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Published by EH.NET (May 2002) 
 
Heinz-Peter Spahn, _From Gold to Euro: On Monetary Theory and the History of Currency
Systems_. Berlin and Heidelberg: Springer-Verlag, 2001. ix + 220 pp. $59.95 (cloth), ISBN:
3-540-41605-6.
 
Reviewed for EH.NET by Catherine R. Schenk, Department of Economic and Social History,
University of Glasgow. <[log in to unmask]>
 
 
Peter Spahn, Professor at Hohenheim University, Stuttgart, has produced a succinct, indeed
sometimes breathless, overview both of the evolution of monetary theory and the experience
of fixed or stable exchange rate systems from the Gold Standard to the Euro. The pace is
rapid. The theoretical chapters set up the role of money in the economy in seventy tightly
argued pages. The empirical review of the gold standard, the Bretton Woods system, the
European Monetary System and the European Monetary Union, each of which has generated many
books on their own, altogether take only ninety pages. Its very brevity, however, is
perhaps the book's strength since it provides the reader with a broad conceptual framework
within which to assess the strengths and weaknesses of stable exchange rate regimes. The
general argument of the book is that exchange rate regimes since 1870 can be seen as part
of a process culminating in the single currency EMU in a bipolar Euro-dollar world. The
lesson of history is that fixed exchange rate regimes fail because of the ultimate primacy
of internal over external stability. When these two policy goals diverge, the foreign
exchange rate is abandoned and the system collapses. Only by eliminating exchange rates as
policy targets (through currency union or floating rates) can this dichotomy be resolved.
 
There is some effort to make up for conceptual shortcuts by providing 'Boxes' focused on
key definitions and theories, which may help the usefulness and accessibility of the book
for advanced undergraduates and postgraduates. There are also helpful summaries of each
section of the book, although no concluding chapter to pull the ideas finally together.
Readers should also be warned that they will find almost no discussion of the experience
of floating exchange rates.
 
Part I of the book provides a critique of both neo-classical and Keynesian theories of
money, and emphasizes the social and political role of money in low-trust societies such
as Europe. Part II introduces the development of monetary policy through the establishment
of the Bank of England and surveys the Currency and Banking School controversy. Spahn here
introduces the importance of reputation and credible redemption that will be major themes
of his analysis of exchange rate standards. Spahn views the return to gold convertibility
in 1821 as an unnecessary and serious mistake that destabilized the English monetary
system. Likewise, he argues later that the continued use of gold as an anchor in the gold
standard and the Bretton Woods system contributed to their weakness.
 
Having established the evolution of the money in England, the book turns a sharp corner,
and the second half is devoted to analyzing exchange rate standards. The link between the
first and second halves of the book might have benefited from being more explicit to
provide a more cohesive argument. Part III is the most innovative and detailed section.
Spahn applies game theory to provide a stylized view of the operation of the pre-war Gold
Standard. He departs from Eichengreen by using a model in which the actors have different
policy priorities with respect to internal versus external equilibrium. In this case
England, as the key currency country where maintaining internal equilibrium was less
important than in other countries, emerges as a Stackelberg follower rather than the
leader.
 
By the end of the nineteenth century, these policy preferences were changing and the
twentieth century witnessed the increased importance of internal stability, especially
price stability and employment as primary targets -- what Spahn terms the move from the
Gold Standard to the Wage Standard. For him, it is this new balance of priorities that
undermines the credibility and therefore the stability of future efforts to sustain stable
exchange rate regimes. The familiar tale of the failed structure of the Bretton Woods
system is detailed in Chapter 6. For Spahn a major error was the continued use of gold in
the US dollar exchange system that fatally undermined it. Spahn notes that during the
Bretton Woods era "political considerations began more and more to dominate attitudes
towards currency matters" (p. 143). There is, however, very little account of the
practical politics of the 1940s and 1960s that prevented a pragmatic solution to the role
of gold in these decades. The drawn out and acrimonious discussions aimed at identifying
and resolving the flaws in the
system hardly get a mention beyond reference to France's disruptive accumulation of gold
in the 1960s. The Bretton Woods era was a highly complex period of international
negotiation and conflict on a variety of strategic, political, economic and monetary
fronts that complicated the process of managing the global exchange rate regime. As Spahn
hints, this was a 'golden age' in terms of the impressive growth experience of many
countries, in spite of rather than because of the operation of the international monetary
system.
 
The important role of politics is again stressed in the following chapter on the reasons
behind the development of the European Monetary System. In terms of the economic evolution
of the system, Spahn models the way that the Deutsche Mark became the key currency of the
EMS because Germany was the most stability-oriented country. He is then critical of the
anti-inflationary policy pursued by the Bundesbank that eventually drove the system apart,
again because of the ultimate supremacy of national over international policy goals. These
conclusions are not very original, but they are expressed using more formal modeling and
game theory than in usual narrative accounts.
 
The final chapter deals with the European attempt to eliminate the flaws of a key currency
system that plagued the gold standard, Bretton Woods and the EMS. Like the EMS, European
Monetary Union was prompted mainly for political rather than economic purposes.
Economically, Spahn predicts that the adoption of price stability as the primary goal of
the European Central Bank may deliver poor prospects for growth and employment, especially
for particular regions. The benefits of currency union in terms of the 'de-politicization'
of monetary policy and the efficiency gained by no longer targeting exchange rates may be
undone by the transfers necessary to soften the impact on regional 'losers.' His final
lesson of the experience of exchange rate standards is that they cannot provide a shortcut
to internal equilibrium by forcing countries to converge with sounder economies. In his
words, "monetary stability has to be built at home," it cannot be achieved through
exchange rate targets (p. 189). 'Home' has just become a much bigger space for Europeans.
It remains to be seen whether it is too big and the rooms too distinct to allow the
European Central Bank to 'build' stability.
 
 
Dr. Catherine R. Schenk is Senior Lecturer in Economic History at the University of
Glasgow. Her most recent book is _Hong Kong as an International Financial Centre_
(Routledge, 2001). She is currently working on the reform of the international monetary
system in the 1960s and on British management of the decline of sterling in that decade.
 
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