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 Einzigï¿½s 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language, reports to governments or commissions, working papers, works that are in only a handful of libraries, and unpublished manuscripts -- this reviewer counted carefully (from the WorldCat database) that Einzig was the author of fifty-seven different books -- a phenomenal number.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, Einzigï¿½s 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.
Certainly, Einzig's total number of books is phenomenal in comparison to any of the other authors. In fact, incredibly, Einzigï¿½s 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; JSTROR 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.
Einzig states, in the preface to the first edition of the _History_, that his purpose is to produce ï¿½a single book ... that would cover the entire history of Foreign Exchange in all its main aspects from its origins to our daysï¿½ (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 ï¿½a selected bibliographyï¿½ -- 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 ï¿½index of names,ï¿½ but the subject index could have been more extensive.
The author's ambitious and unique goal, the tremendous research effort (aided by the authorï¿½s 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.
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 reviewersï¿½ 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 Einzigï¿½s rejoinder (rather than having the reviewer reply)!
Einzig responded to Pressnellï¿½s criticisms, in the preface to the second edition of the _History_, stating, quite correctly, that Pressnellï¿½s review ï¿½amounted to little more than a list of attacks, wasting very little time or space on trying to justify, explain or illustrate his criticismsï¿½ (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.
Einzigï¿½s 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 ï¿½manual exchangeï¿½ (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 "Greshamï¿½s 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 ï¿½a deliberate analysis of cause and effects of Foreign Exchange movements and the role of Foreign Exchange in the economic systemï¿½ (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; Munï¿½s 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 ï¿½Malynes has all the ingredients for the PPP theory and comes ever so close to exhibiting the theory for both fixed and floating ratesï¿½ (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 ï¿½dollar surplusï¿½ 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 ï¿½the 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 systemsï¿½ (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 ï¿½manual exchangeï¿½ (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 ï¿½the bullionist periodï¿½), in both empirical (exchange value of the pound) and theoretical (bullionist-controversy) aspects. Indeed, Einzig writes: ï¿½the so-called ï¿½bullionistï¿½ controversy ... was probably the most important Foreign Exchange controversy for all timeï¿½ (p., 202). However, he makes no reference at all to an earlier ï¿½bullionist period,ï¿½ 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 ï¿½rediscoveredï¿½ 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 ï¿½direct manipulationï¿½ 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. ï¿½Violations of the Gold Points, 1890-1908.ï¿½ _Journal of Political Economy_ 92 (October 1984): 791-823.
Eagly, Robert V. ï¿½Money, Employment and Prices: A Swedish View, 1761.ï¿½ _Quarterly Journal of Economics_ 77 (November 1963): 626-36.
Eagly, Robert V. ï¿½The Swedish and English Bullionist Controversies.ï¿½ 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. ï¿½Primitive Money: A Rejoinderï¿½ (with Editorï¿½s Reply). _Man_ 49 (November 1949): 132.
Einzig, Paul. _The Theory of Forward Exchange_. London: Macmillan, 1937.
Officer, Lawrence H. ï¿½The Purchasing-Power-Parity Theory of Gerrard de Malynes.ï¿½ _History of Political Economy_ 14 (Summer 1982): 256-59.
Officer, Lawrence H. ï¿½The Efficiency of the Dollar-Sterling Gold Standard, 1890-1908.ï¿½ _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. ï¿½Einzig, Paul.ï¿½ 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.
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