Handbook of Exchange Rates

6.3 Historical Application of PPP: Premodern Periods

The “premodern” period denotes human history before the eighteenth century. For the premodern period, the only use of PPP is to assess the extent of the integration of the domestic economy with foreign economies. The closer PPP is to fulfillment, the greater the integration. The best way of using PPP to determine the amount of integration of economies is to test PPP theory statistically; but this method is not possible for premodern economies, because of the lack of data. Alternatively, one could observe either individual-commodity price differences, in domestic currency, at home and abroad, or exchange rates and domestic prices. This technique is usable, even in the absence of recorded price series; for (i) contemporary authors may have written of the price differences or (ii) inferences on price differences may be made by modern scholars on the basis of other information.

Premodern economies are characterized by monetary systems in the realm of a coin standard. Except in China, paper standards were unknown until the eighteenth century. In fact, again except in China, paper money did not even exist until toward the end of the premodern period. Exchange rates were “fixed” at mint parities. According to Einzig (1963, p. 71), foreign-exchange transactions were almost entirely coin-for-coin until the thirteenth century, when bills of exchange became dominant. The “fixity” of exchange rates was not absolute, in two respects. First, ...