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Paul Einzig and the foreign exchanges


The other day, I came upon an interesting article on Vox about The Returns to Currency Speculation: Evidence from Keynes the Trader where Olivier Accominotti and David Chambers described the results of their research on currency speculation in London in the 1920s and 1930s. Looking for more, I found a preliminary unpublished paper by the same authors on the topic in the internet (which unfortunately must not be quoted). In that paper, describing the London foreign exchange market in the period under consideration the authors drew heavily on Paul Einzig’s The Theory of Forward Exchange of 1937. This is one of several rich and fascinating books Paul Einzig wrote (actually, the author himself considered it his best effort, as he mentioned in his autobiography), which, although from another century (in 1919 the telegraph had just begun to change the nature of foreign exchange dealing in London), bear many lessons, not only for historians.

Paul Einzig was born in 1897 in Braşov in Transylvania, in a “quiet little backwater, a small town at the foothills of the South Eastern Carpathians” (Einzig 1960), at a time when this Romanian region was still a part of Hungary. In 1919, after studies at the Oriental Academy of Budapest and first steps as a financial journalist in his home country, he came to London.

The world Paul Einzig was set to conquer: 2nd October 1919: London Dandies attired in menswear by Beau Brummell promenade in London’s Fleet Street.
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In those years, the City of London was the unrivalled centre of the world of finance. It had been a hub of international merchant banking since the 17th and 18th centuries when it had taken over from Amsterdam. This period in its history is worth a closer look as it offers an explanation for the unique position the town developed and in many respects still held when Paul Einzig lived and worked there.

There is no exact date for the transition but as I wrote elsewhere, the decisive years for the emergence of London’s supremacy

“appear to be between 1660 and 1700 when the Navigation Act took effect and England brought a large part of the transatlantic trade under its flag (Inwood 1998: 318 f.). Among the 28 colonies established in the western hemisphere in the 17th century, 12 were English, but only three Dutch and eight French. Around 1700, there were 350,000 to 400,000 British subjects on the other side of the Atlantic, but only 70,000 French. The final stroke to Amsterdam came during the French Wars of 1793-1815. When in 1795 the French occupied the town much of its financial business migrated to London which was one of the few major towns in Europe which had not fallen under Napoleon’s control (Einzig 1970, Inwood 1998). When peace returned many of the Dutch commercial and banking families remained and London benefitted from their money as well as from their experience and worldwide contacts. For a long time, Dutch became the leading business language in London. Many financial regulations, norms and behaviour patterns such as the rules and techniques of stockbroking followed those prevailing in Amsterdam.

The Dutch were not the only aliens dominating trade and finance in London, and they were not the first ones: The first foreign financiers there had been Jews who had settled in London after 1066 where they were the main source of loans until the middle of the 13th century. Next came Italian and Hanseatic merchants as well as many others. The most important group up to the late 15th century were Italians who not only handled about a quarter of England’s overseas trade but also dominated its banking system in using financial techniques and capital not available to native merchants.

War was not the only reason for Amsterdam’s decline. During the 1760s and the 1770s there had been a series of financial crises. In 1763 it was speculation in unsecured war loans which ruined several Amsterdam financiers. In 1772-3 a succession of bankruptcies among Dutch financiers from speculations in East India Company stock brought business to a standstill. In both cases, the Bank of England acted to restore confidence which left the overall impression among the European business community that the financial system in London was safer than the decentralised and uncontrolled system in Amsterdam.

All this does not mean that in the 18th century England as a whole already had an efficient banking system or a well-functioning capital market. On the contrary, before the 1880s, there were almost two separate financial sectors: the ‘City’ with its highly sophisticated system of mainly foreign banks and financiers as well as its insurance, shipping and commodity markets which reflected Britain’s dominant position in the global economy, and a rather backward country banking sector (Cottrell 1992).

During those years, London’s position as a financial centre underwent radical changes. Traditionally, credit had been granted by those with surplus cash, above all, goldsmiths, courtiers and merchants. Some of them became part-time bankers. However, for example, most of the 44 goldsmith-bankers known to have existed in London in 1677 did not survive the next turbulent fifty years (Inwood 1998).

The first true English banking houses were founded only around 1700. In addition, the capital market at that time was poorly organised compared to the continent and its development was largely following domestic needs. On the other hand, the system had already considerable comparative advantages. The Bank of England was the only central bank in the world producing a paper currency with a fixed and guaranteed gold value. There was a whole range of sophisticated financial instruments and methods to shed risk or deliberately take it. Government debt as well as industrial expansion brought a constant flow of financial demand. Since the late 17th century it became possible to buy insurance against all kinds of calamities from individual brokers or underwriters.

1921: The Bank Of England was founded in 1694 and operated from the Grocer’s Hall until 1734 when the new building in Threadneedle Street was opened which was extended by Sir John Soane at the turn of the 18th century.

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In the 19th century London’s international role strengthened. It became common for European merchant banks to open offices there. American banks followed. Those were the years when the Barings and the Rothschilds became the most powerful financiers in the City. In 1914, twelve of the twenty-one leading London merchants banks were Anglo-German, three American and one French. London became the focal point of overseas lending – mostly government and railway issues, but also mining, industry and public works, in America, India, Australia, Canada and New Zealand – with a large proportion of the money originating overseas and much of the businesses handled by the London offices of American and German finance houses. The City’s reputation was high: Foreign merchants used its accepting and discounting services even when their trade was not with England.

Internationalisation was fostered by new technology. The electric telegraph enabled trades between London and other financial centres to be done in minutes rather than days or weeks. The first submarine cable linking London to Paris was established in 1851, to New York in 1866 and to Melbourne in 1872 (Headrick 1990). However, perhaps the most important single advantage was the openness of the financial system which was largely free from government interference and official rules and regulations.”

June 1919: Bank holiday crowds piling onto an open top tram car at Golders Green station, London.

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This was the world Paul Einzig was set to conquer. In his autobiography, he gave a vivid description of his first impression of the town:

“I arrived at Victoria by the Newhaven boat train and took a room at the Grosvenor Hotel for the night. Of course, it was well beyond my means to stay at such an expensive hotel. But I was too tired after a journey across half Europe, and especially after a fairly rough crossing from Dieppe, to be in a mood to explore a strange city in search of more modest accommodation. My pre-War Baedeker recommended this terminus hotel as being very convenient for new arrivals from the Continent …

The view I beheld as I was looking out of my bedroom window could not have been described as attractive with the best will imaginable. All the same, I was fascinated by it, taking in greedily my first impressions of London. It was an ordinary enough sight, but it was all so new to me. The electric signs above the shops and restaurants threw a lurid red glare across the mist. So this is the famous London fog, I thought, having no idea what a real London fog looked like.

It seemed to me almost too good to be true that I should be looking out on a London view from the window of a big London hotel, watching the London traffic being regulated by a helmeted London policeman – another British institution that had been familiar to me. I might have thought the picture almost incomplete without the fog. This is precisely how I had always imagined London, all the time that I was planning to come here and settle one day.”

1922: Horse-drawn and motor traffic at the Bank, central London.

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He had a special reason to choose London instead of Paris, Berlin or New York:

“I think it must have been mainly because I developed an immense admiration for the only English financial newspaper I knew at the time – the Economist, copies of which reached Budapest through Switzerland during the War and which I saw regularly from 1917 onwards. …

I got it into my head that I simply must attempt, as soon as the War was over, to write something for the Economist. In his biography of Marcel Proust, G. D. Painter explained his hero’s strong desire to penetrate into the most exclusive French aristocratic set on the ground of his determination to be accepted ‘where acceptance would be most difficult’. That is precisely how I felt when I decided to go to London and to learn about conditions there to be able to write for the Economist. The difficulty of my task attracted me irresistibly.”

And he succeeded. As he described in his autobiography, only two days after his arrival, despite first doubts he brought himself to visit the offices of the Economist in Arundel Street (near Fleet Street) and ask to see the editor Hartley Withers. He offered him an article on the economic aspects of the recent Hungarian Communist experiment under Bela Kun – and got it accepted.

This was the more surprising as in many respects, this young and newly established financial journalist was still inexperienced as the following little example from his autobiography illustrates:

“In due course I received the payment – something over £5, if I remember well – for my first contribution to the British Press. I presented the cheque at the bank on which it was drawn but was told of course that, since it was a crossed cheque, I would have to pay it into my own banking account. The system of crossed cheques was unfamiliar to me, and I had no bank account nor any experience that would guide me in such a situation. So I was at a loss what to do. I felt it would be undignified to take the cheque back to the Economist and to admit that I was unable to cash it. However, I had an idea. I had just joined the London School of Economics and the payment for my first fee was due. At the office I simply handed over the Economist’s cheque in payment for the fee, the amount of which was somewhat less than that of the cheque.

The girl behind the counter looked at me in amazement. I gained the distinct impression that first-year students were not in the habit of paying their fees with cheques from the Economist. She took the cheque and my file, and disappeared behind a door to consult higher authority. She soon returned smiling and counted out the change that was due to me. On a later occasion when I called again to pay my fee – this time in cash – I heard her whisper to another girl clerk: ‘This is the man who paid his fee with the Economist cheque.’”

The Economist episode was only the beginning of an extraordinary career. Another one followed almost immediately. As Dominique Torre wrote in The Monetary Views of Paul Einzig, when in 1920 the Romanian Government withdrew the Austro-Hungarian Krone and the Russian Rubel still circulating in the new Romania Mare, and defined the Lei as the only legal tender, in London, the Economic Journal accepted the proposition of this 23 years old journalist from Transylvania to report the situation and analyze its consequences on the Romanian economy. Paul Einzig described the event as follows:

“Encouraged by my initial success, I grew even bolder than I was the day when I first called the Economist. I soon discovered that there was a target even more difficult to achieve than getting an article accepted by the Economist – the Economic Journal. Fellow students told me that its Editor, Mr J. M. Keynes, was regarded as the outstanding economist of the younger generation. He was a highly controversial figure and I came across his name in the Press even before I arrived in this country. I had read all about his resignation in protest against the financial provisions of the Treaty of Versailles.

The Economic Journal was obviously the leading publication of its kind. Most of its contributors were economists of international reputation. Its articles were evidently written for posterity; its pages were evidently not intended to serve as experimental ground for a student-freelance journalist’s early efforts. Nevertheless, intoxicated by my success with the Economist, I sent in an article to the Economic Journal in January 1920. It was entitled ‘The Monetary Economy of Bolshevism’.”

Fleet Street looking west, City of London, 1920s.

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Again, the result was a surprising success:

“By return mail I received a letter from Keynes, thanking me for sending the article and saying that, although he had to revise its English to a certain extent, he was glad to accept it for publication in the Economic Journal. …

I could hardly bear to wait till the next quarterly issue appeared. When it did appear in March 1920 I found my name on its cover in the distinguished company of Sir William Beveridge …, Professor Shield Nicholson, Professor Gustav Cassel, the well-known Austrian economist Karl Schlesinger, Professor Arthur Bowley, Barbara Wootton and others.”

Paul Einzig was overjoyed:

“I felt immensely honoured and proud of myself. Is it a wonder that I was inclined to lose my head and to assume that in a matter of months I had really succeeded in securing for myself an established position in British financial journalism and economic literature?”

Despite these encouraging initial successes, however, Einzig’s first years in London were full of privation. His advantage was first-hand knowledge of circumstances and regions not covered by other journalists and he wrote articles and became a regular contributor to various journals and newspapers including the Financial News with which he became permanently associated later. But when the interest of the British public in these regions waned and journals cut their expenses for free-lance writers with a worsening economic situation, his articles were more and more rejected. Temporarily, he earned a living working for a small firm with international business, where he “combined the functions of English, French and German correspondent with those of bookkeeper, filing clerk and office boy” becoming “an expert in making sample parcels”.

In 1921, he decided to go to Paris in order to study for a degree in economics at the Sorbonne and, at the same time, became the Paris correspondent of the Financial News. In 1923, he submitted his thesis on “Le Movement des Prix en France depuis 1914” and returned to London where he was offered to become Foreign Editor of the Financial News. With this appointment his “period of struggles came definitely to an end”, as he wrote.

It was the beginning of a long exciting and productive work life. Beside his countless newspaper and magazine articles and regular columns for the Financial News, the Financial Times, the Economist, the Banker and others, he continued to write for the Economic Journal and other academic reviews, met and corresponded with British economists and churned out “this unreal number” (as Dominique Torre put it) of more than fifty books (a list of which you may find at the end).

With the outbreak of the Second World War, Einzig proposed to be transferred to Westminster and became a Political Correspondent. When in 1945 the Financial News was absorbed by the Financial Times he lost the regular platform he had had for expressing his views, and in particular his ‘Lombard Street’ column which he had used to pursue his various “crusades” and campaigns to criticize London banks, the Bank of England, the Treasury and others, and largely confined his work to news stories. In 1956, he retired from the Financial Times and devoted his time to economic research and writing up to his death in 1973.

Although interested in a wide range of topics, Einzig’s main interest was the theory and practice of the foreign exchanges. Being both an academic economist and author and a columnist and writer of popular books who held pronounced views and launched fierce attacks against what he considered wrong, he was not undisputed. Some of the headlines in his autobiography may illustrate the point:

Crusade against Reparations / I Advocate Devaluations / Anti-Nazi Campaign / My Fight for the Czech Gold / My War with the Ministry of Economic Warfare / I Fight War-time Appeasement / Anderson* Tries to have Me Arrested / My Ups and Downs with Dalton* / Clash with Cripps* over Devaluation

*John Anderson, 1st Viscount Waverley, 1943 – 1945 Chancellor of the Exchequer; Edward Hugh John Neale Dalton, Baron Dalton PC, 1945 – 1947 Chancellor of the Exchequer; Sir Richard Stafford Cripps, 1947 – 1950 Chancellor of the Exchequer.

Drawing attention to his academic work, in his paper Dominique Torre focused exemplary on two different aspects, on forward exchange market imperfections and observed anomalies in the covered interest rates parity and on the properties of different monetary regimes.

Einzig lived in the ideal time to study these and related issues, which in wide parts was characterized by high economic and monetary volatility and uncertainty. For the 1920s and 1930s alone, Accominotti and Chambers distinguished three periods of monetary regimes: (1) the system of floating exchange rates from 1920 to 1927, (2) the gold standard from 1928 to 1931, and (3) the subsequent system of managed floating from 1931 to 1939. In all these years and later on, Paul Einzig was In the Centre of Things – so the title of his autobiography – and his more than fifty books and countless articles and columns offer a wealth of insights. As Dominique Torre wrote:

“From his initial comments on gold points until his books on the failure of Bretton Woods, Einzig is overall – as an academic economist but also as a columnist – a specialist of monetary regimes and exchange rate systems. This interest begins with the return of the Sterling to gold, then continues with the period of inconvertibility of the thirties. During the war, Einzig is interested in the future international monetary arrangements. While not initially satisfied with the general concept of Bretton Woods when Keynes was working on it, he finally considers this form of soft pegs as a way to avoid the interwar problems and feels disappointed with its failure in the early seventies.”

Einzig’s arguments were always more influenced by personal experience than by the scholarly debates of the time. This may explain  why, in later years, in academic circles he almost passed into oblivion. To quote Dominique Torre once again:

“The opposition of Paul Einzig to floating rates has its origins in the interwar period and in the way he interprets the collapse of the convertibility during the Great Depression. The failure of Bretton Woods and the return to free flotation motivates in 1971 a new book to Einzig, only two years before his death. The book is an attack against flexible exchange rates regimes. For many of the arguments it develops, it is an old fashioned book: it is considered by the new specialists of exchange rates and international economics as the work of a disoriented and retreated columnist, few in touch with econometric methods or mathematical modeling, and more generally with the new tendencies of macroeconomics.

Among the reviewers of the book, Gert Haller for The Journal of Money, Credit and Banking, William Poole for The Journal of Finance, Leyland Yeager for The Journal of International Economics among others make very negative appreciations of the text. The way Einzig writes is not acceptable for the mainstream macroeconomics of the seventies for two reasons. The first is explicitly formulated by the three reviewers: the author of The cases against floating exchanges mixes without clear distinction and in the same text ideological a priori positions (narrow-mind anti-communism, ultra British nationalism. . . ) and more scientific arguments, all presented in a literary form no longer in use in the best economic reviews of the early seventies. The second is more implicit: Einzig is not involved in the debates of the post-war monetary macroeconomics, does not contribute to the elaboration of the new macroeconomics and is probably remained distant from his fundamental evolutions. The assumption of the rationality of actions has progressively been adapted by the new classical school in constitution as a reference in all the theoretical construction; during this time, Einzig continues to use implicit assumptions of imperfect rationality and adaptive behaviors. In a similar way, the “competitive adjustment” of the market is generally perceived as the main stabilizing force able to restore a macroeconomic equilibrium initially perturbed exogenously. Free from any of these generally accepted options, Paul Einzig chooses to present four cases against free flotation. …”

Paul Einzig’s work must be considered in context. Dominique Torre rightly emphasized that his observations and analyses are still useful at a time when the international community is struggling to come to terms with exchange rate volatility, the excessive instability of international capital flows and the inadequacies of the euro zone monetary arrangements. Following current debates about the advantages of the gold standard, the introduction of parallel currencies and the calls for capital controls, observers must get the impression that in many respects, the wheel is reinvented. Admittedly, history does not repeat itself, but the experiences of a long life in the “centre of things” are invaluable, in particular, when they have been communicated so extensively.

With respect to the foreign exchanges, the world has not changed that much. True, with the arrival of computers and the internet trade has become faster and market access has become easier. But, more than ever, the market is dominated by a handful of big international banks. It is still by far the largest and, at the same time, least regulated financial market and, as I argued elsewhere, in contrast to a widespread belief  characterized by low transparency and efficiency. The bulk of trades is still done in traditional instruments such as spot transactions and foreign exchange swaps, just as in London in the 1920s and 1930s.

True also that the work of Paul Einzig is old-fashioned and not meeting current standards of economic research. But following recent debates on the causes and remedies of financial crises the treatment of the foreign exchange market, exchange rates and currency regimes must be considered as wholly inadequate. Developing a theory and conceiving a model requires a deeper understanding of actions and relations than the mere study of data can provide and, as Accominotti and Chambers clearly demonstrated, research may strongly benefit from including historic documents and witnesses. Not for nothing are Michael Lewis’ books getting so much attention. The pictures and ideas he and other “insiders” evoke, and the stories they tell, are influencing our thinking and increasing our comprehension of market processes. These days, there are not many books telling insider stories about the foreign exchanges. Old-fashioned or not – the work of Paul Einzig is appreciated.


Maybe this is not a complete list of Paul Einzig’s books, but the following compilation may give an impression of the productivity and range of interests and themes of this peculiar author.

International Gold Movements (1929), Macmillan
The Bank for International Settlements (1930), Macmillan
Behind the Scenes of International Finance (1931), Macmillan
The world economic crisis, 1929-1931 (1931), Macmillan
Behind the Scenes of International Finance (1931), Macmillan
International Gold Movements (1931), Macmillan
Montague Norman – A Study in Financial Statesmanship (1932), Kegan Paul, Trench, Trubner & Co., LTD
The Economic Foundations of Fascism (1933), Macmillan
The Tragedy of the Pound (1932), Kegan Paul, Trench, Trubner & Co., LTD
The Comedy of the Pound (1933), Kegan Paul, Trench, Trubner & Co., LTD
The Sterling-Dollar-Franc Tangle (1933), Kegan Paul, Trench, Trubner & Co., LTD
Germany’s Default (1934), Macmillan
France’s Crisis (1934), Macmillan
The Future of Gold (1934), Macmillan
The Economics of Rearmament (1934), Kegan Paul, Trench, Trubner & Co., LTD (reprint 2014, Routledge)
World Finance Since 1914 (1935)
Bankers, Statesmen and Economists (1935), Macmillan
Monetary Reform in Theory and Practice (1936)
The Theory of Forward Exchange (1937), Macmillan
Will Gold Depreciate? (1937), Macmillan
Bloodless Invasion : German Economic Penetration Into The Danubian States & The Balkans (1939), Duckworth
World Finance, 1938-1939 (1939), Kegan Paul, Trench, Trubner & Co., LTD
Economic Problems of The Next War (1939), Macmillan
Europe in Chains (1940), Penguin
Can We Win the Peace? (1942), Macmillan
The Japanese New Order in Asia (1943), Macmillan
Freedom from want (1944), Nicholson and Watson
Currency after the War. The British and American plans (1944), Nicholson and Watson
Inflation (1952), Chatto & Windus
How Money is Managed – The ends and means of monetary policy (1954), Penguin
The Economic Consequences of Automation (1956), Secker & Warburg
The control of the purse: Progress and decline of Parliament’s financial control (1959), Secker & Warburg
In the Centre of Things (1960), Hutchinson of London
A Dynamic Theory of Forward Exchange (1961), Macmillan
The History of Foreign Exchange (1962), Macmillan
Foreign dollar loans in Europe (1965), Macmillan
Textbook on Foreign Exchange (1966) Palgrave Macmillan
Primitive money in its ethnological,historical and economic aspects (1966), Pergamon Press
The Euro-Dollar System; Practice and Theory of International Interest Rates (1967), Macmillan
Leads and Lags (1968), Palgrave Macmillan
Foreign Exchange Crises; An Essay in Economic Pathology (1968), Macmillan
The Euro-Bond Market (1969), Macmillan
Decline and Fall? Britain’s Crisis in the Sixties (1969), MacMillan
The Case Against Floating Exchanges (1970), MacMillan
Case Against Joining the Common Market (1971), Macmillan
Parallel Money Markets: The New Markets in London v. 1 (1971), Palgrave Macmillan
Parallel Money Markets: v. 2, Overseas Markets (1972), Palgrave Macmillan
Destiny of the Dollar (1972), Macmillan
Destiny of Gold (1972), Macmillan
Textbook on Monetary Policy (1972), MacMillan

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