Barry J. Eichengreen. Globalizing Capital: A History of the International Monetary System. Princeton: Princeton University Press, 1996. viii + 223 pp. $24.95, cloth, ISBN 978-0-691-02880-4.

Reviewed by George Selgin

Published on EH.Net (October, 1997)

In 1892 the English economist Robert Gif‐ gold standard itself, has led Berkeley economist en[1] published an article entitled "Fancy Mone‐ Barry Eichengreen to wonder whether any system tary Standards." Objecting to a recent proposal for of fxed, or at least relatively stable, exchange a new monetary standard aimed at stabilizing the rates can survive in a world of democratic gov‐ purchasing power of money, Gifen observed that ernments. His book, Globalizing Capital: A Histo‐ "Governments, when they meddle with money, ry of the International Monetary System, supplies are so apt to make blunders ... that a nation which a negative answer. Elaborating a thesis put forth has a good money should beware of its being tam‐ by Karl Polanyi in 1944, Eichengreen argues that pered with." If we mess with the gold standard, in modern democratic governments are bound to other words, "we can never tell ... what confusion yield to pressures to pursue goals, such as the and mischief we may be introducing" (p. 1). avoidance of cyclical unemployment, that confict A generation later, the gold standard was not with the maintenance of fxed or pegged ex‐ only tampered with, but largely dismantled. The change rates. The history of the international international monetary system has been witness monetary system, according to Eichengreen, is to a great deal of "confusion and mischief" ever largely a history of major governments' gradual, since, including such "fancy" payments arrange‐ grudging acknowledgment of a confict between ments as the IMF, the EPU, the BIS and the EMS, internal and external monetary stability, and elaborate multinational structures designed by in‐ their generally unsuccessful eforts to overcome ternational committees, and regularly shorn-up the confict by means of international coopera‐ by exchange controls, stand-by arrangements, tion. Eichengreen's book tells the story in four SDR's, gold-pools, and other ad-hoc devices aimed meaty but easily digested chapters (plus an intro‐ at forestalling major devaluations. duction and conclusion, both very brief), covering the gold standard, the inter-war period, the Bret‐ The ultimate failure of all such arrangements, as well as the abandonment of the international H-Net Reviews ton Woods System, and post-Bretton Woods devel‐ Twentieth-century voters might never have devel‐ opments. oped a taste for accommodative monetary policies Eichengreen's general thesis ofers a useful had non-democratic governments of previous starting point for understanding the often Byzan‐ centuries not set a precedent for such policies by tine political economy of international monetary reshaping monetary arrangements to serve their relations, and he is at his best when ofering pithy own fscal ends. After all, the survival of the pre‐ public-choice explanations for major internation‐ war regime was not so much a refection of gov‐ al monetary developments. For example, Eichen‐ ernments' "single minded pursuit of exchange green accounts for Germany's seemingly self-de‐ rate stability" (as Eichengreen claims) as it was a structive support for monetary union by noting largely unintentional byproduct of private fnan‐ that "Germany desired not just an integrated Eu‐ cial frms' contractual obligations to their cus‐ ropean market, but also deeper political integra‐ tomers. tion in the context of which [it] might gain a for‐ Eichengreen also tends, in my view, to over‐ eign policy role. Monetary union was the quid pro state the extent to which democratic nations must quo." Not the last word, perhaps, but as good and rely upon accommodative policies, succinct an explanation as I've read so far. unhindered by fxed exchange rates, to avoid f‐ Some of Eichengreen's explanations are per‐ nancial and macro-economic turmoil. For exam‐ haps a little too simple, as when he attributes the ple, in discussing the success of recent dollar's decline after the mid-1980s to the fact that board-like arrangements, he argues that they an over-valued currency "imposes high costs on have worked best where banking systems have concentrated interests," whereas an undervalued been heavily internationalized, treating the open‐ currency "imposes only modest costs on difuse ness of a nation's banking system as a given. But interests." (Just how does America's involvement that openness is itself to some extent at least a in the Louvre Accord of 1987--a failed attempt to matter of policy. The voters may well favor de‐ restrain the fall of the dollar--square with this mand-management approaches to structural al‐ public-choice insight? Could it be that the dollar's ternatives for avoiding fnancial instability; but decline was simply unavoidable?) this preference has more to do with special-inter‐ est politics standing in the way of desirable struc‐ I also wonder whether Eichengreen's main tural reforms than with sound economic theory. point concerning the incompatibility of democra‐ cy with stable exchange rates really gets to the Nor is it altogether obvious that the interna‐ root cause of the move to foating exchange rates. tional gold standard promoted internal macro- In some loose sense, of course, democratic pres‐ economic instability. Although the standard sures fueled the abandonment of the internation‐ proved defationary until the mid-1890s, this de‐ al gold standard and of later schemes for pegging fation does not seem to have stifed economic exchange rates. But we should not forget the con‐ growth. (Even Marshall, whom Eichengreen cites text: previous changes in domestic monetary ar‐ as a critic of gold, suggested that the defation rangements that subjected money to government might actually have been benefcial.) This isn't to control. Of particular importance was the estab‐ deny that the nineteenth century was marked by lishment of central banks, which removed the en‐ numerous fnancial crises in some countries; but forcement of the gold-standard mechanism from those crises and later ones as well had more to do the hands of private, competing bankers, increas‐ with faulty fnancial legislation than with any ing the risk of both a suspension of payments and shortage of gold. Thus Scotland, with its relatively subsequent yielding to infationary pressures. system, was largely untouched by

2 H-Net Reviews the banking crises that forced English banks to [1]. Robert Gifen, "Fancy Monetary Stan‐ seek last-resort aid while also forcing the Bank of dards," in Economic Inquiries and Studies (Lon‐ England to increase its fduciary issue; and during don: George Bell and Sons, 1904), pp. 168-9. the 1907 "credit squeeze" in the , pri‐ Copyright (c) 1997 by EH.Net and H-Net, all vate Canadian banks helped make up for a short‐ rights reserved. This work may be copied for non- age of U.S. currency due in large part to legal re‐ proft educational use if proper credit is given to strictions on U.S. banks. (The Canadian banks ran the author and the list. For other permission, into legal limits themselves, which were then please contact [email protected]. (Robert loosened.) Whaples, Book Review Editor, EH.Net. Telephone: The restored gold standard of the 20s and 30s 910-758-4916. Fax: 910-758-6028.) was another matter entirely. Here central banks played an active role, mainly by trying to run the gold standard on the cheap, supplementing gold reserves with holdings of foreign exchange (in‐ stead of further devaluing their or en‐ during more defation so as to achieve a higher, sustainable relative price of gold). This cartel-like arrangement could only work so long as creditor central banks resisted the temptation to cash in their foreign exchange holdings. It was, conse‐ quently, far more vulnerable to speculative col‐ lapse than its prewar counterpart. In short, while Eichengreen credits "collabo‐ ration among central banks and governments" with the maintenance of the gold standard, I am inclined to think that government and central bank involvement tended to undermine the gold standard's success. The Canadian case is again rel‐ evant here, for Canada had little difculty main‐ taining its gold standard until 1914 while avoiding fnancial crises without the help of a central bank, even while experiencing massive capital infows. The point is of fundamental importance, because it suggests that, notwithstanding what Keynes ar‐ gued in 1941, a stable exchange rate regime might be just as "automatic" and unreliant upon the chimera of "international cooperation" as one based upon free-foating rates. On the whole, though, I highly recommend Eichengreen's book. It is largely compelling, thought-provoking, highly informative, and a pleasure to read. Notes:

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Citation: George Selgin. Review of Eichengreen, Barry J. Globalizing Capital: A History of the International Monetary System. EH.Net, H-Net Reviews. October, 1997.

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