Globalizing Capital
Short history of the international monetary system; the standard survey.
Summary
Eichengreen wrote a compact history of the international monetary system from the classical gold standard through Bretton Woods to floating rates and the euro. It is the standard short treatment.
His organising argument concerns the political preconditions for each regime. The classical gold standard worked because governments were not held responsible for employment, so central banks could raise rates to defend a parity without political consequence. Once suffrage widened, labour organised and governments accepted responsibility for unemployment, the credibility that made the gold standard work disappeared. The interwar attempt to restore it therefore failed, and Eichengreen argues, developing the work of his Golden Fetters, that adherence to gold transmitted and deepened the Depression internationally, with countries that left earlier recovering earlier.
Bretton Woods worked because capital controls insulated domestic policy from external pressure, and it collapsed when capital mobility returned and made the fixed parities indefensible. The subsequent floating regime, and the European move to monetary union, both reflect the trilemma: a country can have at most two of fixed exchange rates, free capital movement and independent monetary policy.
The book is short, analytically clear and requires little technical background. Editions have been updated to cover the euro crisis. It is the standard reference on why monetary regimes fail, and the trilemma framing is the single most useful tool it supplies for reading any exchange rate arrangement.
Key takeaways 7
- A country can have at most two of fixed exchange rates, free capital movement and independent monetary policy, and every monetary regime is a choice among the three.
- The classical gold standard worked because governments were not held politically responsible for employment, so defending a parity carried no political cost.
- Widening suffrage and organised labour destroyed the credibility that the gold standard required, which is why the interwar restoration failed.
- Adherence to gold transmitted the Depression internationally, and countries that abandoned the parity earlier recovered earlier.
- Bretton Woods depended on capital controls to insulate domestic policy, and it collapsed when capital mobility returned.
- Exchange rate regimes fail for political reasons rather than technical ones, because the commitment they require becomes politically unsustainable.
- European monetary union was a political project that resolved the trilemma by abolishing independent national monetary policy.
Who should read it
Macro investors who want the standard short history of monetary regimes and the trilemma framework for assessing any exchange rate arrangement.
About Barry Eichengreen
Professor of economics and political science at the University of California, Berkeley, and economic historian of international monetary systems.
Golden Fetters established the standard account of the interwar gold standard: fixed exchange rates transmitted deflation across borders, and recovery began in each country only after it left the peg. The later books apply that monetary-history method to reserve-currency status, the euro, sovereign debt capacity and the 2008 policy response.
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