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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).
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