«To cite this version: Dominique Torre. The monetary views of Paul Einzig. The 16th Annual Conference of the European Society for the History of ...»
The monetary views of Paul Einzig
To cite this version:
Dominique Torre. The monetary views of Paul Einzig. The 16th Annual Conference of the
European Society for the History of Economic Thought (ESHET), May 2012, Saint Petersburg,
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Submitted on 29 Aug 2012
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e The monetary views of Paul Einzig Dominique TORRE∗ December 13, 2011 Abstract Paul Einzig was born in 1897 in Brasov but comes to London in 1919. From 1920, he begins to write articles for scientiﬁc reviews, especially The Economic Journal, while he contributes more regularly to The Financial News, The Financial Times or The Banker. From this period to his death in 1973, he writes also many books, on very diverse subjects but devoted for the major part to monetary analysis and international ﬁnance. This paper concentrates on two subjects recurrently developed by Paul Einzig. The ﬁrst is the analysis of forward exchange market where Einzig observes anomalies in the covered interest rates parity. These observations, in accordance with those of Keynes, initiate a long controversy - still not closed -, on the origin of these anomalies. The second subject is less technical and more fundamental: what are in practice the respective properties of the diﬀerent possible external exchange regimes? Einzig provides all his life long historical and analytical arguments to the reader interested in this question. He observes and comments regularly and in detail the crises and failures of diﬀerent monetary arrangements.
These observations and analyzes are still useful at a time when, after many years of trust in the corner solutions (free ﬂotation and monetary unions) the international community ﬁnds necessary to elaborate adequate regulations for the Eurozone policy-mix, or to control the excessive instability of the international capital ﬂows.
JEL Classiﬁcation: B22, B26, E42 Keywords: Paul Einzig, covered interest rates parity, Gold Exchange Standard, free ﬂotation, Romania 1 Introduction “His style is limpid, his ideas are common-sensical, his conclusions deﬁnite and clear. If he panders to popular tastes at all, it is by way of ∗ University of Nice Sophia-Antipolis - GREDEG - CNRS, 250 rue Albert Einstein, 06560 Valbonne, France., E-mail: email@example.com a certain over-emphatic dramatization of events. The strong white light he casts upon his characters causes them to throw shadows blacker than would appear by common day. But this is a fault altogether on the right side. We know exactly where we are with him, and allowances are easily made” (J. Robinson, 1936, p. 122) In 1920, the Romanian Government withdraws Austro-Hungarian Kronen and Russian Rubel denominations still circulating in the new Romania Mare, and deﬁnes the Lei notes as the only legal tender on the whole country. In London, J.M. Keynes and The Economic Journal accept the proposition of a 23 years old journalist of The Financial News born in Transylvania to report the situation and analyze its consequences on the Romanian economy. This is the second academic intervention of Paul Einzig after a ﬁrst short paper in the same Economic Journal on the attempt by the new Soviet Union to propose an intermediary of exchange founded on labortickets (Einzig, 1920a). These two early short papers will be followed by many other texts in The Economic Journal and elsewhere: about 60 books written until 1972 and approximatively the same number of academic papers, without considering its regular production as columnist of The Financial News, The Financial Times and Commercial and Financial Chronicle.
One century after, the paper Paul Einzig wrote on the monetary reform in Transylvania is still of great interest for the reader. The author relates in a direct style one the most astonishing experiences of currency sterilization of the after-war period. New citizens from the previous Hungarian areas then hold Austrian Kronen from the war and pre-war period. Due to the economic uncertainty associated with the Austrian defeat, the unoﬃcial rate of convertibility of these Kronen in Romanian Lei is very low in Romania. A monetary reform is then announced by the Romanian Government with the necessity for each holder of Kronen notes to declare the amount he/she wants to convert in Lei at the oﬃcial rate before the announce of this rate. The incentive to declare is that from the end of the conversion period, the Romanian Lei will be the only legal tender for internal transactions. But given the illegal rate, the Kronen holders expect a low oﬃcial conversion rate but also a subsequent tendency of the Kronen to appreciate in Lei on the external market. A small amount of the Kronen holdings is then declared to the authorities: the holders of the rest rush on shops and spend as many Kronen as they can before the date of conversion. The conversion is then realized in the following way: only 60% of the declared holdings in Kronen are immediately converted in Lei by the monetary authorities. The remaining 40% are exchanged against non-negotiable temporary receipts. Additional amounts of Kronen are accepted for conversion - more of them from shopkeepers victims of the rush -, still against non-negotiable eﬀects. Finally, around 60% of the Kronen previously in circulation are withdrawn against receipts, without any clear date of deﬁnitive conversion. But the more surprising part of Einzig report is still to come. As 2 Kronen are exchanged against 1 single Leu, and given the number of receipts distributed to the previous Kronen holders, the new price in Lei of the commodities ﬁxed at one half of the old price in Kronen in Transylvania, corresponds to a decrease of the purchasing power of the Kronen holders.
As this measure does not aﬀect equally all the population, the Romanian conversion generates - at least in the short run - a negative eﬀect of wealth to the detriment of the previous Kronen holders. But as the rate of conversion of the Kronen is probably overevaluated given the current situation of the Austria, this redistribution is not macroeconomically speaking so important and it has the advantage of withdrawing rapidly all the Kronen holdings from public or private circulation. These last comments are from the author of the present paper and not from Einzig, probably too young and lacking from self-conﬁdence to rise controversial questions in this sensible circumstance. Einzig will have other occasions to lose his shyness. He however had few occasions to write more academic papers on the situation in South-Eastern Europe. The motives can be found in his autobiography: “The Economist, after having published three of my articles, returned several of them, [... ] Keynes [as editor of The Economic Journal ], too, rejected one or two of my articles. The explanation of this [... ] was simply that at this time there was very little interest in Britain in the current economic aﬀairs of Hungary or Roumania, and these were practically the only countries about which I was able to write with any degree of ﬁrst-hand knowledge and authority. I had the monopoly of that market, but it was an extremely narrow market, and saturation point was soon reached” (Einzig, 1960, p. 19). This is probably the reason why Einzig writes his ﬁrst and last academic paper on the situation in Balkanic countries at a time when he is sill not Doctor.
Paul Einzig was born in 1897 in Brasov, Transylvania, at a time when this Romanian region was still a part of Hungary. He is educated at the Oriental Academy of Budapest where he begins to work as journalist during the WW1. He comes to London in 1919 where he is rapidly employed by The Financial News and ﬁnds an early editorial success with the publication of two articles in The Economic Journal, he is nominated as the Paris correspondent of The Financial News where he stays to prepare a Doctorat thesis at La Sorbonne under the supervision of Louis Germain-Martin University. He defends his thesis in 1923 on the movements of prices in France from 1914 with Bertand Nogaro in his committee (Einzig, 1960, p.
40). He becomes the foreign editor of The Financial News in 1923, then continues a carrier devoted to ﬁnancial journalism, enhanced by frequent interventions as author of articles of The Economic Journal or other academic reviews. He meets and corresponds with the best British economists - including Keynes -, and begins to write this unreal number of books, ranging from The Theory of Forward Exchange in 1937 that he makes dynamic in 1961 (A dynamic Theory of Forward Exchange) to numerous less ambitious books devoted to a speciﬁc question or event related to the successive monetary and ﬁnancial systems he will observe until his death in 1973. From 1939, he is correspondent of The Financial Times and maintains a continuous link with this review until he retires in 1956. During this period and after, he continues to write books and articles, overall on ﬁnancial and monetary subjects but even on more unexpected topics like this strange (see The economic consequences of automation in 1956).
The rest of this paper is not an attempt to analyze synthetically the monetary and ﬁnancial views of Paul Einzig. Given the moving environment to which he is obliged to adapt his views, there are too pages to read, comment and put in perspective to do this in a single paper. We then choose to focus on two contrasting topics of Einzig. The ﬁrst (section 2) is very technical and apparently limited in : this is the question of the covered interest rate parity of which Einzig becomes
one of the specialists from the thirties. The second (section 3) is broader in scope:
this is the comparison between diverse external exchange arrangements. We then conclude (section 4).
2 External exchange market imperfections and the interest rate parity issues The name of Paul Einzig is still present in the contemporary academic debates but only in a very specialized subject: Einzig contributes in the twenties to the analysis of forward exchange rates and formulates the so-called “Keynes-Einzig conjecture”.
During many years, Einzig is indeed fascinated by the mechanisms of foreign exchange market. After a decade of observation of this market, he considers from the mid-thirties that his main purely analytical contribution to economic analysis will be located in this ﬁeld.
2.1 The post-war evolution of gold points During the twenties, after the return of the Sterling to Gold, Einzig publishes an article and many smaller notes in the Economic Journal devoted to comment the evolution the Gold points (Einzig 1927a, 1927b, 1928, 1929, 1931), then to elucidate the deviation of those points from their theoretical levels. These meticulous observations are devoted to observe any changes in the coordination rules of the external exchange market from the return to convertibility of the Pound. Einzig indeed observes signiﬁcant changes in the Gold points between London and New-York. “It is a common but superﬁcial conception to regard gold points as something essentially stable, bearing a ﬁxed relation to mint parities. In reality, even before the war, when the factors determining the gold points were more settled than at present, gold points were subject to changes” (Einzig, 1927a, p. 133). Einzig begins to attribute these changes to the increase of the freight, of the insurance and the interest (Einzig, 1927a). In 1928, then in 1929, he comments the new and important movements of Gold among Central Banks, more or less associated with the diﬃculties of The Bank of England to maintain its too high parity. But for the moment, only gold points seem to interest Einzig. During this period, Ei,zig deplores the extent and the rapidity of the changes of the gold points, due to the tendency of Central banks to move large amounts of gold under conditions they determine “independently” from market forces: “in certain cases the exceptional measures of interference are explained by the necessity for some central banks to increase immediately their gold stocks, so as to be able to maintain the gold standard [... ] In other instances the policy is inspired by a desire of saving transport costs. This was the case of the triangular gold transactions arranged in May and June 1929, between the Reichsbank, the Federal Reserve Bank of New York, and the Bank of France, and, to a small extent, between the two former and the National Bank of Belgium” (Einzig, 1929, p. 380).
2.2 The covered interest rate parity With the ﬁrst eﬀect of the Great Depression and the progressive withdrawal of the major countries from the Gold Exchange Standard during the early thirties, gold points stop to play a stabilizing role at the international level and Einzig is now interested in the new stabilizing mechanisms, in a word of ﬂoating exchange rates.
But with gold points, Einzig has understood the role of arbitrage mechanisms in the foreign exchange markets. He ﬁnds rapidly that, with inconvertible currencies, the domestic and external short term interest rates provide a new possibility of international arbitrage when there is a possibility to conclude forward currency exchanges.
This is the (covered) interest rate parity principle already known by the major part of practitioners in the XIXth century and already referred by Keynes in a newspaper article in 1922, then in his 1923 Tract on Monetary Reform (Keynes, 1923).
In 1937, Paul Einzig publishes his ﬁrst theoretical book, on the only technical topic that he will choose to develop during his long life as economist and columnist: the forward exchange market. The book begins by a preface in which Einzig
acknowledges his friends bankers for having read and controlled the manuscripts: