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Money over Two Centuries: Selected Topics in British Monetary History

Author(s):Capie, Forrest
Wood, Geoffrey
Reviewer(s):Wood, John H.

Published by EH.Net (December 2012)

Forrest Capie and Geoffrey Wood, Money over Two Centuries: Selected Topics in British Monetary History. Oxford: Oxford University Press, 2012. x + 367 pp. $125 (hardcover), ISBN: 978-0-19-965512-0.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake Forest University.

Two eminent professors emeriti of economic history at City University London have collected some of their published work over three decades into a convenient and useful analytical account of British monetary experiences the last two centuries.? Competing hypotheses of connections between money, inflation, central banking, and financial stability are examined to help us understand twenty-first-century events as well as the past.? The authors say in the introduction that they began with the goal of a monetary history of the United Kingdom similar to Friedman and Schwartz?s Monetary History of the United States.? An insurmountable obstacle, however, was the openness of the British economy.? For an economy with a third of national income engaged in foreign trade, domestic policies are only part of the story.? It can hardly be said, for example, that because wage changes are moderate there are no inflation dangers.? Nor are other closed-economy models imported from the United States helpful.? An ?output gap? derived from a domestically measured ?supply potential? of an economy open to the world is a meaningless concept (pp. 1-2).? This would also explain why the NBER?s cyclical domestic measures at the center of Friedman and Schwartz?s study are less useful to the analysis of more open economies.? The book and the rest of this review are divided into three parts that treat (i) the causes and effects of money, 1870-1939, (ii) financial crises, 1914-1949, and (iii) international problems and policies since World War II.?
Chapter 2 applies an ARIMA analysis to the distinction between two explanations of the Great Depression (which should probably be renamed ?The Great Price Fall?) of 1873-96 in Britain ? money and excess agricultural supply ? and finds in favor of the former; in particular, the international gold standard under which the quantity of money is outside the control of the authorities and the price level is determined internationally by gold production. (This reviewer would have said the relative cost of gold, but it comes to the same thing.)? The demand for money was also stable, helped by remarkable monetary stability (Chapter 3), which also explains why the post-1929 depression was less severe in Britain than the United States (Chapter 4).? Whatever monetary problems Britain had, including the return to gold in 1925 and the suspension of 1931, the authors conjecture that the stability of money contributed to general economic stability.? ?Institutions were crucial to the contrast in monetary stability between Britain and the rest of the world? (p. 99).? They were at least part of the reason why the deflations of 1873-96 and the interwar period had no important real effects, at least compared with the rest of the world.? The predictability of prices leads to the rejection of Keynes?s and Fisher?s theories of adverse effects of deflation on output in Britain (Chapter 5).?

Chapters 6 and 7 examine devaluations.? British monetary policies left much to be desired during the interwar period, but its institutions managed to get through what might have been crises without severe damage to the economy.? Although suspension of the gold convertibility of the pound in 1931 was a surprise, it was not associated with any of the shocks present in Minsky?s or Kindleberger?s accounts of crises.? There was no major boom and bust, bank run, reserve loss, or large government deficit.? Public and policy responses were mainly sighs of relief, and the suspension was treated as part of a considered adjustment to international events, forced in this case by the breakdown of the gold standard.? The 1949 devaluation was planned, on the other hand, but was similar to 1931 in being a response to conditions.? Both were ?beneficial? though feared beforehand (p. 203).
The third part is historical with interesting implications for the present.? Chapter 11 notes that apparently significant technological and institutional innovations have not ?threatened to move us from a money-using society to one which transacts by some other means,? so that their ?implications for monetary policy have … been, in theory at least, trivial? (p. 235).? A strategic market game implies that as long as transactions costs exist there will be fiat money (p. 249).? To the question, ?Can the EMU Survive?? (Chapter 12), the history of monetary unions suggests: not without more fiscal and political union.? The history of central banks and inflation (Chapter 13) suggests that the distinction between dependent and independent central banks has been overdrawn.? The choice has always depended on the government?s preference.? The history of the IMF in Chapter 14 finds no redeeming qualities.? The institution?s purpose as originally envisioned ? a flexible international order ? was not realized, and its self-anointed role as crisis manager, consisting largely of indefensible bailouts, has not been surprising in ?unelected officials who are not accountable for their actions,? quoting Anna Schwartz (p. 323).? In ?Financial Crises from 1803 to 2009: The Crescendo of Moral Hazard? (Chapter 15), we see government regulation deteriorate from reinforcing market solutions by providing lender-of-last facilities to their opposite, i.e., impeding rather than helping market incentives.? Those who would understand the development of British monetary policies, and appreciate how we got where we are, can do no better than begin with this book.

John H. Wood, Reynolds Professor of Economics, Wake Forest University, is co-author (with Sandeep Mazumder) of ?The Great Recession of 1929-33: It (Almost) Had to Happen,? forthcoming in the Journal of Economic History.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII