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How Much Is That in Real Money? A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States

Author(s):McCusker, John J.
Reviewer(s):Margo, Robert A.

Published by EH.NET (February 2002)

John J. McCusker, How Much Is That in Real Money? A Historical Commodity

Price Index for Use as a Deflator of Money Values in the Economy of the United

States. Second Edition, Revised and Enlarged. Worcester, MA: American

Antiquarian Society, 2001. ix + 142 pp. $15 (paperback), ISBN 1-929545-01-0.

(Available from Oak Knoll Press, 310 Delaware Street, New Castle DE 19720.


Reviewed by Robert. A. Margo, Department of Economics, Vanderbilt University.

The construction of price indices qualifies as one of the central activities

of economic history. Such indices are essential inputs into the measurement of

changes in the standard of living over time. When hard data on outputs are

absent, price data can provide important clues about the ups and downs of the

business cycle. When price series are available for different locations they

inform about the degree, or lack thereof, of economic integration.

How Much is the revised version of an earlier “small” (the author’s

term) book of the same title. As before, the goal is to provide a single,

comprehensive price index for the entire sweep of “American” history — in this

revision, 1665-2001. The revisions are of three sorts: extensions back and

forward in time, more examples, and additional information on colonial exchange

rates. Although economic historians in economics departments will find much

that is useful, I suspect the real audience consists of students, and

historians other than economic, who, for various reasons, need a specific

answer to the question posed in the title.

Most books, even small ones, have several chapters. How Much has a

single chapter — really, an interpretive essay — five appendices with tables,

a bibliography, and a brief Introduction. The essay touches on the history and

uses of price indices, and problems therein. Appendix A presents the overall

index. As previously, the bulk of the index is derived from the work of David

and Solar, whose index itself is mostly derivative of Brady, Bezanson, Cole,

and others. McCusker updates his previous updating of David and Solar to 2001

(estimated) using the Bureau of Labor Statistics’ CPI-U (urban) cost of living

index, available at the click of a button from the BLS website. He also

backdates to 1665 using recent work by P.M.G. Harris and Stephen G. Hardy, who

have constructed indices from probate records for colonial Maryland and

Virginia. These are all spliced together, and the base period set to 1860,

allowing easy comparisons over time.

Appendices B and C draw on McCusker’s bailiwick, colonial monetary history. The

colonies all had their own currency. To convert prices in, say, Maryland and

New York into common units requires exchange rates, which are provided in

Appendix B. Appendix C does the same for paper money during and just after the

Revolutionary War. The tables in these appendices are based on a lot of hard

work in archives over many years. Colonial monetary history is an arcane field

with more than its fair share of arcane debates. Not being a member of this

crowd, I can’t really evaluate the issues but, for the rest of us, Appendices B

and C certainly seem worth the $15.00 the publishers are asking for the book.

Appendix D provides commodity price indices for Great Britain from 1600 to

2001. Table D-1, like Table A-1, has blank rows extending to 2009, suggesting

that another revision may be forthcoming in a few years. Appendix E uses the

price index in Appendix A to provide some conjectural dating of business cycles

in the United States back to the mid-seventeenth century.

How Much is easy to criticize. The interpretive essay is far from

comprehensive. There is barely a mention (except, obliquely, in a footnote) of

quality bias and none that I could find of substitution bias. Readers seeking

“nuts-and-bolts” advice in constructing a price index will not find much of

immediate use in the essay. Although McCusker is correct that some of the

criticism directed at historical price indices is off the mark he is too

dismissive, in my opinion, of the criticism that many historical indices derive

from too limited a range of locations. The essay would have benefited from more

(there are some) of McCusker’s reasoned judgments on what should be done in

future research. The footnotes and bibliography are extensive, but still rather

selective — no mention, for example, is made of this reviewer’s rental price

index for ante-bellum New York City. Then, there is footnote 22 on pp. 26-27

which claims that “[e]conomic historians are in fact guilty of some of the most

simplistic, even misleading use of price indexes” but provides no specific


One can also question the prototypical use — figuring out what specific items

are “worth” in different years — for which the index is intended. Consider

McCusker’s example of George Washington’s false teeth (p. 37), purchased in

1795 for $60.00. According to McCusker’s index, this was “the equivalent of

roughly $820 in year 2000 terms.” “Roughly” is the operative word in this

sentence. In 1984 I purchased my first personal computer, a Kaypro, for $1,500,

worth “roughly” $2,485 in year 2000 terms, according to McCusker’s index. No

one in their right mind would pay $2,485 for such a computer in today’s dollars

($51, I note, is the current price on Ebay). However, if such a machine had

been available, in say, 1964, I am quite sure someone would have paid many

times its alleged 1964 value ($448). Were we able to transport one back in time

to 1864, I am also quite sure its value would have been close to zero, since

there would have been no way to turn it on.

The point is that, given a suitable estimate of aggregate quality bias, indices

like McCusker’s can give us a reasonable sense of the average rate of change of

the price level — inflation — over long periods of time. They do even better

over shorter periods of time. And quality bias matters less when we use such a

price index to deflate indices of nominal wages, since wage indices are also

afflicted by quality bias — today’s workers are healthier, better educated,

and so on, than in the distant past. But, to use such an index to predict

changes in individual prices is more than a little perilous, because the

variance around the average rate of price change — particularly over long

periods of time — is enormous. Unfortunately, naive users are likely to forget

this caveat — embedded as it is in the word “rough” — if they are aware of it

at all. This caveat notwithstanding, I certainly value having a copy of

McCusker at hand, and expect to turn to it often.

(McCusker is Ewing Halsell Distinguished Professor of History, and professor of

economics at Trinity University in San Antonio, Texas.)

(Editors Note: The two series: RPI from Great Britian, 1600 to present, and the

CPI from the United States, 1650 to present; from this book are available

online on the EH.Net server at )

Robert A. Margo is Professor of Economics and History at Vanderbilt University,

Nashville TN. He is the author of Wages and Labor Markets in the United

States, 1820-1860 (University of Chicago Press, 2000); and, with Joel

Perlmann, Women’s Work? American School Teachers, 1650-1920 (University

of Chicago Press, 2001).

Subject(s):Living Standards, Anthropometric History, Economic Anthropology
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Muchisse, Itelio

First Name: Itelio
Last Name: Muchisse


Affiliate: Student
Department: Ciências Sociais e Filosóficas
University: Universidade Pedagógia - UniSaf
Street: Americo Boavida
City: Maxixe
State: Inhambane
Country: Moçambique
Postal Code: 12

Phone: +258846450410

Areas of Interest

  Primary Interest

  Subject: History of Economic Thought; Methodology
  Geographic Area: Europe
  Time Period: 16th Century

  Additional Interest 1

  Subject: Education and Human Resource Development
  Geographic Area: Africa
  Time Period: General or Comparative

  Additional Interest 2

  Subject: Social and Cultural History, including Race, Ethnicity and Gender
  Geographic Area: Africa
  Time Period: General or Comparative

Much More than a Game: Players, Owners, and American Baseball since 1921

Author(s):Burk, Robert F.
Reviewer(s):Haupert, Michael

Published by EH.NET (January 2002)

Robert F. Burk, Much More than a Game: Players, Owners, and American

Baseball since 1921. Chapel Hill, NC: University of North Carolina Press,

2001. xi + 372 pp. $45 (cloth), ISBN: 0-8078-2592-1; $19.95 (paperback), ISBN:


Reviewed for EH.NET by Michael Haupert, Department of Economics, University of

Wisconsin- La Crosse.

During the Second World War federal legislation was introduced to mandate

that a minimum of ten percent of major league baseball players be amputees.

During the 1920s and 30s, when black players were barred from playing with

white players and thus formed their own leagues, they enjoyed greater freedom

of mobility and bargaining leverage than did white players. Over the past

three quarters of a century the average major league baseball player has gone

from earning approximately ninety percent of the average U.S. salary to

earning eighty times the average U.S. salary. This is just a smattering of the

type of information I was able to glean from reading Robert Burk’s history of

baseball labor relations.

Much More than a Game is the sequel to Burk’s similarly titled Never

Just a Game, a business history of professional baseball up to 1920. This

work completes the story through the 2000 baseball season. It is an excellent

overview of the often rocky and seldom dull relationship between professional

baseball players and owners. Burk takes us behind the scenes and into the

front office of major league baseball. The book is exhaustively researched

from numerous primary sources, all of which are noted in an extensive

bibliography, which should prove to be very useful to anyone interested in

pursuing research in the area of baseball business history.

Burk relies more on anecdote than detailed analysis, but offers an interesting

and engaging history nonetheless. One thing that is frustrating is the

vagueness of the footnotes. There is no clear indication of the source of some

of the detailed financial information that is presented. Footnotes are

reserved for the end of paragraphs, often referencing several sources. In some

cases, all of the sources are secondary, which often led me to wonder about

the reliability of the information.

This is but a small complaint however. Overall, Burk does a nice job of

outlining the historical origins of contemporary problems. Competitive

imbalance, one of the favorite whipping boys of the current ownership and

commissioner, is actually an old problem. However in the early days of

competitive imbalance, it was the players who paid the price. During the “low

salary era” (pre-1976) it was important for a player to be with a

first-division club for its post-season bonus pay potential. Given the

competitive imbalance, such supplementary income was not available for the

vast majority.

The animosity that colors player-owner negotiations today evolves out of

similar antagonistic relationships that have always existed, though as Burk

notes, it was the owners who held the upper hand originally. Given the history

of blatant exploitation and unethical behavior by the owners, it is little

wonder that the current players approach the bargaining table with a

no-holds-barred attitude. In fact, the more I read, the more I found myself

cheering for the players in their current efforts. I couldn’t help but think

that it might take another half century of player gains before they even the

score in the labor relations game.

Burk relates plenty of anecdotes about negotiating ploys and outright lying.

Shrouded in paternalistic jingo, the owners robbed and cheated the players

blind. They used salary cuts, demotions and blacklisting to keep player costs

under control. Among the seamier bits of chicanery owners employed was a form

of money laundering designed to short change the amount they had agreed to

provide to the players pension fund. Other examples of penurious behavior

included the owner who traded a player for a 25-pound turkey and another who

sold his own son-in-law to pay off a bank debt.

Each chapter covers roughly one decade from 1921 to 2000. The book is

especially strong in what Burk calls the inflationary era (post-1965). This

corresponds to the period when Marvin Miller took over as head of the baseball

players association, ultimately to be succeeded by Donald Fehr. In the past

thirty-five years the players have made steady, spectacular gains, leading to

an increase in average annual salaries from $16,000 to over two million

dollars. To put this in perspective, the previous half-century had seen the

average salary increase by barely $10,000. He also addresses the minor leagues

and Negro leagues, though this coverage is spotty and not as comprehensive. It

serves more as a comparison than anything else.

As I read about the historical evolution of the baseball business, I realized

that not much has really changed in the past eighty years. As early as the

1920s owners complained of the disparity between large and small market clubs.

Then as now, the owners attempted to transfer the burden of solving this

problem onto the players. In 1924 the result was a ban on incentive clauses in

player contracts as a way to prevent the wealthier clubs from putting pay

increase pressure on poorer clubs. Today, owners are attempting to implement a

salary cap. In the 1920s the gripes from owners centered on the high cost of

acquiring talent from the minor leagues. Ultimately, this led to a draft

system for acquiring players from minor league teams, and eventually was

replaced by near total vertical integration of the professional baseball

industry by the sixteen major league teams. Similar complaints are made today

about the cost of player salaries. Chief among them is the idea that large

market clubs, such as the New York Yankees, can afford to purchase all of the

best players. This complaint is hardly new. As far back as 1926 the Yankee

roster consisted of only one player (Lou Gehrig) who had not been acquired

through purchase or trade from another major league organization. Before free

agency, big market clubs held the advantage over small market clubs in player

acquisitions because they could pay higher bonuses to attract unsigned talent

and because they could afford to purchase talent directly from poorer clubs.

The only difference now is that the players, instead of the owners, receive

the cash for such transactions.

Burk concludes with some predictions for the fate of baseball in the new

century including the globalization of the sport to include international

drafts, foreign farm clubs, and perhaps even international competition on the

field. In the end, he wishes for labor peace between the players and the

owners, and hopes that for the good of the game the two sides will enter a new

era of cooperation instead of confrontation. Given the history that he so

thoroughly outlines however, this may be asking too much.

Mike Haupert is Professor of Economics at the University of Wisconsin – La

Crosse and Editor of the Newsletter of the Cliometric Society. He is

currently working on a number of baseball-related topics, including a

financial history of the New York Yankees.

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Credit in the Colonial American Economy

David T Flynn, University of North Dakota

Overview of Credit versus Barter and Cash

Credit was vital to the economy of colonial America and much of the individual prosperity and success in the colonies was due to credit. Networks of credit stretched across the Atlantic from Britain to the major port cities and into the interior of the country allowing exchange to occur (Bridenbaugh, 1990, 154). Colonists made purchases by credit, cash and barter. Barter and cash were spot exchanges, goods and services were given in exchange for immediate payment. Credit, however, delayed the payment until a later date. Understanding the role of credit in the eighteenth century requires a brief discussion of all payment options as well as the nature of the repayment of credit.


Barter is an exchange of goods and services for other goods and services and can be a very difficult method of exchange due to the double coincidence of wants. For exchange to occur in a barter situation each party must have the good desired by its trading partner. Suppose John Hancock has paper supplies and wants corn while Paul Revere has silver spoons and wants paper products. Even though Revere wants the goods available from Hancock no exchange occurs because Hancock does not want the good Revere has to offer. The double coincidence of wants can make barter very costly because of time spent searching for a trading partner. This time could otherwise be used for consumption, production, leisure, or any number of other activities. The principle advantage of any form of money over barter is obvious: money satisfies the double coincidence of wants, that is, money functions as a medium of exchange.

Money’s advantages

Money also has other functions that make it a superior method of exchange to barter including acting as the unit of account (the unit in which prices are quoted) in the economy (e.g. the dollar in the United States and the pound in England). A barter economy uses a large number of prices because every good must have a price in terms of each other good available in the economy. An economy with n different goods would have n(n-1)/2 prices in total, not an enormous burden for small values of n, but as n grows it quickly becomes unmanageable. A unit of account reduces the number of prices from the barter situation to n, or the number of goods. The colonists had a unit of account, the colonial pound (£), which removed this burden of barter.

Several forms of money circulated in the colonies over the course of the seventeenth and eighteenth centuries, such as specie, commodity money and paper currency. Specie is gold or silver minted into coins and is a special form of commodity money, a good that has an exchange value separate from the market value of the good. Tobacco, and later tobacco warehouse receipts, acted as a form of money in many of the colonies. Despite multiple money options some colonists complained of an inability to keep money in circulation, or at least in the hands of those wanting to use it for exchange (Baxter, 1945, 11-17; Bridenbaugh, 153).1

Credit’s advantages

When you acquire goods with credit you delay payment to a later time, be it one day or one year. A basic credit transaction today is essentially the same as in the eighteenth century, only the form is different.2 Extending credit presents risks, most notably default, or the failure of the borrower to repay the amount borrowed. Sellers also needed to worry about the total volume of credit they extended because it threatened their solvency in the case of default. Consumers benefited from credit by the ability to consume beyond current financial resources, as well as security from theft and other advantages. Sellers gained by faster sales of goods and interest charges, often hidden in a higher price for the goods.3

Uncertainty about the scope of credit

The frequency of credit versus barter and cash is not well quantified because surviving account books and transaction records generally only report cash or goods payments made after the merchant allowed credit, not spot cash or barter transactions (Baxter, 19n). Martin (1939, 150) concurs, “The entries represent transactions with those customers who did not pay at once on purchasing goods for [the seller] either made no record of immediate cash purchases, or else there were almost no such transactions.” The results of Flynn’s (2001) study using merchant account books from Connecticut and Massachusetts found also that most purchases recorded in the account books were credit purchases (see Table 1 below).4 Scholars are forced to make general statements about credit as a standard tool in transactions in port cities and rural villages without reference to specific numbers (Perkins, 1980, 123-124).

Table 1

Percentage of Purchases by Type

Purchases by Credit Purchases by Cash Purchases by Barter
Connecticut 98.6 1.1 0.3
Massachusetts 98.5 1.0 0.4
Combined 98.6 1.0 0.4

Source: Adapted from Table 3.2 in Flynn (2001), p. 54.

Indications of the importance of credit

In some regions, the institution of credit was so accepted that many employers, including merchants, paid their employees by providing them credit at a store on the business’s account (Martin, 94). Probate inventories evidence the frequency of credit through the large amount of accounts receivable recorded for traders and merchant in Connecticut, sometimes over £1,000 (Main, 1985, 302-303). Accounts receivable are an asset of the business representing amounts owed to the business by other parties. Almost 30 percent of the estates of Connecticut “traders” contained £100 or more of receivables as part of their estate (Main, 316). More than this, accounts receivable averaged one-eighth of personal wealth throughout most of the colonial period, and more than one-fifth at the end (Main, 36). While there is no evidence that enables us to determine the relative frequencies of payments, the available information supports the idea that the different forms of payment co-existed.

The Different Types of Credit

There are three different types of credit to discuss: international credit, book credit, and promissory notes and each facilitated exchange and payments. Colonial importers and wholesalers relied on credit from British suppliers while rural merchants received credit from importers and wholesalers in the port cities and, finally, consumers received credit from the retailers. A discussion starts logically with international credit from British suppliers to colonial merchants because it allowed colonial merchants to extend credit to their customers (McCusker and Menard, 1985, 80n; Martin, 1939, 19; Perkins, 1980, 24).

Overseas credit

Research on colonial growth attaches importance to several items including foreign funds, capital improvements and productivity gains. The majority of foreign funds transferred were in the form of mercantile credit (Egnal, 1998, 12-20). British merchants shipped goods to colonial merchants on credit for between six months and one year before demanding payment or charging interest (Egnal, 55; Perkins, 1994, 65; Shepherd and Walton, 1972, 131-132; Thomson, 1955, 15). Other examples show a minimum of one year’s credit given before suppliers assessed five percent interest charges (Martin, 122-123). Factors such as interest and duration determined for how long colonial merchants could extend credit to their own customers and at what level of markup. Some merchants sold goods on commission, where the goods remained the property of the British merchant until sold. After the sale the colonial merchant remitted the funds, less his fee, to the British merchant.

Relationships between colonial and British merchants exhibited regional differences. Virginia merchants’ system of exchange, known as the consignment system, depended on the credit arrangements between planters and “factors” – middlemen who accepted colonial goods and acquired British or other products desired by colonists (Thomson, 28). A relationship with a British merchant was important for success in business because it provided the tobacco growers and factors access to supplies of credit sufficient to maintain business (Thomson, 211). Independent Virginia merchants, those without a British connection, ordered their supplies of goods on credit and paid with locally produced goods (Thomson, 15). Virginia and other Southern colonies could rely on credit because of their production of a staple crop desired by British merchants. New England merchants such as Thomas Hancock, uncle of the famous patriot John Hancock, could not rely on this to the same extent. New England merchants sometimes engaged in additional exchanges with other colonies and countries because they lacked goods desired by British merchants (Baxter, 46-47). Without the willingness of British merchant houses to wait for payment it would have been difficult for many colonial merchants to extend credit to their customers.

Domestic credit: book credit and promissory notes

Domestic credit was primarily of two forms, book credit and promissory notes. Merchants recorded book credit in the account books of the business. These entries were debits for an individual’s account and were set against payments, credits in the merchant’s ledger. Promissory notes detailed a debt, including typically the date of issue, the date of redemption, the amount owed, possibly the form of repayment and an interest rate. Book credit and promissory notes were substitutes and complements. Both represented a delay of payment and could be used to acquire goods but book accounts were also a large source of personal notes. Merchants who felt payment was either too slow in coming or the risks of default too high could insist the buyer provide a note. The note was a more secure form of credit as it could be exchanged and, despite the likely loss on the note’s face value if the debtor was in financial trouble, would not represent a continuing worry of the merchant (Martin, 158-159).5

Figure 1

Accounts of Samuell Maxey, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
5/28/1748 To Maxey earthenware by Brock 62.00 5/30/1748 By cash & Leather 45.00
10/21/1748 To ditto by Cap’n Long 13.75 8/20/1748 By 2 quintals of fish @6-0-0 [per quintal] 12.00
5/25/1749 To ditto 61.75 11/15/1748 By cash received of Mr. Suttin 5.00
6/26/1749 To ditto 27.35 5/26/1749 By sundrys 74.75
10/1749 By cash of Mr. Kettel 9.75
12/1749 By ditto 18.35

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.7.

The settlement of debt obligations incorporated many forms of payment. Figure 1 details the activity between Samuell Maxey and Jonathan Parker, a Massachusetts merchant. Included are several purchases of earthenware by Maxey and others and several payments, including some in cash and goods as well as from third parties. Baxter (1945, 21) describes similar experiences when he says,

…the accounts over and over again tell of the creditor’s weary efforts to get his dues by accepting a tardy and halting series of odds and ends; and (as prices were often soaring, especially in 1740-64) the longer a debtor could put off payment, the fewer goods might he need to hand over to square a liability for so much money.

Repayment means and examples

The “odds and ends” included goods and commodity money as well as other cash, bills of exchange, and third party settlements (Baxter, 17-32). Merchants accepted goods such as pork beef, fish and grains for their store goods (Martin, 94). Flynn (2001) shows several items offered as payment, including goods, cash, notes and others, shown in Table 2.

Table 2

Percentage of Payments by Category

Repayment in Cash Repayment in Goods Repayment by note Repayment by Reckoning Repayment by third- party note Repayment by Bond Repayment by Labor


27.5 45.9 3.3 7.5 6.9 0.0 8.9
Mass. 24.2 47.6 2.8 7.5 13.7 0.2 2.3
Combined 25.6 46.9 3.0 7.5 10.9 0.1 5.0

Source: Adapted from Table 3.4 in Flynn (2001), p. 54.

Cash, goods and notes require no further explanation, but Table 2 shows other items used in payment as well. Colonists used labor to repay their tabs, working in their creditor’s field or lending the labor services of a child or yoke of oxen. Some accounts also list “reckoning,” which occurred typically between two merchants or traders that made purchases on credit from each other. Before the two merchants settled their accounts it was convenient to determine the net position of their accounts with each other. After making the determination the merchant in debt possibly made a payment that brought the balance to zero, but at other times the merchants proceeded without a payment but a better sense of the account position. Third parties also made payments that employed goods, money and credit. When the merchant did not want the particular goods offered in payment he could hope to pass them on, ideally to his own creditors. Such exchange satisfied both the merchant’s debts and the consumer’s (Baxter, 24-25). Figure 1 above and Figure 2 below illustrate this.

Figure 2

Accounts of Mr. Clark, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
9/27/1749 To Clark earthenware 10.85 11/30/1749 By cash 3.00
4/14/1750 By ditto 1.00
?/1762 By rum in full of Mr. Blanchard 6.35

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.2.

The accounts of Parker and his customer, Mr. Clark, show another purchase of earthenware and three payments. The purchase is clearly on credit as Parker recorded the first payment occurring over two months after the purchase. Clark provided two cash payments and then a third person Mr. Blanchard settled Clark’s account in full with rum. What do these third party payments represent? For answers to this we need to step back from the specifics of the account and generalize.

Figures 1 and 2 show credits from third parties in cash and goods. If we think in terms of three-way trade the answer becomes obvious. In Figure 1 where a Mr. Suttin pays £5.00 cash to Parker on the account of Samuell Maxey, Suttin is settling a debt with Maxey (in part or in full we do not know). To settle the debt he owes Parker, Maxey directs those who owe him money to pay Parker, and thus reduce his debt. Figure 2 displays the same type of activity, except Blanchard pays with rum. Though not depicted here, private debts between customers could be settled on the merchant’s books. Rather than offering payment in cash or goods, private parties could swap debt on the merchant’s account book, ordering a transfer from one account to another. The merchant’s final approval for the exchange implied something about the added risk from a third party exchange. The new person did not pose a greater default risk in the creditor’s opinion, otherwise (we would suspect) they refused the exchange.6

Complexity of the credit system

The payment system in the colonies was complex and dynamic with creditors allowing debtors to settle accounts in several fashions. Goods and money satisfied outstanding debts and other credit obligations deferred or transferred debts. Debtors and creditors employed the numerous forms of payment in regular and third party transactions, making merchants’ account books a clearinghouse for debts. Although the lack of technology leaves casual observers thinking payments at this time were primitive, such was clearly not the case. With only pen and paper eighteenth century merchants developed a sophisticated payment system, of which book credit and personal notes were an important part.

The Duration of Credit

The length of time outstanding for credit, its duration, is an important characteristic. Duration represents the amount of time a creditor awaited payment and anecdotal and statistical evidence provide some insights into the duration of book credit and promissory notes.

The calculation of the duration of book credit, or any similar type of instrument, is relatively straightforward when the merchant recorded dates in his account book conscientiously. Consider the following example.

Figure 3

Accounts of David Forthingham, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
10/1/1748 To Forthingham earthenware 7.75 10/1/1748 By cash 3.00
4/1749 By Indian corn 4.75

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.2.

The exchanges between Frothingham and Jonathan Parker show one purchase and two payments. Frothingham provides a partial payment for the earthenware at the time of purchase, in cash. However, £4.75 of debt remains outstanding, and is not repaid until April of 1749. It is possible to calculate a range of values for the final settlement of this account, using the first day of April to give a lower bound estimate and the last day to give an upper bound estimate. Counting the number of days shows that it took at least 182 days and at most 211 days to settle the debt. Alternatively the debt lasted between 6 and 7 months.

Figure 4

Accounts of Joseph Adams, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
9/7/1747 to Adams earthenware -30.65 11/9/1747 by cash 30.65
7/22/1748 to ditto -22.40 7/22/1748 by ditto 12.40
No Date7 by ditto 10.00

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.4.

Not all merchants were meticulous record keepers and sometimes they failed to record a particular date with the rest of an account book entry.8 Figure 4 illustrates this problem well and also provides an example of multiple purchases along with multiple payments. The first purchase of earthenware is repaid with one “cash” payment sixty-three days (2.1 months) later.9 Computation of the term of the second loan is more complicated. The last two payments satisfy the purchase amount, so Adams repaid the loan completely. Unfortunately, Parker left out the date for the second payment. The second payment occurred on or after July 22, 1748, so this date is the lower end of the interval. The minimum time between purchase and second payment is zero days, but computation of a maximum time, or upper bound, is not possible due to the lack of information.10

With a sufficient number of debts some generalization is possible. If we interpret the data as the length of a debt’s life we can use demographic methods, in particular the life table.11 For a sample of Connecticut and Massachusetts account books the average duration looks like the following.12

Table 3

Expected Duration for Connecticut Debts, Lower and Upper Bound

(a) (b) (c) (d) (e)
Size of debt in £ eo lower bound (months) Median lower bound (interval) eo upper bound (months) Median upper bound (interval)
All Values 14.79 6-12 15.87 6-12
0.0-0.25 15.22 6-12 15.99 6-12
0.25-0.50 14.28 6-12 15.51 6-12
0.50-0.75 15.24 6-12 18.01 6-12
0.75-1.00 14.25 6-12 15.94 6-12
1.00-10.00 13.95 6-12 15.07 6-12
10.00+ 7.95 0-6 10.73 6-12

Table 4

Expectation Duration for Massachusetts Debts, Lower and Upper Bound

(a) (b) (c) (d) (e)
Size of debt in £ eo lower bound (months) Lower bound median (interval) eo upper bound (months) Upper bound median (interval)
All Values 13.22 6-12 14.87 6-12
0.0-0.25 14.74 6-12 17.55 12-18
0.25-0.50 12.08 6-12 12.80 6-12
0.50-0.75 11.73 6-12 13.08 6-12
0.75-1.00 11.01 6-12 12.43 6-12
1.00-10.00 13.08 6-12 13.88 6-12
10.00+ 14.28 12-18 17.02 12-18

Source: Adapted from Tables 4.1 and 4.2 in Flynn (2001), p. 80.

For all debts in the sample from Connecticut, the expected length of time the debt is outstanding from its inception is estimated between 14.78 and 15.86 months. For Massachusetts the range is somewhat shorter, from 13.22 to 14.87 months. Tables 3 and 4 break the data into categories based on the value of the credit transaction as well. An important question to ask is whether this represents a long- term or a short-term debt? There is no standard yardstick for comparison in this case. The best comparison is likely the international credit granted to colonial merchants. The colonial merchants needed to repay these amounts and had to sell the goods to make remittances. The estimates of that credit duration, listed earlier, center around one year, which means that colonial merchants in New England needed to repay their British suppliers before they could expect to receive full payment from their customers. From the colonial merchants’ perspective book credit was certainly long-term.

Other estimates of duration of book credit

Other estimates of book credit’s duration vary. Consumers paying their credit purchases in kind took as little time as a few months or as long as several years (Martin, 153). Some accounting records show book credit remaining unsettled for nearly thirty years (Baxter, 161). Thomas Hancock often noted expected payment dates, such as “to pay in 6 months” along with a purchase, though frequently this was not enough time for the buyer. Thomas blamed the law, which allowed twelve months for people to make repayments, complaining to his suppliers that he often provided credit to country residents of “one two & more years” (Baxter, 192). Surely such a situation is the exception and not the rule, though it does serve to remind us that many of these arrangements were open, lacking definite endpoints. Some merchants allowed accounts to last as long as two years before examining the position of the account, allowing one year’s book credit without charge, and thereafter assessing interest (Martin, 157).

Duration of promissory notes

The duration of promissory notes is also important. Priest (1999) examines a form of duration for these credit instruments, estimating the time between a debtor’s signing of the note and the creditor’s filing of suit to collect payment. Of course this only measures the duration for notes that go into default and require legal recourse. Typically, a suit originated some 6 to 9 months after default (Priest, 2417-18). Results for the period 1724 to 1750 show 14.5% of cases occurred within 6 months after the initial contraction date, the execution of the debt. Merchants brought suit in more than 60% of the cases between 6 months and 3 years from execution, 21.4% from six to twelve months, 27.4% from one to two years and 14.1% from two to three years. Finally, more than 20% of the cases occurred more than three years from the execution of the debt. The median interval between execution and suit was 17.5 months (Priest, 2436, Table 3).

The duration of promissory notes provides an important complement to estimates of book credit’s term. Median estimates of 17.5 months make promissory notes, more than likely, a long-term credit instrument when balanced against the one year credit term given colonial importers. The estimates for book credit range between three months and several years in the literature to between 13 and 16 months in Flynn (2001) study. Duration results show that merchants waited significant amounts of time for payment, raising the issue of the time value of money and interest rates.

The Interest Practices of Merchants

In some cases credit was outstanding for a long period of time, but the accounts make no mention of any interest charges, as in Figures 1 through 4. Such an omission is difficult to reconcile with the fairly sophisticated business practices for the merchants of the day. Accounting research and manuals from the time demonstrate clearly an understanding of the time value of money. The business community understood the concept of compound interest. Account books allowed merchants to charge higher and variable prices for goods sold on book credit (Martin, 94). While in some cases interest charges entered the account book as an explicit entry in many others interest was an added or implicit charge contained in the good’s price.

Advertisements from the time make it clear that merchants charged less for goods

purchased by cash, and accounts paid promptly received a discount on the price,

One general pricing policy seems to have been that goods for cash were sold at a lower price than when they were charged. Cabel[sic] Bull advertised beaver hats at 27/ cash and 30/ country produce in hand. Daniel Butler of Northampton offered dyes, and “a few Cwt. of Redwood and Logwood cheaper than ever for ready money.” Many other advertisements carried allusions to the practice but gave no definite data. A daybook of the Ely store contained this entry for October 21, 1757: “William Jones, Dr to 6 yds Towcloth at 1/6—if paid in a month at 1/4. (Martin, 1939, 144-145)

Other advertisements also evidence a price difference, offering cash prices for certain grains they desired. Connecticut merchants likely offered good prices for products they thought would sell well as they sought remittances for their British creditors. Hartford merchants charged interest rates ranging from four and one-half to six and one-half percent in the 1750s and 1760s, though Flynn (2001) arrives at different rates from a different sample of New England account books (Martin, 158). Many promissory notes in South Carolina specified interest, though not an exact rate, usually just the term “lawful interest” (Woods, 364).

Estimates of interest rates

Simple regression analysis can help determine if interest was implicit in the price of goods sold on credit though there are numerous technical issues, such as borrower characteristics, market conditions and the quality of the good that make a discussion here inappropriate.13 In general, there seems to be a positive correlation, with the annual interest rates falling between 3.75% and 7%, which seem consistent with the results from interest entries made in account books. There is some tendency for the price of a good to increase with the time waited for repayment, though many other technical matters need resolution.

Most annual interest rates in Flynn’s (2001) study, explicit and implicit, fall in the range of 4 to 6.5 percent making them similar to those Martin found in her examination of accounts and roughly consistent with the Massachusetts lawful rate of 6 percent at the time, though some entries assess interest as high as 10 percent (Martin, 158; Rothenberg, 1992, 124). Despite this, the explicit rates are insufficient on their own to form a conclusion about the interest rate charged on book credit; there are too few entries, and many involve promissory notes or third parties, factors expected to alter the interest rate. Other factors such as borrower characteristics likely changed the assessed rate of interest too, with more prominent and wealthy individuals charged lower rates, either due to their status and a perceived lower risk, or possibly due to longer merchant-buyer relationships. Most account books do not contain information sufficient to judge the effects of these characteristics.

Merchants gained from credit use by charging higher prices; credit required a premium over cash sales and so the merchant collected interest and at the same time minimized the necessary amount of payments media (Martin, 94). Interest was distinct from the normal markups for insurance, freight, wharfage, etc. that were often significant additions to the overall price and represented an attempt to account for risk and the time value of money (Baxter, 192; Thomson, 239).14


Credit was significant as a form of payment in colonial America. Direct comparisons of the number of credit purchases versus barter or cash are not possible, but an examination of accounting records demonstrates credit’s widespread use. Credit was present in all forms of trade including international trade between England and her colonies. The domestic forms of credit were relatively long-term instruments that allowed individuals to consume beyond current means. In addition, book credit allowed colonists to economize on cash and other means of payment through transfers of credit, “reckoning,” and other means such as paying workers with store credit. Merchants also understood the time value of money, entering interest charges explicitly in the account books and implicitly as part of the price. The use of credit, the duration of credit instruments, and the methods of incorporating interest show credit as an important method of exchange and the economy of colonial America to be very complex and sophisticated.


Baxter, W.T. The House of Hancock: Business in Boston, 1724-1775. Cambridge: Harvard University Press, 1945.

Bridenbaugh, Carl. The Colonial Craftsman. Dover Publications: New York, 1990.

Egnal, Marc. New World Economies: The Growth of the Thirteen Colonies and Early Canada. Oxford: Oxford University Press, 1998.

Flynn, David T. “Credit and the Economy of Colonial New England.” Ph.D. dissertation, Indiana University, 2001.

McCusker, John J., and Russel R. Menard. The Economy of British America, 1607-1789. Chapel Hill: University of North Carolina Press, 1985.

Main, Jackson Turner. Society and Economy in Colonial Connecticut. Princeton: Princeton University Press, 1985.

Martin, Margaret. “Merchants and Trade of the Connecticut River Valley, 1750-1820.” Smith College Studies in History. Department of History, Smith College: Northampton, Mass. 1939.

Parker, Jonathan. Account Book, 1747-1764. Mss:605 1747-1815. Baker Library Historical Collections, Harvard Business School; Cambridge, Massachusetts

Perkins, Edwin J. The Economy of Colonial America. New York: Columbia University Press, 1980.

Perkins, Edwin J. American Public Finance and Financial Services, 1700-1815. Columbus: Ohio State University Press, 1994.

Price, Jacob M. Capital and Credit in British Overseas Trade: The View from the Chesapeake, 1700-1776. Cambridge: Harvard University Press, 1980.

Priest, Claire. “Colonial Courts and Secured Credit: Early American Commercial Litigation and Shays’ Rebellion.” Yale Law Journal 108, no. 8 (June, 1999): 2412-2450.

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

Shepherd, James F. and Gary Walton. Shipping, Maritime Trade, and the Economic Development of Colonial North America. Cambridge: University Press 1972.

Thomson, Robert Polk. The Merchant in Virginia, 1700-1775. Ph.D. dissertation, University of Wisconsin, 1955.

Further Reading:

For a good introduction to credit’s importance across different professions, merchant practices and the development of business practices over time I suggest:

Bailyn, Bernard. The New England Merchants in the Seventeenth-Century. Cambridge: Harvard University Press, 1979.

Schlesinger, Arthur. The Colonial Merchants and the American Revolution: 1763-1776. New York: Facsimile Library Inc., 1939.

For an introduction to issues relating to money supply, the unit of account in the economy, and price and exchange rate data I recommend:

Brock, Leslie V. The Currency of the American Colonies, 1700-1764: A Study in Colonial Finance and Imperial Relations. New York: Arno Press, 1975.

McCusker, John J. Money and Exchange in Europe and America, 1600-1775: A Handbook. Chapel Hill: University of North Carolina Press, 1978.

McCusker, John J. How Much Is That in Real Money? A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States, Second Edition. Worcester, MA: American Antiquarian Society, 2001.

1 Some authors note a small amount of cash purchases as well as small numbers of cash payments for debts as evidence of a lack of money (Bridenbaugh, 153; Baxter, 19n).

2 Presently, credit cards are a common form of payment. While such technology did not exist in the past, the merchant’s account book provided a means of recording credit purchases.

3 Price (1980, pp.16-17) provides an excellent summary of the advantages and risks of credit to different types of consumers and to merchants in both Britain and the colonies.

4 Please note that this table consists of transactions mostly between colonial retail merchants and colonial consumers in New England. Flynn (2001) uses account books that collectively span from approximately 1704 to 1770.

5 In some cases with the extension of book credit came a requirement to provide a note too. When the solvency of the debtor came into question the creditor, could sell the note and pass the risk of default on to another.

6 I offer a detailed example of such an exchange going sour for the merchant below.

7 “No date” is Flynn’s entry to show that a date is not recorded in the account book.

8 It seems that this frequently occurs at the end of a list of entries, particularly when the credit fully satisfies an outstanding purchase as in Figure 4.

9 To calculate months, divide days by 30. The term “cash” is placed in quotation marks as it is woefully nondescript. Some merchants and researchers using account books group several different items under the heading cash.

10 Students interested in historical research of this type should be prepared to encounter many situations of missing information. There are ways to deal with this censoring problem, but a technical discussion is not appropriate here.

11 Colin Newell’s Methods and Models in Demography (Guilford Press, 1988) is an excellent introduction for these techniques.

12 Note that either merchants recorded amounts in the lawful money standard or Flynn (2001) converted amounts into this standard for these purposes.

13 The premise behind the regression is quite simple: we look for a correlation between the amount of time an amount was outstanding and the per unit price of the good. If credit purchases contained implicit interest charges there would be a positive relationship. Note that this test implies forward looking merchants, that is, merchants factored the perceived or agreed upon time to repayment into the price of the good.

14 The advance varied by colony, good and time period,

In 1783, a Boston correspondent wrote Wadsworth that dry goods in Boston were selling at a twenty to twenty-five percent ‘advance’ from the ‘real Sterling Cost by Wholesale.’ The ‘advances’ occasionally mentioned in John Ely’s Day Book were far higher, seventy to seventy-five per cent on dry goods. Dry goods sold well at one hundred and fifty per cent ‘advance’ in New York in 1750… (Martin, 136).

In the 1720s a typical advance on piece goods in Boston was eighty per cent, seventy-five with cash (Martin, 136n). It should be noted that others find open account balances were commonly kept interest free (Rothenberg, 1992, 123).


Citation: Flynn, David. “Credit in the Colonial American Economy”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL

The History of Foreign Exchange

Author(s):Einzig, Paul
Reviewer(s):Officer, Lawrence H.

Published by EH.NET (January 2006)

Classic Reviews in Economic History

Paul Einzig, The History of Foreign Exchange. London: Macmillan, 1962. xvi + 319 pp. (second edition, 1970, xxi + 362 pp.)

Review Essay by Lawrence H. Officer, Department of Economics, University of Illinois at Chicago.

The History of Foreign Exchange: A Provocative Classic

Paul Einzig (1897-1973) was both a financial journalist and an author of scholarly works. (A brief, excellent biography of Einzig is Tether, 1986.) Einzig was a prolific writer in both the popular press and academic realms. For two decades, he contributed a regular, ?Lombard Street,? column for the Financial News (London). Later, he provided a weekly column in the Commercial and Financial Chronicle (New York). Because of his popular writings, academic economists have a tendency to discount Einzig?s contributions to economics as a discipline. This reviewer feels compelled to refute that tendency.

Using a strict definition of ?book? — excluding pamphlets, revised editions, works with similar titles, translations from English into other languages, volumes written solely in a non-English language, reports to governments or commissions, working papers, works that are in only a handful of libraries, and unpublished manuscripts — this reviewer counted carefully (from the WorldCat database) that Einzig was the author of fifty-seven different books — a phenomenal number. Of this total, one is Einzig?s autobiography and at most a half-dozen could be construed as political treatises (judging by title). This leaves fifty volumes as primarily economic in content. No doubt, some of these volumes were written in haste and some are not particularly technical. On the other side, Einzig?s books contain only his own writings; not one is an edited volume.

It is instructive to count also the number of books produced by the seven other authors of 2006 Classic Reviews series. Allowing for edited as well as authored volumes (but excluding works edited by others, and to which the author of interest merely contributed one or more chapters), the number of books attributed to each of the eight authors is listed below.

Number of Books Attributed to Author


Source: WorldCat. See text.

Certainly, Einzig?s total number of books is phenomenal in comparison to any of the other authors. In fact, incredibly, Einzig?s number of books exceeds even the total number of the other seven authors. True, the table is purely quantitative, not qualitative, in nature. And, true, unlike the other authors Einzig was strictly a writer by profession. Nevertheless, by any standard, Einzig was a prolific book author indeed.

Further, Einzig published articles in professional economics journals, even though he was not an academic economist. The JSTOR database lists nineteen articles authored by Einzig — eighteen in the Economic Journal and one in the Journal of Finance. These numbers are exclusive of book reviews; JSTOR lists twelve by Einzig, of which six are in the Economic Journal and one in the Economic History Review.

The point of the above discussion is that, although Einzig was neither an academic professor nor a government economist, he should be taken seriously as an astute observer of contemporary economic events, as an applied-economic theoretician, and as an economic historian. One of his best books in the first category is International Gold Movements (1929, 1931) — invaluable to historians of the interwar gold standard. His best work in the second category is The Theory of Forward Exchange (1937), still useful to researchers of interest-rate parity. Among other virtues, that book contains an excellent discussion of selection of variables to test the theory, as well as data still used in scholarly studies. In the third category, paramount is The History of Foreign Exchange, the anatomy (including publication history) of which is shown in Table 2.

Anatomy of The History of Foreign Exchange

St. Martin?s Press

St. Martin?s Press


Listing edition in catalogue. Source: WorldCat.

a Reprint, with alterations.

b Japanese translation, by Asao Ono and Shunzo Muraoka.

Einzig states, in the preface to the first edition of the History, that his purpose is to produce ?a single book … that would cover the entire history of Foreign Exchange in all its main aspects from its origins to our days? (p. xi in the second edition — all references in this review are to that edition). He remarks that nobody before had produced such a treatise. It is fair to say that neither has anybody since done so. There have been many books on the entire history of money as such, rather than of foreign exchange, and a variety of books on foreign exchange for particular currencies over a lengthy period of time or for a variety of currencies over a particular era — but no one other than Einzig has produced a history of the foreign-exchange characteristic of currencies for purportedly all currencies (of interest) and for all eras. From probable international bills of exchange in Babylonia (twenty-first century B.C.), to U.S. borrowing in the Eurodollar market (late 1960s), Einzig succeeds admirably in conveying the flavor of foreign exchange.

To cover systematically experience of such breadth, Einzig divides his book into chronologically based sections, as shown in Table 2. Part I deals with the Ancient Period (primarily Greece and Rome, though also earlier civilizations), Part II the Medieval Period, Part III the Early Modern Period (sixteenth to eighteenth centuries), Part IV the Nineteenth Century (to World War I), Part V 1914-1960, and Part VI (added in the second edition) the 1960s. To provide breadth systematically for each of these six eras, Einzig instills discipline on his research and writing by dividing each Part into four chapters: (1) foreign-exchange markets and practices, (2) exchange rates, including crises and trends, (3) foreign-exchange theory, and (4) exchange-rate policy. This schema greatly enhances the value of the volume as a reference work. Part I includes an introductory chapter, on the origins of foreign exchange; and the book includes a general introduction and a general conclusion (the latter largely rewritten in the second edition).

Each chapter in Parts I-V (but not Part VI) contains endnotes, which are purely bibliographical. There is also an excellent bibliographical essay, termed ?a selected bibliography? — and, in the second edition, this bibliography is extended to incorporate the 1960s. Again the book is presented excellently as a reference volume. This characteristic is helped by a good ?index of names,? but the subject index could have been more extensive.

The author?s ambitious and unique goal, the tremendous research effort (aided by the author?s proficiency in several languages), and the systematic presentation of the research results all make The History of Foreign Exchange a classic in economic history. The caliber of the journals that reviewed the History is indicative of that judgment. Of the five top general journals in economics 1960s vintage (American Economic Review, Economic Journal, Journal of Political Economy, Quarterly Journal of Economics, and Review of Economics and Statistics), the three that reviewed books (the first three stated) did in fact review the History. Two of the top three journals in economic history at the time (Journal of Economic History, and Economic History Review) reviewed the book. It is not surprising that the third, Explorations in Entrepreneurial History (the predecessor of Explorations in Economic History), did not review the History, because of the then-narrow orientation of the journal. (As for the Journal of European Economic History, it did not commence publication until 1972.) Among major economics journals that engaged in book reviews, only Kyklos elected not to review the History. On the other side, American Historical Review, perhaps the top general-history journal, did conduct a review.

These reviews, together with several others in outlets not specializing in history, are listed and summarized in Table 3. The caliber of some reviewers is unusually high: the economic historians J. R. T. Hughes, L. S. Pressnell, and Raymond de Roover; and the international-economics specialist Arthur I. Bloomfield. Most reviewers had very positive things to say about the History; but they did not withhold criticism.

Reviews of The History of Foreign Exchange

Note: All reviews are of the first edition, except the 1971 Choice review.

The most negative evaluation is that of L. S. Pressnell, whose positive assessments are few, and even these are negative assessments in disguise. Einzig did not hesitate to respond to reviewers? criticisms that he viewed as unfair or based on incorrect facts. He had written a rejoinder to a review of his Primitive Money (1949), this review appearing in the anthropological journal Man. The editor of the journal published Einzig?s (1949) rejoinder in condensed form, and, incredibly, wrote a reply to Einzig?s rejoinder (rather than having the reviewer reply)!

Einzig responded to Pressnell?s criticisms, in the preface to the second edition of the History, stating, quite correctly, that Pressnell?s review ?amounted to little more than a list of attacks, wasting very little time or space on trying to justify, explain or illustrate his criticisms? (p. viii). Einzig gleefully, and again correctly, castigates Pressnell for associating paper credit with inflation/deflation in Ancient Rome, whereas in fact there was no paper money and inflation took the form of coinage debasement. Einzig then writes:

Long-suffering authors have seldom the opportunity to answer their critics, which is a pity because, by drawing attention to flagrant instances of ill-informed criticisms such as the one denounced above, they might be able to raise the standard of criticism. Being a hard-hitting critic myself it is not for me to object to being hit hard — provided my critic knows what he is talking about.

In fairness to Einzig, he did meet the criticism of some reviewers that ?the chapters dealing with modern developments were ?too sketchy?? (p. vii), by producing a second edition with the addition of Part VI. However, Einzig disagreed with the criticism that ?the chapters dealing with earlier periods were unnecessarily long,? and therefore did not condense these chapters (or otherwise alter them substantively) in the second edition. The present reviewer agrees with this decision; for the existing literature on foreign exchange is heavily oriented to recent periods. Einzig?s work on earlier periods fills a definite void.

Turning to this reviewer?s impressions of the History, consider each Part in order. For the Ancient Period, there is lack of everything: data, writings on theory, definitive information about markets and about rationales for policy. Einzig acknowledges that he has ?to make bricks with very little straw? (p. 7). There is much conjecture on Einzig?s part, albeit his presentation generally makes sense. He shows knowledge of both the classical literature and modern treatises on these times, and does as much as he can with snippets of information.

Einzig?s definition of a true foreign-exchange transaction (involving coins of both domestic and foreign parties) is acceptance by tale rather than by weight. He suggests that this first occurred in the fifth or sixth century B.C. As for the use of bills of exchange in foreign-exchange transactions, Einzig speculates that this could have arisen even earlier. There is discussion of depreciation and debasement of coinage, including the observation that the debasement of Roman coins had the effect of India ceasing to accept them. Einzig emphasizes that foreign trade was inflexible and, in particular, inelastic with respect to the exchange rate. He notes that exchange-rate information for this era is not only scarce but also complicated, due to the existence of trimetallism (three monetary metals: copper, silver, gold) and symmetallism (electrum: gold/silver alloyed coins).

Einzig is careful not to overstate the role of foreign exchange in theory and policy. Debasement of coinage in Rome was generally done to finance budget deficits rather than to correct balance-of-payments deficits. The same is true for Greek devaluations and debasements. The purchasing-power-parity (PPP) theory of exchange rates cannot be discerned in Ancient writing. The reason given again is the inelasticity of foreign trade, with tremendous differences in prices of goods across countries (due to both high transport costs and high profit margins). On the other side, exchange control was the policy of Sparta and of Egypt (under Ptolemaic and Roman rule), with Plato the intellectual champion of such a policy. Exchange control existed in the Roman Empire in connection with the accumulation of exchange as tribute to be transferred to Rome.

Considering the Medieval Period, Einzig observes that ?manual exchange? (exchange of domestic for foreign coin) began to give way to bills of exchange in an evolutionary process. He makes much of the fact that international bills (because they involved exchange risk) were a means of circumventing the anti-usury laws of the Church. He is impressed with medieval foreign-exchange theorizing, which arose in the context of whether exchange rates concealed interest, and discerns a variety of theories (or harbingers of theories) of exchange-rate determination in the Scholastic writings: demand and supply, exchange risk, cost-of-production, money-supply, balance-of-payments, and PPP. Exchange control over bills was less strict and less pervasive than over coins, because the Church required freedom of transferring funds emanating from Papal collections.

For the Early Modern Period (sixteenth-eighteenth centuries), Einzig provides a good discussion of the gradual transition from medieval to modern practices. He notes that Thomas Gresham (of ?Gresham?s Law? fame) made the first known computation of a specie point (the English gold-import point from Flanders) in 1558. Einzig outlines the history of the British, French, Dutch, German, Spanish, Swedish and Russian exchange rates (each relative to other currencies) during this period. The Early Modern Period witnessed the first true exchange-rate theorizing, meaning ?a deliberate analysis of cause and effects of Foreign Exchange movements and the role of Foreign Exchange in the economic system? (p. 138). Salamancan (Spanish) writers of the sixteenth and seventeenth centuries are credited with the money-supply theory and the purchasing-power theory of the exchange rate; but (as Einzig states) it is unclear whether they meant the entire money supply (coinage) in circulation or the supply merely in the foreign-exchange market for the purchase of foreign bills. The Salamancans did not develop the balance-of-payments (or trade-balance) theory of the exchange rate; this was done by English writers, such as Gresham and Mun.

The Malynes-Misselden-Mun controversy is judged to be ?one of the most important controversies in the history of Foreign Exchange theory? (p. 142); but only one page is devoted to this controversy. Malynes, who here had a speculation theory of the exchange rate, lost the debate; Mun?s view that the exchange rate and specie flows depended on the trade balance became preeminent. Yet elsewhere Malynes theorized the price specie-flow mechanism, but Einzig does not acknowledge this accomplishment. Nor does Einzig mention that ?Malynes has all the ingredients for the PPP theory and comes ever so close to exhibiting the theory for both fixed and floating rates? (Officer, 1982, p. 258). Schumpeter (1954, p. 737) also judges that ?Purchasing-Power Parity theory, or some rudimentary form of it … can … certainly be attributed to Malynes.?

Regarding policy in the Early Modern Period, Einzig mentions various alternatives to exchange control:

1. A uniform tax on exchange transactions — temporarily imposed in England in 1586, after exchange control was abandoned. Not noted by Einzig, the idea was resurrected (but not implemented) during the period of ?dollar surplus? in the 1960s.

2. Official pegging of exchange rates. This was done by fixing the price of foreign coins in domestic coins. The pegging was adjustable, that is, the price was changed periodically.

3. Official intervention in the foreign-exchange market, for example, by requiring exporters to sell their foreign exchange to the government at unfavorable rates. This is actually a form of exchange control. Creation of an exchange equalization account, that would have enabled intervention similar to the Bretton Woods system and the managed float that followed it, was advocated by Gresham and others, but did not occur.

4. Altering mint parities. This was often done to induce a net inflow of specie, rather than to affect exchange rates as such.

5. Changing or suspending seigniorage on coinage. This affected specie points and therefore the exchange-rate spread. Once seigniorage was abolished (as in England in 1666), this policy lost its mechanism.

Regarding the Nineteenth Century, Einzig writes that ?the advanced paper currency inflation in France during the Revolution and the fluctuation of the inconvertible pound during the period of suspension may be regarded as the first meaningful experience in Foreign Exchange movements under inconvertible paper currency systems? (p. 171). This statement is incorrect on two counts:

First, nothing is said about the experience of China, where paper was invented and paper money first issued. At times, paper money circulated together with coined money, and at times the paper money was inconvertible. It is known that Chinese coins circulated in foreign countries in the fifteenth century and probably earlier (see, for example, Bernholz, 2003, p. 56). There must have been implications for exchange rates, if only for ?manual exchange? (domestic for foreign coin). True, little if any information on such foreign exchange exists. Yet that deficiency did not stop Einzig from making conjectures about foreign exchange in the Ancient Period!

Second, several pages are devoted to the Bank Restriction Period (the inconvertible pound in 1797-1821, also called ?the bullionist period?), in both empirical (exchange value of the pound) and theoretical (bullionist-controversy) aspects. Indeed, Einzig writes: ?the so-called ?bullionist? controversy … was probably the most important Foreign Exchange controversy for all time? (p., 202). However, he makes no reference at all to an earlier ?bullionist period,? the Swedish inconvertible paper currency and floating exchange rate of 1745-1776. China was the first country to introduce paper money; but Sweden was the first to issue banknotes. In fairness to Einzig, the Swedish experience was not generally known until ?rediscovered? by Eagly (1963, 1968, 1971). Nevertheless, Einzig could have incorporated this important experience in the second edition of the History, but he chose not to do so.

This reviewer also takes exception to Einzig?s view that ?technical devices? to discourage the outflow or encourage the inflow of gold were undertaken predominantly by countries (such as France and Germany) other than the three (Britain, the United States, Holland) that ?with really narrow gold points were … on a really effective gold standard? (p. 173). Regarding the latter three countries, Einzig states only that the Bank of England adopted such devices during the Boer War, and mentions nothing about U.S. use of these policies. In fact, both the Bank of England and U.S. Treasury engaged in extensive ?direct manipulation? of gold points for much of the classical gold-standard period (see Clark 1984; Officer 1986, 1996, chapter 9).

For the period 1914-1960, Einzig reports the great change in foreign-exchange policy: from minimal government interference with free foreign-exchange markets over the century since the end of the Napoleonic Wars, to official intervention the rule rather than the exception. Exchange control, which had lapsed into disuse, was resurrected. Correspondingly, PPP theory had been almost entirely forgotten during the century of relative stability of the major exchange rates. Now the theory was restated, with great vigor and dogmatism, by Gustav Cassel. Supported by major economists, such as John Maynard Keynes (who later withdrew his support) and A. C. Pigou, the theory would never again be ignored.

Discussion of the 1960s, reluctantly included by Einzig as an additional part in the second edition of the History, is not particularly impressive, in part because a single decade does not warrant the space given to it in a study stretching over several millennia. Einzig compares the only occasional and isolated foreign-exchange crises of the 1815-1914 century to the multitude of crises decade after decade since. The prevalence of foreign-exchange crises continues to this day!

In his concluding chapter, Einzig predicts that an abandonment of the fixed-rate system of Bretton Woods (which was often discussed in the literature, but had not yet happened at the time of his writing) would only be temporary. ?It would not take very long for most Governments to realise the grave disadvantages of the currency chaos resulting from their ill-advised decisions to de-stabilise their exchanges. Sooner or later they would return to the system of stability, as their forerunners did each time they were forced to abandon it in the past? (p. 348). Einzig expresses that view from the perspective of four thousand years of exchange rates! The creation of the euro — fixed exchange rates par excellence, which replaced multiple national currencies with one supranational currency — provides partial validation of Einzig’s prediction. Time will tell whether the present float, or rather managed float, between the various currencies of the developed world (euro, dollar, yen, pound, etc.) will also be succeeded by a renewed fixity of exchange rates. That event would make Einzig’s prediction impressive indeed. Einzig was well-known as a proponent of fixed as distinct from floating exchange rates; but his prediction that any lapse from fixed rates would only be temporary is a positive statement, not a normative one.

Einzig was well-known as a proponent of fixed as distinct from floating exchange rates; but his prediction that any lapse from fixed rates would only be temporary is a positive statement, not a normative one.

Einzig observes, with disdain, the ?obscurantist presentation? of modern foreign-exchange theory and the widening gap of this theory from foreign-exchange policy. He writes: ?No contribution to Foreign Exchange Theory expressed in terms of mathematical economics has added anything of substance to the subject that could not have been added to it without the use of mathematics? (p. 322). This statement is not quite the same as the more-common view that ?any legitimate theory that is expressed mathematically can also be exposited verbally.? Einzig is consistent, for there is not one mathematical symbol in the History!

If there is any general weakness of the History, it is the absence of tables and charts of exchange rates, mint parities, and specie points. Einzig is aware of this limitation; he writes:

There is everything to be said for compiling continuous series of exchange rates for all the important exchanges in the principal Foreign Exchange markets, at least from the 16th century, but preferably also for the late Medieval Period. The material is there, in public records and business archives. But to make it accessible is a task that only some well-endowed research department could undertake. (p. xii)

It is fair to say that economic historians have performed much work of this nature since the publication of the History.

The History of Foreign Exchange has great limitations as well as great strengths. It is an impressive, but also a controversial and provocative, work. Undoubtedly, though, it deserves to be called a classic.


Bernholz, Peter. Monetary Regimes and Inflation: History, Economic, and Political Relationships. Cheltenham: Edward Elgar, 2003.

Clark, Truman A. ?Violations of the Gold Points, 1890-1908.? Journal of Political Economy 92 (October 1984): 791-823.

Eagly, Robert V. ?Money, Employment and Prices: A Swedish View, 1761.? Quarterly Journal of Economics 77 (November 1963): 626-36.

Eagly, Robert V. ?The Swedish and English Bullionist Controversies.? In Robert V. Eagly, ed., Events, Ideology and Economic Theory. Detroit: Wayne State University Press, 1968: 13-31.

Eagly, Robert V., editor, The Swedish Bullionist Controversy. Philadelphia: American Philosophical Society, 1971.

Einzig, Paul. International Gold Movements. London: Macmillan, first edition, 1929, second edition, 1931.

Einzig, Paul. Primitive Money in Its Ethnological, Historical and Economic Aspects. London: Eyre and Spottiswoode, 1949.

Einzig, Paul. ?Primitive Money: A Rejoinder? (with Editor?s Reply). Man 49 (November 1949): 132.

Einzig, Paul. The Theory of Forward Exchange. London: Macmillan, 1937.

Officer, Lawrence H. ?The Purchasing-Power-Parity Theory of Gerrard de Malynes.? History of Political Economy 14 (Summer 1982): 256-59.

Officer, Lawrence H. ?The Efficiency of the Dollar-Sterling Gold Standard, 1890-1908.? Journal of Political Economy 94 (October 1986): 1038-73.

Officer, Lawrence H. Between the Dollar-Sterling Gold Points: Exchange Rates, Parity, and Market Behavior. Cambridge: Cambridge University Press, 1996.

Schumpeter, Joseph A. A History of Economic Analysis. New York: Oxford University Press, 1954.

Tether, C. Gordon. ?Einzig, Paul.? In Lord Blake and C. S. Nicholls, eds., The Dictionary of National Biography. Oxford: Oxford University Press, 1986.

Lawrence H. Officer is Professor of Economics at the University of Illinois at Chicago and Editor, Special Projects, EH.Net. He is a specialist in international economics and monetary history. His recent journal publications include ?The U.S. Specie Standard, 1792-1932: Some Monetarist Arithmetic,? Explorations in Economic History (2002) and ?The Quantity Theory in New England, 1703-1749: New Data to Analyze an Old

Question,? Explorations in Economic History (2005). Officer is a recurrent contributor to the ?How Much Is That?? section of EH.Net.

Copyright (c) 2006 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (; Telephone: 513-529-2229). Published by EH.Net (January 2006). All EH.Net reviews are archived at

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

A History of Monetary Unions

Author(s):Chown, John F.
Reviewer(s):Officer, Lawrence H.

Published by EH.NET (August 2004)

John F. Chown, A History of Monetary Unions. London: Routledge, 2003. ix + 369 pp. $129.95 (cloth), ISBN: 0-415-27737-X.

Reviewed for EH.NET by Lawrence H. Officer, Department of Economics, University of Illinois at Chicago.

John Chown, a partner in Chown Dewhurst LLP, has written a book that, notwithstanding its title, is more like a general monetary history (complementing the author?s previously published History of Money, London: Routledge, 1994) than a history of monetary unions. The book contains good, summary histories of many countries? monetary experiences, and it is readable and witty. In fact, the volume is like a grand sweep of world monetary history. It is encyclopedic in the number of countries covered, including little-known experiences (such as Korea). There are some nice tidbits of information. For example, Russia was the first country to decimalize its currency (in 1704) and the third country (after China and France under John Law) ?to make sustained use of inconvertible paper money.?

While there is no original research, there is certainly original selection of a set of monetary experiences, original organization, and original presentation. The author offers a good descriptive history, but the analysis is not deep. In fact, the book is disappointing from an analytical standpoint. There is no grand analytical theme — or, from the vantage point of this reviewer, any theme. The book could have benefited from a chapter devoted to conclusions — if only in the author?s mind.

Too often, too much is left unsaid. For example, Chown makes blunt statements such as the following: ?The United Kingdom … joined the Snake, but was effectively driven out by market forces six weeks later? (p. 201). One wonders: what were these market forces? Again, ?Exchange controls increase the time between bad economic decisions and their viable consequences; this is both their attraction to a certain type of politician, and the most serious and subtle way in which they damage the economy? (p. 202) — a perceptive comment, but there is no elaboration.

Also, the book is replete with breadth but not depth. The book is composed of 54 chapters! With so many chapters, it stands to reason that many of them are too short. Also, the chapters can be quite disjoint from one another. Sometimes the reader receives the impression of rat-tat-tat from one experience to another. The volume contains too many trees, not enough forest.

Nevertheless, the book is excellent as a chronicle of events. It is a useful reference volume on monetary history, with the virtue of being well readable cover to cover. The book presents in one volume what is available elsewhere in many different sources — and the author is scrupulous in citing sources (except for the tables, only one of which has the source provided). The references to specific-country histories will prove most useful to the monetary historian. It is clear that Chown did a thorough literature research. Perhaps he has too heavy a reliance on ?authority,? but he compensates by writing well. The British orientation and caustic comments on U.K. policy might annoy and amuse American readers.

The volume is mainly a literary history. There are no mathematics and no econometrics. There is some reference to quantitative studies, but this is far from exhaustive. There are only eight tables and no graphs — on a subject that lends itself to quantification. In fairness, the author does provide substantial quantitative information within the text.

The title of the book is misleading, in suggesting that the book deals exclusively with ?monetary unions.? In fact, the book covers the following topics:

1. monetary unions (perhaps with greater concern with formation than functioning)

2. monetary ?disunions? (breaking-up of existing unions)

3. ?not-really? monetary unions (and disunions)

4. ?never-happened? monetary unions (proposed but did not happen)

The usual definition of a monetary union (or ?monetary integration?) is perhaps best presented by W. M. Corden (Monetary Integration, International Finance Section, Princeton University, 1972): permanently fixed exchange rates and permanent currency convertibility (that is absence of exchange controls). Corden sees the former as inevitably involving a union central bank. (Of course, if a smaller country enters the monetary area of a larger one, via a currency board or ?dollarization,? the large country?s central bank functions as the supranational bank.) Chown accepts the first criterion — ?a really permanent fixed rate? (p. 12) — but not the second, and does not require a supranational central bank. This opens the door to a broad interpretation of what are monetary unions (that is, inclusion of topic 3 above in the volume).

Regarding topic 1, true monetary unions, cases of union that result from national political unification (for example, Germany, Italy, Switzerland) are discussed. Beyond that, the Austro-Hungarian Empire and Latin Monetary Union are emphasized. Chown observes, as others have, that the latter organization could have, but did not, lead to a world monetary union; but his eloquence is telling: ?Then, as now, politics and national pride took precedence over economic common sense? (p. 4). It is regrettable that Chown, in a rare neglect of the literature, does not refer to the excellent work of Luca Einaudi (Money and Politics: European Monetary Unification and the International Gold Standard, 1865-1873, Oxford: Oxford University Press, 2001) on the Latin Monetary Union. Chown too readily seems to accept the view that F?lix Esquirou de Parieu, who advocated European and world monetary union, was a French nationalist; whereas Einaudi provides evidence that he was an internationalist.

Chown is very good on European monetary union. He contrasts the actual process of achieving union — economic convergence, followed by irrevocably fixed exchange rates, followed by replacement of national currencies with the euro — with alternative schemes. The monetary union of East and West Germany is termed ?badly conceived,? and it endangered the larger and more-important European monetary union.

Turning to topic 2, Chown emphasizes monetary ?disunions? as much as unions. The disintegration of the currency unions (following disintegration of the political unions) of the Austro-Hungarian Empire, Yugoslavia, Czechoslovakia, and the Soviet Union are discussed. Also receiving attention are the break-ups of colonial currency areas and the sterling area, and the U.S. Civil War. Chown comments that the last ?contradicts the idea that monetary union makes for a lasting peace.? This reviewer finds that statement to rest on a simplistic straw man.

Topic 3, ?non-really? monetary unions (and disunions), is not termed so by Chown, who has an overly broad concept of what is a monetary union. He includes metallic standards (gold, silver, bimetallic) under this rubric. So the historic gold and bimetallic standards receive attention, both as union and disunion (breaking-up). Much is made of the collapse of bimetallism and its deleterious implications for c ountries on a silver standard. Even the Bretton Woods system is a topic of study. Here Chown acknowledges: ?The Bretton Woods system was not a monetary union but was, in its day, the nearest approach we had? (p. 193).

Treatment of metallic standards (to say nothing of Bretton Woods) as monetary unions is unusual, to say the least. Chown can also be criticized for not explaining why the U.K. made the mistake of returning to gold at the prewar mint price in 1925 and for saying very little about why the gold standard collapsed in 1931. He mentions ?declining confidence in banks,? but why this decline? The entire discussion of the gold standard suffers from neglect of the issue of credibility.

Topic four, ?never-happened? monetary unions, treats proposed U.S./Canada (possibly including Mexico) and Australian/New Zealand unions. Chown observes that, for political reasons, Canada objects to monetary union with the United States. However, it is also true that Canada historically has, from time to time, revealed a preference for monetary policy independent of (or at least not wholly dependent on) that of the United States — the proof being Canada?s occasional predilection for a floating exchange rate even when most of the world was on a fixed rate. Here, as usual, Chown mainly presents the views of others (?authorities,? one might say). Interestingly, while Chown comments negatively on a proposed Argentina/Brazil monetary union — ?This might well have been disastrous for both countries? (p. 312) — he does not make the obvious point that inclusion of Mexico as a third party in a North American monetary union is also not sensible.

An omission from a book that takes so broad a view of monetary unions is monetary disunions that never happened, for example, monetary implications of a secession of Quebec from Canada.

All in all, Chown has produced a useful work for the monetary historian and an interesting book for non-specialists.

Lawrence H. Officer is Professor of Economics at the University of Illinois at Chicago. He is also Editor, Special Projects, at EH.Net. His recent research concentrates on historical-data development, both for printed journals and for the ?How Much Is That?? section of EH.Net. An example of the former is his article ?The U.S. Specie Standard, 1792-1932: Some Monetarist Arithmetic,? Explorations in Economic History, Vol. 39, No. 2 (April 2002), pp. 113-153.

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

A Dictionary of Economics

Author(s):Black, John
Reviewer(s):Whaples, Robert

Published by EH.NET (March 2004)

John Black, A Dictionary of Economics. Oxford: Oxford University Press, 2002, second edition. vi + 501 pp. $16.95 (paperback), ISBN: 0-19-0860767-9.

Reviewed for EH.NET by Robert Whaples, Department of Economics, Wake Forest University.

Economic History in a ‘Mainstream’ Reference Work

Oxford’s Dictionary of Economics would make an excellent gift — perhaps as a prize to the top student in an introductory economics class. It’s a fairly good buy, especially after noting that lists it at over $5 off the publisher’s price. The Dictionary “aims to provide for the needs of students of economics at A-level and in the ‘mainstream’ part of first degree courses, and of lay readers of journals such as The Economist,” and will generally serve these audiences well. It includes about 2500 definitions of concepts that are used in standard economics texts and terms connected with personal finances. The definitions are unusually clear and often include editorial comments about the broader importance of a concept or the controversies surrounding a theory or issue. I learned a lot just thumbing through its pages and will keep the volume close at hand.

I wouldn’t be reviewing the dictionary for EH.NET, however, unless more needed to be said about its treatment of economic history. I first flipped to the appendix, where there is a list of Nobel Prize winners in economics. Tellingly, Douglass North’s first name is misspelled. By chance, within minutes of beginning to browse the dictionary itself I came across the term “cliometrics.” The text offers this definition: “the application of quantitative methods in economic history. The main problem with applying econometrics to any but very recent economic history is the poor quality of the available data.” The first sentence has room for improvement. I would prefer something closer to “the application of economic theory and quantitative techniques to the study history,” and it would be informative to add something about the etymology of the term, but the tragedy of this definition and, perhaps, of the recent fate of the field of economic history, is that the author felt compelled to add his blunt, ill-informed aside. The thickness and richness of historical data sets has always amazed me and I assume this is true of almost anyone with even a passing familiarity with what is available to researchers. Thus, I can only attribute Black’s comment to gross ignorance. Is he representative of the vast body of ahistorical economists who flip right past the economic history articles that still appear in the leading mainstream journals and wouldn’t even consider picking up a journal or book with the word “history” in the title?

What can be done to solve the problem of the deafness of mainstream economists toward economic history? My preferred solution has always been to make the cost of obtaining economic history lower and lower — hence the existence of EH.NET, our database collection, our book reviews, our abstracts service, and especially How Much Is That? and the online Encyclopedia of Economic and Business History. These resources get a lot of traffic, but it is interesting and informative to see what types of economic history sell. The ten most frequently accessed articles in EH.NET’s encyclopedia last year are listed below (note that most of these articles have significant cliometric content):

1. “The Economics of the Civil War” by Roger Ransom
2. “Alcohol Prohibition” by Jeffrey Miron
3. “The Smoot-Hawley Tariff” by Anthony O’Brien
4. “Slavery in the United States” by Jenny Wahl
5. “The Economic History of Tractors in the U.S.” by William White
6. “Child Labor during the British Industrial Revolution” by Carolyn Tuttle
7. “The Depression of 1893” by David Whitten
8. “The Works Progress Administration” by Jim Couch
9. “Women Workers in the British Industrial Revolution” by Joyce Burnette
10. “The Gold Standard” by Lawrence Officer

My conclusion is that the buying public (in this case probably mostly students) looks to economic history mainly for a recurrent trio of intriguing topics — human conflict (slavery and the Civil War), economic depression (Smoot-Hawley, 1893, the WPA), and the industrial revolution. Also, near the top of the list is another “sexy” topic — booze.

However, giving the product away for free has only limited success, because the demand curve for most economic history doesn’t seem to be very elastic. Is there some way to force feed this stuff to our colleagues and the public? Can we sugar coat it, so that they don’t know they’re getting it? The Economic History Association has recently shifted to subsidizing new producers — granting funds to budding economic historians in graduate school.

Interestingly, the Dictionary generally exudes a confidence about economic growth. For example, several figures discussing hypothetical economic trends (natural vs. logarithmic scales, trade cycles, and time trends) all depict strong upward trends in GDP — growth triumphant, as Richard Easterlin might say. Perhaps this is one of the discontents of growth — as the future looks brighter and brighter there is less of a compelling reason to look to the past?

Finally, there are a few errors and omissions in the Dictionary worth mentioning. For example, AFDC is identified as the U.S. federal welfare program — despite its replacement by TANF in 1997, and the ICC’s entry states that “its jurisdiction has since been extended to include transport by inland waterways, roads, and pipelines” belying the fact that it was terminated in 1996. “Black Monday” (October 19, 1987) is identified, but not “Black Tuesday,” (October 29, 1929). (Likewise, the entry titled “stock market crash” surprisingly refers only to October 19, 1987!) Perhaps due to its British origin several entities one would regularly see discussed in the business press, such as Fannie Mae and Freddie Mac, have no entries. A “chartist” is defined as “a person who believes there are recurring patterns in the behaviour of market variables over time, so that study of past variations assists in predicting the future.” There is no mention of William Lovett, the People’s Charter and the political economy of Britain in the 1830s and 1840s. The definition of exploitation doesn’t explain the neoclassical version of the term. The discussion of “globalization” gives the impression that “the process by which the whole world becomes a single market” has had a pretty uniform trend — leaving out the retrogression in the era from World War I to World War II. The space given to the Great Depression is woefully small — shorter even than the discussion given to nearby terms such as “gravity model,” “greenfield development,” and “greenhouse gases.” Likewise the slender discussion of “mercantilism” is shorter than discussions of “median,” “merit good,” and “migrants’ remittances.” The definition of public choice — “the choice of the kind, quantity, and quality of public goods to provide, and how to pay for them” — seems unduly restrictive. I would have preferred Dennis Mueller’s definition: “the economic study of nonmarket decision making, or simply the application of economics to political science.” Based on the evidence I’ve seen, the caveats about the quantity theory of money seem overly cautious: “maybe the quantity theory would work in the very long run, but it would be ages before this could be checked.” The paragraph about the “ratchet effect” neglects to mention arguments about the growth of government. The discussion of the “rustbelt” is inappropriately written in the present tense — “the rustbelt suffers from high obsolescence.” The entry on slavery appears to be uninformed by the intense debates triggered by Robert Fogel and Stanley Engerman’s findings. It unblinkingly states that while slavery has a long history, it is no longer generally practiced on humanitarian grounds and “because it is believed to be inefficient at providing incentives for work.” Other terms missing include “comparable worth,” “prime rate,” “social savings rate” and perhaps worst of all — “institution.”

Robert Whaples is the editor of EH.NET’s Encyclopedia of Economic and Business History at

Subject(s):Development of the Economic History Discipline: Historiography; Sources and Methods
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative


Author(s):Heckscher, Eli F.
Reviewer(s):McCusker, John J.

Eli F. Heckscher, Mercantilism. London: George Allen and Unwin, revised, second edition, edited by Ernst F. S?derlund, 1955, 2 volumes. (Originally published as Merkantilisment: Ett led i den ekonomiska politikens historia. Stockholm: P. A. Norstedt and S?ner, 1931.)

Review Essay by John J. McCusker, Departments of History and Economics, Trinity University.

Heckscher: Mercantilism Redivivus

Eli Filip Heckscher (1879-1952) obviously wrote one of the seminal books of twentieth-century economic history. Originally published in Swedish in 1931, it was translated into German the next year and, from the German edition, appeared initially in English in 1934. (Heckscher reviewed and revised the English translation himself [1]). It attracted immense critical attention from the first, partly because it touched a nerve among economic historians of his era, many of whom were vexed as much by its contemporary political ramifications as they were by its implications for economic history (2). The book and its subject had less play in the second half of the twentieth century when the worries of the world shifted from a fear of totalitarianism of the right to a fear of totalitarianism of the left. Indeed, by mid-century, some were prepared to deny that mercantilism as an economic doctrine had ever existed, effectively reducing Heckscher to insignificance. At the end of a devastatingly horrendous century of world wars, hot and cold, perhaps we can better assess Heckscher — and mercantilism — less in the shadows of fascism and communism and more for the monumental work of scholarship that it was and is.

To begin it is important to understand mercantilism as a set of beliefs — a doctrine — about how the components of modern western society (workers, business and the state) should be organized for the common good. Mercantilism privileged the nation. The argument ran that, without a strong central government, society would revert of the chaos of feudal parochialism, a dark age. (One may or may not accept the characterization of that which people needed to fear in order to accept that “dark ages” worked well as a negative reference point.) It followed then, as day follows night, that the balance in society must be tipped in favor of the central government in order to avoid such a sorry fate. The interests of business and workers were secondary; everything had to be channeled to the interests of the nation. In pursuit of the common good, the nation must come first.

It may also be pointed out that the successor doctrines competing for custodianship of that common good later argued for the primacy of business (capitalism) and the primacy of workers (socialism). Observe that none of them denied the importance of the others, asserting only primacy. Note, too, that government’s role as the organizing agent is central in all three doctrines. In reality there was never any such thing as laissez-faire. In all three modes government is to do all that it can to protect, to promote, to encourage. Under mercantilism, government is to organize the economy in the best interests of the nation; under capitalism, for the best interests of business; and under socialism, for the best interests of workers — all for the common good. The critical question was cui bono? (3)

Heckscher strove simply and successfully to spell out the premises and workings of mercantilism the doctrine as it developed over time. Based on what he wrote, one can define mercantilism as a set of policies, regulations and laws, developed over the sixteenth through the eighteen centuries, to support the rising nation states of Atlantic Europe by subordinating private economic behavior to national purposes. The key to that goal, quickly identified, was government promotion of overseas trade because that trade could be taxed to the benefit of central government much more efficiently and with very many fewer negative domestic consequences thanany other activity.

The neatness of the definition disguises the inchoateness of a doctrine that was the creation of business leaders and government leaders who found common ground in certain practical policies. There was no single evangelist of mercantilism who authored its tenets nor codifier who formulated them. Adam Smith came as close as anyone to lending the “modern system” a patina of cohesion but he did so after the fact, the better to argue its faults. All have agreed that mercantilism contributed little to advance economic science — as if that were some kind of benchmark to establish either the reality or the importance of such a doctrine. The policies that mercantilists pursued were the designs of people who shared the notion that all were better off in a nation that was strong enough to protect them. Such strength cost money. The best way to raise that money was by taxing overseas trade. Government could increase its revenues by promoting the expansion of overseas trade. A strong nation benefited all of its people, especially those who engaged in overseas trade.

The elevation of foreign trade meant the relegation of other sectors of the economy — not their elimination, just their relegation to a secondary status. All modes of economic enterprise — agriculture, fishing, manufacturing, domestic trade, overseas commerce — were necessary in an economy but under mercantilism the overseas commercial sector was the favored child. If push came to shove, if a choice among competing interests had to be made, that which was the most necessary to a taxable foreign trade won out. Those who were less favored naturally complained about the tyranny of trade — just as, under a capitalist regime, workers learned to lament the overweening power of big business.

In telling the tale of Europe’s journey from medieval chaos to the modern nation state Heckscher’s book ranged widely across the continent beginning in the late middle ages and ending “after mercantilism” with a discussion of nineteenth-century liberalism. He discovered evidence of the origins of a mercantilistic impulse in early interaction between the guilds and the monarchies of France and England. A realization that internal economic regulation benefited both business and government translated readily into a broader sense that foreign trade provided even richer possibilities for mutual aggrandizement. Portugal and Spain, The Netherlands, England and France all, successively, adopted and profited from mercantilist policies that offered the central government regular funds through taxes on the trade and emergency monies through borrowing from the very merchants whose trade government promoted. Stronger central governments could more powerfully protect those same businesses who bought and sold the produce of the land and put workers to work, all to the improvement of society. The acquisition of gold and silver was the means to that end; the balance of trade was the measure of success. Other, smaller states followed the leaders, emulated their goals, envied their triumphs. The richer the nation, the stronger the nation; the stronger the nation, the better for every member of that kingdom. Or so preached mercantilist doctrine, according to Heckscher’s exegesis.

Heckscher, in detailing the origins, development and workings of mercantilism, may have sounded a bit too triumphalist a note but the simple fact is that mercantilism accomplished what it proponents promised. Over the three centuries down to the middle of the eighteenth century, many of the parochial domains of feudal Europe had coalesced into mercantilist nation states, creating a political map dominated by leviathans. Each of these nations in its turn had established an empire to expand its overseas trade the better to fund its political aspirations (a subject not developed by Heckscher), the most successful of the lot being Great Britain. That mercantilism, in its victory, sowed the dragons’ teeth of capitalism, does not for one moment diminish the presence or power of mercantilist doctrine in its own day (4).

Heckscher’s readers in the 1930s had barely survived the first half of a two-part world war between nations created under mercantilism and they felt the second half of that struggle looming ever closer. His critics may be forgiven if they took issue with his analysis of a doctrine, however out-dated, that visited its own brand of chaos upon them and their children. Even though the doctrines of capitalism had won out a century earlier and business interests had learned to control the levers of power in those nations, the frightening echoes of mercantilism resonated in its invocation by totalitarian nations that sought legitimacy by conjuring up the tenets of the dead doctrine. Many perceived in Heckscher’s rational exposition of the origins and development of mercantilism a rationalization for those who sought to justify the domination by the state of the lives of its citizens, a totalitarianism of the state (5). Still, as Heckscher himself argued (1936), he and most of his critics agreed on the basic elements of his work, however much they may not have liked his persuasive summary of what mercantilism was all about. It is always dangerous to be the bearer of an unwelcome message (6).

As World War II came and passed, many thought they saw the future in an even newer and now victorious doctrine, socialism. For them Heckscher was even less relevant — or, better put, mercantilism was irrelevant. After the demise of the world of nation states, it seemed to some best forgotten and, with it, the doctrine that had served to underpin its foundation. By the middle of the twentieth century more than one writer on the early modern period of Western European history was prepared to deny mercantilism’s very existence. Heckscher’s exposition of this doctrine thus came to be less and less read or referenced. The most extreme of these writers, D. C. Coleman (1980, p. 791), classed mercantilism with other “non-existent entities.” It was an invention, conjured up “to prevent the study of history from falling into the abyss of antiquarianism” (7). With hated capitalism under attack from the bastions of academe, mercantilism suffered the even worse face of being ignored. It is only at the end of the twentieth century, as capitalism and socialism seem willing to entertain a peaceful co-existence, that writers can with some dispassion once again explore the origins and nature of the doctrine that preceded them both: mercantilism (8). As a consequence Heckscher’s star has risen in the firmament, a guiding light to the economic doctrine preached and practiced over the sixteenth through the eighteen centuries as the nation states of western Europe struggled to establish themselves — and did, for better or worse.

John J. McCusker is the Ewing Halsell Distinguish Professor of American History and Professor of Economics at Trinity University in San Antonio, Texas. He has written many books and articles on the economic history of the early modern Atlantic World. If all goes according to plan, in the year 2001 — the first year of the next century — he will publish The Early Modern Atlantic Economy (Cambridge, England: Cambridge University Press), co-edited with Kenneth Morgan; a second edition of How Much Is That in Real Money? A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States (Worcester, Massachusetts: American Antiquarian Society); and Mercantilism and the Economic History of the Early Modern Atlantic World (New York: Cambridge University Press).


1. The translation from the German was done by Mendel Shapiro. The revised edition has since been reprinted and reissued at least twice, most recently in 1994 with an introduction by Lars Magnusson.

2. Many but not all. For a partial list of Heckscher’s contemporary critics and a summary of their comments, see Magnusson (1994), p. 32.

3. These themes are elaborated in McCusker (2001).

4. For the beginnings of the end of mercantilism as the dominant doctrine during “the pre-classical period” prior to 1776, see Hutchison (1988).

5. See especially Judges (1939).

6. It did not help Heckscher’s case that many of his insights were grounded in the scholarship of nineteenth-century German writers interested in the processes of national unification. Such efforts culminated in Schmoller (1884), the second part of a twelve-part exposition of the progress of the German state between 1680 and 1786. See also Schmoller (1896).

7. Beginning in 1957, Coleman had authored several attacks on mercantilism — and on Heckscher in particular. See Coleman (1957) and (1969), especially the editor’s introduction to the latter.

8. Foremost among such efforts is Magnusson (1994). Compare Allen (1987). See also Ekelund and Tollison (1981). Unfortunately in their exploration of the subject Ekelund and Tollison offer little more than “poor history,” “circular arguments,” and a disinterest “in what the mercantilist writer actually wrote,” according to Magnusson (p. 50), an evaluation with which I can only agree, sadly.


William R. Allen. 1987. “Mercantilism,” in The New Palgrave: A Dictionary of Economics, edited by John Eatwell, Murray Milgate, and Peter Newman, 4 vols. London: The Macmillan Press Ltd. Volume III, 445-449.

Donald C. Coleman. 1957. “Eli Heckscher and the Idea of Mercantilism,” Scandinavian Economic History Review, V, no. 1, 3-25.

Donald C. Coleman, editor. 1969. Revisions in Mercantilism. London: Methuen and Co., Ltd.

Donald C. Coleman. 1980. “Mercantilism Revisited,” Historical Journal, XXIII (December).

Robert B. Ekelund, Jr., and Robert D. Tollison. 1981. Mercantilism as a Rent-Seeking Society: Economic Regulation in Historical Perspective. College Station, Texas: Texas A & M University Press.

Eli F. Heckscher. 1936. “Mercantilism,” Economic History Review, [1st Series], VII (November): 44-54.

Terence W. Hutchison. 1988. Before Adam Smith: The Emergence of Political Economy, 1662-1776 Oxford: Basil Blackwell.

Arthur V. Judges. 1939. “The Idea of a Mercantile State,” Transactions of the Royal Historical Society, 4th Series, XXI: 41-69.

Lars Magnusson. 1994. Mercantilism: The Shaping of an Economic Language. London: Routledge.

John J. McCusker. 2001. Mercantilism and the Economic History of the Early Modern Atlantic World. Cambridge: Cambridge University Press.

Gustav F. Schmoller. 1884. “Das Merkantilsystem in seiner historischen Bedeutung: St?dtische, territoriale und staatliche Wirtschafts-politik,” Jahrbuch f?r Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich, VIII: 15-61

Gustav F. Schmoller. 1896. The Mercantile System and Its Historical Significance Illustrated Chiefly from Prussian History, translated by W. J. Ashley. New York and London: Macmillan & Company, Ltd.

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Europe
Time Period(s):Medieval

Network Origins of the Global Economy: East vs. West in a Complex Systems Perspective

Author(s):Root, Hilton L.
Reviewer(s):Yang, Clair Z.

Published by EH.Net (October 2021)

Hilton L. Root, Network Origins of the Global Economy: East vs. West in a Complex Systems Perspective. New York: Cambridge University Press, 2020. xxxi + 306 pp. $40 (hardcover), ISBN: 978-1-108-77360-7.

Reviewed for EH.Net by Clair Z. Yang, Jackson School of International Studies, University of Washington, Seattle.


How can we systematically compare the structures of economies and societies from different historical periods and in disparate parts of the world? Are there any universal rules by which history shapes the present and, if so, how can they help us predict the future? This book, Network Origins of the Global Economy by Hilton L. Root, offers a new perspective on the study of historical political economy. It applies the tools of complex system and network science to investigate three major transitions in world history and two in the contemporary period, with a special focus on Europe and China. This social network approach helps bridge the gap in the micro-macro dichotomy that we economists are most familiar with, and offers a powerful new tool to conduct truly comparative studies in political economy and economic history.

Despite being deeply rooted in the theories of complex systems, the book is very accessible for newcomers to the field. The first three chapters introduce the concepts and a range of structural network properties that are applied later. Chapters 4 to 6 examine the first great transition: the gradual formation and sudden demise of kingship networks in historical Europe and China. The argument builds on the conventional debate of centralization versus decentralization in the Great Divergence literature, and moves beyond it by utilizing social network topology to contemplate its implications on stability versus resilience, efficiency of information flow, and the regions’ long-term developmental trajectories. It maintains that the hub-and-spoke structure of China was the outcome of one single process of optimization by the ruling dynasty, while Europe’s scale-free network derived from the independent decision making of numerous decentralized nodes. Hence, the former led to dramatic dynastic cycles of prosperity and chaos, while the latter endured throughout the medieval era with localized modifications and helped determine the borders of modern Europe.

Chapter 5 discusses the formation of the Western legal system through a confluence of Germanic customs and Roman codification. It points to the contractual nature of the Germanic tradition of fealty as the root of a Western legacy of limited government. This reasoning echoes that of many scholars, which emphasizes the importance of feudalism and parliamentary systems in constraining the predatory behavior of the monarch and promoting economic development. Root also stresses the other side of the story: the top-down rationalist imperative taken by the crown, which was aided by the rediscovery of the Justinian Code in the eleventh century, brought otherwise disconnected regions together on a common legal ground. Thanks to compromises on both sides, strong and limited governments emerged throughout Western Europe. Chapter 6 concludes the first part of the book with a thorough review of the commercialization, the innovation, and the industrialization processes that eventually led to the Great Divergence. The historical analysis culminates in the assertion that the global network structure is a key determinant of innovation incubation, information diffusion, and system-wide resilience.

The book then moves to the present day. Leveraging these lessons from history, Root first examines China’s recent emergence as a global power and the challenges that it brings to the global governance structure. When the centuries-old kingship networks of Europe started to collapse following World War I, the United States, then a peripheral player, proposed a new global order premised on democratic universalism. Based on level of conformity with this ideology, the world was divided into two camps, each with its own hierarchy. To bring the discussion to the present, Root provides quantitative evidence of a new decentralization trend in global networks since the end of the Cold War, using data on diplomatic voting, military arms transfers, and international trade. He demonstrates that a jump in network density, as peripheral countries increasingly connect with each other, is driving down global hegemony and giving birth to a new multipolar order.

A theme that surfaces many times throughout the book is that power cannot be understood as a feature of an individual; it rises through an interaction between the individual and the overall network structure. When the global network transitions from a traditional hierarchy to a decentralized structure, multiple alternative flows develop and traffic reroutes. The central node loses its exclusivity even though its own features remain the same. In Root’s own words, “the concept of actor centrality is an incomplete measure of power within the system, and an incomplete framework for building global order. The degree of system centralization is paramount” (p. 234).

Root’s discussion opens up multiple avenues for future empirical research. To mainstream economics and political science, the paper points to social networks as a convincing foundation for history-dependence. There is increasing interest and bourgeoning evidence in the field of political economy that history matters. Most of these studies rely on the persistence of formal institutions or cultural inheritance, thus utilizing this perspective of social networks has the potential to bridge the two approaches and to promote new insights.

For example, world history has obviously witnessed a coevolution of political structures and social networks. But for social scientists, is it possible to distinguish the two directions of causality? Can we identify conditions under which political structures mold the topology of social networks, and vice versa? Could this line of reasoning lead us to factors even more fundamental?

The book also provides a useful analytical perspective on the dynamic evolution of the state-society relationship. The boundary between state and society becomes increasingly blurred the further back we travel in history. A few aristocratic families dominated the political arena in Europe for centuries, while the core of Chinese politics had shifted from family connections to state bureaucratic structures by the tenth century. At what point can we start calling an interconnected web of power a state? And how did multilateral bargaining shape the capacity, efficiency, and priorities of such a state?

The empirical directions pointed out by Root’s work are promising in light of recent developments in historical databases and big data methods. We have arrived at a stage where serious empirical analysis of social networks in historical contexts has become feasible. Detailed micro-level historical datasets are hard to obtain. It is thus of much empirical interest to know whether there exists a universal relationship between the behaviors of a society and the network structure of its elite, as well as under what conditions we can employ network structures of the elite as an indicator of more profound social and cultural changes.


Clair Yang is Assistant Professor of Economics at the Jackson School of International Studies at the University of Washington, Seattle. Her most recent paper is “A Longevity Mechanism of Chinese Absolutism,” with Yasheng Huang, forthcoming in the Journal of Politics.

Copyright (c) 2021 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (October 2021). All EH.Net reviews are archived at

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Asia
Time Period(s):General or Comparative

Germany 1871: Nation Building and the Transition to Modern Economic Growth

Editor(s):Pfister, Ulrich
Hesse, Jan-Otmar
Spoerer, Mark
Wolf, Nikolaus
Reviewer(s):Guinnane, Timothy

Published by EH.Net (October 2021)

Ulrich Pfister, Jan-Otmar Hesse, Mark Spoerer and Nikolaus Wolf, editors, Deutschland 1871: Die Nationalstaatsbildung und der Weg in die moderne Wirtschaft (Germany 1871: Nation Building and the Transition to Modern Economic Growth). Tübingen: Mohr Siebeck, 2021. xix + 454 pp. €99 (hardcover), ISBN: 978-3-16-160068-5.

Reviewed for EH.Net by Timothy Guinnane, Department of Economics, Yale University.


January of 2021 marked the 150th anniversary of the first unified state in modern German history. For political and diplomatic historians the 1871 Empire (Reich) has long served as a milestone. For economic historians 1871 has held less significance. Some major institutions of German economic integration preceded the Reich. The Customs Union (Zollverein), which included nearly all of the states that later formed the Reich, dates to 1834. Most German states had adopted a common business code in 1861. Other institutions important to economic integration came long after 1871; for example, Germany lacked a common (civil) law code until 1900.

Prussia’s role within the 1871 “small German” Reich (“small” meaning it excluded Austria) poses a second issue. Prussia dominated the North German Confederation (1866-70), which served as the institutional model for the Reich. The new Reich had about 41 million inhabitants, of whom some 25 million were Prussians. Prussia alone was larger than all but a handful of other European countries at the time. France had about 36 million people (1872), the United Kingdom 31 million (1871), and Italy 27 million (1871). Prussia dwarfed other relatively-developed countries such as Belgium (4.8 million in 1866) or the Netherlands (3.6 million in 1869).

The collection under review here treats 1871 in two ways. Most contributors stress longer continuities rooted in pre-1871 history as well as the slow process by which the Reich advanced new forms of economic integration. Others push the significance of 1871 a bit harder, stressing that the Reich adopted some policies that would have been hard to imagine without it. The thoughtful editors’ introduction lays out four channels that could link the Reich to improved economic performance. The first is national identity; the nation-building that followed 1871 could awaken in Germans a “buy German” sentiment that would have meant less to someone who thought of herself as a Hessian or Saxon. Market integration, a second channel, features today in many studies in economic history, economic geography, and related fields. A third channel presumes that under the Reich, the state and federal governments developed new capacities to deliver services that might promote growth. The final channel runs through better economic institutions, including compulsory social insurance and better patent law.

The collection has nineteen chapters plus the editors’ introduction. The twenty-seven authors represent most of the active economic historians of Germany today, while the comparative chapters bring in leading scholars of other countries. The authors are major authorities in their own areas but do a good job of summarizing other views and pointing the reader to a range of literature. There is little technical material that would challenge interested readers from other disciplines. The collection has a “handbook” feel, albeit a handbook that is unusually comprehensive and scholarly.

Felix Kersting and Nikolaus Wolf begin with a fascinating discussion of the role nationalism played in German state formation, stressing the connections to economic and technological developments. This is well-trodden ground, but they offer new perspectives by bringing in insights from the recent literature on the economics of identity and culture. Readers will appreciate their stress on the way states and the movement for national unification used each other to advance often conflicting goals.

Alfred Reckendrees discusses cooperation among state officials before 1871. The states had long traditions of working together both formally and informally to address issues of common concern. Reckendrees stresses informal networks of officials who met and worked together in many different contexts. These networks laid the foundation for the Reich’s ability to coordinate the state offices responsible for executing important policy initiatives.

Gerold Ambrosius discusses the federal structure created in 1871. At one level, the Reich had sole competence for legislation in economic areas. On the other, the new entity at first had little of the requisite bureaucratic apparatus. The federal chancellor (Kanzler) began (with staff, of course) as the only real Reich functionary. The chancellor relied on the Prussian state’s ministries in the absence of Reich equivalents: thus the details of economic policy for the Reich were developed by officials in the Prussian trade ministry. This arrangement suited Otto von Bismarck, who served as both Reich chancellor and the Prussian equivalent (Ministerpräsident) until relieved by the Emperor in 1890. By the late 1870s the Reich had created some of its own ministries (such as Justice and Finance) and acquired a more direct role in policy after Bismarck’s departure.

Ulrich Pfister stresses significant developments in German economic growth starting in the 1870s, but explicitly sets aside the question of the Reich’s causal role in this change. The growth of both GDP per person and real wages was faster in the later nineteenth century than earlier. The industrial sector became relatively (much) larger and more heterogeneous than it had been during the early years of industrialization. One interesting finding notes that marriage rates became less dependent on short-term economic fluctuations later in the century. He interprets this (and other evidence) as reflecting a transition from an agrarian to an industrial economy.

Mark Spoerer explores the fiscal implications of the Reich’s federal character. By design, the Reich had little taxation power: the member states insisted on this provision to constrain the central government’s powers. This feature also limited the Reich’s ability to engage in costly nation-building. Major initiatives such as social insurance were largely self-funded. Towards the end of the nineteenth century, city and other local governments (Kommunen) assumed responsibility for many new functions, including clean water and sewage and later, provision of gas and electricity. By the 1880s, Prussia’s local governments took in more total tax income than the state itself.

Sebastian Braun and Jan-Otmar Hesse consider the Reich’s impact in an area where one would think a national government could make the most difference: developing and integrating the post, a telegraph system, and the railroad. Considerable effort prior to 1871 had resulted in only partial integration of these services across state boundaries. The Reich quickly created an all-German post office (1871) and, later, a telegraph system, but the railroad network remained largely uncoordinated until after World War I.

Michael Schneider describes the statistical services for the several states and their cooperation under the leadership of the Reich office created in 1872. Larger states such as Saxony and Prussia had long funded services that published often detailed reports on population, the economy, government operations, and other matters. These offices had coordinated to provide some common information such as the Customs Union censuses. But the main story was heterogeneity: smaller, poorer states could not afford the costs of the material churned out by Prussia and others, and different offices adopted conflicting definitions and approaches that reflected, in part, differences in local economies. The Reich office’s initial role was to persuade state offices to collect information in a standard way. Schneider focuses, quite usefully, on the difficulties involved in the census of enterprises (Betriebzählung).

Matthias Morys describes the adoption of the gold standard (1873) and the formation of the first all-German central bank, the Reichsbank (1875). Currency was one area for which the Reich had exclusive authority. Prior to 1871 the German states had, by agreement, simplified their many silver-based monetary systems into two. Morys argues that public opinion broadly favored shifting to the gold standard prior to the Reich, but the new federal entity’s sole legislative competence in this area made the process much easier. The Reichsbank, as Morys notes, was essentially a re-foundation of the Prussian central bank. The central bank at first was one of thirty-three note-issuing banks in the Reich (although the largest by far). As others failed or lost this authority, the Reichsbank’s unique all-German reach made it dominate even more than its purely legal role would imply.

Alexander Donges and Jochen Streb consider an area where the Reich had one of its greatest immediate impacts: patent law. Prior to 1871 the states had different attitudes towards patents. Prussia allowed patents but construed the novelty requirement quite narrowly. Once issued, Prussian patents had a short duration and were rarely renewed. Other states such as Saxony were more liberal in their interpretation of what deserved a patent. While there was widespread agreement on the need for an all-German patent law, the drastically conflicting views required serious compromise. The Reich patent law (1876) reflected Prussia’s narrow interpretation of what could be protected, but permitting repeated renewals.

Carsten Burhop and Felix Selgert take a different approach to the question of 1871, focusing sharply on the years just before and the years just after. By the turn of the twentieth century Germany’s firms could acquire finance from large universal banks or tap extensive equity markets. Burhop and Selgert trace the key steps in this financial system’s development to a process of deregulation in the years just before the Reich’s creation. The North German Confederation adopted general incorporation in 1870. This change, carried into the Reich, resulted in both many new banks organized as corporations, and many new corporations that wanted to access markets for their equities and bonds. Later moves amounted to a partial re-regulation and put remaining large banks at the center of the financial system.

Eva-Maria Roelevink and Dieter Ziegler take a historiographical approach to the question in their title: “How Organized was Capitalism in the Reich?” Their theme harks back to a literature from the 1960s and 1970s that viewed the late-nineteenth century German economy as run by various combinations of firms: lobbying groups (Verbände) that pushed for tariffs and other preferential treatment; cartels that raised prices above competitive levels; and inter-locking directorates and other, less formal connections among firms. The earlier literature argued that competition among firms under these conditions was largely illusory. The authors stress that these views pre-dated the opening of major archives (governmental in the former East Germany, businesses in the former West) and have not held up well to new evidence. In their view, the lobbies, cartels, and interlocking directorates were real and influential, but less so than earlier work claimed.

Tobias Jopp and Jochen Streb discuss social insurance. Bismarck’s complex of health, workplace accident, and old-age insurance (introduced in steps 1883-1891) reflects the specific political considerations of the Reich, but followed older models and reacted in part to unsatisfactory, earlier reform efforts. This chapter also considers the recent literature on how Bismarck’s social insurance affected emigration (German workers became less likely to emigrate, suggesting they valued social insurance); fertility (probably not at all); and savings (for which there is evidence of crowding out).
Thilo Albers and Charlotte Bartels address the evolution of income and wealth distribution during the nineteenth and early twentieth centuries. This chapter faces an especially severe version of the data constraints that shape all economic history, and the authors carefully explain their sources and what those sources can say. They detect three phases: (1) slowly increasing equality into the early 1870s, reflecting both the “grain invasion” and industrialization; (2) more rapid increases reflecting a quicker pace of industrialization to roughly 1890; then (3) a more modest pace of rising inequality. The authors stress the essential role of inequality in the Reich’s politics and economic policies.

Sascha Becker, Francesco Cinnirella, and Erik Hornung describe the growth of the German educational system from the early nineteenth century. The strong role of religious institutions in education meant that even in the early nineteenth century, Germany’s Protestant areas had higher levels of schooling than its Catholic areas. Protestant areas also enjoyed smaller male/female gaps in educational attainment. By the mid-nineteenth century, several German states had enrollment figures meeting or exceeding most other countries in the world, and the system improved still more later in the nineteenth century. The authors argue that Germany’s well-educated workforce played an important role in the economic development of the higher-tech sectors of the “second industrial revolution.”

Wolf-Fabian Hungerland and Markus Lampe provide a rich overview of Germany’s international trade in this period. (“International” means “crossing the borders of the Customs Union.”) The data become much better after 1871, making the Reich’s direct impact on trade hard to study. Important policies such as tariffs and non-tariff barriers were important tools after 1871, but they had been before, as well. Hungerland and Lampe do a valuable service in stressing aspects of Germany’s international trade that get lost in simple tales. Germany’s most important trading partners were the United Kingdom and other developed areas of western Europe. Most trade was intra-industry.

Four final chapters offer comparative perspectives. Jean-Pierre Dormois stresses strong similarities in the motivations for the relatively high tariffs introduced in 1879 (Germany) and France (1892). Dormois argues that tariffs in this period reflect revenue concerns at least as much as efforts to protect particular sectors, a claim supported by the targets of these tariffs: Germany had no banana producers to protect. His claims that tariff protection was ultimately futile, however, may over-state his case.

Giovanni Federico’s account of Italian unification offers a clear account of the political history of unification and the institutional changes that followed. His comparative remarks on German unification stress differences. Italy had no Prussia; Sardinia-Piedmont, the closest thing to an Italian Prussia, had only 3.2 million people in 1860. While Italians had discussed a customs union inspired by Germany’s Customs Union, the proposals never led to action. One reason may have been the relatively weak incentives to trade within Italy. The newly unified Italian state adopted many new laws and institutions by adopting what existed already in Sardinia, and instead of a federal structure, moved to a highly-centralized, unitary state more like France than the Reich. Federico argues that any economic effects from unification per se reflect a long-term process of change brought about by institutional changes and other indirect effects such as better internal transport.

Max-Stefan Schulze provides a comparison from the Dual Monarchy. This discussion focuses on growth of economic aggregates and growth accounting exercises. Schulze stresses recent findings that rehabilitate Austria-Hungary from an older view that its economic performance was always weaker in the nineteenth century; Hungary, less developed than either Austria or the Reich, enjoyed faster productivity growth 1870-1910 than either. The chapter concludes with a brief discussion of regional issues covered in more detail in the author’s other publications (for example, Max-Stephan Schulze and Nikolaus Wolf, “On the Origins of Border Effects: Insights from the Habsburg Empire,” Journal of Economic Geography 9, no. 1 (2009): 117-136).

Nicholas Crafts compares the economic performance of the British and German economies in the period 1870-1914. The great theme is Britain’s putative “entrepreneurial failure,” a comparison that is apt because the literature usually stresses Britain’s performance relative to Germany. Crafts is the undisputed master of this and related material; for a recent overview, see his Forging Ahead, Falling Behind, and Fighting Back (Cambridge University Press, 2018).

So what did 1871 mean to the German economy? A natural way to consider 1871 is to consider an explicit counter-factual. For example, we could imagine a region dominated by a Prussian-led North German Confederation with independent, smaller states such as Bavaria remaining aloof. Curiously, only a few chapters even nod in this direction. Morys, for example, notes that in the absence of the Reich, the Prussian central bank would have enjoyed the dominant position in all of the German states that the Reichsbank actually acquired. While little more than a remark here, this kind of thinking raises the question of whether Prussia’s size and weight would have led to similar economic integration through the looser ties of the Customs Union and other inter-state agreements. This kind of thinking arises in many earlier discussions of German unification and deserves more attention than it receives here. None of the authors here ventures to say that the Reich had a particular overall impact, but it would have been nice to see some discussion of what was really just Prussian (for example).

This review reflects the German-language text cited above. An English version will appear soon in the Routledge series “Explorations in Economic History.” Anyone interested in modern German economic history will want to read this collection. Those interested in the comparative history of related topics will find these chapters both a great overview and an introduction to the research literature. Instructors in advanced undergraduate or graduate courses will want to use it to supplement the growing journal-article literature. Federico’s contribution on Italian unification will be especially valuable in teaching. In either language, this collection deserves a wide readership and the editors our gratitude.


Timothy W. Guinnane is the Philip Golden Bartlett Professor of Economic History in the Department of Economics at Yale University. Recent publications include “The Introduction of Bismarck’s Social Security and System and its Effects on Marriage and Fertility in Prussia” (with Jochen Streb) Population and Development Review, 2021, and “Creating a New Legal Form: the GmbH,” Business History Review, 2021.

Copyright (c) 2021 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (October 2021). 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):19th Century