Money and the Nation State: The Financial Revolution, Government and the World Monetary System

Published by EH.NET (November 1999)

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Kevin Dowd and Richard H. Timberlake, Jr., editors, Money and the Nation State: The Financial Revolution, Government and the World Monetary System. New Brunswick, NJ and London: Transaction Publishers for the Independent Institute, 1998. vii + 453 pp. $39.95 (cloth), ISBN 1-56000-302-2; $24.95 (paper), 1-56000-930-6 (paper).

Reviewed for EH.NET by Howard Bodenhorn, Department of Economics, Lafayette University.

Kevin Dowd (Sheffield Hallam University) and Richard Timberlake (University of Georgia emeritus) bring together 13 essays, an introduction by the editors, and a foreword by Merton Miller, recipient of the 1990 Nobel Memorial Prize in Economic Science, all unified by an Austrian methodology. These authors believe that information and knowledge are dispersed so that centralized decision makers cannot possess the omniscience to effectively coordinate economic activity. True coordination or “catallaxy,” to employ Hayek’s preferred term, occurs through the operation of the invisible hand. While the Austrian approach is familiar enough to many, its application to monetary systems may not be. This book thus represents an important contribution because it “provides the essential framework for those willing to return to first principles in thinking about the role of monetary arrangements in economic life” (p. viii).

Money and the Nation State is divided into three sections. The first containing five chapters describing how the world abandoned a naturally evolving monetary arrangement (gold standard) for a government-controlled monopoly system. David Glasner (Chapter 1) walks us through the state’s involvement in money from ancient Lydia through Britain’s disastrous return to gold in 1925. Frank van Dun (Chapter 2) argues that money fell under state control through incremental expansion of the boundaries of sovereignty. Whatever becomes identified with the public interest or the common good quickly becomes a legitimate governmental activity.

Chapters 3 through 5 provide real insight into the mind of Austrian monetary analysts. Timberlake (Chapter 5 ), for example, reiterates Mises’s assertion that a gold standard acts as “an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs within the same class with political constitutions and bills of rights” (p. 179). Similarly, after detailing the gold standard, Britain’s interwar monetary machinations, Bretton Woods, and post-1973 developments, Leland Yeager (Chapter 3) concludes that all were “palliative policies of the usual variety; ” they were not “genuine commitment[s] by governments and central banks to currencies of stable purchasing power” (p. 101). Murray Rothbard (Chapter 4) summarizes by noting that these events ultimately plunged the world into a “chaos of fiat money, competing devaluations, exchange controls, and warring monetary and trade blocs, accompanied by a network of protectionist restrictions” (p. 155). All this seems like a lot to blame on modern monetary arrangements, and it is easy for critics to portray these writers as paranoid, conspiracy theorists, but a lot of what they have to say rings true and each makes a compelling case for his interpretation.

Section II includes four chapters that discuss the effects, intended and not, of central banks and modern monetary arrangements. Thomas Cargill (Chapter 6) recites a list of statutory changes in financial regulations in the post-Bretton Woods era. He argues that deregulation, while sometimes disruptive, was practically inevitable given the rapid advances in telecommunications and computer technologies, which opened the floodgates of financial innovation. Genie Short and Kenneth Robinson (Chapter 7) make the now familiar argument that financial safety nets, such as deposit insurance, generate moral hazard problems , which have the perverse effect of magnifying rather than eliminating financial instability. Alan Reynolds’ (Chapter 8) assessment of the International Monetary Fund’s activities is as unceasingly critical as any I have seen. He argues that the IMF doctors, like doctors of old, invariably prescribe the same wrong cure (the financial equivalent of purging and leeches) regardless of the patients’ illnesses. It is not surprising, then, that the IMF’s success stories are few and do not offset the devastation typically left in its wake.

Robert Keleher’s contribution (Chapter 9) on global economic integration provides a nice conclusion to the section. He posits that there are two broad approaches to increased integration: (1) a Keynes-gone-global approach; or (2) a classical Austrian-Hayekian approach. The former begins from the premise that governments can effectively coordinate economic activity, only now it needs to do so in an international setting. This implies a need for super-national organizations like the IMF, the World Bank, and the World Trade Organization because sovereign countries rarely relinquish control over domestic policy instruments even though most create international externalities. The latter, or Hayekian, approach suggests that coordination should occur at the micro level. Countries should not attempt coordinated monetary and fiscal policies aimed at manipulating the macroeconomy. Instead, they should eliminate tariffs, quotas, and other restrictions on the free movement of labor, capital, and commodities. Moreover, they should adopt consistent rules for such things as bankruptcies, intellectual property, and contracts. Consistent accounting and disclosure rules, too, would eliminate one level of uncertainty and promote cross-country economic harmonization.

The third section of Money and the Nation State contains four chapters that outline proposals for financial reform. Richard Burdekin, Jilleen Westbrook, and Thomas Willet (Chapter 10) provide a public choice analysis of several central bank reform proposals and conclude that central bank independence is critical. Kevin Dowd (Chapter 11) provides a blistering critique of European monetary union. While supporters of union have argued that the benefits of a common currency outweigh its costs, little supporting evidence has been provided. The move toward union, it seems, is more political than economic and is driven by French fears of German hegemony on the continent (p. 355).

Lawrence H. White (Chapter 12) reconstructs, in a modern context, Hayek’s 1937 proposals for optimal monetary arrangements. One proposal was for universal free banking; the other for an apolitical transnational central bank. Finally, Steve Hanke and Kurt Schuler (Chapter 13) offer a spirited defense of currency boards, which issue notes convertible into a reserve asset, usually a foreign currency, on demand at a fixed exchange rate. Currency boards do not accept deposits; they do not act as lenders of last resort; they do not guarantee commercial bank deposits ; they do not interfere in commercial bank portfolios, or engage in a host of other regulatory functions. Consequently, currency boards do not suffer from the moral hazard problems inherent in central bank and deposit insurance structures and are compatible with stable free banking systems.

Current debates on financial reform pit those with few shared ideological premises against one another. One side of the debate argues that rapid changes in telecommunications and computers, along with increased globalization and a quickening pace of financial innovation require greater regulatory efforts to deal with the developing complexities. The other side argues that recent and future innovations have and will occur too quickly and be so significant that no regulatory mechanism will keep up with them, much less reign them in. Moreover, many innovations develop to circumvent existing regulations. The latter camp, inspired by the Austrian approach to markets, argues that only market-driven discipline will be an effective promoter of financial stability. The contributors to this volume all begin from Austrian premises and trace the implication of those premises for modern monetary arrangements. Most show that intervention leads to sub-optimal economic outcomes, and many argue that it leads to usurpation of economic and political rights. In some cases, the point is overstated, but in some of the more reflective sections, the message is clear and powerful.

Marx and Engels argued in the Communist Manifesto that one of the preconditions for communism was centralization of credit in the hands of the state, by means of a central bank with an exclusive monopoly. While none of the contributors to this volume could convincingly argue that Marx and Engel’s precondition has been realized in any western-style economy, most would argue that central banking, by its very nature, entails the “fatal conceit” of central planning, one of the defining elements of socialism. Something to think about the next time you buy your morning coffee with a Federal Reserve note or, perhaps, your stored-value card.

Howard Bodenhorn is author of A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation-Building due from Cambridge University Press in January, 2000.

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