Published by EH.NET (March 2004)


Marc Flandreau, Carl-Ludwig Holtfrerich, and Harold James, editors, International Financial History in the Twentieth Century: System and Anarchy. Cambridge: Cambridge University Press, 2003. x + 278 pp. $60 (cloth), ISBN 0-521-81995-4.

Reviewed for EH.NET by Joseph R. Mason, Department of Finance, Drexel University.

This book, while not always fun to read, is, however, fascinating. In ten chapters, the essays lay out some of the important principles underlying path dependence between nineteenth and twentieth century international financial institutions. The essays are arranged in an order that demonstrates first the sophistication of late nineteenth century institutions and by the end the relative backwardness of what many consider to be sophisticated modern-day institutions. The essays in the book weave in and out of different academic disciplines, combining history, history of economic thought, and political economy in a way that offers a unique perspective of path dependence.

Flandreau and James sum up the book’s argument succinctly in the introduction. There, they assert:

… modern advocates of monetary reform are just the latest offspring of a long and venerable tradition dating back to the nineteenth century…. The past has lessons that are relatively cheap to learn, and, as we shall see, they are telling and compelling.


Put simply, these lessons are: (1) attempts at international coordination or control rarely work; (2) such attempts are most unstable when they are politicized as a result of unstable international politics; (3) the markets are themselves possible only on the basis of powerful institutional, political, and social forces (pp. 2-3).

Those are important and powerful lessons. I feel, however, that Flandreau and James reach a bit too far when they attempt to draw a globalization analogy out of the history of international monetary order. The authors characterize the interwar period as the bottom of a U-shaped trend of globalization. The present set of essays, however, seems to show that the extremes of the U-shape were lower than previously believed, i.e., that there was less coordination in the nineteenth century and today than was previously believed. Hence, it may be more appropriate to characterize the interwar period as one of transition toward a new hegemony or a new coordination mechanism rather than a low point in globalization per se.

Nonetheless the set of essays contained in the book is extraordinary. Chapter One, written by Marc Flandreau, describes how, under the previously perceived order of the classical gold standard, there existed significant sovereign risk that could detract from monetary order. Global financial centers grew immensely after 1840. This growth was due to better capabilities of screening borrowers and pricing risk, along with faster information flows arising from the growth of the telegraph, which was capped by the completion of cables between London and the Continent (1852) and Europe and America (1866).

Evidence for substantial sovereign risk in the era comes from records of the Service des Etudes Financi?res (SEF) as part of Cr?dit Lyonnais in 1871. The SEF was initially established to organize the vast amounts of information and data into a reference unit accessible to those making credit decisions for the bank. While from its inception in 1871 through about 1879 the SEF was underfunded and understaffed, and as a result only marginally effective at this task, by 1889 the SEF had achieved notoriety as the premier think tank for research into credit risk and international affairs (which at the time were highly correlated).

During its heyday, the SEF produced country ratings that relied critically upon adjusting sovereigns’ own reports of fiscal health for various known accounting irregularities and fudges, and for probabilities of sovereign risk of default. Hence, Flandreau effectively demonstrates that gold standard discipline was not absolute, nor did contemporary investors believe that was the case. Furthermore, disciplined investors routinely estimated default risk during the gold standard era in ways that are strikingly similar to modern rating mechanisms.

Still, there was ample room for investment outside the government sector during the gold standard era. That is the subject of Chapter Two, written by Mira Wilkins, regarding foreign direct investment between 1880 and 1914. Wilkins has poured a phenomenal amount of work into first appropriately defining, and then setting about to estimate a concept akin to what we now call foreign direct investment. A great deal of difficulty stems from not only utilizing vastly different corporate forms in the gold standard era, but also, of course, in the paucity of data from that era. At the end of the chapter Wilkins offers seven conclusions, the seventh of which I found the most intriguing for the purpose of the book: although “… the gold standard reduced the risks of losses based on currency fluctuations; it did not reduce commercial or political risks.” Hence, without nationalized industry business faced substantial risk even in the face of gold standard discipline.

Transitional essays begin with Stephen Shuker’s chapter on the Gold-Exchange Standard. Shuker’s essay offers intriguing insights into the politics of the interwar era and illustrates how resistance to the costs of moving the monetary center from Britain to America resulted in trade blocs that would later define the boundaries of World War II. This essay also points out the many problems inherent in building monetary order on the basis of “conference diplomacy.” Hence the primary difference in stability across the gold and gold standard eras was not one of inherent discipline, as countries routinely broke the “rules of the game” in both eras, but that the pressures left by WWI had already changed the rules in ways that economists at the time may not have recognized.

Kenneth Mour? continues the interwar theme in his chapter, which extends his book, Managing the Franc Poincar? (1991), back in time prior to 1928. Moure describes how, during the period 1914-1928, French politicians locked themselves into a policy of restoring and maintaining the franc’s link to gold.

Beginning as early as 1915, France urged its citizens to exchange gold for paper bank notes “without losing any part of their savings, without running any risk, without having to pay more for anything they wish to buy” (p. 97). The government even mobilized the Catholic Church, appealing to Christian principles, to encourage the exchange. By the end of WWI and lasting until 1928, however, France was in no position to exchange the paper back into gold as promised. For almost fourteen years, then, French citizens were told that France would reestablish her link to gold. Hence, France had little choice but to remain tied to gold once conversion was complete, even in the face of the Great Depression that gripped the world a short while later.

Robert Skidelsky’s chapter begins two essays devoted to the Bretton Woods era. Skidelsky skillfully describes how many of Keynes’ most important contributions owed to his experiences as a British citizen during and after the Great Depression. Hence, Keynes usually wrote from a vantage point of reestablishing Britain’s hegemony. Because the U.S. did not seem to want the role, Keynes was often of the opinion that the U.S. should contribute significant sums to attain this goal. A reluctant U.S., however, was not forthcoming until a shared threat, in the form of the Cold War, motivated it to take a leading role in the New World Order.

Jakob Tanner, on the other hand, describes how difficult it was for the neutral countries, including Sweden, Switzerland, Portugal, Spain, and Turkey, to play any part in helping shape that New World Order. Since the neutrals did not help win the war, and in fact may have in some ways interfered with victory, they were not looked kindly upon in the immediate post-war era. Hence, these countries were not invited to Bretton Woods, and could only join the arrangements in 1946. Those countries, however, being small and relying substantially upon foreign exports for economic growth, were acutely affected by the outcome at Bretton Woods.

The next two chapters deal with issues related to German reconstruction. The chapter by Charles Kindleberger and Taylor Ostrander analyzes the roots of the 1948 German monetary reform. This essay is fascinating on a number of different levels. First it shows just how costly and difficult managing a defeated nation’s postwar economy can be. Myriad resources were devoted to keeping order, planning succession governments, and establishing new monetary arrangements, all the while fighting inflationary pressures and, toward the end of the period, the Cold War. Second, and central to the essay provided here, the essay shows just how difficult it is to reestablish a currency rate that balances inflation, trade, and growth in a volatile country under military occupation. The main point is that the occupying forces often had to take steps that were impossible for an infant government to impose without losing credibility to an extent that insurrection or even war might ensue.

The chapter by Werner Abelshauser builds upon Kindleberger and Ostrander, pointing out that World-class Wars lead to world-class financial commitments long after the battlefields are quiet. Abelshauser demonstrates how military expenditures play a key role in international financial relations. These expenditures began with costs of the German occupation of around one billion dollars per year lasting into the 1960s (chiefly borne by the U.S. and U.K.). By 1960, the costs of the Cold War, Korea, and NATO nuclear armaments forced the U.S. and U.K. out of Germany and into exorbitant spending programs devoted to high-tech weaponry. Those weapons programs led to diplomatic agreements (and disagreements) about how to spread the financial burden of defense and to broader monetary coordination.

Eric Helleiner’s chapter on global money poses the question of whether the world is moving toward or away from a global currency. Some have suggested that the gold standard represented a means by which regional currencies were aggregated to national currencies. National currencies based on the gold standard were thought to be uniform, leading toward a global monetary standard. However, earlier essays revealed that the “rules of the game” in the gold standard era were often violated. Furthermore, once nations took control of their moneys they quickly used coins and currencies as nationalist tools, reflecting national icons, traditions, and pride. Although such movements may be taken as barriers to a global money standard, today a number of nations operate on the basis of substantial dollar-denominated trade. Hence, the market may in fact be driving the world to a de facto monetary standard without central coordination. If that is indeed the case, Friedrich Hayek would be pleased.

The last chapter, by Louis Pauly, characterizes twentieth century international relations not by the absence of gold standard “rules of the game,” (which many have argued were often absent in the nineteenth century anyway) but by the presence of a new means of coordinating monetary arrangements: “conference diplomacy.” Beginning with the League of Nations in the early 1920s, diplomats convened large assemblies of “the right sort of people” who could think intelligently about world economic difficulties and settle on arrangements to ameliorate those difficulties.

These early conferences are the basis of the institutions we know today, GATT, the IMF, the World Bank, etc. But while the minds have changed, the important issues of the day are remarkably similar to those considered in the earliest conventions. Pauly attributes this constancy to the philosophical nature of the debate. It is not economic principles that are being debated, but principles of “contestable markets, efficiency, and fairness” (pp. 254-5). In fact, Pauly notes that even the conclusions of the 1997 WTO meeting of the world’s leading trade ministers — we hereby create a working group, “to study issues raised by Members relating to the interactions between trade and competition policy, including anti-competitive practices, in order to identify any areas that may merit further consideration,” — are uncomfortably similar to the final goals of the Geneva Conference of 1927. Hence Pauly ends his essay with the perhaps disturbing insight:

We do not need to rediscover as the League of Nations did that the important question concerning the universal evolution of deep structural standards is not “efficient and fair for what,” but “efficient and fair for whom.” Symmetry in the distribution of the adjustment burdens associated with global economic interdependence was a key principle of the Bretton Woods system, albeit one honored mainly in the breach. In the post-Bretton Woods environment, it remained a normative ideal. It would seem wise to bring that principle back to center stage before accelerating the movement to articulate and enforce international standards of industrial organization and business practice (pp. 262-3).


Of course, much of the detail on monetary arrangements found in this book is described in Barry Eichengreen’s Globalizing Capital (1996), but that type of detail is not the main contribution. In my opinion, the main contribution is in drawing analogies in history and politics that can contribute perspective on the institutions of the past and help guide decisions in the future. In that regard, I think nearly every essay in the collection has succeeded.

Joseph Mason is the author of numerous articles including, “Do Lender of Last Resort Policies Matter? The Effects of Reconstruction Finance Corporation Assistance to Banks during the Great Depression,” Journal of Financial Services Research, August 2001, pp. 77-95. Find out more at