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Monetary Regime Transformations.

Monetary Regime Transformations details several monetary regime transformations in the twentieth century. The book is a collection of twenty papers focusing on a wide variety of monetary changes in Europe and the United States. The anthology gives thorough and insightful explanations for the reasons behind the changes in monetary regimes, and it also analyzes the economic effects of the reforms. Systems of fixed exchange rates receive the most emphasis within the book, and the conflicting domestic and international goals which can destabilize fixed exchange rate systems are well documented.

Two lessons resonate throughout the episodes in the book. First, a successful monetary regime transformation must be credible. If participants in a monetary regime do not believe a transformation is going to be effective, the reform is often doomed to failure. Credibility in part rests upon the internal consistency of a policy; ending inflation with a tight monetary policy will be undermined by a simultaneous fiscal expansion. The second lesson is that it is very difficult for any country to maintain monetary stability without international coordination. In almost all of the historical periods examined in the book, problems arose when countries engaged in noncooperative behavior, whether it be gold-hoarding, mercantilism or unrestrained monetary expansion. Unfortunately, the book has few insights as to how these coordination problems can be overcome, but perhaps this is a question for the political scientist rather than the economist.

One minor fault in the collection is that it is slightly Eurocentric in its focus. While it is true that Britain had a greater role in international affairs before World War II and thus warrants more focus in this time period, expanded coverage of U.S. monetary developments in the post-war period would improve the scope of the book.

The book is perhaps most adept at analyzing systems of fixed exchange rates. A paper by R. G. Hawtrey examines the gold standard as it existed before 1914, and the paper provides a good introduction to both the mechanics and the inherent contractionary tendencies of the pre-war gold standard. In this system when one country contracted its money supply others were forced to do the same or they risked losing their gold reserves. Conversely, countries were less likely to expand their money supplies when they had a surplus of gold reserves. International cooperation often failed to stem this inherent bias toward monetary contraction, and financial panics were not uncommon.

The question whether the gold standard, and fixed exchange rates in general, leads to volatile credit fluctuations and financial instability is a crucial one when considering the viability of a fixed exchange rate regime. Clearly financial panics are much less frequent today than they were under the pre-war gold standard. What is unclear is whether it is the end of the gold standard, or some other factor such as the development of central banking, which has provided financial stability. A paper by Jeffrey Miron attributes the smoothing of interest rates and the disappearance of financial panics to the founding of the Federal Reserve in 1914. He notes that there was a drastic reduction in the seasonality of interest rates and an absence of financial panics from 1915-1928, an unparalleled length of time in the United States. Miron attributes the financial instability surrounding the Great Depression to the fact that in 1928 the Fed began to focus monetary policy on restricting stock market speculation instead of smoothing interest rates. Miron claims that as long a central bank maintains an interest-rate smoothing focus, the probability of a financial panic will be greatly reduced.

Another possible cause of the disappearance of the seasonality of interest rates could be that the international gold standard was dissolved after 1914. A paper by Clarke (1986) outlines this hypothesis. Unfortunately for the reader, Clarke's paper is absent from the volume. However, a paper by Barsky, Mankiw, Miron, and Weill defends Miron's hypothesis against the criticism of Clarke. Barsky et al., use later examples of fixed exchange rates to isolate the influence of the Fed from the gold standard. They argue that once the gold standard was reinstated (both in the inter-war period and under Bretton Woods) the seasonality of interest rates did not return. Two authors, Giorgio Basevi and Alan Stockman, separately point out that the inter-war and post-war gold standards were not equivalent to the pre-World War I gold standard. Their comments suggest that it may be that less rigid systems of fixed exchange rates (such as the Bretton Woods system) do not produce financial instability as did the pre-World War I gold standard.

A discussion of the Bretton Woods system is included in the volume, and two papers chronicle its failures and eventual collapse. According to a paper by Harold van Buren Cleveland, the lesson to be learned from the failure of the Bretton Woods system is that the domestic goals of an individual country (in this case the United States) can conflict with the goals of the international monetary regime, and in such cases the system will become untenable.

The final papers in the volume discuss the origins and future prospects of the European Monetary System. These papers serve to highlight the monumental obstacles of cooperation which must be overcome in order to implement a stable fixed exchange rate environment. The episodes detailed in the book suggest that the domestic needs of individual countries (such as Germany) may prevent the success of the EMS.

Monetary Regime Transformations provides many provocative and insightful observations regarding changes in monetary systems. The book is an excellent introduction to a twentieth century monetary history. In particular, this collection would be extremely useful to those who wish to examine recent experiences with fixed exchange rates. Those who wish to analyze the current EMS system would do well to see the problems countries have had with maintaining a stable fixed exchange rate system.
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Author:Darin, Robert M.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Oct 1, 1993
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