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From Gold to Euro: On Monetary Theory and the History of Currency Systems

Author(s):Spahn, Heinz-Peter
Reviewer(s):Schenk, Catherine R.

Published by EH.NET (May 2002)

Heinz-Peter Spahn, From Gold to Euro: On Monetary Theory and the History of

Currency Systems. Berlin and Heidelberg: Springer-Verlag, 2001. ix + 220

pp. $59.95 (cloth), ISBN: 3-540-41605-6.

Reviewed for EH.NET by Catherine R. Schenk, Department of Economic and Social

History, University of Glasgow.

Peter Spahn, Professor at Hohenheim University, Stuttgart, has produced a

succinct, indeed sometimes breathless, overview both of the evolution of

monetary theory and the experience of fixed or stable exchange rate systems

from the Gold Standard to the Euro. The pace is rapid. The theoretical chapters

set up the role of money in the economy in seventy tightly argued pages. The

empirical review of the gold standard, the Bretton Woods system, the European

Monetary System and the European Monetary Union, each of which has generated

many books on their own, altogether take only ninety pages. Its very brevity,

however, is perhaps the book’s strength since it provides the reader with a

broad conceptual framework within which to assess the strengths and weaknesses

of stable exchange rate regimes. The general argument of the book is that

exchange rate regimes since 1870 can be seen as part of a process culminating

in the single currency EMU in a bipolar Euro-dollar world. The lesson of

history is that fixed exchange rate regimes fail because of the ultimate

primacy of internal over external stability. When these two policy goals

diverge, the foreign exchange rate is abandoned and the system collapses. Only

by eliminating exchange rates as policy targets (through currency union or

floating rates) can this dichotomy be resolved.

There is some effort to make up for conceptual shortcuts by providing ‘Boxes’

focused on key definitions and theories, which may help the usefulness and

accessibility of the book for advanced undergraduates and postgraduates. There

are also helpful summaries of each section of the book, although no concluding

chapter to pull the ideas finally together. Readers should also be warned that

they will find almost no discussion of the experience of floating exchange


Part I of the book provides a critique of both neo-classical and Keynesian

theories of money, and emphasizes the social and political role of money in

low-trust societies such as Europe. Part II introduces the development of

monetary policy through the establishment of the Bank of England and surveys

the Currency and Banking School controversy. Spahn here introduces the

importance of reputation and credible redemption that will be major themes of

his analysis of exchange rate standards. Spahn views the return to gold

convertibility in 1821 as an unnecessary and serious mistake that destabilized

the English monetary system. Likewise, he argues later that the continued use

of gold as an anchor in the gold standard and the Bretton Woods system

contributed to their weakness.

Having established the evolution of the money in England, the book turns a

sharp corner, and the second half is devoted to analyzing exchange rate

standards. The link between the first and second halves of the book might have

benefited from being more explicit to provide a more cohesive argument. Part

III is the most innovative and detailed section. Spahn applies game theory to

provide a stylized view of the operation of the pre-war Gold Standard. He

departs from Eichengreen by using a model in which the actors have different

policy priorities with respect to internal versus external equilibrium. In this

case England, as the key currency country where maintaining internal

equilibrium was less important than in other countries, emerges as a

Stackelberg follower rather than the leader.

By the end of the nineteenth century, these policy preferences were changing

and the twentieth century witnessed the increased importance of internal

stability, especially price stability and employment as primary targets — what

Spahn terms the move from the Gold Standard to the Wage Standard. For him, it

is this new balance of priorities that undermines the credibility and therefore

the stability of future efforts to sustain stable exchange rate regimes. The

familiar tale of the failed structure of the Bretton Woods system is detailed

in Chapter 6. For Spahn a major error was the continued use of gold in the US

dollar exchange system that fatally undermined it. Spahn notes that during the

Bretton Woods era “political considerations began more and more to dominate

attitudes towards currency matters” (p. 143). There is, however, very little

account of the practical politics of the 1940s and 1960s that prevented a

pragmatic solution to the role of gold in these decades. The drawn out and

acrimonious discussions aimed at identifying and resolving the flaws in the

system hardly get a mention beyond reference to France’s disruptive

accumulation of gold in the 1960s. The Bretton Woods era was a highly complex

period of international negotiation and conflict on a variety of strategic,

political, economic and monetary fronts that complicated the process of

managing the global exchange rate regime. As Spahn hints, this was a ‘golden

age’ in terms of the impressive growth experience of many countries, in spite

of rather than because of the operation of the international monetary system.

The important role of politics is again stressed in the following chapter on

the reasons behind the development of the European Monetary System. In terms of

the economic evolution of the system, Spahn models the way that the Deutsche

Mark became the key currency of the EMS because Germany was the most

stability-oriented country. He is then critical of the anti-inflationary policy

pursued by the Bundesbank that eventually drove the system apart, again because

of the ultimate supremacy of national over international policy goals. These

conclusions are not very original, but they are expressed using more formal

modeling and game theory than in usual narrative accounts.

The final chapter deals with the European attempt to eliminate the flaws of a

key currency system that plagued the gold standard, Bretton Woods and the EMS.

Like the EMS, European Monetary Union was prompted mainly for political rather

than economic purposes. Economically, Spahn predicts that the adoption of price

stability as the primary goal of the European Central Bank may deliver poor

prospects for growth and employment, especially for particular regions. The

benefits of currency union in terms of the ‘de-politicization’ of monetary

policy and the efficiency gained by no longer targeting exchange rates may be

undone by the transfers necessary to soften the impact on regional ‘losers.’

His final lesson of the experience of exchange rate standards is that they

cannot provide a shortcut to internal equilibrium by forcing countries to

converge with sounder economies. In his words, “monetary stability has to be

built at home,” it cannot be achieved through exchange rate targets (p. 189).

‘Home’ has just become a much bigger space for Europeans. It remains to be seen

whether it is too big and the rooms too distinct to allow the European Central

Bank to ‘build’ stability.

Dr. Catherine R. Schenk is Senior Lecturer in Economic History at the

University of Glasgow. Her most recent book is Hong Kong as an International

Financial Centre (Routledge, 2001). She is currently working on the reform

of the international monetary system in the 1960s and on British management of

the decline of sterling in that decade.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII