Published by EH.NET (October 2005)

Gianni Toniolo (with the assistance of Piet Clement), Central Bank Cooperation at the Bank for International Settlements, 1930-1973. Cambridge: Cambridge University Press, 2005. xxii + 729 pp. $125 (cloth), ISBN: 0-521-84551-3.

Reviewed for EH.NET by Geoffrey Wood, Faculty of Finance, Cass Business School, London.

This book covers the history of the Bank of International Settlements (BIS) from its birth in 1930 to 1973, a date determined by the thirty year rule. There is, before the historical study proper starts, a fascinating opening chapter which very briefly describes international monetary systems between 1870 and 1973, discusses what central bank cooperation can mean, and reviews that cooperation under the classical gold standard and for the years 1914 to 1922, as well as setting out “A BIS View of Cooperation.” Let it be said immediately that this is a useful and interesting book. It is also very detailed, and, except for the specialist, for dipping into rather than cover to cover reading. (Friedman and Schwartz’s Monetary History of the United States, which covers a much bigger subject over a much longer period, is longer by only 131 pages.) Its length and detail do, however, make it essential for the specialist.

What would a reader of it learn? It is in twelve chapters, ordered, after the first, chronologically, the breaks determined by key events such as exchange rate regime changes. There are also five appendices, and, absolutely essential to understanding, a list of acronyms – of which there are many.

The chapters deal with the planning for and birth of the BIS; its organization; and then into rough waters, with 1931. The next three chapters cover the discussions after the collapse of the international gold standard; actions between the end of gold and the start of war; and wartime. Then of course comes Bretton Woods and its long aftermath –multilateral payments, convertibility, and the “Patching Up” (Toniolo’s apt phrase) of the 1960s. Finally comes monetary union and the move of the BIS into being concerned with financial stability.

There is something, then, for almost everyone with an interest in monetary, or international financial, history. The book is plainly comprehensive. Is it good? Obviously Toniolo’s reputation leads one to expect so — but a check is always useful, and I first carried out that check by looking at chapter five, which is on a period on which I have worked fairly recently, and at chapter one, where the issue of defining cooperation is considered. As that strikes me as not altogether straightforward I wanted to see what Toniolo made of it.

The difficulty was highlighted by the opening of the preface. Toniolo reports his experience of a heavy snow storm in North Carolina cutting off electricity over a wide area, and, noting next how the payments system also depends on cooperation among many individuals, leads on to a discussion of the importance of cooperation over a wide area of economic life and then to how central banks have cooperated. Now, I think that is to confuse two quite different things. The first two cases are examples, complicated ones admittedly, of the kind of self interested actions that were identified by Adam Smith as bringing us “our beef, our beer, and our bread.” Central bank cooperation is different in kind, for it involves action to produce mutually beneficial results when there are no markets to facilitate this outcome.

Did the BIS understand cooperation in this way? If not, what did it understand by the term? What did it do? And what did it facilitate being done? We get answers to these questions in the course of the book. Indeed, we get the answers to the first two questions on pages 2 to 5, where the BIS Annual Report for 1935 is examined. The answers suggest an ambitious definition and an equally ambitious agenda. Central Banks should develop a common body of monetary doctrine, understand each other’s difficulties, learn how to avoid doing harm to each other, gather and exchange monetary and economic data, improve central bank practice in a “wide range of technical matters,” assist the creation of new central banks and aid small ones, and work out technical improvements to the international monetary system.

It is striking how much of that has actually been pursued. Indeed, the only area where progress has been entirely absent is the first, where few central banks have trod — or in some cases even shown any interest. Toniolo in the “historical” chapters describes much of what was done in these other areas, and how the BIS tried to help. But before leaving chapter one it must be noted that he makes interesting and instructive use of political science writing, such as that of Keohane, on the conditions necessary for successful cooperation, observing that it explains, for example, the difficulties of cooperation during the “insecure interwar years.” He is, I think, less persuasive in his brief use of game theory literature, for he uses it to explain why cooperation is needed to deal with “major single shocks.” I do not see why these cannot be dealt with by a set of prearranged rules or conventions, just as domestic lender of last resort operations can deal with domestic crises. But that is a minor criticism of an interesting and useful ground clearing chapter.

Of Chapter Five, which covers the end of the international gold standard and events immediately subsequent up to the London Conference and the German transfer crisis of 1933, there can be nothing but praise. It avoids the overdramatic melancholy that so often afflicts British accounts of Britain’s departure from gold, is full of fascinating detail, including Norman’s absence at sea at the crucial time, and also manages to convey how the world was sliding into autarchy and political disaster.

I learned much from the chapter on the BIS in wartime; I encountered material completely new to me in the account of how the BIS survived Bretton Woods; and, in chapter 10 started to achieve, I think, a grasp of the tangled and vague notion of convertibility. There was no chapter from which I did not learn something, and that holds even for chapter 12, which covers “Monetary Union and Financial Stability.” Both of these topics, European monetary union, in particular the Werner plan, and the stability implications of Eurocurrency markets, are areas where I have been involved both as a researcher and as a worker on policy, and even here I learned — not only some fresh perspectives, but also facts new to me.

Where the book disappoints is its lack of analysis. How much of what has been achieved in areas of concern to the BIS was achieved because of the BIS? When was it necessary, when helpful, and when irrelevant? Are all the objectives it set out to attain actually desirable?

These are important issues. The book does not resolve them, but it does unambiguously provide an abundance of material to help do so. It is tempting to conclude by saying that the only thing which stops me recommending this book to every monetary historian is that many would lack the strength to lift it, but that would be to treat with excessive levity a massive and skilled work of historical scholarship. We should all be grateful to Toniolo for by his efforts providing us with the material to address a large number of important questions, and for embedding that material in a useful and informative historical narrative.

Geoffrey Wood’s next book is Studies in the Lender of Last Resort, with Forrest Capie, to be published by Routledge in late 2005. He has just published, with Forrest Capie and Terry Mills, a study of the hedging properties of gold. He is currently working on a comparative study of four financial crises.