Derek H. Aldcroft, Michael J. Oliver. Exchange Rate Regimes in the Twentieth Century. Cheltemham, UK and Northampton, Mass.: Edward Elgar, 1998. xiii + 210 pp. $85.00 (cloth), ISBN 978-1-85898-320-2.
Reviewed by Anna J. Schwartz (National Bureau of Economic Research)
Published on EH.Net (November, 1999)
This is a chronological historical narrative of selected features of exchange rate regimes since the interwar period. Fully half the book is devoted to the 1920s and 1930s. The treatment of the Bretton Woods era and its aftermath is briefer and more succinct. The penultimate chapter that traces the evolution of the European Monetary System ends before the date when the eleven countries judged to have met the Maastricht criteria were qualified as EMU members. A six and one-half page concluding chapter asks "Do Monetary Systems Matter?"
What is distinctive about the book is first, the series of tables that accompany the text, and second, the extraordinary number of references that are cited for each substantive point. The tables provide data, drawn from official and academic sources, for various time periods on nominal and real variables, as well as chronologies of important events. The references tend to include competing views with regard to the topic under discussion. In some cases, the authors find merit in all the competing views. In other cases, they express strong priors in favor of one position, without much analysis of the factors supporting their conclusion.
Chapter One deals with the restoration of monetary stability in European countries, and countries in North America, Central and South America, Africa, Asia, and Oceania, following the post-World War I years of floating exchange rates and hyperinflation. The attention paid to the experiece of countries that are not usually covered in this context is a strength of the chapter. It ends with a discussion of the costs and benefits of floating exchange rates of the early 1920s. This is an instance when the authors convey an impression of ambivalence in their assessment: they offer pros and cons, without any clear conclusion.
Chapter Two deals with the consequences of the stabilization of the pound and the franc at inappropriate levels, one of the key differences between the prewar gold standard and the restored gold standard of the later 1920s. Inherent weaknesses in the restored arrangements doomed them. Peripheral countries ran into trouble even before the disintegration of the standard in the center countries in the summer of 1931. At this point, the authors take a stand on the issue of US monetary policy during the Great Depression without much supporting detail. They assert that "the Federal Reserve allowed the monetary base to contract for fear of being forced off gold" (p.58). That is a highly controversial view.
Chapter Three takes up the story with the abandonment of the gold standard in the early 1930s by most of the countries that had re-established it in the 1920s. The authors discuss the rise of currency blocs after 1933: the sterling area, the gold bloc, and countries with exchange controls. They note the extensive management of exchange rates, for which purpose exchange stabilization funds were created, and the Tripartite Agreement was negotiated. They also compare the recovery experience from 1929 to 1937/38 of countries classified under different regimes. They dispute an earlier finding that Spain avoided the worst effects of the depression because its exchange rate floated. In general, they argue that currency changes of the 1930s did not generate trade-induced recovery
Chapter 4 covers the well-known elements of the Bretton Woods system and the reasons for its decline. In the authors' view, Triffin's prediction of the inevitable demise of the system was wrong on two counts: (1) he believed that large-scale conversion of dollars into gold by central banks would reduce outstanding US dollar liabilities, when in fact they increased; and (2) he claimed the conversion would be deflationary by reducing the total amount of international reserves, contrary to the facts. I concur with the authors' statement, " . . . it is strange that in the quarter century since the end of generalised fixed rates, policymakers and politicians have sought to return to some variant of fixed rates by frequently assuming that the Bretton Woods system was a paragon of a rules-based system" (p. 120).
Chapter Five on the aftermath of Bretton Woods discusses two broad problems under floating rates: (1) endogenous and exogenous shocks that disturbed currencies; and (2) volatility of exchange rates that was greater than predicted. The authors conclude that, despite the difficulties associated with floating rates, it is highly unlikely that the float will be replaced by a new Bretton Woods in the foreseeable future.
Chapter Six turns to the attraction of a fixed rate system to most of Western Europe as a way of guaranteeing the stability of intra-European trade. New to me is the discussion in this chapter of the biggest institutional reason for this attraction, namely, the close connection to European exchange rate policy of the Common Agricultural Policy (CAP). Calls for greater exchange rate stability arose because of problems for CAP under floating rates. The authors are skeptical about the benefits of a single European currency They might also have been more skeptical in accepting the theory of self-fulfilling prophecies as a "more satisfactory explanation" of the turmoil on the foreign exchanges under the European Exchange Rate Mechanism between July 1992 and August 1993 (p. 165).
To Fix or not to Fix? That is the question for which this book seeks to provide an answer from twentieth century history.
Anna J. Schwartz is a research associate of the National Bureau of Economic Research. She is co-author with Michael D. Bordo of a chapter, "Monetary Policy Regimes and Economic Performance: The Historical Record," in Volume 1 of the Handbook of Macroeconomics, John Taylor and Michael Woodford (eds.), North-Holland (forthcoming).
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Anna J. Schwartz. Review of Aldcroft, Derek H.; Oliver, Michael J., Exchange Rate Regimes in the Twentieth Century.
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