Exchange Rate Regimes in the Twentieth Century

Published by EH.NET (November 1999)

Derek H. Aldcroft and Michael J. Oliver, Exchange Rate Regimes in the

Twentieth Century. Cheltenham, UK, and Northampton, MA, USA: Edward Elgar,

1998. xiii + 210 pp. $85.00 (cloth), ISBN: 1 85898 320 7.

Reviewed for EH. NET by Anna J. Schwartz, National Bureau of Economic

Research.

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 11 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 1 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 experience 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 2 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 3 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 generalized 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 5 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.

Chapt4er 6 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 19 93 (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.

(Derek H. Aldcroft is Research Professor in Economic History at Manchester

Metropolitan University. Michael J. Oliver

is Lecturer in Economic History at the University of Leeds.)

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).