----------------- HES POSTING ----------------- 
Published by EH.NET (August 2002) 
 
Andrew Britton, _Monetary Regimes of the Twentieth Century_. New York: 
Cambridge University Press, 2001. xi + 244 pp. $70 (hardcover), ISBN: 
0-521-80169-9. 
 
Reviewed for EH.NET by George Macesich, Department of Economics, Florida 
State University. <[log in to unmask]> 
 
 
Myth, fact, and fancy tend to dominate monetary affairs. Some themes in the 
literature of monetary controversy may be interpreted as involving puzzles 
fundamentally vexing to the human mind, since they have provoked discussion 
over the centuries with no evident improvement in the general level of 
comprehension. Monetary problems are thus as fascinating as they are 
perplexing, combining as they do a rich mixture of technical economics, 
political repercussions, and even the psychology of symbols and beliefs. 
 
Andrew Britton in his study provides insight into monetary and political 
problems as they appear in the twentieth century. He concentrates on 
developments in the United States, Europe, and Japan from the period of the 
gold standard regime to the end-of-the-century regimes he calls 
"neo-liberal." It is a journey he describes as "to Utopia and back." In his 
view "no school of macroeconomics is right for all time; different 
theoretical models may be appropriate." Macroeconomics must be seen in its 
historical context if it is to add to our understanding of economic, and 
indeed, political processes. 
 
Britton's narrative pulls together in eight chapters various episodes in 
the twentieth century in a clear manner. It is, he writes, a book about 
history and economics. Each chapter begins with a section describing the 
behavior of the world's major economies with respect to inflation, output 
growth, unemployment, and interest rates. A second section describes the 
evolution of economic policy and specifically monetary policy for most of 
the economies under review. A third section takes under discussion 
international monetary systems. In a fourth section Britton illustrates the 
interrelationship between economic behavior and the monetary regime in 
place. 
 
This is a useful book. Monetary regimes in the world do indeed have a 
colorful history. They certainly merit serious study. These regimes have 
ranged from stone money to the current fiat monetary regimes. The better 
known are the specie (gold and/or silver) regime, under which domestic 
currency was convertible into specie, and the fiat (paper) regime. The 
specie regime, more or less, dominated until 1971. The fiat paper regime 
has come to be the world's principal regime since 1971. 
 
Other regimes included: bimetallic standard (gold and silver); unimetallic 
(gold or silver); gold exchange standard; and post-World War II Bretton 
Woods. Over the years government priorities changed from the earlier focus 
on domestic currency convertibility to that of general (macro) domestic 
economic stability. These changes were prompted by economic (and indeed 
political) problems during the interwar years particularly during the Great 
Depression of the 1930s. 
 
Although the post-World War II Bretton Woods regime with its adjustable peg 
exchange rate arrangement maintained an indirect link with gold, the 
convertibility into gold was abandoned. Henceforth, the goals would be 
internal domestic economic stability and especially "full" employment. The 
net effect was to set off the Great Inflation of the 1960s and 1970s. The 
experience promoted many monetary authorities worldwide to again emphasize 
the goal of low inflation and some sort of rules-based monetary regime. 
Indeed, by the 1990s a rules-oriented monetary regime became increasingly 
popular as a means for restoring and preserving the credibility of monetary 
authorities and central banks. 
 
What are we to make of the performance of the several monetary regimes? We 
have it from such studies as Milton Friedman and Anna J. Schwartz, _A 
Monetary History of the United States, 1867-1960_ (Princeton: Princeton 
University Press, 1963); Michael D. Bordo, "The Classical Gold Standard: 
Some Lessons for Today," _Monthly Review_, Federal Reserve Bank of St. 
Louis (May 1981); Colin D. Campbell and William Dougan editors, 
_Alternative Monetary Regimes_ Baltimore: Johns Hopkins University Press, 
1986); Gary M. Walton and Hugh Rockoff, _History of the American Economy_, 
eighth edition (Orlando: Harcourt, Brace, Jovanovich, 1998); and George 
Macesich, _Money and Monetary Regimes: Struggle for Monetary Supremacy_ 
(Westport, CT: Praeger Publishers, 2002) that real output was considerably 
less stable in both the United States and the United Kingdom during the 
interwar years than during the post-World War II years when both higher 
rates of inflation and lower variability in output and unemployment were 
registered. This demonstrates the apparent policy preference away from 
long-term price stability toward full employment and suggests the reason 
behind the strong inflationary pressures in the postwar years. It is on the 
basis of such evidence that the public recognized that a specie-like 
monetary regime no longer existed and began to arrange its affairs 
accordingly. 
 
The evidence also suggests that a fiat monetary regime based on some type 
of monetary rule, including one calling for a steady monetary growth, could 
provide the benefits of the gold standard without its costs. A prerequisite 
for success, however, is a firm commitment from the government to maintain 
a monetary rule and to incorporate long-run stability as one of its goals. 
 
In any case, the international gold regime cannot now be restored. It 
requires a return to the set of economic, political, and philosophical 
beliefs upon which that regime was based, which is unlikely. It is probably 
easier to deprive the government altogether of its monopoly over money, 
although the magnitude of such a task should not be minimized. Because the 
sensitive issue of national sovereignty is involved, as well as for other 
reasons, governments will not voluntarily abdicate their power over money 
(currency boards and similar arrangements may in fact do just that). 
 
Constraints imposed on national monetary sovereignty by the rules of the 
international gold standard regime have been eroding since the collapse of 
the international monetary system. Fumbling attempts to reimpose monetary 
constraints through international monetary reform since World War I have 
only served the cause of discretionary intervention and imposed tasks on 
the monetary system, which it has been unable to attain. 
 
Few monetary problems have ever been so ingeniously contrived to maximize 
difficulty as that of granting discretionary authority to central banks. 
Such authority, when granted central banks over domestic monetary policies 
-- undertaken for various and often illusive goals -- constitutes a 
formidable reinforcement of nationalism in the economic sphere and creates 
an important source of instability. At the same time, the discretionary 
authority serves the central bank well whose preference function may indeed 
differ significantly from that of the general public. Central banks are an 
economic arm of the political interventionist position, while admirably 
serving their own bureaucratic goals and interests. 
 
Central banks are subject to potential pressures, and their typical 
response, in the absence of explicit constraints, is to manipulate money 
and monetary policy as a matter of bureaucratic survival. They are, after 
all, creatures of the national state. Little wonder that the Federal 
Reserve System stubbornly refuses to disclose the criteria it uses to 
decide when to pump more money into the economy to drive (nominal) interest 
rates down or when to draw money out of the economy to drive (nominal) 
rates up. It is this lack of clarity that is an important criticism of the 
Federal Reserve. 
 
One suspects (and Andrew Britton observes) that the Federal Reserve System, 
along with many other central bank staffs and some economists, do not use 
growth in the money supply in monetary policy deliberations. They appear to 
prefer to rely on the Phillips Curve and/or atheoretical relations. What 
evidence we do have suggests that minimizing the role of money and its 
growth is ill-advised indeed. 
 
In fact, such evidence underscores that there is a positive and close 
relation between the price levels and money relative to real income. This 
relation holds for long as well as short periods of time for many countries 
(see Milton Friedman, _Money Mischief: Episodes in Monetary History_, New 
York: Harcourt Brace Jovanovich, 1992). The average rise in this 
relationship during the early 1990s appears to be transitory and not at all 
unusual when viewed in a larger context. Indeed, the argument advanced by 
some economists that there is no information in monetary aggregates is 
simply incorrect. This is in marked contrast to the conclusion drawn by 
Milton Friedman "that substantial changes in prices or nominal revenue are 
almost always the result of changes in the nominal supply of money, rarely 
the result of changes in demand for money" (_Money Mischief_, p. 46). 
 
Friedman also observes that a change in the "monetary regime can set the 
world sailing on unchartered monetary seas . . . without any agreed on and 
trustworthy map to the future course of the monetary voyage" (_Money 
Mischief_, p. 142). That in fact is now the problem. The world since the 
1970s is on an irredeemable fiat monetary regime unprecedented in history. 
We are sailing into turbulent seas without reliable charts or an anchor to 
the general level of prices that earlier monetary regimes provided. Andrew 
Britton, to his credit, does point out some of the rocks and shoals. 
Certainly, I recommend the book to those who prefer reading economics 
without the usual ballast. 
 
 
George Macesich is the author of several books, including _Political 
Economy of Money: Emerging Fiat Monetary Regime_ (Praeger, 1999); _Issues 
in Money and Banking_ (Praeger, 2000) and _Money and Monetary Regimes: 
Struggle for Monetary Supremacy_ (Praeger, 2002). 
 
Copyright (c) 2002 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: 513-529-2850; Fax: 513-529-3308). 
Published by EH.Net (August 2002). All EH.Net reviews are archived at 
http://www.eh.net/BookReview  
 
 
------------ FOOTER TO HES POSTING ------------ 
For information, send the message "info HES" to [log in to unmask]