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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).

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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).

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):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.

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 (August 2015). All EH.Net reviews are archived at

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

Medical Monopoly: Intellectual Property Rights and the Origins of the Modern Pharmaceutical Industry

Author(s): Gabriel, Joseph M.
Reviewer(s):Troesken, Werner

Published by EH.Net (June 2015)

Joseph M. Gabriel, Medical Monopoly: Intellectual Property Rights and the Origins of the Modern Pharmaceutical Industry. Chicago: University of Chicago Press, 2014. x + 334 pp. $35 (hardcover), ISBN: 978-0-226-10818-6.

Reviewed for EH.Net by Werner Troesken, Department of Economics, University of Pittsburgh.


In his thought-provoking and well-researched book, Medical Monopoly: Intellectual Property Rights and the Origins of the Modern Pharmaceutical Industry, Joseph M. Gabriel explores the evolution of patenting, and to a lesser extent, trademark registration, in the American pharmaceutical industry. It is a fascinating and timely contribution. Gabriel begins by describing how in the late eighteenth and early nineteenth century, the “orthodox” medical profession obeyed and enforced strong norms against patents and trademarks. Patents and trademarks, he explains, were thought to inhibit the free exchange of ideas; hinder the transmission of therapies and drugs that might help alleviate human suffering; and promote quackery and nostrum vending. In addition, to the extent that patents and trademarks promoted monopolies and market power, they were sometimes seen as unpatriotic because of the central role that concerns about monopoly played in animating the American Revolution.

The norm against patenting appears to have been quite strong. Despite the huge potential for private gain and profit, for example, Edward Jenner did not patent his smallpox vaccine during the 1790s and early 1800s. As Gabriel points out, orthodox physicians decades later used Jenner’s behavior as a model of how physicians should behave (pp. 133-34). Similarly, while patenting grew increasingly common in other areas of the economy because of improved courts and administrative processes during the antebellum period, they remained rare in the medical and pharmaceutical industries. Gabriel writes (p. 44): “despite the rapid growth of patenting [in general], the shift to an increasingly friendly legal environment for resolving patent disputes, and a patent system that clearly allowed medicines to be patented . . . drug manufacturers did not share the enthusiasm for patenting. Between 1836 and the outbreak of the Civil War only a tiny number of patents were granted for medicinal goods.” Moreover, even when inventors developed and patented new and effective therapies during the antebellum period, practicing physicians often refused to respect those patent rights.

Consider, for example, the discovery of ether as a general anesthetic. In 1846, a year before the creation of the American Medical Association, a dentist named William T.G. Morton administered sulfuric ether to Gilbert Abbott. A “thin, spare man,” Abbott was “suffering from a tumor on the jaw, composed of a knot of enlarged and tortuous veins.” Although the ether initially left Abbott “flushed and exhilarated,” after four or five minutes he was sleeping as “quietly and soundly as any child,” and he remained asleep throughout the surgery to remove the tumor. As Gabriel explains, it was “a truly remarkable discovery.” Before the introduction of ether, surgery was an almost unimaginable horror. Here is how one patient, himself a surgeon, recalled an operation he had endured (Ashhurst 1896, p. 377): “The operation . . . necessitated cruel cutting through inflamed and morbidly sensitive parts, and could not be dispatched by a few strokes of the knife. . . . Of the agony it occasioned I will say nothing. Suffering so great as I underwent cannot be expressed in words, and thus fortunately cannot be recalled. The particular pangs are now forgotten; but the blank whirlwind of emotion, the horror of great darkness, and the sense of desertion by God and man, bordering close upon despair, which swept through my mind and overwhelmed my heart, I can never forget, however gladly I would do so.” In addition, ether (and later chloroform) did not just render surgery much less frightening and painful; it also made it safer. As Cheever (1896) argued, proper antiseptic care was predicated on effective anesthesia, because without the immobility and unconsciousness associated with the latter it was impossible to keep the wound clean and free from disease causing pathogens.

Yet when Morton patented his procedure, much of the orthodox medical community refused to honor it or characterized it as an imposition of quackery and monopoly. Only when physicians came to believe that, as a lowly dentist, Morton was not bound by the ethics of the orthodox medical community was this tension finally resolved. Quoting a prominent Boston physician, Gabriel writes (p. 61): “We all thought it very strange that any regular physician would, even for a moment, consent to apply for a patent for such a boon to humanity as this promised to be. But Dr. Morton was the only person known as the administrator of the article and he was at that time a dentist only, and therefore not subject to the medical ethics contained in the unwritten law of the profession.” Morton’s patent was, in the end, largely ignored by the medical community and his discovery earned him little financial reward. The final blow against Morton came in 1865 when a court in New York ruled that the use of ether in surgery was a discovery, not an invention, and as a result could enjoy no patent protection.

Although the pace of patenting medical devices and drugs picked up in the years surrounding the Civil War, orthodox medical practitioners remained united in their opposition to patents until the mid-1880s when Gabriel finds evidence of growing discontent among the flock. The most vocal reformer was Francis Stewart. Stewart chaffed at the notion, promulgated by the American Medical Association and other mainstream medical associations, that patents slowed the diffusion of medical knowledge and health-promoting therapies and drugs. For Stewart, “a thing patented [was] a thing divulged” because the patent system necessitated “the publication of full knowledge of every invention patented” (pp. 133-34). Not surprisingly, major pharmaceutical companies soon appropriated the arguments of Stewart and other reformers in an effort to promote patenting and better internalize the gains from their own scientific inquiries. Stewart himself worked for Parke-Davis (a large pharmaceutical company) occasionally, though it appears to have been an uneasy relationship. One aspect of Gabriel’s narrative I particularly like is how in examining the relationship between Stewart and Parke-Davis he deftly probes the complex relationship between the pursuit of profit and scientific advance. That deftness, by the way, is not unique to this specific discussion. It runs throughout the book.

Reformer physicians also argued that patenting might help make newly introduced drugs safer by giving their creators greater control over those who might use and employ the therapy. Consider, for example, this argument from a physician describing Edward Jenner’s dissatisfaction with poorly trained vaccinators who often subverted the efficacy of his vaccine and sometimes spread other infectious diseases as a result of their sloppy and unsanitary practices (Transactions of the American Medical Association, June 5-8, 1906, pp. 71-72): “A great deal has been said about the fact that Jenner did not take out a patent on vaccination. It would have been a great deal better for vaccination if Jenner had. He himself complained of the harm that was done by careless and ignorant vaccinators. If he had been able to control the standard of vaccine and the method of vaccinating for a few years, the result might have been very much better.” This excerpt is referring to the early history of smallpox vaccinations (during the early 1800s) when arm-to-arm cowpox vaccinations were said to have spread a wide variety of early childhood infections and sometimes might have even resulted in unnecessary childhood deaths. Although Gabriel does not discuss this episode in particular, he does describe how legislation during the early 1900s (such as the Biologics Control Act of 1902) helped to improve the safety of vaccines in the United States and how those improvements might have helped undercut opposition to mandatory vaccination laws.

Gabriel points to two pieces of evidence that suggest the anti-patent views of the orthodox medical community began to soften during the 1890s. The first of these was the willingness of Parke-Davis to patent a digestive enzyme. The second was the experience of Emil Behring in patenting the diphtheria antitoxin. Building on earlier work, Behring developed an effective therapy for diphtheria, a leading cause of death among young children. After several failed attempts, Behring finally succeeded in securing a patent, and while the orthodox medical community was highly critical of the patent, Gabriel argues that the surrounding rhetoric revealed a subtle but important shift in thinking. Physicians objected to the patent not because it was wrong to reward researchers for original discoveries — if a company invested vast sums of money in search of an effective drug, it was fine to reward the company for that effort with a short-lived monopoly — what most physicians objected to was the context and unjust nature of Behring’s patent. Gabriel writes (p. 168): “The reaction to Behring’s patent, while vituperative, did not presuppose that all such patenting was equally unethical. Indeed, numerous patented drugs were introduced around the same time without attracting such criticism.” Nor did the critique of the antitoxin appeal to the idea that it was a quack product that promised the world without delivering. On the contrary, the antitoxin was widely recognized as a highly effective intervention, and that is part of what fueled the opposition. Critics argued that it was wrong to profit off the suffering of young children while at the same time to deny anyone access to the drug because of a high price.

Although he concludes by reviewing recent historical developments, Gabriel ends his narrative in the early 1900s, by which time, pharmaceutical manufacturers were far more comfortable taking legal actions to enforce their intellectual property rights. One example of the new found strength to use the courts to protect patents was the experience of Bayer with aspirin. Bayer had attempted to patent aspirin in several countries but it was only in the United States where the courts (surprisingly perhaps) were willing to uphold and protect the patent. American courts upheld the patent, in part, because Bayer had been able to purify the underlying chemical to an extent previous manufacturers had not. This created a situation where aspirin sold for a higher price in the United States than it did in England and other European countries. Given this price differential, American pharmacists sometimes used foreign suppliers to acquire the product more cheaply and undercut Bayer’s American version. As Gabriel explains (p. 198), “Bayer was quite aggressive in its efforts to suppress Aspirin smuggling, and although the company preferred to settle out of court, it was not afraid to sue druggists it felt had violated its patent rights.” According to Gabriel, aspirin represented a turning point, and legitimate retail druggists would no longer countenance handling smuggled products to sidestep patent law.

Although patents hold center stage in Gabriel’s narrative, other legal developments also helped to sustain and promote intellectual property rights in the pharmaceutical industry. Particularly important in this regard where trademark law, pure food and drug law, medical licensing law, and antitrust law. Trademark law, for example, played a central role in helping firms brand their products, while antitrust law was important in shaping how the courts treated patent pools and vertical restraints such as resale price maintenance arrangements between retail druggists and manufactures. Branding might have been important in this setting if it gave firms an incentive to invest in quality and safety; and recent research in industrial organization suggests resale price maintenance might have given retail druggists an incentive to carry high-quality and high-priced products they otherwise would have shunned (Asker and Bar-Isaak 2014).


John Ashhurst. 1896. “Surgery before the Days of Anesthesia,” Boston Medical and Surgical Journal, 85: 378-80.

John Asker and Heski Bar-Isaac. 2014. “Raising Retailers’ Profits: On Vertical Practices and the Exclusion of Rivals,” American Economic Review, February 2014, Vol. 104 (2): 672-86.

David W. Cheever. 1896. “What Anesthesia Has Done for Surgery,” Boston Medical and Surgical Journal, 85: 381-84.

Werner Troesken is the author of four books. Why Regulate Utilities? (University of Michigan Press, 1996) argues that state utility commissions were created in response to a fundamental contracting problem between municipalities and utility companies. Water, Race, and Disease (MIT Press, 2004) shows how and why investments in public water systems benefited African Americans more so than whites. The Great Lead Water Pipe Disaster (MIT Press, 2006) explores the origins and magnitude of water-related lead poisoning. Troesken’s most recent book, The Pox of Liberty: How the Constitution Left Americans Rich, Free, and Prone to Infection (University of Chicago Press, 2015), shows how legal and political institutions shaped the American disease environment for good and for bad. His current research projects explore the political economy of Jim Crow (joint with Daniel Jones and Randy Walsh); the causes and consequences of municipal ownership in the water industry (joint with Brian Beach and Nicky Tynan); and the long-term effects of early-life shocks related to lead exposure (joint with Joe Ferrie and Karen Rolf), water quality (joint with Brian Beach, Joe Ferrie, and Martin Saavedra), and nutrition (joint with Karen Clay and Ethan Schmick).

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 (June 2015). All EH.Net reviews are archived at

Subject(s):Business History
History of Technology, including Technological Change
Markets and Institutions
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII

Cities of Commerce: The Institutional Foundations of International Trade in the Low Countries, 1250-1650

Author(s):Gelderblom, Oscar
Reviewer(s):Hohenberg, Paul M.

Published by EH.Net (February 2014)

Oscar Gelderblom, Cities of Commerce: The Institutional Foundations of International Trade in the Low Countries, 1250-1650.  Princeton, NJ: Princeton University Press, 2013.  xii + 293 pp. $35 (hardcover), ISBN: 978-0-691-14288-3.

Reviewed for EH.Net by Paul M. Hohenberg, Rensselaer Polytechnic Institute.

In this book, Oscar Gelderblom, who is Associate Professor of Economic History at Utrecht University, sets out to embed the development of three major commercial centers in the ongoing debate over the rise of market-friendly institutions during the late Middle Ages and the early modern period.   Between them, the ports of Bruges, Antwerp, and Amsterdam held the top rank among north European commercial cities for the entire period.  Amidst all the wars, dynastic rivalries, economic cycles, and demographic and religious upheavals, the ships came and went, the goods piled up in warehouses and streamed out again, and the merchants bargained, bickered and borrowed – and often grew rich in the process.  In this fine book, we get a real sense of the riskiness associated with trade (no mention of the polyglot and multi-specie confusion that must have made things even more complicated) and of the efforts urban authorities made to cope with risk.

The focus on institutions is nothing new in economic history; indeed, the “old” economic history studied little else.  But the “New” practitioners look to the role of trade-enabling institutions in fostering the pervasive capitalist economy that was to come, grounded in private enterprise, laissez-faire government, and heavy use of capital.  One school of thought credits the strong nation state and its willingness to honor its debts to private persons. As Gelderblom points out, while this may hold for England, Continental territorial rulers more often hindered than helped trade.  A second school holds that private merchant networks were largely able to cope with the agency problems inherent in long-distance trade.[1]  Again, Gerlderblom believes (and documents) that it took additional institutional scaffolding to manage risk.

The present book offers a third model, one which puts the emphasis on urban institutions not only created to facilitate trade but adaptable to changing needs and circumstances.  Cities were propelled by the need to compete – not just for trade but for a nodal role in trade networks.  Success meant, in particular, the presence of foreign merchants who would reside, store goods, and engage in financial transactions as well as trade.

The bulk of the book is devoted to a close, highly detailed analysis of mechanisms in the three cities intended to deal with recurring problems.  The chapter headings tell the story: “The Organization of Exchange,” “Crossing Borders” (trade at a distance), “Conflict Resolution,” “The Protection of Trade” (from violence), and “Dealing with Losses.”  Using “thick description,” Gelderblom shows how urban mechanisms were generated, modified, and adapted to meet the needs of a disparate set of trades and traders under changing conditions.  The idea was both to supplement private arrangements and to circumvent often overly-rigid and archaic institutions of territorial rulers.

While giving due credit to the depth and breadth of learning these chapters display, I want to focus briefly on the principal argument that it was competition between cities that motivated institutions conducive to long-distance trade.  To do so requires closer attention to two meanings of the term.  Economists use competition to designate a market structure in which sellers that persist in the market must operate with a level of efficiency such that they can cover all costs at the prevailing price.  None has any special incentive to innovate, nor is there any push toward a hierarchy of “firms” (in this case ports).  Competition can also, however, imply rivalry, where the fight for survival or supremacy plays out between two (or a few) contenders.  Here a first mover advantage can prove decisive, providing ample incentive (in this case) to offer foreign merchants a more hospitable habitat with trade-friendly institutions.

Because the three cities succeeded one another as leading ports in the north European network, one expects the second meaning of competition to prevail.  One also expects to find (at least relative) institutional failure, first in Bruges and then in Antwerp, as they lost their primacy.  Yet this is just what we do not find.  In fact, institutional failure gets almost no attention beyond vague allusions to other places.  The decline of Bruges and Antwerp gets little notice; by implication, the causes were exogenous, largely the result of political struggles and aggression by territorial rulers.  Thus, the core argument loses some of its edge given the book’s near-exclusive focus on successful urban institutions in a world of sharp variation in the fortunes of commercial cities

The book is well-written, and only a few infelicities betray the fact that English is not the author’s primary language (and that copy-editing by publishers has fallen victim to the times).  I close with an observation, not a criticism: three things one might expect to find in a study of European trade in these four centuries shine, as the French say, by their absence: Mercantilism, usury, and the silting up of the Zwin (Bruges’ estuary).

1. Full disclosure: the two articles on which much of the recent literature is based appeared in the same issue of the Journal of Economic History.  The present reviewer, though proud as then-editor to shepherd two fine papers into print, did not foresee the impact they would have.  Nor did either win the Journal’s Cole Prize as the best paper published in that year. See Douglass C. North and Barry R. Weingast (1989), “Constitutions and Commitment: Evolution of Institutions Governing Public Choice,” Journal of Economic History 49 (4): 803-32; and Avner Greif (1989), “Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders,” Journal of Economic History 49 (4): 857-82.

Paul M Hohenberg is Professor of Economics Emeritus at Rensselaer and has written widely on European economic history and urbanization.  He is the author with Lynn Hollen Lees of The Making of Urban, Europe, 1000-1994 (Cambridge, MA: Harvard University Press, 1994).

Copyright (c) 2014 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 (February 2014). All EH.Net reviews are archived at

Subject(s):International and Domestic Trade and Relations
Markets and Institutions
Urban and Regional History
Geographic Area(s):Europe
Time Period(s):Medieval
16th Century
17th Century

Global Finance

The Global Finance database

The Global Finance database is the basis of Olivier Accominotti, Marc Flandreau, and Riad Rezzik’s “The Spread of Empire: Clio and the Measurement of Colonial Borrowing Costs”, forthcoming (2010) in The Economic History Review. The database is an extension of the one published in Marc Flandreau and Frédéric Zumer’s The Making of Global Finance (Flandreau and Zumer, 2004) to which 15 colonies of the British Empire and one sovereign nation (the US) have been added. The Making of Global Finance can be read online by clicking here.

The Global Finance database includes 18 sovereign countries: Argentina (ARGE), Austria- Hungary (AH), Belgium (BELG), Brazil (BRAZ), Denmark (DENM), France (FRAN), Germany (GERM), Greece (GREE), Italy (ITAL), Netherlands (NETH), Norway (NORW), Portugal (PORT), Russia (RUSS), Spain (SPAI), Sweden (SWED), Switzerland (SWIT), the United Kingdom (UNIK) and the United States (USA). Most of the data for sovereign countries come from Flandreau and Zumer (2004). However, this newly posted version incorporates updates and minor corrections compared to the tables published in Flandreau and Zumer (2004) and should be preferred. Several series (Interest service on public debt, Government revenue, Budget Deficit, Nominal public debt, Nominal exports, Population,Yields on government bonds, Exchange rates) have also been completed with data for the United States. Full details on the sources used for sovereign countries can be found in Flandreau and Zumer, 2004, The Making of Global Finance, Paris: OECD Development Centre.

The Global Finance database also provides data for 15 colonies of the British Empire: Canada (CAN), Cape Colony (CAP), Ceylon (CEY), Egypt (EGY), India (IND), Jamaica (JAM);Mauritius (MAU), Natal (NAT), New South Wales (NSW), New Zealand (NZL), Queensland (QUE), South Australia (SAU), Tasmania (TAS); Victoria (VIC), Western Australia (WAU).  For the sources used in adding to the Flandreau-Zumer database, see Accominotti, Flandreau and Rezzik (2010).

To download the Accominotti, Flandreau, and Rezzik (2010) database, please click here.

The original (and updated) Making of Global Finance series can be accessed through the links provided below.


Interest Service Total coupon payment on foreign debt
Virtual Service Unpaid part of foreign service (defaulting nations)
Share in Gold Share of foreign debt serviced in gold or gold currency (%)
Government revenue
German government revenue
Public Debts Nominal debt
German Debts
Share of Customs Share of custom revenue in government revenue (%)
Reserves Central bank reserves
Circulation Notes circulation
Nominal GDP
Prices Base: 100 = 1913
Yields Yield on government gold bonds
Short term rates Central bank rates
Exchange Rates Annual average number of francs for one foreign unit
Exchange rate volatility Vulnerability index (average cumulated depreciation)
Years on gold
Suffrage Fraction of population with right to vote
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