Globalizing Capital

"Globalizing Capital focuses specifically on financial globalisation and the history of financial globalisation. What I like about this book is the clarity with which it describes certain dilemmas that financial globalisation creates. Those dilemmas are very much the same ones that we’ve been discussing, but here we see them specifically in the area of macroeconomic policy. The gold standard came to an end precisely when the assumption that domestic economic policy should be driven by the needs of an international gold standard, at the expense of any kind of domestic policy objective, became untenable. What had sustained the gold standard in the 19th century was the idea that monetary policy didn’t have to have any domestic objectives. The only priority for monetary policy was, first of all, to keep a fixed parity to gold, and secondly, maintain open capital flows. What happened when those objectives came into conflict with domestic employment or domestic price stability or domestic economic growth? The standard gold standard answer was that you just had to grin and bear it – no matter how costly it was going to be. But by 1931, when Britain came off gold again and the gold standard began to unravel, the domestic polity had changed significantly – with the organisation of the world’s working classes, with much stronger trade unions and the expansion of the franchise. The presumption that domestic macroeconomic policy could be insulated from the pressure of these domestic organised groups in a more democratic environment became untenable – and Britain said to hell with the gold standard. That lesson – which the Eichengreen book describes in great detail – is again something that is very much with us. We keep learning it over and over again. For example, it’s the lesson that many countries in Europe are having to learn right now. Those countries that are in the Eurozone are essentially in a fixed exchange rate arrangement, just like the gold standard. In order to maintain that fixed exchange rate, their common currency, they are having to make their economies go through very, very wrenching, and costly adjustments. If Greece and Spain and Portugal and Ireland are living with it, that’s presumably because they think there’s a greater benefit to being members of the European Union, to be part of some kind of political union of the future. So there’s some compensating benefit. In 2001/2002, Argentina went through a similar kind of experience. In that case there was no compensating benefit so that the Argentines eventually ended up renouncing the fixed exchange rate and stopped repaying their external debt. This kind of experience keeps coming back. On the one hand, you want to put on the golden straitjacket and hope that it will lift you up. On the other hand, the golden straitjacket becomes very expensive at times of stress, and then the temptation to throw it away becomes way too strong. Yes, very much so. Financial crises are a recurring feature of financial globalisation and we see that going back to the various banking crises under the gold standard, the highly turbulent 1920s, and then, increasingly since the 1980s, a series of sovereign debt and financial crises that have rocked the world economy. Eichengreen does a very good job of giving us that story too."