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Sunday, November 25, 2007

Globalizing Capital

Barry Eichengreen's Globalizing Capital - A History of the International Monetary System was part of the readings for a class I have. For various reasons I never had the book when we were supposed to have to do the readings. So I borrowed and read it over my Thanksgiving break even when I wasn't sure whether the whole book or only parts of it had been assigned. Some people might wonder why now, but in my last college days, for reasons I cannot quite fathom yet, I have become increasingly interested in macroeconomic developments and the international economic arena in general.

Eichengreen in his book gives an overview of the history of the international monetary system (admittedly relatively unsurprising considering the subtitle of the book) from the 1870s onwards. He sketches the path to the gold standard, its predominance until 1914, the futile interwar attempts of reestablishing it and the ensuing instability, the Bretton Woods System, the following floating exchange rates, and finally attempts at monetary unification. Published in 1996, the one glaring omission of this book is EMU. Also, one of today's most pressing financial issues, the build-up of dollar reserves in developing countries, specifically China, is not included. But even if the inclusion of these more recent developments would have been appreciated, Eichengreen obviously cannot be faulted for them as he had finished writing his book before these points really arose. Furthermore, the book is highly interesting in any case.

I don't want to write a lengthy review of this book because of two reasons. Firstly, to give the author justice one would have to be very detailed in a critique of his book, as his argument is very detailed and exhaustive in regard to the amount of information provided. Secondly, I simply am not sure whether I am truly capable of criticizing an economic author like him yet. I started getting into economical issues late in my studies, a year ago really, and I cannot say that I have developed enough of a grasp as of yet to really have strong personal opinions on topics as abstract as this one.

Yet, having said that, it seems to me that Eichengreen's main argument is that there are two reasons why the gold standard could not be successfully implemented again after the First World War. The strict adherence to the gold standard, which was necessary to prevent speculative attacks on currencies, resulted in countries sacrificing growth and employment figures (through deflation) for stable exchange rates. This was possible mainly because the segments of society mainly hit by unemployment and this decrease in growth were politically irrelevant, they could not vote. With universal suffrage becoming a reality in most of Western Europe it became impossible for governments and central banks to pursue this kind of policy. Thus, another measure was used to keep exchange rates in check, capital controls. This made speculative attacks more difficult even if it never eradicated them permanently. Furthermore, these controls became less and less efficient and an ever increasing global flow of capital made the adherence of fixed exchange rates more and more difficult leading to the current system of most major currencies floating freely against one another.

If Eichengreen uses stylized facts in his book, I just super-stylized those. I thought I should at least try to offer a concise (hopefully) and short (definitely) summary of his book though. I really enjoyed reading it and I will almost assuredly try to find out more about this subject.

1 comment:

Thomas Oatley said...

Good summary, and you are the first student in the four years that I have assigned that book to admit (publicly) to having read it and pulled out the main argument.