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14
Hegemonic Stability
Theories of the International
Monetary System
BARRY EICHENGREEN
Barry Eichengreen evaluates the applicability of hegemonic stability
theory (see Krasner, Reading 1, and Lake, Reading 8) to international
monetary relations. He examines the argument that the existence
of a single dominant power in the international arena is necessary
for the establishment and maintenance of stable monetary systems.
Eichengreen examines three monetary systems—the classical gold
standard, the interwar gold-exchange system, and the Bretton Woods
system—to see whether the presence or absence of a hegemon
was the primary cause of their development and maintenance.
He finds that while hegemons may contribute to the smooth
operation of international monetary regimes, international
cooperation has been equally important to their design and
functioning.An international monetary system is a set of rules or conventions governing the
economic policies of nations. From a narrowly national perspective, it is an unnatural
state of affairs. Adherence to a common set of rules or conventions requires a
certain harmonization of monetary and fiscal policies, even though the preferences
and constraints influencing policy formulation diverge markedly across countries.
Governments are expected to forswear policies that redistribute economic welfare
from foreigners to domestic residents and to contribute voluntarily to providing
the international public good of global monetary stability. In effect, they are expected
to solve the defection problem that plagues cartels and—equivalently in this
context—the free-rider problem hindering public good provision. Since they are
likely to succeed incompletely, the public good of international monetary stability
tends to be underproduced. From this perspective, the paradox of international
monetary affairs is not the difficulty of designing a stable international monetary
system, but the fact that such systems have actually persisted for decades.
Specialists in international relations have offered the notion that dominance
by one country—a hegemonic power—is needed to ensure the smooth functioning