Globalizing Capital: A History of the International Monetary System.

• Author: Schwartz, Anna J.

Princeton: Princeton University Press, 1996. Pp. viii, 223. $24.95 cloth.

A major theme of Barry Eichengreen's accessible history of the international monetary system since 1850 is that pegged exchange rates are viable when governments arc insulated from domestic politics. Under domestic political pressure governments will give up exchange rate stability--external stability of the currency--for other goals, such as low interest rates and high employment.

The study traces the changing face of international monetary regimes:

* fixed-exchange-rate commodity-based systems--bimetallic before 1870, the gold standard thereafter--until World War I;

* the postwar reconstruction of a fixed-exchange-rate gold exchange standard, and its disintegration in the 1930s, followed by managed floating exchange rates before World War II;

* the Bretton Woods system of pegged but adjustable exchange rates from 1946 to 1971; and the variety of exchange-rate arrangements since: managed floating by large industrialized countries, an effort to establish monetary union in Western Europe, currency boards and nominal exchange-rate anchors in less developed countries (LDCs).

Eichengreen notes the association of exchange-rate behavior in each monetary regime with contemporaneous developments in world capital markets. Features of the gold standard era were the high level of international capital mobility and the freedom from controls of international financial transactions. The introduction of capital controls and a drastic decline in capital flows after 1928 marked the interwar period. The Bretton Woods era began with officially sanctioned capital controls. When the era ended, the controls had been eroded by the emergence of liquid international financial markets. Since the 1970s, there has been further growth of highly mobile capital flows and a deepening of international capital markets.

Eichengreen rejects the proposition that the demise of the pegged-exchange-rate Bretton Woods system and the subsequent shift to fluctuating exchange rates are wholly attributable to the resurgence of capital mobility. Fixed exchange rates and unfettered capital mobility, after all, characterized the gold-standard regime.

The explanation for the success of the pre-World War I gold standard, according to Eichengreen, was limited suffrage and the weakness of labor unions and of labor-oriented political parties. Authorities therefore could face down a challenge from the masses, when...