Fixed Ideas of Money: Small States and Exchange Rate Regimes in Twentieth-Century Europe

Published by EH.NET (November 2010)

Tobias Straumann, Fixed Ideas of Money: Small States and Exchange Rate Regimes in Twentieth-Century Europe. New York: Cambridge University Press, 2010. xix + 392 pp. $90 (hardcover), ISBN: 978-0-521-11271-0.

Reviewed for EH.Net by Per H. Hansen, Center for Business History, Copenhagen Business School.

Tobias Straumann is lecturer in history at the University of Z?rich and in economics at the University of Basel, and in his first book, Fixed Ideas of Money, he demonstrates his command of both disciplines while also drawing on international political economy (IPE) literature. As the title suggests Straumann?s point of departure is that states and central banks do not always make rational choices with respect to exchange policy, and that they have, therefore, ?fixed ideas of money.? This idea is not new, of course, since it has been put forward by Barry Eichengreen and Peter Temin, among others, who have argued that the gold standard was carried by a mindset that made it almost impossible for decision makers not to believe in it. What is new in Straumann?s book, however, is the shift in focus from the Great Powers to small states in Europe and the expansion of the time period to include the decades after Bretton Woods broke down in the early 1970s.

In focus is on three Scandinavian countries, Sweden, Norway and Denmark, as well as Belgium, the Netherlands, and Switzerland and — to a lesser degree — Austria. The author leaves Austria out of the analysis of the interwar period because of its tumultuous monetary history, but it is not entirely clear why the Austrian case would not be both interesting and relevant. The fact that the international financial crisis of 1931 began with the Credit Anstalt crisis and was an important immediate cause of Britain?s and the Scandinavian countries? decision to leave the gold standard in September 1931 seems to support this.

It is a difficult genre that Straumann has entered. Comparative economic history is often quantitative and cliometric in its approach, but Straumann actually delivers a few ?blows? to such approaches and to research that has stressed the importance of private interests and institutional variables in determining the exchange rate policy of small states. For instance, Straumann finds Beth Simmons? analysis of the interwar monetary problems insufficient and problematic. Instead he uses qualitative analysis based on what he calls ?narrative evidence.? This does not mean that the analysis lacks rigor, however. It could be argued that this approach may lose some strength — depth, thick description, search for meaning, and understanding rather than explanation — when applied across seven countries, but Straumann avoids this and does an impressive job. The book is not only based on a huge secondary literature but also on unpublished archival material mostly from the respective central banks, on published government material and national newspapers and so on. In order to master this literature, Straumann had to learn the Scandinavian languages along the way.

The book is organized in two main parts. The first part is structured chronologically and deals with the interwar period, while the second part, which analyses the post-Bretton Woods era, is thematically structured. In the first part, Straumann sets the record straight in four chapters that analyze the divergence of inflation and exchange rates during and after World War One, the return to prewar parity, monetary policy after September 1931, and the small Gold Bloc countries? insistence on staying the course until 1935 and 1936. In each chapter, Straumann places his analysis in the context of existing research and debates, and he concludes that the divergence during and after the war was not caused by monetary factors but by variations in trade deficits, and that the timing of the return to prewar parity was related to these imbalances as well. At the same time the heavy emphasis on returning to the old parity was a result of a wish to restore the old economic order, or as it was said in Denmark to restore the ?honest krone.? Straumann finds that policymakers did not change the focus of monetary policy after they left gold, and he disputes the idea that Sweden shifted to price targeting in the early 1930s or that the Danish central bank changed its monetary policy during the banking crisis of the 1920s. The debate on these issues is likely to continue, but Straumann?s comparative focus is a great strength.

In the last chapter of part one, Straumann discuss the Gold Bloc?s stubborn and problematic allegiance to gold into the mid-1930s, and he agrees with Eichengreen and Temin?s point that it was ideas rather than interests that determined this policy. Country size was also important, in that small states in general followed large states. Here, it would have been interesting to add a more detailed discussion of the differences between the Scandinavian and the small gold bloc countries with respect to what determined the different timing for leaving gold. The author argues that gold reserves, trade structure and the banking system explain the timing better than institutional frameworks, but how did the ?fixed ideas? matter for timing?

In the second part, size is again demonstrated to be an important variable. As before, small states preferred fixed exchange to floating regimes and this was mostly due to a sense of vulnerability, as also discussed in the IPE literature. Notably, some large countries, including the United States introduced a flexible exchange rate regime while the European Community set up the snake and then the European Monetary system with less rigid rules than the gold standard, and with some restrictions on capital mobility. As Straumann notes, the ?idea that exchange rates should be fixed proved to be remarkably persistent? (p. 172). It was only with the crisis of 1992 that Sweden — and later Norway — introduced a flexible exchange rate regime based on inflation targeting. As is well known, other small Western European states joined the Euro, while Denmark, apparently still suffering from ?Fixed Ideas,? pegged the krone to the Euro.

This process is discussed in four chapters, with chapters five and six focusing on the divergence of the 1970s and 1990s respectively, while chapters seven and eight look into the experience of Switzerland, Sweden and Norway with floating exchange rates. Straumann draws on economic theory in order to raise the relevant questions, and he finds, again, that ideas or perception was important. Policymakers in small open economies believed in pegged exchange rates, and it was only when Sweden and Norway broke with this ideal that ?Fixed Ideas? began to lose their power. And it was not accidental that it was these countries (and Switzerland from the 1970s) that first let go of the idea. They were financially open but not members of the EU, and therefore they were exposed to international markets. Straumann concludes that the shift to flexible exchange rates by Sweden and Norway was a watershed, and that it has served these countries well. Whether Denmark?s decision to peg the krone to the Euro is a good idea is not discussed.

Overall, ?Fixed Ideas? is a very welcome and important contribution to comparative economic and monetary history. The scale of the empirical material — quantitative as well as qualitative — is impressive, and the analysis is solidly grounded in the research literature. It seems that by now there is more or less consensus that ideas or even discourses and narratives mattered (and matters) a great deal for understanding financial and economic matters. In order to take this understanding to the next level, economic historians will have to draw on concepts and ideas (such as embeddedness, sense making and meaning) from sociology and cultural studies. Despite the few small problems I have raised, Fixed Ideas contributes in an important way to our understanding of small European states? exchange rate policy in the twentieth century, and in combination with other research it provides a good starting point for entering the next level.

Per H. Hansen is professor at the Center for Business History at Copenhagen Business School. He has published books and articles on Danish financial history, the business history of Danish design, organizational culture and change, among other things. He is currently working on an analysis of central bank cooperation during the 1931 international financial crisis.

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