Customer Reviews

Globalizing Capital: A History of the International Monetary System (Second Edition)

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The title of this book is misleading; it's not really about capital, it's about monetary systems. There's not very much here on the banking systems of the world, or regimes for financial regulation, or the evolution of bills of exchange--all of which are indispensable parts of such a history. Another criticism is that the book is not terribly imaginative in its focus on five countries, the USA, UK, France, Germany, and Japan. Again, this is disappointing but not really a fair rebuke: Eichengreen's book is a skeletal outline of the subject of global monetary *regimes*, and if that's what you need, it has some real strengths.


These strengths include a clear and vivid explanation of the policy dilemmas facing central bankers over the last hundred years; fair-minded discussion of the role of different countries over the last 100 years; a non-doctrinaire treatment of the macroeconomics; and attention to the role of political regimes. Eichengreen is syncretical (offering different hypotheses to explain major events) without being muddled, which is a very valuable achievement. I think his analysis is sound, and he avoids a lot of pitfalls that lesser economists make routinely. It is a valuable reference, particularly for its superb bibliography.


The analysis of the gold standard's inception is not the best I've seen; readers interested in the matter may want to consult Lawrence H. Officer's Between the Dollar-Sterling Gold Points (2007) or any of his essays on hnn.us. Also, how does one write a book on this subject without mentioning the Mundell-Fleming Model? Most likely readers of this book won't really be reading it for that, but for answers to the question "How did we get to the system we have now?" I assume this because the overwhelming bulk of it addresses the most plausible explanation, viz., because it worked fairly well for the most important industrial nations of the West; and because the 2nd and 3rd tiers of industrial nations would cope with it (with reservations). So my review has focused on how well it answers that question.


However, I think this is where the book stumbles the worst. It's not just an oversimplification to neglect the lower echelon powers in this book. This neglects the really serious ways in which the existing monetary system hurts the chances of emerging economies to achieve moderately high levels of employment, or adequate housing and sanitation for most of their population, or even water security. Likewise, when economists grumble that "workers resist flexible labor markets" (a paraphrase), it's pretty much the same as saying "the existence of humans ruins economic development." It's not that the economist/historian is affronting the sensibilities of non-economists in developing countries, it's that the economist normalizes failure for the profession of economics when treating all opposition as equally self-regarding and therefore equally worthy of dismissal.


But this is mistaken. When investors demand that a country ensure their high rates of return through reliable repatriation of profits, that may be politically decisive, but it's a "soft" requirement; the investor, as such, is not entitled to a put option. When the majority of the population is, either through unemployment or "wage realignment," unable to earn enough to meet essential expenses, that is a "hard" requirement: the economic system has failed and is inadequate. By ignoring this persistent aspect of the "global" monetary system, the neglect becomes a systemic bias. One is led to believe that "growth" is a viable alternative to "social peace." This ignores the urgent stresses on land, water, and fossil fuels that we have experienced and which are going to be worsen. These are not optional considerations, but lie at the heart of our global trading system's ability to renew itself over time.

Barry Eichengreen's "Globalizing Capital" (2ed) succinctly fits 140 years worth of history about the international monetary standard in 232 pages. This is a heroic feat to say the least. His analysis covers each monetary system in roughly equal proportions. "Globalizing Capital" is just one of the many outstanding works in Eichengreen's long, and notable, career.

Eichengreen begins by explaining why the gold standard was never a true gold standard and why it institutions prevented chaos rather than 'pure economics.' He then explains why the interwar gold standard caused the Great Depression (Please read "Golden Fetters" for a more in-depth explanation). After that is a detailed examination of why Bretton Woods I never really worked and why it was doomed to fail. He finishes with an examination of what is now considered Bretton Woods II and the changing nature of domestic exchange rate regimes.

Eichengreen comes to the startling conclusion that with increased global capital flows floating exchange rates are (mostly) inevitable. However, this can have extremely dangerous effects on developing markets that are not prepared to liberalize their capital account. This leaves developing countries vulnerable to the inevitable push towards globalization.

Eichengreen ends his tale with a warning about US debt and an examination of the Euro. He views the burgeoning US debt as problematic for Bretton Woods II and the Euro as an unlikely model for other regional blocks to emulate.

Unfortunately, the 2ed came out shortly before the Financial Crisis of 2008. For anyone interested in Eichengreen's views regarding the financial crisis and the international push for stimulus please go to Voxeu and read "A Tale of Two Depressions" (Amazon will not allow me to post the link).

"Globalizing Capital" is a great work for anyone interested in the financial history of the world.

Economist Barry Eichengreen offers great insights into the workings of the international monetary system from 1850-2008 in the second edition of Globalizing Capital. This book shows the strong influence that the monetary system has had on the world economy at various points in history.

The most dramatic example began in 1929, as nations' rigid reliance on the gold standard facilitated the spread of the Great Depression from country to country. Under the gold standard, the major countries of the world were linked by a common policy whereby nations pledged to convert their currency into gold at a fixed price upon demand by anyone who would present it for such an exchange. This system maintained the value of paper money relative to gold and relative to the currencies of other countries. Countries saw that maintaining fixed currency values facilitated trade with other countries, as importers and exporters were freed from the risk of financial ruin that might otherwise result from fluctuations in currency values between the time an order was placed and the receipt of payment.

The rigid linking of currencies to the price of gold was thought to prevent trade imbalances between countries. If a country imported much more than it exported, the flow of money and gold outward would cause the general price level to drop, which would make additional importing less attractive and make one's exports more competitive. Another benefit of the gold standard was that the promise to exchange for gold gave the public confidence in paper currency printed by central banks. Unfortunately, this became a double-edged sword.

Here is the Eichengreen script (simplified) of the Great Depression. In 1927, the U.S. Federal Reserve began to raise interest rates in order to curb stock market speculation. The increased rates attracted savings from overseas, which caused declines in economic activity in Europe, which had previously been awash in loan capital from the U.S. This, in turn, caused other countries to raise their own interest rates in order to keep their capital and their gold (gold was money) from fleeing to the U.S and to the other countries that had already raised their rates. Rising interest rates spread from country to country and depressed economic activity. The economic decline which began in 1929 was accompanied by rising interest rates, which delayed any recovery. The worsening economy led to bank failures which shrank the money supply and led to deflation, which further suppressed the economy. Nations hesitated to step in as lender of last resort to banks because that required them to print quantities of new money to liquify the banks, which would detract from their ability to maintain the link between their currency and gold (there's that pesky gold standard, again).

In fact, rescuing banks might have been counterproductive, as the printing of money not backed by gold would lead to fears of devaluation and cause investors to withdraw their national currency - denominated bank deposits, which would worsen the crisis further. In other words, reliance on the gold standard threw the world into what would now be called a negative feedback loop, consisting of shrinking bank deposits, imploding supplies of money, deflation and economic contraction.

Eichengreen finds confirmation of the gold standard's role in transmitting the Depression among countries, as he ties the eventual recoveries by various countries to the timing of their subsequent abandonment of the gold standard, which ushered in reflation and floating currency exchange rates: first the U.K., then the U.S., then France.

Later chapters in the book cover the Bretton Woods Agreement (1944-1973), the subsequent breakdown of fixed exchange rates, and the various currency crises through 2008. Bretton Woods was an attempt to peg currency exchange rates within a 1% range, while providing mechanisms for cooperation and policy coordination among the member countries. Its purpose was to facilitate trade. It broke down for the same reason that all such rigid systems break down - it failed to accommodate the changing economic experiences and political needs of its members. The Asian currency crisis of the late 90s was similar to earlier crises in that it consisted of the cracking of a framework of pegged exchange rates.

This book also provides brief, but instructive treatment of countries that have used currency boards to peg their exchange rate to the dollar (like Argentina, which did it until pressures caused them to devalue and abandon the peg, and Hong Kong). There is also some discussion of our ongoing trade imbalance with China, wherein China exports goods to the U.S. and keeps its currency exchange rate low by investing in U.S. government debt.

Eichengreen summarizes the factors surrounding the creation of the Euro currency, which has succeeded at promoting trade and economic growth among its members. He provides an insightful case for its continued survival, even as individual members may find themselves under strain from time to time, unable to accelerate the printing of money to prime the national economy. His point is that any country that seriously considers abandoning its reliance on the Euro currency in order to engage in monetary stimulus will experience an outflow of funds from its banking system as investors will want to avoid having their Euro bank deposits converted to a new national currency that will almost certainly lose value. The decline of bank deposits would depress that nation's economy even further. Awareness of the likelihood of this scenario will likely keep the Euro family together for the foreseeable future.

Globalizing Capital presents a comprehensive story. Eichengreen's insights on the mechanisms by which the Great Depression traveled from country to country have been quoted extensively by such experts on the Great Depression as Christina Romer, chairwoman of the Obama Administration's Council of Economic Advisers, and Ben Bernanke, chairman of the Federal Reserve. Overall, reading this book requires some effort, but it gives the reader a solid understanding of how evolving changes in the international monetary system have directly affected the course of economic history.

Mr. Eichengreen has written a very informative book on the global financial system starting with the pre World War I (often called classic) gold standard. This work is extremely well referenced with a truly astounding number of sources, both in the footnotes and in the bibliography at the end. Mr. Eichengreen has also provided a very informative glossary at the end of the book.

Mr. Eichengreen starts by describing the pre World War I gold standard. He demonstrates that this gold standard came in being rather accidentally. The authorities in England without detailed market knowledge overvalued gold coin in respect to silver. Thus gold became the currency of the realm. Later problems with bimetallism (use of silver coin as well as gold) became apparent and caused the United Kingdom and other countries to go on the gold standard.

The author demonstrates that the pre World War I gold standard with its currencies pegged to gold was a historically specific institution. The United Kingdom was the major industrial power of the era. Its central bank stood ready to take action to ward off any financial threats to the gold standard. The central banks of the major European powers cooperated with the Bank of England to help maintain the pegged exchange rates of the gold standard. Any European country whose imports lagged exports and was having trouble meeting demand for its gold reserves could depend on the aid of the central banks of Europe. The conditions for this gold stand did not exist after 1914.

Mr. Eichengreen demonstrates that fixed exchange rates including in particular the gold standard rates depend on international cooperation to succeed. The the pre World War I gold standard and the Bretton Woods system of exchange rates lasted as long as they did because of the extensive cooperation between the major industrial and financial powers within the systems. In the Bretton Woods system in particular there was a large degree of cooperation and mutual aid among the financial authorities.

In essence fixed exchange rates fail because of the movement of capital. Capital flows of investment and speculative funds from one country to another are not like the trade in goods. Capital funds are unpredictable and subject to sudden change. These funds make the maintenance of fixed exchange rates virtually impossible. There is too much speculation against the weakest currency.

Mr. Eichengreen also wrote chapters on the failed gold standard of the 1920s and 1930s which lead to the Great Depression, and the system of floating exchange rates after 1971 when the Bretton Woods system dissolved. The latter period encompassed exchange rate difficulties in several developing countries and their resolution. Also described is the integration of much of Europe into a single currency area to escape floating exchange rate fluctuations.

This work is a very thorough and informative resource. I did find the extensive discussion of the European attempts at monetary integration prior to the euro somewhat long winded. However I guess this is part of the story.

This book is excellent and should be read by all economics students.

Eichengreen does a great job in explaining this complicated subject. Starting from the early days of the markets' globalization in the late 19th century, he traces the transformation and the trial an error of the different international monetary systems. The pre-war gold standard, the interwar chaos, the Great Depression, the Bretton Woods system, the emergence of the Euro, the current financial markets, the US-China trade imbalances, among others, are all explained in this money saga.

Most of the book is centered in the developed countries, but the last chapter also covers the crisis in Argentina, Turkey, and other emerging markets. The advantages and disadvantages of a pegged currency are very well illustrated for the Argentinian case. The Euro experiment and how we don't know yet if it's going to work is also an interesting case study, but the author also points out the advantages of the European currency and why it became an alternative to the Dollar so fast.

The book includes a very useful Glossary that makes the reading much easier. Very recommended if you want to learn about this important topic.

All the reader reviews and editorial info I see on this page refer to the earlier edition (1996); this book, however, is a 2008 update. From Princeton's description: "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. Globalizing Capital shows how these and other recent developments can be put in perspective only once their political and historical contexts are understood."

Love the book. Highly insightful history.

Kindle edition stinks: poor image quality and, even worse, the iPad highlighting doesn't work properly.