Lucid, accessible, and provocative, and now thoroughly updated to cover recent events that have shaken the global economy, Globalizing Capital is an indispensable account of the past years of international monetary and financial history—from the classical gold standard to today's post—Bretton Woods "nonsystem. Concise and nontechnical, and with a proven appeal to general readers, students, and specialists alike, Globalizing Capital is a must-read for anyone who wants to understand where the international economy has been—and where it may be going. Project MUSE promotes the creation and dissemination of essential humanities and social science resources through collaboration with libraries, publishers, and scholars worldwide. Forged from a partnership between a university press and a library, Project MUSE is a trusted part of the academic and scholarly community it serves. Built on the Johns Hopkins University Campus.
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Eichengreen notes the association of exchange-rate behavior in each monetary regime with contemporaneous developments in world capital markets. Features of the gold standard era were the high level of international capital mobility and the freedom from controls of international financial transactions.
The introduction of capital controls and a drastic decline in capital flows after marked the interwar period. The Bretton Woods era began with officially sanctioned capital controls. When the era ended, the controls had been eroded by the emergence of liquid international financial markets. Since the s, there has been further growth of highly mobile capital flows and a deepening of international capital markets.
Eichengreen rejects the proposition that the demise of the pegged-exchange-rate Bretton Woods system and the subsequent shift to fluctuating exchange rates are wholly attributable to the resurgence of capital mobility.
Fixed exchange rates and unfettered capital mobility, after all, characterized the gold-standard regime. Authorities therefore could face down a challenge from the masses, when defense of the convertibility of domestic currencies into the weight of gold specified by the fixed exchange rate required raising interest rates and contracting economic activity. Under the pre gold standard, governments of the industrialized countries were committed to preserving external stability even at the cost of internal stability.
Since World War I, however, universal suffrage and the rise of a politically robust labor movement have constrained the ability of government authorities to elevate external over internal stability. The imposition of controls on capital mobility afforded them some leeway to pursue internal objectives without sacrificing the external objective.
Unimpeded inflows of capital can lead to inflation and outflows to recession. Capital controls freed the authorities from these unwanted consequences, but because controls are never watertight, and eventually became unenforceable, they were no answer to the weakened commitment in modern societies to pegged exchange rates. His is a political economy view, but I believe the argument also holds true on economic grounds.
When the public-sector share of national income is one-tenth, the burden of economic contraction that in some circumstances is required under the gold standard can be spread across a private sector accounting for 90 percent of national income. Other themes of the work are less compelling. Throughout, Eichengreen stresses the crucial role of international cooperation in preserving monetary regimes. Similar comments in the book are that if other countries during the interwar period had supported the exchange rate of the nation in distress, economic conditions would not have deteriorated so badly p.
Declaiming the benign consequences of international cooperation is sentimentality. Nations have interests. Eichengreen recognizes that at the domestic level, no policy consensus may exist. How much more so, it follows, will lack of consensus exist at the international level.
A monetary regime that requires international cooperation for it to be viable will not survive. The design of a regime must ensure that economic relations among nations promote their self-interests. Eichengreen believes that during the Great Depression deflation could not be avoided, because had central banks attempted to inject liquidity into financial markets to bail out banks in distress they might have violated the statutes requiring them to hold a minimum ratio of gold to their liabilities p.
This view finds no support in the case of the Federal Reserve system. Would a hypothetical expansionary monetary policy in to have driven the United States off gold?
The answer is no, according to the historical record. Even after these gold losses, however, the gold-reserve ratio against Federal Reserve notes and deposits was still at least 50 percent above the legally required minimum.
In addition, by the spring of foreign claims against U. Just as gold losses in to did not force the United States to devalue, had they occurred in to in response to a hypothetical monetary expansion, they also would not have done so. In August , at the start of the Great Depression, the U. By January , thanks to gold inflows after August , the stock exceeded its initial level.
Thereafter, demand for gold coin and certificates soared, reflecting domestic fear of devaluation and speculative purchases of sterling, as the incoming Roosevelt administration raised doubts about its commitment to the existing gold parity. Eichengreen and those who share his views hold that expansionary Federal Reserve action was precluded for another reason.
Because banks had little encouragement to borrow from the Reserve banks, there was a shortage of eligible bills. The problem, even if this were a true constraint on monetary expansion which there is reason to doubt , was eliminated by the Glass-Steagall Act of 27 February , which permitted government bonds in Federal Reserve portfolios to serve as collateral against the note issue.
In any event, if the condition existed, it did so only during the five months from October through February Not only the U. Despite my reservations about some of the positions Eichengreen takes on historical and current monetary regimes, he has performed a useful service by providing a succinct characterization of the varieties of international monetary regimes that countries have adopted in recent decades in response to the rise of capital mobility.
Forces undermining capital controls overwhelmed efforts of governments to manage their currencies. The book traces the evolution of preferences for different kinds of exchange-rate arrangements by countries against the background of swings in the behavior of their exchange rates.
For the United States and Japan the shift toward flexible exchange rates since appears sustainable, and it will likely lead smaller countries in the Western Hemisphere and Asia to tie their currencies to that of their larger neighbor.
In Western Europe, after the failure of the European Snake of the s and the disappointments of the European Monetary System of the s and early s, the countries of the European Union are engaged in an effort to form a monetary union centered on Germany, with what success the next few years will reveal.
LDCs have tried to reduce high inflation rates by unilaterally pegging the nominal exchange rate as a nominal anchor in a stabilization program.
Some small open economies have tried a currency-board arrangement as an alternative. As Eichengreen concludes, to understand the present diversified international monetary system, one needs to appreciate its history. Hardcover Paperback. Anna J. Schwartz , National Bureau of Economic Research.
Globalizing Capital: A History of the International Monetary System
Barry J. Princeton: Princeton University Press, A generation later, the gold standard was not only tampered with, but largely dismantled. 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. Elaborating a thesis put forth by Karl Polanyi in , 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. Monetary union was the quid pro quo. In some loose sense, of course, democratic pressures fueled the abandonment of the international gold standard and of later schemes for pegging exchange rates.
Eichengreen notes the association of exchange-rate behavior in each monetary regime with contemporaneous developments in world capital markets. Features of the gold standard era were the high level of international capital mobility and the freedom from controls of international financial transactions. The introduction of capital controls and a drastic decline in capital flows after marked the interwar period. The Bretton Woods era began with officially sanctioned capital controls. When the era ended, the controls had been eroded by the emergence of liquid international financial markets.
Barry Eichengreen. First published more than a decade ago, Globalizing Capital remains an indispensable part of the economic literature today. Written by renowned economist Barry Eichengreen, this classic book emphasizes the importance of the international monetary system for understanding the international economy. Brief and lucid, Globalizing Capital is intended not only for economists, but also a general audience of historians, political scientists, professionals in government and business, and anyone with a broad interest in international relations. This updated edition continues to document the effect of floating exchange rates and contains a new chapter on the Asian financial crisis, the advent of the euro, the future of the dollar, and related topics.