International Monetary Systems in Historical Perspective

Money has always been a profoundly ‘national’ affair. First and foremost this is because of seigniorage — whoever produces money stands to gain a revenue from the difference between its face value and its intrinsic worth, particularly if he is the monopoly producer of such an essential commodity. The state, which has a monopoly of power as well, has often been attracted by this and has tended to take over the function of producing money. Secondly, because money can only be employed to discharge obligations where contracts are enforceable, it becomes closely associated with the territory of the ruler who produces it and has every interest in universalising its use. Lastly, money has an emblematic value, as a sign of the might and independence of rulers or states. Even today, ‘few symbols of national sovereignty are as powerful as coins or bank notes’ (Eichengreen, 1993). One example, as we shall see, is Napoleon III who used monetary policy to further his aims of political aggrandisement and the expansion of France’s sphere of influence.

From a late twentieth-century perspective, the international gold standard in its nineteenth-century heyday appears impressively stable and flexible. Some observers have argued that the gold standard outperformed the actively managed monetary arrangements of more recent decades. But since our understanding of the details of the workings of the historic gold standard remains seriously incomplete, such statements remain speculative. This chapter examines a major shock to the gold standard — the large flow of British capital attracted by the massive surge in American railroad investment in the 1880s. The episode dealt an unanticipated shock to the international monetary equilibrium. Adjustment to the shock provides a chance to examine details of various economies’ responses under the gold standard. Unfortunately the detailed history of the decade provides little support to any of several hypotheses regarding gold standard adjustment mechanisms. Largely crisis-free adjustment appears to owe more to coincidence of the timing of British domestic investment than to any mechanism that adjusted the British economy to the massive upsurge of foreign lending.

After almost a century of neglect, the past few years have seen a revival of interest in bimetallism as a subject of study. Paradoxically, until a few years ago the monetary system that dominated the post-Medieval world had received little attention in the modern professional economic literature. Bimetallism had mostly been seen as an unstable precursor of the gold standard, subjecting economies to unnecessary — and possibly costly — periodic recoinages. The system’s interesting dynamics were usually summarised by a reference to Gresham’s Law, or ‘good money drives out bad money.’ Recently, a more sophisticated understanding of the system has emerged and its merits have been reappraised.

In 1865, a monetary union was formed between Belgium, France, Italy and Switzerland (Greece would follow three years later). According to the Treaty (which created what the press called l‘Union latine or Latin Union, but which was officially known as Convention de 1865) the member states shared a common monetary base consisting of specie. The agreement, established in the first instance for fifteen years and renewable (it would be indeed renewed in 1880) provided for the circulation throughout the Union of gold and silver coins issued independently by all participants. The Latin Union’s coins were identical in all respects but the print which indicated the country of origin. The agreement was substantiated by the commitment on behalf of each national Treasury to accept in payment the coins of any other member state.

The Scandinavian Currency Union is sometimes considered the most successful of the monetary unions established in Europe during the latter half of the nineteenth century.² Following Bartel (1974: 703): ‘It was an important precursor to the attempts at international monetary cooperation which were to come after the Second World War.’ This chapter offers a re-examination of the Union, its background and its working until its breakdown under the strains of the First World War. The findings of the present analysis are more ambiguous than the above statements when it comes to evaluating the Union. While clearly successful as a currency union, its performance as an economic union was less convincing.

This chapter deals with just one view from the periphery of the central banks’ world of the 1920s and 1930s. It does not presume to cover all the experiences peripheral central banks had in that period. The view is that gained by looking into the archives of the Bank of Italy, with supporting research in Bank of England and Federal Reserve Bank of New York archives.¹

It has taken a long time for the mainstream of economic literature to accept that the Bretton Woods Agreements did not establish the working rules of the post-war international monetary system. The conventional periodisation, in which these rules were laid down in 1945, suspended by Britain’s failure to make sterling-dollar convertibility work in 1947, gradually reintroduced between 1949 and 1958, and then fully restored by the general return to dollar convertibility in 1958, seems likely at last to have been put aside. A new schematisation is suggested by McKinnon, in which the monetary system sketched out in the Bretton Woods Agreements had no applicability after 1950.¹ What emerged by that year was the fixed-rate dollar system, enduring until 1970. In this new periodisation it is the ‘rules of the game’ which define the systems, a Bretton Woods system which failed to operate successfully between 1945 and 1950, and the subsequent fixed-rate dollar system — a period of relatively stable exchange rates exceeded in length and stability only by the international gold standard.

France played a crucial role in the breakdown of the Bretton Woods international monetary system. Aggressive financial diplomacy coupled with the conversion of dollar holdings into gold weakened confidence in the dollar and helped to precipitate the collapse of fixed exchange rates. Most standard histories of the period find the motives behind these policies in President de Gaulle’s ‘anti-American’ political goals rather than any sound economic objectives. President de Gaulle is viewed as playing to French fears of encroachments on their autonomy.²

Portugal adhered to fixed exchange rates for long periods in modern history. The Portuguese currency was pegged to gold from 1854 to 1891. In the twentieth century, the escudo was pegged to sterling from 1931 to 1949 and from 1949 until 1973 the escudo was pegged to the dollar. The monetary authorities exhibited a strong and credible commitment to the maintenance of the fixed rate which is clearly illustrated by the behaviour of the nominal exchange rate throughout the period from 1931 to 1973 (see Figure 8.1). In particular, the escudo-dollar central parity was kept constant from 1949 until 1971, when the dollar was devalued. This commitment is apparent if we compare the behaviour of exchange rates during both wars and immediate post-war years. Thus, the escudo can be considered a hard currency during the 1950s and 1960s, supported by persistent balance of payments surpluses and by large gold and foreign exchange reserves. By the end of the 1960s, the Portuguese monetary gold stock was about 2.25 per cent of the world total monetary stock.

Politicians, bankers and economists have at various times and again in recent years started to urge that there be created an ‘international lender of last resort’. Depending on the context, the ‘international’ role is thought to cover either the European Union, or, in some particularly ambitious proposals, the world as a whole, with the IMF sometimes suggested as taking on the role of worldwide lender of last resort (LLR). In every case, the objective is to ensure the stability of national banking systems — either within the EU or worldwide. The purpose of this chapter is to consider the international LLR proposal from three aspects — analytical, historical and, to some extent, that of the history of economic thought; the primary focus is on theory and history. The chapter is in four main sections.

The search for stable money has produced a variety of monetary arrangements which have fascinated economists. History is a useful laboratory for testing monetary experiments such as the economic effects of introducing two circulating or parallel currencies. Several such episodes exist in the Soviet history of the 1920s. An analysis of this period in monetary history can also provide useful insights for the current post-Soviet experiment in parallel currencies and the prospects for a continued monetary union in what was the Soviet Union.² Indeed, some of the former Soviet Republics, in particular the Baltic States, the Ukraine as well as Kyrgystan, have each introduced parallel currencies as a probable prelude to the introduction of separate currencies. Whether continued monetary union with a single currency, or parallel currencies, or some form of ‘dollarisation’ takes place remains to be seen. This chapter adds historical frame of reference to the continuing debate about these questions.