by Barry Eichengreen
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Product Description
The importance of the international monetary system is clearly evident in daily news stories about fluctuating currencies and in dramatic events such as the recent reversals in the Mexican economy. It has become increasingly apparent that one cannot understand the international economy without knowing how its monetary system operates. Now Barry Eichengreen presents a brief, lucid book that tells the story of the international financial system over the past 150 years. Globalizing Capital is intended not only for economists but also for a general audience of historians, political scientists, professionals in government and business, and anyone with a broad interest in international economic and political relations. Eichengreen's work demonstrates that insights into the international monetary system and effective principles for governing it can result only if it is seen a historical phenomenon extending from the gold standard period to interwar instability, then to Bretton Woods, and finally to the post-1973 period of fluctuating currencies. Eichengreen analyzes the shift from pegged to floating exchange rates in the 1970s and ascribes that change to the growing capital mobility that has made pegged rates difficult to maintain. However, he shows that capital mobility was also high prior to World War I, yet this did not prevent the maintenance of fixed exchange rates. What was critical for the successful maintenance of fixed exchange rates during that period was the fact that governments were relatively insulated from democratic politics and thus from pressure to trade off exchange rate stability for other goals, such as the reduction of unemployment. Today pegging exchange rates would require very radical reforms of a sort that governments are understandably reluctant to embrace. The implication seems undeniable: floating rates are here to stay.
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Average Customer Review:
0 of 0 people found the following review helpful:
 Dense but highly readable account of global financial coordination and its failures, 2008-07-08
This book has two central premises:
1. It's easier for national governments to keep their currency's exchange rate in check when they don't have to worry about voters.
2. International monetary arrangements have a way of coming unraveled if any of the parties has an incentive to back out of the arrangement; this is an instance of what's called a "coordination problem" (the prisoner's dilemma is the classical coordination problem). Consequently, the only way to keep such arrangements working is to tie nations together, in such a way that any nation's backing out of the arrangement would harm it.
The first point gets us from the start of the gold standard until its end in the early part of the 20th century. (Depending upon how it's phrased, it seems like you could make a case that the gold standard ended in the 30's when Britain left it, or in the 70's when Nixon let the U.S. dollar float. I don't follow the details well enough to explain why you'd pick the one date over the other. More on this ignorance below.) And actually, the start of the gold standard in Britain was a pure historical accident, which takes up one of the more interesting paragraphs I've ever read.
It's an application of Gresham's Law, and involves Sir Isaac Newton. Newton was the warden of the Royal Mint when Britain was on a bimetallic standard; it was using both silver and gold for its currency. A bimetallic standard is tricky to manage, because you have to set the relative price of the coins properly. For instance, suppose that on the open market, an ounce of gold is worth as much as 16 ounces of silver; gold and silver coins should then stand in approximately the same ratio. Suppose that the market price of silver then rises to 1/10th the price of gold. If the currency still stands at the old 16-to-1 ratio, then silver coins are worth more melted down into bars and traded for gold than they are as coins. Silver coins will systematically disappear and be melted down. If this ill-chosen exchange rate persists for too long, silver coins will disappear altogether from the market.
I should note something up front here: I need to think more about the economic details of this argument. Why, for instance, wouldn't the melting-down of silver coins eventually self-correct? By melting down coins and taking them out of circulation, we reduce the supply of currency, so the value of each coin goes up; likewise, the rising supply of silver bars makes the value of each bar go down. Eventually, wouldn't the two balance out again?
The answer is probably that it depends. If the difference between the commodity value and the coin value of silver is too large, all the coins could well disappear before the market has had time to equalize. One might then ask why the British government didn't continue producing more coins until the market worked it out -- or quickly realize their error and return to more sensible relative prices for gold and silver. As it happens, in any case, they didn't: they ended up accidentally with a monometallic standard. And that's how we got the gold standard: the lucky (?) confluence of a Newtonian mistake and British dominance in the 18th century.
Another historical accident kept the gold standard working for a while: most people didn't have the right to vote, and those who did were wealthier than those who didn't. In a world run by (to modern eyes) undemocratic governments, it's easy to defend your currency's gold value: if an ounce of gold buys you $35, say, and the currency devalues so that it now buys you $40, the U.S. government can just spend as many dollars as necessary to bring the currency back into line. In a more democratic world, you need to use those dollars to support your people. In a less-democratic world, the dollars can all go toward gold.
There's an important supporting fact about 19th-century less-democratic governments that makes this all work out: currency traders know exactly how the government is going to behave. Hence they have every reason to believe that the American government will keep the dollar right where it's always been. If the currency drops from $35/oz. to $40/oz., traders know that the government will make every effort to bring it back to the old level. They have no reason to bet on future currency drops; the only rational bet they could make is that the dollar would return to its old value. Consequently, the dollar *does* return to its old value.
What if, instead, traders know that the government has other obligations toward its people? If it would cost a prohibitive amount to defend the gold standard, traders rationally believe that the government will let the depreciation stand, and they will bid the value of the currency down. Now there's an even *wider* gap for the government to make up, so traders know it's even *less* likely that the government will fix it. And so on down the drain. This is a "speculative attack." In fact Eichengreen gives an example of a *self-fulfilling* speculative attack, where countries with a perfectly healthy economy (low inflation, healthy balance sheet, etc.) nonetheless find themselves with a quickly depreciating currency.
Governments can try other options to keep their currency under control. They can limit the flow of money: charge a hefty fee for every large bundle of dollars or gold that leaves the country, for instance. Other countries have to get involved to make this work: as capital gets more mobile, any country that locked down currency transfers would find itself with a massively depreciating currency as investors sold it and bought other, freer currencies. You can see why multinational agreements to lock down currency transfers would have a hard time sticking around: if I defect -- you lock down and I don't -- money flows into my country and out of yours. We need some way to tie our fates together if we're going to make this work. My understanding is that European monetary union -- the euro -- is precisely such a fate-tying mechanism: we give up flexibility in some areas of monetary policy in order to solve a larger coordination problem.
Again a question of detail comes up: suppose the currency flows from a less-open to a more-open economy. For the sake of concreteness, let's say those economies are Germany and France, respectively. Money flows from Germany to France, so now one franc buys more deutsch marks. France doesn't want this exchange rate to rise *too* far, because now Germans can't buy as many French products; export-intensive French industries are harmed by Germany's capital constraints. So it would seem that France and Germany are already quite strongly linked by self-interest, even in the absence of any agreements on capital controls.
I'm sure the answer to this, as well as to all my other questions, is within Globalizing Capital. My sense is that it is a book which can never be read, only reread. I'm really looking forward to rereading it.
0 of 1 people found the following review helpful:
 sweet, 2008-06-08
a short and sweet book on the history of monetary system, packed with facts and some founded opinions. he did it again
1 of 1 people found the following review helpful:
Nifty, 2008-01-27
This is a great book for readers who like economic history. In just 200 pages, Eichengreen tells the history of the modern international monetary system, from the classical gold standard of the late 19th century to the Asian financial meltdown of the 1990s. He writes clearly and his narrative never gets bogged down in historical arcana or mathematical abstractions. The book is a great example of how complex economics can be made comprehensible to ordinary readers if the writer sticks to the big picture and uses simple language.
Eichengreen's basic idea is that the rise of democracy made it impossible for central banks to continue to pursue exchange rate stability at the expense of all other economic objectives. That doomed the gold standard and made inevitable a world of floating exchange rates, even though that world would have been unthinkable to most central banks and finance ministries prior to the 1960s and 1970s.
I knocked off one star only because Eichengreen is very U.S./Europe-centric. He barely discusses Japan let alone the developing world. Huge events like the rise of OPEC and the Latin debt crisis of the 1980s are hardly mentioned. For that reason, his book never addresses the way that dependence on international capital flows now constrains policymaking in developing countries almost as much as the gold standard ever did.
11 of 12 people found the following review helpful:
 Great macro text but very G7 centric, 2001-06-02
Barry Eichengreen's book Gold Fetters is a classic on the Gold Standard and the Great Depression. The cover of this one claims that it will become a classic on the international monetary system. While it's good, it certainly isn't a classic. It's a great book, but spoilt by its lack of breadth. Globalizing Capital is full of details and gives readers a terrific account of how mainstream exchange rates were managed (or weren't) in the period from 1870 to 1997. Each of the four main chapters is self contained (1870-1914, 1918-1944, 1944-1973, 1973-1997). Globalizing Capital has two broad threads. Firstly, the only periods in recent history when exchange rates have been stable have occurred when there have been a) high levels of international co-operation or b) periods when governments have been able to choose between high capital mobility and extending democracy. Trying to court both the masses and international traders has often been the trigger for banking and currency crises. The second theme is the choice between fixed and floating regimes. The world nowadays is characterised by instantaneous communications and highly mobile capital. Small countries can chose to float and large groups with deep interlinks can form monetary unions, but the rest are faced with increasingly unpleasant choices. As capital becomes more mobile, the choices faced by those left in the middle will become even more perilous. While the theoretical line is flawless, the content isn't. Globalizing Capital is extremely G7-centred and gives little if any indication that there was a world outside the North Atlantic until Japan emerged in the 1960s. There is little mention of the history of colonial currency boards prior to Hong Kong in the early 1980s, no attempt to tackle the issues thrown up by recent debt crises in Latin America and nothing on transition countries in Eastern Europe and Asia who dispensed with central planning and multiple exchange rates in the 1990s.
11 of 15 people found the following review helpful:
Clearly-written classic on the world monetery system., 1998-10-11
This book is not for the casual reader. However, we do recommend it strongly to anyone interested in understanding the relationship between global politics and international economics. Our consulting staff uses it often when discussing pricing policies and long-range financial planning with experienced and sophisticated exporters. John R. Jagoe, Director, Export Institute.
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