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EH.NET BOOK REVIEW 
 
Published by EH.NET  (October 1997) 
 
Barry J. Eichengreen, _Globalizing Capital: A History of the International 
Monetary System_. Princeton: Princeton University Press, 1996.  viii + 223 
pp.  $24.95 (cloth), ISBN: 0-691-02880-X. 
 
Reviewed for EH.NET by George Selgin, Department of Economics, University 
of Georgia.  <[log in to unmask]> 
 
In 1892 the English economist Robert Giffen published an article entitled 
"Fancy Monetary Standards."  Objecting to a recent proposal for a new 
monetary standard aimed at stabilizing the purchasing power of money, 
Giffen observed that "Governments, when they meddle with money, are so apt 
to make blunders...that a nation which has a good money should beware of 
its being tampered with."  If we mess with the gold standard, in other 
words, "we can never tell...what confusion and mischief we may be 
introducing." (1) 
 
A generation later, the gold standard was not only tampered with, but 
largely dismantled.  The international monetary system has been witness to 
a great deal of "confusion and mischief" ever since, including such "fancy" 
payments arrangements as the IMF, the EPU, the BIS and the EMS, elaborate 
multinational structures designed by international committees, and 
regularly shorn-up by exchange controls, stand-by arrangements, SDR's, 
gold-pools, and other ad-hoc devices aimed at forestalling major 
devaluations. 
 
The ultimate failure of all such arrangements, as well as the abandonment 
of the international gold standard itself, has led Berkeley economist Barry 
Eichengreen to wonder whether any system of fixed, or at least relatively 
stable, exchange rates can survive in a world of democratic governments. 
His book, _Globalizing Capital: A History of the International Monetary 
System_, supplies a negative answer.  Elaborating a thesis put forth by 
Karl Polanyi in 1944, Eichengreen argues that modern democratic governments 
are bound to yield to pressures to pursue goals, such as the avoidance of 
cyclical unemployment, that conflict with the maintenance of fixed or 
pegged exchange rates.  The history of the international monetary system, 
according to Eichengreen, is largely a history of major governments' 
gradual, grudging acknowledgment of a conflict between internal and 
external monetary stability, and their generally unsuccessful efforts to 
overcome the conflict by means of international cooperation. Eichengreen's 
book tells the story in four meaty but easily digested chapters (plus an 
introduction and conclusion, both very brief), covering the gold standard, 
the interwar period, the Bretton Woods System, and post-Bretton Woods 
developments. 
 
Eichengreen's general thesis offers a useful starting point for 
understanding the often Byzantine political economy of international 
monetary relations, and he is at his best when offering pithy public-choice 
explanations for major international monetary developments. For example, 
Eichengreen accounts for Germany's seemingly self-destructive support for 
monetary union by noting that "Germany desired not just an integrated 
European market, but also deeper political integration in the context of 
which [it] might gain a foreign policy role.  Monetary union was the quid 
pro quo."  Not the last word, perhaps, but as good and succinct an 
explanation as I've read so far. 
 
Some of Eichengreen's explanations are perhaps a little too simple, as when 
he attributes the dollar's decline after the mid-1980s to the fact that an 
overvalued currency "imposes high costs on concentrated interests," whereas 
an undervalued currency "imposes only modest costs on diffuse interests." 
(Just how does America's involvement in the Louvre Accord of 1987--a failed 
attempt to restrain the fall of the dollar--square with this public-choice 
insight?  Could it be that the dollar's decline was simply unavoidable?) 
 
I also wonder whether Eichengreen's main point concerning the 
incompatibility of democracy with stable exchange rates really gets to the 
root cause of the move to floating exchange rates.  In some loose sense, of 
course, democratic pressures fueled the abandonment of the international 
gold standard and of later schemes for pegging exchange rates.  But we 
should not forget the context: previous changes in domestic monetary 
arrangements that subjected money to government control.  Of particular 
importance was the establishment of central banks, which removed the 
enforcement of the gold- standard mechanism from the hands of private, 
competing bankers, increasing the risk of both a suspension of payments and 
subsequent yielding to inflationary pressures. Twentieth-century voters 
might never have developed a taste for accommodative monetary policies had 
non-democratic governments of previous centuries not set a precedent for 
such policies by reshaping monetary arrangements to serve their own fiscal 
ends.  After all, the survival of the prewar regime was not so much a 
reflection of governments' "single minded pursuit of exchange rate 
stability" (as Eichengreen claims) as it was a largely unintentional 
byproduct of private financial firms' contractual obligations to their 
customers. 
 
Eichengreen also tends, in my view, to overstate the extent to which 
democratic nations must rely upon accommodative central bank policies, 
unhindered by fixed exchange rates, to avoid financial and macroeconomic 
turmoil.  For example, in discussing the success of recent currency 
board-like arrangements, he argues that they have worked best where 
banking systems have been heavily internationalized, treating the openness 
of a nation's banking system as a given.  But that openness is itself to 
some extent at least a matter of policy.  The voters may well favor 
demand-management approaches to structural alternatives for avoiding 
financial instability; but this preference has more to do with 
special-interest politics standing in the way of desirable structural 
reforms than with sound economic theory. 
 
Nor is it altogether obvious that the international gold standard promoted 
internal macroeconomic instability.  Although the standard proved 
deflationary until the mid-1890s, this deflation does not seem to have 
stifled economic growth.  (Even Marshall, whom Eichengreen cites as a 
critic of gold, suggested that the deflation might actually have been 
beneficial.) This isn't to deny that the nineteenth century was marked by 
numerous financial crises in some countries; but those crises and later 
ones as well had more to do with faulty financial legislation than with any 
shortage of gold.  Thus Scotland, with its relatively free banking system, 
was largely untouched by the banking crises that forced English banks to 
seek last-resort aid while also forcing the Bank of England to increase its 
fiduciary issue; and during the 1907 "credit squeeze" in the 
United States, private Canadian banks helped make up for a shortage of U.S. 
currency due in large part to legal restrictions on U.S. banks. (The 
Canadian banks ran into legal limits themselves, which were then loosened.) 
 
The restored gold standard of the 20s and 30s 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 (instead of further devaluing their currencies or enduring more 
deflation 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, consequently, far more vulnerable to speculative collapse than its 
prewar counterpart. 
 
In short, while Eichengreen credits "collaboration 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 relevant here, for 
Canada had little difficulty maintaining its gold standard until 1914 
while avoiding financial crises without the help of a central bank, even 
while experiencing massive capital inflows.  The point is of fundamental 
importance, because it suggests that, notwithstanding what Keynes argued 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-floating rates. 
 
On the whole, though, I highly recommend Eichengreen's book.  It is largely 
compelling, thought-provoking, highlyinformative, and a pleasure to read. 
 
1. Robert Giffen, "Fancy Monetary Standards," in _Economic Inquiries and 
Studies_ (London: George Bell and Sons, 1904), 
pp. 168-9. 
 
George Selgin 
Department of Economics 
University of Georgia 
 
George Selgin is an Associate Professor of Economics at the University of 
Georgia.  His recent publications include _Less Than Zero: The Case for a 
Falling Price Level in a Growing Economy_ (London: Institute of Economic 
Affairs, 1997) and _Bank Deregulation and Monetary Order_ (London: 
Routledge, 1996). 
 
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author and the list. For other permission, please contact 
[log in to unmask] (Robert Whaples, Book Review Editor, EH.Net. 
Telephone: 910-758-4916. Fax: 910-758-6028.) 
 
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