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
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
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).