------------ EH.NET BOOK REVIEW --------------
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only a handful of libraries, and unpublished manuscripts -- this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.
http://eh.net/bookreviews/library/officer.shtml#0.1_table01
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; 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.
http://eh.net/bookreviews/library/officer.shtml#0.1_table02
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.
http://eh.net/bookreviews/library/officer.shtml#0.1_table03
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.
References:
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 ([log in to unmask]; Telephone: 513-529-2229). Published
by EH.Net (January 2006). All EH.Net reviews are archived at
http://www.eh.net/BookReview.
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