Published by EH.NET (February 2002)

Geoffrey Poitras, The Early History of Financial Economics, 1478-1776: From

Commercial Arithmetic to Life Annuities and Joint Stocks. Cheltenham:

Edward Elgar, 2000. x + 522 pp. $120 (cloth), ISBN: 1-84064-455-9.

Reviewed for EH.NET by Salim Rashid, Department of Economics, University of


This book aims at providing an introduction to the history of finance, more

properly financial mechanisms, from the fifteenth through the eighteenth

centuries. Poitras makes no claim to be presenting original research; rather he

is concerned with a synthesis of the historical literature on finance and

economics. Beginning with the nature of Scholastic and ‘Mercantilistic’

economic thought, the text takes us through the institutional changes and the

conceptual developments they fostered over the next four centuries. The

expository plan is easy to follow, since it follows the historical timeline and

stops to describe various institutional changes brought on by the growth of the

European economies.

This book should have a ready market. Many who begin with economics, gravitate

silently to finance and many others have no need of the transition. The easy

exposition and the portrayal of the historical developments make this useful

supplementary reading; with a text of original writings, it could serve as a

good introductory text in the history of finance. The reproductions of several

pages of original text provide the text with an authentic flavor. In most

places, the book has much ‘fun’ stuff to read.

Unfortunately, the author has not written with one audience consistently in

mind. Some aspects of the presentation will lose many potential readers. On

many occasions, the concepts are not introduced clearly. For example, while

there is much discussion of bills of exchange, there is no benchmark

definition. There are two major difficulties with the expository method chosen;

the reader will silently assume that bills of exchange were the same across

Europe at any point in time, and that they remained the same over time. (If

indeed there were no such locational differences or changes over the centuries,

this is a remarkable fact and needs prominence.) In keeping with the purpose of

the book, there should have been actual photographic reproductions of bills of

exchange through the ages. A short numerical example should precede the

definition. Thus: ‘Here is a problem faced by Merchant X in Bruges… In order

to solve this problem, the following piece of paper is drafted as a legally

enforceable document…. This is how the above document solves the problem….

The analytical concepts needed to understand this solution are….’ Students,

and readers like myself, would be much benefited by such pages. To make room

for them, items such as debates about the self-seeking behavior of the Church

could be made into footnotes or appendices. As it stands, the text gives the

impression of someone who began by wanting to write a text on finance, but

found the topic so closely related to the history of economics that he felt

compelled to give equal time to both subjects. This is not fair because finance

has a narrower scope and clearer analytical structure than economics. One does

not have to sacrifice historical detail to achieve analytical clarity. Take the

case of “fixed Income Valuation” on p 146. The first paragraph will not be

necessary for those who know what this involves, while the novice will find it

abrupt and unhelpful. In the middle of the next paragraph there is a clear

definition of the analytical essentials: “Valuation requires knowledge of: the

price, the size of the payment, the time period (term to maturity); and the

interest (discount).” If this sentence were followed by the points made in the

first paragraph on the need to use present values, we would have all the

essentials described. Next, the historical treatment could show us which of

these concepts were known and how they were utilized; finally, we could

appreciate which problems were fully solved and which needed to await further

theoretical development. Such a method would be helpful in many places

throughout the book as, say, the description of “dry exchange” (p. 245).

Models for the general reader do exist. Consider Poitras’ treatment of the

Triple or German contract (pp. 38-40) with that in The Abuse of

Casuistry (Albert Jonsen and Stephen Toulmin, Berkeley, University of

California Press, 1988) — a book whose intended audience is the general

reader. The first move toward a new paradigm was the introduction of a theory

of interest popularly referred to as the “triple contract,” the “German

contract,” or the “5% contract.” It marked a notable departure from the

medieval thesis and opened the way for a modern theory of profit from loans.

The name “triple contract” expressed the essence of the arrangement that Eck

popularized. Partners entered into three distinct contracts with each other.

First there was a contract of partnership, which was considered legitimate by

all commentators. Second, a contract of insurance was signed; under this the

investor was insured against a loss of his capital and, instead of paying a

premium, agreed to accept a lesser percentage of the total profits than would

otherwise come to him. Third, a contract was signed that guaranteed the

investor was a “sort of debenture holder without industry or danger of losing

capital.” This was an attractive form of investment, which provided the active

partner with considerable working capital. Commentators conceded that, if made

with different parties, each of these three contracts would be legitimate, but

most of them doubted the morality of the triple contract between two parties.

(pp. 188-89)

If the author plans a second edition, I hope he will look more at the financial

instruments devised by Islamic finance in the period 800-1400 AD. The growth of

world trade in this period is well covered in books such as those of Janet

Abu-Lughod. The fact that the Italians devised the earliest financial

instruments for Europe may not be unconnected with their close trading

relations with the world of Islam. In looking at financial history, Adam Smith

is less instructive than individuals like Lewes Roberts in the 1640’s and

Malachy Postlethwayt in the 1760’s.

The current “Conclusion” has interesting speculations on what leads to fame in

this area and why the contributions of “Anonymous” should figure largely in a

history of finance. The book should perhaps end with a list of potential topics

for future research. We know that the best mathematicians of this period were

limited to using polynomials, and low order polynomials at that. How accurate

were speculations with low order polynomials? If the speculations were more

successful than we can expect on the basis of the explicit mathematical

knowledge, does this then suggest that humans have much implicit or tacit

knowledge, which they can use but cannot necessarily articulate?

Salim Rashid is author of Economic Policy for Growth: Economic Development

Is Human Development (Kluwer 2000). His recent research asks “Can there be

theory of money?”