Domestic Politics of International Monetary Order: the Gold Standard

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This page is a summary of an essay written by Lawrence Broz, titled "The Domestic Politics of International Monetary Order: the Gold Standard."

Recognizing that a smoothly functioning monetary regime deviates from "natural state of affairs," Broz is deeply concerned with the question of how macroeconomic policy cooperation among member states--the key prerequisite of the regime's existence--is achievable. Whereas Charles Kindleberger attributes this to the existence of a hegemonic economic power, Broz calls this hegemonic stability theory into question on the grounds that empirical work does not fully support it, and that the model's assumption that member states' have homogeneous preferences is contrary to reality. Nevertheless, Broz does not consider this assumption essential to international monetary regimes. His main argument in the essay is that, stable international monetary regime can arise notwithstanding its participants heterogeneous national policy preferences, especially with respect to the issue of exchange-rate variability, so long as all parties to the regime willingly perform specialized regime-stabilizing functions consistent with their national objectives. This paradoxical idea that a state can pursue its national interest while contributing to the international public good is referred to as positive externalities. Using the Gold standard in the late nineteenth and early twentieth-century as a case in point, Broz surveys the British, French and German experiences, and shows that their different contributions to the functioning of the gold standard are shaped and sustained by domestic interests.


England's most conspicuous contribution to operations of the international gold standard is making sterling a global currency that serves as a medium of exchange and a store of value for the world. Part of the reason for England's strong commitment to the convertibility of gold is that London rises into prominence as the greatest financial center in the world after the Napoleonic Wars. Interests of the fast-growing banking sector and those of the traditionally dominant landed aristocrats coalesced around the gold standard.


France provided the system with lender-of-last-resort facilities for balance-of-payment financing. France never subscribed to principle of gold standard nor abode by its rules, because all of the three sectors--finance, manufacturing, and agriculture--were concerned above all else with maintaining domestic macroeconomic flexibility, which entailed limited external drains of gold and stable interest rates. To achieve the first goal, France operated a “limping gold standard,” which subjected the convertibility of gold to official manipulations, the most famous being the premium for gold, which effectively limited gold export. In order keep the domestic interest rate low and stable, the government must find a way to insulate its economy from external disturbances in the system. The Bank of France achieved this by amassing an enormous gold reserve and using it to aid foreign countries in times of financial distress, thereby playing a crucial role in stabilizing the international gold standard.


Germany adopted the gold standard in 1873, but never fully adhered to its principles. Its national preferences lied in maintaining domestic price stability, and insulating its domestic economy from external financial stress. Like France, gold convertibility was conditional and discretionary.