depression and U.S. Economic Growth, New Haven:  Yale University Press, 2011.  Email:

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (January 2017). All EH.Net reviews are archived at

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Money Changes Everything: How Finance Made Civilization Possible

Author(s):Goetzmann, William N.
Reviewer(s):Neal, Larry

Published by EH.Net (July 2016)

William N. Goetzmann, Money Changes Everything: How Finance Made Civilization Possible.  Princeton: Princeton University Press, 2016. x + 584 pp. $35 (cloth), ISBN: 978-0-691-14378-1.

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

Long awaited by other financial historians, myself included, William N. Goetzmann’s book has finally appeared! This, after years of research and teaching during which Goetzmann allowed anyone interested in financial history to view his chapters in progress on-line at: (The website is well worth visiting in any case for the wide selection of primary source materials he has made readily available there for the rest of us.)  The printed product covers defining episodes in the history of finance from ancient Mesopotamia to the sub-prime crisis of 2008.  The introduction explains the themes that underlie the chest-thumping title despite his modest initial disclaimer that, “This book is a somewhat personal narrative about the people, places, and things that, in my view, shaped the history of finance as a technology of civilization” (p. 3). To motivate the structure of the book chapters that follow Goetzmann summarizes the key elements of finance as:
1. Reallocating economic value through time
2. Reallocating risk
3. Reallocating capital
4. Expanding the access to, and the complexity of, these reallocations

After explaining and extolling the virtues of each financial element, however, he broadens and deepens the implications of financial innovations that have occurred through history under each element.  The first element, the re-allocation of economic value through time, he sees as the fundamental feature that allowed civilizations to arise in the first place, wherever and whenever they occurred. Drawing on earlier work by his father, the late historian William H. Goetzmann, he distinguishes cultures as “structures of interrelated institutions, language, ideas, values, myths and symbols.  They tend to be exclusive, even tribal.  Civilizations, on the other hand, are open to new customs and ideas. They are syncretistic, chaotic, and often confusing societal information systems.  They continue to grow in the richness, variety and complexity of societal experience” (p. 9).

Goetzmann concludes with the optimistic view that: “financial technology allowed for more complex political institutions, enhanced social mobility, and greater economic growth – in short, all the major indicators of complex society we call civilization” (p. 14). Following this upbeat overview, there are four major sections, each with a separate introduction to explain the motivation.  Part 1, “From Cuneiform to Classical Civilization,” starts with Babylon and ends with Roman finance making a transition from informal securities markets in the Republic to central control of the money supply and its uses under the Empire.  Part II, “The Financial Legacy of China,” is a thoughtful diversion about the different routes that financial engineers can take, depending on the nature of political controls and contract enforcement.  Part III, the bulk of the book in two hundred pages, describes in loving detail “The European Crucible,” beginning with sovereign debt in Venice and concluding with American substitutes for sovereign debt, often underwritten by Dutch financiers.   Part IV, “The Emergence of Global Markets,” takes the reader into the maelstrom of the late nineteenth, twentieth, and early twenty-first centuries as global finance made its way among competing political visions in the world, all the while becoming increasingly complex — and disruptive.

Part I, “From Cuneiform to Classical Civilization,” focuses on lasting contributions to the rise of civilizations in the West, starting with writing, then cities, and culminates with a “financial architecture” based on record keeping, contract enforcement, a numerical system that permitted compound interest calculations, and astronomical observations based on a calendar year of 360 days (to make interest calculations easier).  This financial architecture held congeries of cities together in mutually beneficial trade networks, but then also allowed the rise of empires and their disruptive consequences.  Especially poignant is the interpretation of the Muraŝu archive discovered in the ruins of ancient Nippur, which must have been one of the financial centers of the Persian Empire.  Three generations of the Muraŝu family maintained their clay tablets recording outstanding claims on property and business ventures, concluding with their aid to a usurper who overthrew the reigning emperor, Sogdianus.  The Muraŝu family organized the financing of the army of his half-brother, Ochus, who became Darius II.  After which, however, the archive testifies to continuing indebtedness and foreclosures of the various financiers.  Goetzmann concludes, “finance could rapidly and powerfully focus economic assets in one time and place for political gain” (p. 68).

The historical record of finance in the ensuring centuries remains largely to be decoded from the millions of clay tablets now dispersed in museums throughout the world, but the Mesopotamian innovations persisted into Grecian times.  The famed orator, Demosthenes, was often hired to express eloquently and convincingly the case of his client, whether an aggrieved creditor or debtor, before a mass jury of Athenian citizens.  His various speeches demonstrate the sophistication and complexity of Athenian private finance. Goetzmann concludes, “The Athenian state was able to induce investors into the equally risky venture of prospecting and mining through mechanisms for dispute resolution and the means by which the state fairly and transparently allotted property rights” (p. 91).

Roman finance, he argues, laid the basis for later development of corporate enterprises and secondary markets in mortgages as the Roman Republic expanded at the expense of Grecian (and Phoenician) city-states, while adopting their most successful and proven financial techniques, including the use of standardized coins to facilitate impersonal exchanges throughout the unified empire.  Why some forms of private finance, annuities based on rental properties, disappear from the historical record after the rise of the Empire remains a mystery.  The later travails of the Roman Empire with increasingly desperate measures for war finance, moreover, elicit a comparison with the contemporaneous Han Empire in China.

Part II, “The Financial Legacy of China,” basically resolves the so-called “Needham Paradox,” the failure of the technology advances of the Song Dynasty to generate an industrial revolution or further scientific advances that occurred much later in Europe, to the financial divergence between China and Europe. The key factor was the failure of China to develop sovereign debt, whether for its magnificent cities or for the central government.  Only with the opening of China’s treaty ports in the nineteenth century did the Chinese government finally resort to state debt, and even then the first Chinese government bonds were floated on international debt markets rather than in China itself.  But when China did enter global markets of the late nineteenth century, it did so with a vengeance. Shanghai rapidly became one of the great banking centers of the world in the 1920s, but only by discarding the imperial legacy of centuries before.  Goetzmann notes, “There was great debate in the Han over the role of private enterprise versus state ownership [especially regarding salt, iron, and maritime trade] and state ownership won” (p. 174).  Thereafter, the state provided credit to merchants and warlords when it needed to mobilize resources, eventually creating fiat paper money in the Song Dynasty.  Goetzmann concludes, “It is impossible to create fiat money without complete fiat.  Thus, the value of the currency rose and ultimately collapsed with the state” (p. 202).

Part III, “The European Crucible,” develops the logic that led small, competing, and warring city-states scattered across Western Europe to create viable forms of finance that led, with many well-known missteps but also with a few underappreciated financial successes, to modern, global finance.  Goetzmann sees the stages of financial development in Europe as: “first, the emergence of financial institutions; second the development of securities markets; third, the emergence of companies; fourth, the sudden explosion of stock markets; fifth, the quantification of risk; and finally, the spillover of this system to the rest of the world” (p. 203). The next twelve chapters explore both the missteps and the occasional successes that lay the foundations for modern finance.

After 219 pages of fascinating historical episodes, often interleaved with personal accounts of Goetzmann’s encounters with archaeological digs or archival sites, he sums up the lessons of history from the European example.  “Financial technology is redundant, adaptive, and sometimes mercurial.  The institutions we take to be sacrosanct, inevitable, and indispensable are probably not.  Given the random outcome of historical events, another set of institutions might have emerged to solve the same financial problems.  Financial innovation is thus a series of accidents of history — the caprice of time, location, and opportunity” (p. 219).  Consequently, his treatment of the technical advances in probability theory and actuarial science, starting with Fibonacci, Bernoulli and Pascal, contrasts sharply with that of Peter Bernstein’s Against the Gods: The Remarkable Story of Risk (New York: Wiley, 1996).  For Bernstein, the practical application of the Black-Scholes model for pricing options, built on the assumption that past distributions of asset prices could persist over the near future, had created the modern, efficient, global financial market.  For Goetzmann, however, the successes of the early financial markets led to the formalization in mathematical terms of the underlying processes.  He notes with approval the possibilities of non-linearities formalized by his Yale colleague Benoit Mandelbrot and erratic market movements highlighted by another Yale colleague, Robert Shiller.  Both scholars were inspired by observing anomalies in the price discovery processes revealed in the securities markets of the 20th century.

The final success of the European Crucible, according to Goetzmann, however, arose in the American colonies, first with their experiments with land banks (until outlawed by the British Parliament) and then with land companies backed usually by Dutch and British investors.  With all the current fervor surrounding the role played by Alexander Hamilton, thanks to the Broadway musical based on Ronald Chernow’s biography, Goetzmann instead gives Abraham Van Ketwich and a number of other Dutch bankers primary credit for having securitized the early debt of the United States.  True, “Dutch investors made out well when the debt of the United States was reorganized by Alexander Hamilton and the young nation made good on its financial commitments” (p. 386).  So, real credit for America’s success should go to the eighteenth century Dutch investors who developed the financial innovation of closed end mutual funds, which allowed small investors to share the returns from risky assets.

Part IV, “The Emergence of Global Markets,” begins with an interesting discussion of Marx, especially his insights into contemporary finance as demonstrated in his newspaper columns in the New York Daily Tribune in the U.S.  Goetzmann writes, “His prose is terse, witty, and convincing.  When I read these lively columns I can almost forgive him” (p. 411). The Tribune articles by Marx portray a world of “global linkages and geo-political dynamics” and that is what excites Goetzmann about this period of financial history. Especially noteworthy is the amount of information contained in the Investor’s Monthly Manual “quoting thousands of prices for securities from all over the world” (p. 412).  (And it’s available on downloadable pdf files from Goetzmann’s website given above.)  He extols The London Stock Exchange in 1870 as “giant economic lever with the fulcrum planted in the present, balancing past savings and future promises” (p. 413).

There follow fascinating insights into the experiences in pre-revolutionary China (“China’s Financiers”) and pre-World War I and early revolutionary Russia (“The Russian Bear”). Each country attempted to adopt financial innovations and capital from abroad while trying to establish legitimacy for a new government.  Both lapsed into authoritarian regimes espousing Marxian ideology, demonstrating again the historical contingencies under which financial innovations arise or meet their demise.  Chapter 26, “Keynes to the Rescue,” contrasts Keynes’ macro-economic recommendations, familiar to all from his General Theory, with his microeconomic investment strategies in handling the endowments of King’s College at Cambridge University.  At the macro-level, Keynes prescribed governmental spending whenever the animal spirits motivating private investment flagged while at a micro-level he switched from speculating on price movements in equities or foreign exchange (with dismal results) into equity investments in firms with sound management and robust markets.

“The New Financial World” emerged after World War I, not World War II, on Goetzmann’s account.  Highlighting the leadership of the U.S. in finance were skyscraper bonds, which he sees as an application into vertical space of the early American land companies dealing with wide, open horizontal spaces.  Financial architecture mimicked in many ways the new architecture that created a building boom toward the sky.  It is their eventual demise at the end of 1926 that Goetzmann sees as the collapse of a real bubble as “skyscrapers built in Manhattan were … driven by a demand for bonds that backed them rather than by a demand for the amazing new machine to make the land pay” (p. 480). Following the collapse of the urban real estate market in the U.S., returns from applying other new technologies such as radios, autos, and electrical appliances were delayed by a decade of more and equity prices in their companies collapsed, destroying the American public’s craving for investing in the stock markets.

Out of the Great Depression that followed, however, Goetzmann sees the emergence of useful financial innovations, starting with government regulation of the securities markets, implementation of a national Social Security plan, and improvements in mutual fund designs, all leading to post-war developments in financial theories, as well as intense empirical research into the varieties of movements in equity prices.  The challenges of the future, in a global financial system with confidence badly shaken from the 2008 financial crisis, lie in providing assurances to the current working age populations around the world that their future medical expenses and pension benefits can be financed. Attempts to meet these challenges with new financial innovations, whether from private or public initiatives, should be encouraged, as history shows that the consequences of disappointing the public’s expectations have always been disastrous for a civilization.

Larry Neal is the author of A Concise History of International Finance: From Babylon to Bernanke (Cambridge University Press, 2015).

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (July 2016). All EH.Net reviews are archived at

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

Inglorious Revolution: Political Institutions, Sovereign Debt, and Financial Underdevelopment in Imperial Brazil

Author(s):Summerhill, William R.
Reviewer(s):Hanley, Anne

Published by EH.Net (June 2016)

William R. Summerhill, Inglorious Revolution: Political Institutions, Sovereign Debt, and Financial Underdevelopment in Imperial Brazil.  New Haven: Yale University Press, 2015. xiii + 342 pp. $85 (hardcover), ISBN: 978-0-300-13927-3.

Reviewed for EH.Net by Anne Hanley, Department of History, Northern Illinois University.

William Summerhill (Department of History, UCLA) presents us with a puzzle.  How was it that Brazil managed to gain the trust of international and domestic capital markets by establishing its creditworthiness in the nineteenth century yet failed to engender growth-inducing financial market development at home?  Aren’t the two supposed to go hand in hand?  According to Douglass North and Barry Weingast, they should.  Britain’s Glorious Revolution provides the example of a constitutional reform that separated the sovereign from control over public finance, handing it to an elected parliament responsive to the body politic.  This was the key to creditworthiness.  Political institutions that safeguarded the property rights of state creditors were also responsive to the demands of entrepreneurs at home, leading to financial deepening that created the conditions for robust economic growth and development.  One political revolution, two virtuous outcomes.  Yet in Brazil, the same constitutional reform that established the creditworthiness of the state did not promote financial deepening.  Summerhill’s book studies Brazil’s success in one endeavor and failure in the other to explore a lost opportunity.  If only the legislators who repeatedly borrowed and consistently serviced debt had also acted to promote instead of stifle the domestic private financial sector, Brazil may have parlayed its excellent creditworthiness into modern, sustained economic growth.  Yet this assumes that being a credible borrower naturally leads to broad-based financial development.  The Brazilian case shows that it ain’t necessarily so.  Summerhill offers a series of carefully crafted chapters resting on an array of richly constructed original data sets to demonstrate precisely why.  Early chapters focus on the nature, timing, cost, and track record of borrowing abroad and at home to establish Brazil’s surprisingly vibrant creditworthiness in spite of challenges from many disruptions and conflicts from regional revolts to international war.  Later chapters turn to domestic financial markets — the Rio de Janeiro stock exchange and commercial banks — to identify how and why these were stymied.

Summerhill weaves a sophisticated analysis of the Brazilian experience across the two parts of the book.  Brazil successfully committed to borrow without default for sixty years, a highly unusual feat for Latin American countries who had a propensity to default in the aftermath of independence, and was rewarded with regular access to the capital markets and downward trending costs of capital.  To take just one example of Summerhill’s carefully layered analysis, he delves into Brazil’s declining costs of capital to test what the proximate causes were and how they differed for foreign and national creditors.  Where others have argued that Brazil’s improved terms came from always making its payments, Summerhill’s tests show that shifts in risk premia came from reassessments of the likelihood of default.  The market responded not to past performance, the so-called “reputational effect,” but to the implications of disruptions for future repayment, a finding that is interesting while one is reading about the conflicts of the 1830s to 1860s, but downright chillingly prescient by the end of the book.  Moreover, his rich price data series reveal that the risks keeping domestic creditors up at night were entirely different from those that occupied the concerns of foreign lenders.  In a bit of historical fortune that the two rarely coincided, Brazil always had access to capital on one side of the Atlantic or the other.  Because of this access, Summerhill argues, it was able to fight and win wars, strengthen the central state, invest in infrastructure, and extend its authority over a continent-sized country.  Its borrowing in foreign and national markets reinforced its good behavior: what was good for external debt service (low inflation) was also good for domestic creditors (no fear that debts would be inflated away).  Chapter 4, a wonderful investigation of domestic borrowing, leaves us with a picture of a sophisticated market and savvy government officials.

Yet the political elites that succeeded so well in building up the state elected to closely control and stifle domestic financial market development.  The Council of State, an advisory body to the Emperor comprised of members of parliament, had ultimate control over approving corporate charters.  This turned out to be a clear conflict of interest:  by limiting the number of charters, the parliament limited the options available to the investing public and diverted their savings into domestic credit instruments when the government needed money.  This skewed incentive that promoted the nation-state at the cost of private sector development was reinforced by the close ties between statesmen and entrepreneurs who received the coveted charters.  As a result, banks were few and profitable.  The Brazilian economy was woefully underserved, while the political-financial cronies got rich. What would the British think of that?!  If nothing else, Summerhill’s tale of two markets is a compelling illustration that Britain’s experience was exceptional, not the standard.

This is an excellent book built on a solid foundation of data carefully examined, tested and explored so it seems petty to want to know more, but a series of unanswered questions nag the reader:  what were the financial theories and models available to Brazil’s statesmen as they designed their constitution that gave fiscal power to elected legislators?  Their experience with the Portuguese crown was enough to make them want to separate the sovereign from the purse, but how did they decide what this new form should take?  And what was their inspiration for maintaining tight control over the distribution of corporate charters?  This question is important, because one wonders whether the Brazilian elites knew of a virtuous path that could have benefited the nation yet actively chose the course of self-gain, or if they were responding to a unique set of constraints that gave incentive to development-stunting policy choices.  That is, was cronyism an initial input or an unintended outcome?  In the end, it didn’t matter.  A political coup in 1889 put an end to Brazil’s creditworthy status and turned it into the serial defaulter it is now known to be.  If there ever was an example of the weakness of the reputational effect argument, this was it, loud and clear.

Anne Hanley is associate professor of Latin American history at Northern Illinois University.  She is author of Native Capital: Financial Institutions and Economic Development in São Paulo, Brazil 1850-1920 and is writing a book on municipal finance and the provision of public services in Brazil.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (June 2016). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):19th Century

Sovereign Debt and International Financial Control: The Middle East and the Balkans, 1870-1914

Author(s):Tunçer, Ali Coşkun
Reviewer(s):Esteves, Rui

Published by EH.Net (March 2016)

Ali Coşkun Tunçer, Sovereign Debt and International Financial Control: The Middle East and the Balkans, 1870-1914. Houndmills, UK: Palgrave Macmillan, 2015. xii + 243 pp. $119 (cloth), ISBN: 978-1-137-37853-8.

Reviewed for EH.Net by Rui Esteves, Department of Economics, University of Oxford.

Sovereign debt and default are among the most studied subjects in economics and economic history, for good and unfortunately also for bad reasons. The very concept of “sovereign debt,” i.e. of a sovereign obliged to repay a debt obligation, borders on being an oxymoron. This characteristic has made the topic a popular object of research among economists. Some have attempted to rationalize sovereign debt as a form of incomplete contracts enforced through extra-judicial means (political or economic sanctions) or as the outcome of a pure reputational equilibrium, where the sovereign’s incentives are aligned by the threat of future loss of funding. Others have taken the theory to the data to test whether it predicts how sovereign risk is priced by markets. In pure reputational models, spreads are driven by the credibility of the borrower, which in turn depends on such observables as stability of political institutions, fiscal capacity of the state and economic fundamentals. This book follows on this literature by offering four detailed case studies of emerging nations in the Eastern Mediterranean (the Ottoman Empire, Egypt, Greece and Serbia). The first signal contribution of this book lies in its unapologetic historical detail.

Ali Coşkun Tunçer combines a critical review of the secondary literature with new evidence from archival and statistical sources to weave a compelling narrative about the emergence of these nations into the perilous sea of international finance, about how they ended up defaulting and, more interestingly, about the consequences of default. For all of these reasons, this book will certainly become a go-to reference for historians interested in the region and economists seeking better understanding of the mechanisms of default. Apart from geography, the unifying principle of these four cases is that in all of them default gave rise to a loss of sovereignty. As part of the agreement to settle their defaults, each nation had to surrender a fraction of its fiscal sovereignty to external organizations allegedly representing their creditors. Tunçer refers to these as “international financial control” (IFC) organizations. Standard economic theory would predict that substituting foreign control for non-credible sovereigns reduced the risk of buying these nations’ bonds. And, indeed, Tunçer broadly confirms this through a statistical analysis of bond prices using breakpoint tests.

However, the connection between IFCs and improved credit is neither direct nor one-way. Instead, Tunçer uncovers a more nuanced story whereby the joint commitment of creditors and sovereigns to the IFCs was the key for a good outcome. The Ottoman Empire is the prime example of a successful cooperation since the Sublime Porte saw in the creation of the Dette Ottomane in 1881 an opportunity to increase the efficiency and the returns of its tax collection. In a similar way, the institution of an IFC over Egyptian finances in 1876 led to a permanent reduction in borrowing costs, although the establishment of the British protectorate six years later abolished any agency on the part of the Egyptian authorities. At the other extreme, the two IFCs created after the Serbian and Greek defaults, in 1895 and 1898 respectively, were considerably weaker institutions, with less control over tax revenues than their Ottoman and Egyptian counterparties. Not only were they weaker at birth (at the insistence of the sovereigns), but they also had to live in constant conflict with the local governments, especially in Greece. Unsurprisingly, Table 8.1 in the book shows that while spreads halved for Egypt and Turkey, after the establishment of their IFCs, they only fell by a quarter in the other two countries.

This nuanced discussion of historical IFCs is a distinct advance over the literature on sanctions or “super-sanctions,” which takes them as a black box enforcement mechanism for sovereign debt. In other words, the imposition of IFCs did not turn nations into fiscal colonies of European powers, except when fiscal control was just an inroad into effective political control, as in Egypt. Although compelling, this focus on spreads may be partly misleading. The same Table 8.1 also shows that Egyptian debt per capita stagnated after the institution of an IFC and even fell in Turkey, compared to a large increase in Greece and especially Serbia. One therefore wonders whether spreads were compressed by restored credibility or by credit rationing imposed by the more powerful IFCs. Similar arguments have been made about the pricing of colonial bonds and it would be interesting to disentangle the importance of the two effects — reduced demand and expanded supply of funds.

Tunçer then goes on to ask what determined the relative degrees of cooperation of sovereigns with their international creditors by resorting to a political economy of taxation framework. Around the mid-nineteenth century, all of these nations had a fiscal structure based on direct taxes on land and agriculture. The transactions costs of raising revenue were correspondingly high and the actual collection was often outsourced to tax farmers. In this context, foreign control over these sources offered an opportunity to raise revenue more efficiently, and the Ottoman government in particular acted on it by actually enlarging the scope of taxes managed by the Dette Ottomane in 1888. A similar opportunity was not present in countries such as Greece and Serbia, where the share of indirect taxation was higher in the 1890s. It is therefore not surprising that the IFCs were given short shrift by the local governments. A final element in this framework is the degree of political representation. The Ottoman Empire and Egypt were ruled by centralized elites, which were prepared to share control over costly taxation with the IFCs in exchange for future credibility. Greece and Serbia, on the other hand, were constitutional monarchies where this kind of deal was harder to reach and enforce in the face of greater political instability. This analysis leads the author to question, quite rightly, the association between limited governments and protection of property rights (at least the rights of external creditors) so common in the literature.

Toward the end of the book, Tunçer reveals another intriguing outcome of default in the Eastern Mediterranean. Even though nations that adopted stronger forms of IFC (Turkey and Egypt) gained more in terms of credibility and borrowing costs over the short-to-medium run, they may have lost over the long-run. In fact, by outsourcing their fiscal capacity they ended up postponing necessary reform, whereas in Greece and Serbia the higher costs of borrowing worked as the catalyst for monetary and fiscal reforms. On the eve of World War I, the fiscal capacity of these two nations had converged toward the European norm, whereas revenue per capita in Egypt and the Ottoman Empire had stagnated. So, not only were IFCs not a sufficient condition to improve credibility (as assumed in the literature on sanctions) but they were also not a necessary condition, and may actually have harmed the build-up of state capacity. Development economists worry today about the need to empower governments in developing nations, rather than outsource state functions to more efficient international organizations or NGOs, and they will find confirming evidence in this book. To be sure, this framework is not fully worked out yet and perhaps the main omission in the narrative is war. Charles Tilly famously declared that “States make war, and wars make states” (Tilly 1990). War and military build-up is a constant presence in the history of the Eastern Mediterranean all the way to the large conflagrations of the Balkan Wars and the Great War. It would be interesting to understand how the second part of the dictum applied in this very unstable corner of Europe, i.e. how ability to tax (state capacity) and fiscal credibility reacted to military ambition rather than high borrowing costs.

In sum, this is an admirable work of nuanced historical interpretation that questions received generalizations and raises many questions for future research. Economists and economic historians interested in sovereign default, state capacity and even the debt crisis in the Eurozone will do well to read it.


Charles Tilly (1990), Coercion, Capital, and European States, Cambridge: Basil Blackwell.

Rui Esteves is Associate Professor in Economics in the Department of Economics, University of Oxford. He is the author of “Like Father like Sons? The Cost of Sovereign Defaults in Reduced Credit to the Private Sector” (with João Jalles), Journal of Money, Credit and Banking (forthcoming)

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (March 2016). All EH.Net reviews are archived at

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):Europe
Middle East
Time Period(s):19th Century
20th Century: Pre WWII

The Oxford Handbook of the Italian Economy since Unification

Editor(s):Toniolo, Gianni
Reviewer(s):Prados de la Escosura, Leandro

Published by EH.Net (October 2015)

Gianni Toniolo, editor, The Oxford Handbook of the Italian Economy since Unification. New York: Oxford University Press, 2013. xiv + 785 pp. $170 (cloth), ISBN: 978-0-19-993669-4.

Reviewed for EH.Net by Leandro Prados de la Escosura, Department of Social Sciences, Universidad Carlos III.

In addition to being a leading scholar of the economic history of modern Italy, Gianni Toniolo has been throughout his career an outstanding citizen. He has had a leading role in debates on Italy’s economic performance since the 1970s — initially as an active member of the new generation of distinguished economic historians that challenged and renovated the conventional narrative. More recently, he has led a new generation of young economists and economic historians in a major revision of Italian economic history that focuses on standards of living and income distribution.

The Oxford Handbook, a most ambitious re-interpretative project in modern European economic history, is the latest proof of Toniolo’s good citizenship. The purpose of this collective effort is assessing Italian long run economic performance within an international perspective. A common element in the contributions to the volume is addressing historical issues from a present day’s perspective and emphasizing its policy dimensions. This feature differentiates the volume from conventional economic history texts. The wide variety of issues considered does not harm the volume’s unity. In addition, the book is well written and accessible to the non-technical reader.

The volume is divided into five parts: aggregate growth and policy; sources of growth and welfare; international competitiveness; firms, banks, and the state; and the regional divide. For each topic within each of the five sections, the editor has chosen two or three specialists, usually an international scholar in the field and an Italian economist or economic historian. Such a bold idea proves to be a success. An excellent quantitative appendix, that includes a new set of GDP estimates from the output and expenditure sides, together with new series of labor quantity, capital stock and total factor productivity, completes the volume.

Part I on aggregate growth and policy represents, perhaps, the most ambitious interpretative section of the volume. It starts with a thoughtful introduction by the editor that constitutes a good guide for the rest of the volume. In contrast to the relative decline during the Early Modern era, Italy experienced sustained growth and catching up to the leading economies for most of the twentieth century, separating two phases (pre-1896 and post-1992) of sluggish performance and falling behind.  The process of international convergence was accompanied by internal divergence between north and south. The introduction is followed by Harold James and Kevin O’Rourke’s assessment of Italy’s performance during the first globalization and its subsequent backlash, in which they stress pre-World War II capital scarcity and highlight the specificity of interwar industrial policy under the lead of state-owned industrial conglomerate IRI. Then, Andrea Boltho compares Italy to Germany and Japan, countries defeated in World War II and great successes in the postwar, which slowed down significantly at the turn of the century.  Lack of major reforms during the reconstruction years, administrative inefficiencies, permanent conflict in industrial relations, and the gap between North and South are pointed out as Italy’s distinctive elements. Nicholas Crafts and Marco Magnani carry out a path-breaking interpretation of Italy’s catching up during the Golden Age and lagging behind since 1992. Their main argument is that institutions and policy choices that allow success in a far-from-frontier economy differ from those required for a close-to-frontier economy. Thus, Italy successfully performed as a far-from-frontier economy in the so-called age of Fordist manufacturing within a stable context of growing export demand, diffusion of U.S. technology, and high investment opportunities, with regulation, industrial policy, government intervention, and undervalued exchange rates as the main policy instruments. As Italy got closer to the technological frontier, factor and product markets’ flexibility and human and intangible capital accumulation became central to growth opportunities and Italy fell short of achieving them, as the delayed diffusion of information and communications technologies confirms. In the closing paper, Marcello de Cecco provides an original insight on how major issues in Italian economic performance were addressed by foreign scholars in which dualism receives particular attention.

Part II on sources of growth and welfare represents the most empirical section of the volume and provides a quantitative background for the rest of the volume’s contributions. It opens with a major contribution by Alberto Baffigi (that represents a collective endeavor) to produce a new set of historical national accounts with homogeneous GDP series from the supply and demand sides, at current and constant prices, over one hundred and fifty years. In the next chapter, Stephen Broadberry, Claire Giordano and Francesco Zollino compute new series of capital and labor and combine them with Baffigi’s new GDP series to draw trends in labor and total factor productivity (TFP) that place Italy in comparative perspective. Their analysis of the sources of growth reveals that during 1913-1993, TFP drove labor productivity growth (in which structural change played a relevant part) especially during growth accelerations. However, up to 1913 and, then, since 1993, factor accumulation dominated long-run growth. Italy appears to have come full circle. Andrea Brandolini and Giovanni Vecchi address standards of living in a comprehensive way to conclude that modern economic growth in Italy was compatible with substantial achievements in human development and the eradication of extreme poverty. The evolution of Italy’s educational system is addressed in Giuseppe Bertola and Paolo Sestito’s essay. They find that insufficient education levels (in both quantity and quality) represent a much more relevant obstacle for growth and catching up in today’s advanced Italian economy than during the Golden Age. In their assessment of emigration, Matteo Gomelli and Cormac Ó Gráda stress the positive self-selection of migrants and the favorable impact of migration on living standards and growth, as well as on reducing regional discrepancies. Lastly, Luigi Guiso and Paolo Pinotti use the enfranchisement of 1912 to investigate whether civic capital had an effect on democratization. After enfranchisement, electoral turnout declined but more in the South than in the North, which was more civic-capital intense. From this finding they conclude that formal democratization had a lower impact in the South as lower civic capital reduced political participation and, hence, did not contribute to closing the North-South gap.

Part III focuses on the international competitiveness of the Italian economy. It starts with a complete survey of the evolution of comparative advantage by Giovanni Federico and Nikolaus Wolf who emphasize the association between economic growth and export performance. They stress the dynamic role of manufacturing exports from World War I to 1980, when low-tech exports dominated and competitiveness declined, especially during the last two decades. Virginia di Nino, Barry Eichengreen, and Massimo Sbracia show that Italy’s currency was mostly undervalued between unification and the 1990s, after which it became overvalued. Undervaluation stimulated growth through export expansion and a more efficient resource allocation. Federico Barbiellini Amidei, John Catwell, and Anna Spadavecchia, who investigate technological innovation, highlight the major role played by international transfers of technology. Italy creatively adopted foreign technology, as industries’ innovation was driven more by engineering and design than by R&D. Since the 1990s, imports of foreign disembodied technology slowed down while R&D expenditure lagged behind advanced countries deepening the gap. A most informative chapter on the emergence and expansion of Italian multinationals by Fabrizio Onida, Giuseppe Berta, and Mario Perugini closes Part III.

The theme of Part IV is how firms and industries evolved and what the role played in it by banks and public policies. Franco Amatori, Matteo Bugamelli, and Andrea Colli assess how firms reacted to different technological paradigms in a global economy. During the first three-fourths of the twentieth century, industry, especially small and medium-size firms, performed satisfactorily. However, in the latest phase of globalization, small-size firms were unable to take full advantage of the information and communication technology, while suffered increasing competition from emerging countries. Inability to manage social conflict and to create a modern institutional framework seems to underlie Italy’s disappointing performance during the last two decades. The impact of credit allocation on growth and efficiency since World War II is at the core of Stefano Battilossi, Alfredo Gigliobianco, and Giuseppe Marinelli’s essay. They find a contribution of Italian banks to economic growth up to 1970, while overregulation and financial repression — a result of policies socially motivated and serving vested political interests — had a negative impact between the 1970s and mid-1990s. Liberalization had a positive effect on the banking system that responded to growth opportunities and directed credit towards promising industries. Banks, thus, should not be blamed for Italy’s current structural problems. In their chapter, Fabrizio Balassone, Maura Francese, and Angelo Pace find support for the hypothesis of a negative association between public debt and growth over the long run through a reduction in capital accumulation. Nonetheless, unlike the experience of the late nineteenth and early twentieth century, reducing public debt from  1995 to 2007 did not have a positive effect on growth. Delayed fiscal consolidation and the size of public expenditure and deficits appear as the explanation. In this section’s closing paper, Magda Bianco and Giulio Napolitano address the impact of public administration on the efficiency of the Italian economy.

In Part V, dedicated to the regional divide, Giovanni Iuzzolino, Guido Pellegrini, and Gianfranco Viesti focus on the changes in regional convergence of GDP per head since unification and find a declining North-South gap between the late nineteenth and mid-twentieth century that gave way to its increase during the Golden Age, to be followed by a reduction that has stabilized since the 1980s. In human development terms, however, the divergence partially closed over time. Brian A’Hearn and Anthony Venables investigate, in turn, the role of internal geography and foreign trade patterns in regional disparities showing that location of natural advantage and access to domestic and international markets favored the North over time, rejecting the hypothesis of an inverted-U pattern of regional inequality. Water abundance permitted intensive agriculture after unification; largely inward-looking industrialization in the early twentieth century also gave advantage to the North with its larger and more sophisticated markets. In the post-World War II era agglomeration in the North facilitated its access to European Community markets.

I cannot refrain from adding some succinct remarks after reading such a fascinating volume. As regards the quantitative part, it needs to be said that Baffigi’s chapter would by itself justify the volume. However, the way the new series are presented is a bit disappointing. One misses the presentation of long-run trends in GDP and GDP per head and the contribution due to supply and demand components.

In the excellent chapter by Broadberry, Giordano and Zollino it seems surprising that human capital is not considered independently. This decision implies that in the estimates any potential contribution of labor quality is included in the residual, rendering TFP estimates an upper bound of its actual magnitude. In turn, using full time equivalent workers (FTE) fails to take into account the decline in hours worked per employed worker that probably results in a downward bias in labor productivity levels and growth.

Some additional questions emerge. Are broad capital accumulation and efficiency gains, complementary or alternative? Does TFP growth follow capital accumulation? Should it be concluded that Italy exhausted its catching-up potential as it got closer the technological frontier? Other national experiences, such as Korea’s, tend to suggest otherwise.

On the contentious issue of inequality, the Italian historical experience appears of great interest. A’Hearn and Venables do not find confirmation for the hypothesis of an inverted-U pattern of regional inequality. Such a finding is consistent with the results for personal income distribution by Brandolini and Vecchi. This coincidence suggests a possible association between them as differences in average incomes between rich and poor regions will be most probably an element in overall inequality and would explain, perhaps, the absence of a Kuznets curve in Italy.

As the reader will realize, the long journey through this lengthy book is worth pursuing. Italian and European economic history is better and more thoughtful after the appearance of The Oxford Handbook of the Italian Economy.

Leandro Prados de la Escosura is the author of “Economic Freedom in the Long Run: Evidence from OECD Countries (1850-2007),” Economic History Review (forthcoming).

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (October 2015). All EH.Net reviews are archived at

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economic Planning and Policy
Economywide Country Studies and Comparative History
Financial Markets, Financial Institutions, and Monetary History
Industry: Manufacturing and Construction
International and Domestic Trade and Relations
Living Standards, Anthropometric History, Economic Anthropology
Urban and Regional History
Geographic Area(s):Europe
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Economic Development in Early Modern France: The Privilege of Liberty, 1650-1820

Author(s):Horn, Jeff
Reviewer(s):Bossenga, Gail

Published by EH.Net (September 2015)

Jeff Horn, Economic Development in Early Modern France: The Privilege of Liberty, 1650-1820.  Cambridge: Cambridge University Press, 2015. viii + 319 pp. $105 (hardback), ISBN: 978-1-107-04628-3.

Reviewed for EH.Net by Gail Bossenga, Elizabethtown College.

It has often been said that economic growth in France during the old regime suffered from the stranglehold of a welter of privileges that prevented efficiency, innovation, and competition.  At the same time, historians have observed that economic growth in eighteenth-century France was quite robust and compared favorably with Great Britain.  In this ambitious study, Jeff Horn, Professor of History at Manhattan College, takes on this seeming contradiction and argues that although some privileges did check economic development, the Bourbon government was able to use other privileges effectively as a way to counteract these blockages and open up France to economic opportunities.  These countervailing privileges freed businessmen from regulations, inspections, guild reception fees, limitations on workforce size, taxes, militia service, and other such requirements associated with the jumble of privileged bodies in the old regime.  Because these privileges liberated entrepreneurs from other, undesirable privileges, Horn calls the government’s strategy the “privilege of liberty.”  Not only did businessmen acquire the liberty that they needed to create dynamic enterprises, the French government found a way to create dynamic growth that allowed it to compete with its rivals internationally.

Several types of privileges contributed to this strategy.  Enclaves outside city walls controlled by seigneurs with rights of high justices were unimpeded by guild regulations, allowed manufacturers to hire as many workers as they needed, and provided the freedom to experiment with innovative products.  Territories, such as Avignon and Orange, enjoyed rights of transit, which allowed them to sell silk at costs lower than a rival like Lyon.  The special status of “royal manufacture” exempted entrepreneurs from burdens such as guild controls and customs duties, and sometimes even provided subsidies.  Rights of naturalization and de facto toleration allowed highly successful Jewish, Protestant and foreign businessmen to continue to build up their enterprises, even though religious minorities as a whole suffered legal disabilities.

Colbert and many of his successors believed that quality control was essential to win foreign markets, and used a combination of strict regulation and privilege to achieve this end.  The poor quality of the woolens in Languedoc, for example, had led Turkish markets to reject them.  By subsidizing woolen manufacturers there, setting up a cartel that limited debilitating competition, and requiring members of the cartel to adhere to rigorous quality controls, officials were able to stimulate a noticeable increase in woolen exports.

In the realm of colonial commerce, the Bourbon state used privileged, chartered trading companies to raise the necessary capital to exploit overseas markets.  Under Louis XIV, the government created 39 trading companies with monopolies over trade in particular regions.  All of these companies, however, with the exception of the East Indies Company, failed.  Greater freedom to trade in the Antilles, by contrast, led to spectacular commercial growth.  In this case, by contrast to Horn’s other examples, “liberty was more effective than privilege in encouraging colonial development” (p. 118).

After 1750, reforming government officials began to embrace liberty and competition as the watchword of economic vitality.  As a result, Horn argues, Bourbon policy became characterized by the “privilege of liberty,” that is, officials “increasingly deployed the language of liberty to justify the long-standing practice of granting privileges” (p. 5).  Liberty proved difficult to implement, and was no panacea for the economy.  Turgot’s unsuccessful attempt to abolish the guilds, for example, destabilized the work force and undid years of regulatory quality measures that had supported exports.

The Revolution changed the rules of the game by embracing liberty as a foundational principle.  Some economic privileges survived one or two years, but overall the slate was wiped clean.   Horn argues that after the Revolution privilege started to return under the guise of regulations, but the goal of administrators was always to protect consumers and guarantee the quality of exports.  No lasting privileges took root, except for a reduced version of Marseille’s old free port status and a set of state-regulated trademarks that could be used in regions known for producing high-quality textiles.

Horn’s book draws on an impressive array of sources in the secondary literature, as well as national and regional archives.  He shows that the Bourbon state was more flexible and pragmatic than one might have assumed, and he makes a good case that privilege had a role to play in helping to advance the cause of economic progress.

At the same time, some features of the book are problematic.  The author has a disconcerting and recurring tendency to start with one generalization and end with another that appears to contradict the first. Thus one runs into statements like, “chapters two to seven demonstrate that reliance on privilege made the practice of mercantilism both capitalist and absolutist.”  The next paragraph states, “Even though it created a potentially hegemonic fiscal-military state, the Bourbon monarchy was never ‘absolute’” (p. 12).  Does this mean that the mercantilist use of privilege was absolutist, but the Bourbon government employing it was not?

There is reason to suspect that crony capitalism was more involved in the distribution of privilege than Horn’s narrative suggests.  There are occasional allusions to favoritism.  Thus, in Guyenne, “close ties to administrative and social elites” allowed protected entrepreneurs to drive out competitors, so that glass making there stagnated (p. 212).  Yet it would be surprising if more of these deals were not present.  Royally chartered joint stock companies, for example, were notorious for relying on insiders at the royal court.

Finally, evaluating the relationship of privilege to economic growth requires a more comprehensive understanding of the fiscal underpinnings of the state.  According to Horn, the “quid pro quo demanded by the state in exchange for the granting of privilege was development” (p. 22).   Too often, however, the quid pro quo was the payment of cold cash into the perennially bankrupt French treasury. The French monarchy had a longstanding habit of manipulating privilege as a source of much-needed revenue.  Cities were forced to purchase offices or make “free gifts” to the king.  The consortium of financiers known as the “General Farm” not only leased the right to collect indirect taxes including customs, but also, in the absence of a national bank like the Bank of England, served as a banker to the crown by advancing short-term credit to it. Periodically, the monarchy sold offices of inspectors and masterships in the guilds to raise money.

Each of these payments to the crown was backed by local revenue sources, which then had to be protected.  Cities had a vested interest in guarding the tax-paying population within their walls.  The Farmers General were naturally vigilant about collecting every last toll and custom duty under their lease. Guilds raised the cost of their masterships to raise required sums for the crown.

In other words, by using privilege periodically to support its finances, the Bourbon state itself contributed to the blockages and market fragmentation that its administrators tried to circumvent in other circumstances by using “the liberty of privilege.”  This fundamental contradiction in state policies may help to explain why when the monarchy tried to “liberate” or “rationalize” the economy, it was reduced to nibbling around the edges by applying counteracting privileges and liberties.  To reform the economy as a whole would have meant alienating powerful allies and finding alternative sources of revenue.

Overall, then, Horn demonstrates why economic privileges need not be viewed in uniformly negative terms and were used in certain situations to stimulate economic growth.  His broader claim about “the effectiveness and the dynamism” (p. 5) of state-sponsored reform relying on privilege, however, ignores other, less praiseworthy uses of economic privilege that the crown also employed.

Gail Bossenga is a Scholar in Residence at Elizabethtown College.  She is the author of “Financial Origins of the French Revolution,” in Dale Van Kley and Thomas E. Kaiser, eds., Origins of the French Revolution (Stanford University Press, 2011), and “A Divided Nobility: Status, Markets, and the Patrimonial State in the Old Regime,” in Jay Smith, ed., The French Nobility in the Eighteenth Century: Reassessments and New Approaches (Penn State University Press, 2006).

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Subject(s):Economywide Country Studies and Comparative History
Government, Law and Regulation, Public Finance
Geographic Area(s):Europe
Time Period(s):17th Century
18th Century
19th Century

Making Money in Sixteenth-Century France: Culture, Currency, and the State

Author(s):Parsons, Jotham
Reviewer(s):Santarosa, Veronica Aoki

Published by EH.Net (September 2015)

Jotham Parsons, Making Money in Sixteenth-Century France: Culture, Currency, and the State. Ithaca, NY: Cornell University Press, 2014. x + 324 pp. $60 (hardcover), ISBN: 978-0-8014-5159-1.

Reviewed for EH.Net by Veronica Aoki Santarosa, University of Michigan Law School.

In Making Money in Sixteenth-Century France, Jotham Parsons (associate professor of history at Duquesne University) argues that money, as a technology of power, was imbricated within the larger web of social, political, and cultural structures of sixteenth-century France. In a series of interrelated essays (parts of which are published elsewhere), the book sets out to trace the intellectual origins of the idea of currency as a destabilizing force and to describe how the control over coinage became inextricably connected to the sixteenth-century French kings’ governance projects of state building and monarchic consolidation.

The first chapter describes in detail the technology behind the process of coining and examines the institutional structures that controlled the production and flow of coins in the second half of the sixteenth century. The second chapter turns to intellectual history to develop the conceptual backbone of the book. The third and fourth chapters focus on monetary policy between the reign of Henry II and the ascension of Henry IV and the Bourbon monarchy. Parsons traces how various governments confronted the Great Inflation of the second half of the sixteenth century and the economic consequences of the Wars of Religion (1562–1598). In the last third of the book, looking primarily at literary interventions and at the Cour des Monnaie’s law enforcement activities, he examines how a broader range of French society interacted with money.

Under the reign of Henry II (1547–1559), the Cour des Monnaies increased in size, power, and prestige. Drawing on newly minted theories connecting currency to sovereignty, the king made monetary policy a priority in the governance project of state building and set up a sophisticated legal and administrative apparatus to control coinage. Parsons argues, counterintuitively, that the numerous currency crises offered opportunities for the monarchy to centralize and strengthen the administrative control of the mint system. From a detailed analysis of the Pinatel scandal and a few other episodes in which the coinage system failed, Parsons extracts the lesson that creative and effective government policies and an efficient mint system were able to quell the various financial concerns the state faced in that period and achieve political stabilization. This view is, however, at odds with a large literature that exposes the ephemeral nature of the benefits of the ambitious 1577 monetary system reorganization, whose effects had largely reverted by 1602 (Blanc 2011; Sargent and Velde 2014), and the failed attempts by the various kings to restore royal authority and prevent its disintegration during the Wars of Religion (Parker 1983).

In fact, Parsons’ history of the Cour des Monnaies and the French monarchy’s responses to crises treats the political process as one of continuous learning and administratively efficient results. It is beyond doubt that monarchs often succumbed to the temptation to manipulate currency for self-interested reasons or to lessen the financial pressure created by warfare (Munro 2010). Beyond the few paragraphs dedicated to literary depictions of Charles X, “the prince counterfeiter,” however, Parsons does not discuss this possibility. Nor does he discuss the economic calculus of the king in weighing the profits of seigniorage against the loss of credibility with his subjects.  There is also almost no discussion of what, beyond the sophisticated technology deployed to achieve consistency and prevent counterfeiting, kept the mints successful and honest, as the mints were farmed out to private contractors. Parsons’ approach is mainly qualitative and illustrative, with an emphasis upon individuals and the ideas that motivated them. However, in giving primacy to the influence of ideology rather than incentives, to motivation more than outcome, and to discourse rather than action, Parsons misses an opportunity for fruitful interdisciplinary dialogue especially with modern monetary theory, which, according to him, “has little to offer a non-quantitative study like this one” (p. 11 ).

Parsons argues more broadly that the ways money was theorized closely tracked to how governments responded to crises. In his view, an intellectual force — the roots of which he traces to Aristotelian philosophy — was the impetus behind both the expansion of the bureaucratic and administrative apparatus to control coinage and the profuse legislation regulating aspects of economic and social life. According to Parsons, well into the sixteenth century the French held Aristotelian conceptions of money. That is, they deemed money an “inevitable but dangerous and destabilizing product of commerce between households and polities” (p. 14). At the same time, the belief that one could control economic forces, and that the king had the ability to solve the dangers money posed, encouraged sophisticated theoretical reflections on government intervention in the economy. Challenging the received wisdom in the current literature that “[t]he genesis of what was later to be economic policy was only faintly perceptible in the sixteenth century” (Boyer-Xambeu et al. 1994, p. 44), Parsons makes an important contribution in tracing the emergence of a “science of maxims” and how these early theorizations in monetary policy shaped modern economic thought. However, perhaps because he constrains his attention almost exclusively to the wisdom produced by the political elites advising the king and omits the theological discourse on how money was conceptualized, the intellectual landscape in Parsons’ narrative appears surprisingly uncontested — in stark contrast to the religious and economic turbulence of the period. Turning to coinage regulation, Parsons’ thesis that the Cours des Monnaies’ regulatory activity was the explicit model for social regulation in general is perhaps his boldest. His comparison of coinage regulation with sumptuary laws is novel and persuasively reveals common patterns behind these bodies of law. According to him, both types of laws were addressed at punishing those who hoped to find social mobility through artifice and deception, and were motivated by contemporary thought that “associated disordered passions not only with individual vice but with political disorder” (p. 70). When counterfeiters manipulated the display of wealth, clothes and coins lost their value as a signal and fueled fears of inflation. Yet, clothing was just one “technology” which could be deployed to subvert the social order, and Parsons provides no clear analysis of how these were all interconnected: venal offices, dueling, marriage, etc. One wonders, however, how far the analogy between coinage and sumptuary legislation can take us as his analysis doesn’t rule out equally plausible alternative explanations for their perceived similarities. A perhaps more obvious point is that the shared spur behind these bodies of law was the protection of national markets and the national monetary space, in that these regulations were part of a broader proto-mercantilist policy. As Howell (2010, p. 218) plausibly hypothesizes, “[M]any of these laws had a distinctly mercantilist cast, for they targeted imported goods and seemed to equate such purchases with bad citizenship, even with treason.” For example, a 1543 French law condemned “excessive and superfluous expense on cloth and ornaments of gold and silver … the means by which huge sums of money are sucked from the realm,” which permits foreigners to “enrich themselves from the fat of our realm and give aid to our enemies.”

The first two-thirds of the book focus primarily on the elite’s reactions to a range of financial challenges and how they used currency to further their own projects of governance. The “view from above” predominates. In the last third of the book we are given glimpses into the world of the rest of society — those who traded for their needs –and their relationship to currency; these hints come mostly through such indirect sources as French poetry, theater and literary prose, and criminal records. Counterfeiting was severely punished as a crime against the sovereign (crime of lèse-majesté). The legal rhetoric embodied in the coinage regulation, though, was at odds with the social realities of such crimes as explored by Parsons. In Parsons’ records, counterfeiting was a “desperate attempt to achieve a new social position or to retrieve one that was slipping away” — not an attempt to conspire and threaten the authority or ideological foundations of the monarchy. This disconnect is perhaps a product of Parsons’s caseload sample, which is of mostly small-scale, urban crime.

Despite its title, this book is not about money in general but about coinage. Although not a symbolic vehicle for sovereign power, the circulation of privately produced money (book money, bullion, bills of exchange, unofficial substitutes) could, equally as coins, interfere with financial stability. To the extent that the government’s attempt to achieve financial stability was part of a broader strategy to enhance government power, the book would benefit from a discussion of policies directed at controlling these other mediums. To take just one example, in the second half of the fifteenth century, Philip and his successors in the Low Countries issued a series of ordinances that stifled the development of deposit banks due to fears that “money-changers, especially those acting as deposit-bankers, were a threat to the integrity of the ducal mints and of the money supply” (Munro 2003).

Making Money in Sixteenth-Century France will be an important and invaluable reference for anyone working in early modern economic history. It is ambitious in its analysis, engagingly written, and wide ranging. The great strength of the book, in addition to its history of economic thought, is Parsons’ astute weaving of different strands of sociological literature and unstudied archival material. In that account, his analysis achieves the right balance between breadth and depth. Coinage is a highly technical and ill-understood subject, and Parsons deserves much credit for his ability to make the intricacies of coinage in the sixteenth century understandable and interesting for a broad audience.


Blanc, Jérôme. “La réforme monétaire française de 1577: Les difficultés d’une expérience radical,” Journées d’études “La souveraineté monétaire et la souveraineté politique en idées et en pratiques: identité, concurrence, corrélation?” Paris: Centre d’études européennes, Sciences Po, 8–9 June 2011.

Boyer-Xambeu, Marie-Thérèse, Ghislain Deleplace, and Lucien Gillard. Private Money and Public Currencies: The Sixteenth Century Challenge. M.E. Sharpe, 1994.

Howell, Martha C. Commerce before Capitalism in Europe, 1300-1600. Cambridge: Cambridge University Press, 2010.

Munro, John H. “The Coinages and Monetary Policies of Henry VIII (r. 1509–1547): Contrasts between Defensive and Aggressive Debasements.” Working Paper, 2010.

Munro, John H. “The Late-Medieval Origins of the Modern Financial Revolution: Overcoming Impediments from Church and State.” Working Paper, 2003.

Parker, David. The Making of French Absolutism. Edward Arnold, 1983

Sargent, Thomas J., and François R. Velde. The Big Problem of Small Change. Princeton, NJ: Princeton University Press, 2014.

Veronica Aoki Santarosa is an assistant professor of Law at the University of Michigan Law School and the author of “Financing Long-Distance Trade: The Joint Liability Rule and Bills of Exchange in Eighteenth-Century France” (Journal of Economic History, 2015).

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (September 2015). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Geographic Area(s):Europe
Time Period(s):16th Century

The Great Crash of 1929: A Reconciliation of Theory and Evidence

Author(s):Kabiri, Ali
Reviewer(s):Hekimian, Raphaël

Published by EH.Net (August 2015)

Ali Kabiri, The Great Crash of 1929: A Reconciliation of Theory and Evidence. Basingstoke, UK: Palgrave Macmillan, 2014. xv + 236 pp. $115 (hardcover), ISBN: 978-1-137-37288-8.

Reviewed for EH.Net by Raphaël Hekimian, West Paris University and the Paris School of Economics, and David Le Bris, KEDGE Business School.

The New York Stock Exchange (NYSE) crash in 1929, which featured a 45 percent decline in stock prices over the last weeks of October, is one of the most studied topics in financial history, and academic researchers still fiercely debate many of its aspects. Among those, we can cite the crucial question of whether or not the stock market boom of the 1920s was justified by fundamental values. The Great Crash of 1929: A Reconciliation of Theory and Evidence aims at resolving this issue: could the rise in stock prices before the crash be seen as an asset “bubble,” and if so, could it have been anticipated?

Ali Kabiri relies on both contemporaries (Smith 1924) and more recent academic research (Shiller 1981, 2000; Goetzmann and Ibbotson 2006) to provide extensive and detailed empirical analysis. After checking some of their results with new hand-collected data, the book details a range of econometric tests and robustness checks in order to rigorously analyze ex ante and ex post stock prices movements between 1921 and 1932.

The book is organized into six chapters. After an introduction, chapter two reviews the modern literature on the financial history of the 1920s, the different types of tests used in this literature, the theory of asset “bubbles,” and the Efficiency Market Hypothesis (EMH).

Chapter 3 focuses on the historical background of the U.S. economy, providing a detailed look at debt levels in various economic sectors, in particular the housing debt held within the banking sector. In addition, Kabiri considers the Gold Standard system and the newly formed Federal Reserve and its interest rate policy, and the effect of credit expansion on U.S. corporate earnings and stock prices. The chapter ends with a look at productivity growth and expected inflation as drivers of the valuation of assets. The main results are that the first part of the boom (1921-1927) can be attributed to a credit/debt expansion coming from World War I monetary base expansion, along with an expectation of higher returns or lower risk premia on U.S. common stocks.

The fourth chapter looks at the dynamics of U.S. common stock prices from 1870 up to 2010. The author tests market efficiency with a long-term asset prices perspective, using historical data to observe both ex ante expectations and ex post realizations of stocks returns. The objective here is to test for a potential deviation from rational valuation during the second part of the boom (1927-1929) in three ways. First, at the aggregate level: the author estimates the scale of the overvaluation of stocks in September 1929. In order to replicate the 1920’s investors’ expectations, he applies a method of that time (Smith, 1924) to a set of common stocks of large firms between 1900 and 1929 to calculate the dividend growth rate; accepting the hypothesis that expectations of that time were formed according to financial theories of that time. The historical Equity Risk Premium (ERP) before 1927, taken from both recent (Goetzmann and Ibbotson 2006) and contemporary (Smith 1924) research, is used as a discount rate to solve a Dividend Discount Model. This market valuation is then compared to the actual level reached in 1929, so as to estimate the scale of the overvaluation, following the basic method of Schiller (1981). According to this method, the estimated overvaluation of U.S. common stocks is found to revolve around 50 percent. Secondly, an ex post analysis of the very long-run realized returns is run. The aim is to test if investors could have anticipated an upcoming growth in dividends in 1927, before the second phase of the boom. To do so, the author constructs a total return index (cautiously avoiding the survivorship bias) using data from 1925 up to 2010. This return is then compared with real returns of government bonds to deduct a realized equity premium, which is found to be similar to the historical ERP calculated in Smith (1924). According to the author, this indicates that high returns were not forthcoming on stocks when compared to historical figures, so perfect foresight should have prevented rational investors from expecting a higher dividend growth rate in the late 1920’s. Finally, the aviation industry, a technological sector potentially prone to overvaluation in the 1920s, is tested using a valuation model available in the Moody’s Manual of Investments (1930). The model is calibrated with historical data from 1904 to 1929 of the automobile industry’s growth path. This test implies that aviation stocks were overvalued in 1929 by around 300 percent, relative to the history of the automobile industry. It means that a rational investor in 1929 would not have held those stocks in his portfolio.

Chapter 5 investigates the role of the money market in the boom and bust of the NYSE. It is known that the Federal Reserve took measures to slow down speculation by restraining credit to banks and funds under regulation. The author argues that a sort of ‘shadow banking system” had been developing to lend to traders, as a regulatory arbitrage. Funds were coming mostly from U.S. unrestricted corporations, but also investment funds and foreign banks. In order to assess whether the crash was due to an exogenous shock stemming from a credit retraction of those unregulated sources, tests of the ratio of stock prices to credit are run. Data show that the crash was not induced by a credit contraction even if regulation arbitrage generated instability. The results are more in favor of a bubble reversal in stock prices.

Finally, chapter 6 studies stock prices movements with regards to their fundamental values but during the 1929-1932 period. According to the data, it seems as if an undervaluation occurred during the Great Contraction based on ex post analysis. The conclusion is that the low level of the market in 1932 cannot be fully explained by rational forecasts, meaning that irrational pessimism probably took place.

Ali Kabiri’s book provides a synthesis of the debates on the 1929 crash but also a new set of tests built on both existing and newly collected data to understand which forces drove the stock market to levels reached in the 1920s, based on both ex-ante and ex-post analysis. In financial history, the book provides new insights on how investors could have valued stocks with respect to available information and, this is an important hypothesis, methods at the time.  He also finds evidence of the deviation in prices based on ex post fundamental values. In addition, the book contributes to behavioral economics, estimating the rationality of the rise and fall in stock prices during the boom and bust as well as to history of economic thought, detailing financial theories and methods of the 1920s.

Raphaël Hekimian is a Ph.D. student at the West Paris University and the Paris School of Economics. He is also research assistant for DFIH, a database project collecting and keying financial historical data on the Paris Stock Exchange. David Le Bris is an assistant professor at KEDGE Business School. He has written several articles about the history of the French financial market. Using daily data, they work together examining the absence of any contagion of the 1929 U.S. crash to the French stock market.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII