202 The Domestic Politics of International Monetary Order: The Gold Standard
because groups in other countries absorb some of the benefits or bear some of the
costs of the externalities as well. And because the international spillovers of domestic
policy choices may be positive as well as negative, a stable international monetary
regime can exist even when the preferences of major states vary widely.
In essence, this is the “joint product” model applied to the workings of
international monetary systems. States produce and consume two goods: a private
good (happiness of the domestic dominant coalition) and a public good (international
monetary stability). As long as the production of joint products involves a supply
technology in which the private outputs cannot feasibly be separated from the
associated collective outputs, then a convergence can arise between the private
(national) and social (international) costs of public goods provision. Hence, for
states large enough in economic terms to produce systemic effects, there can be
incentives to absorb the overall costs of producing systemic benefits, if the private
goods they seek cannot be produced without generating the associated public
goods. Nevertheless, it is the excludable private benefits that drive the micro-
processes of international monetary order: domestic politics are primary, while
the international consequences of domestic policy choices are viewed largely as
by-products....
Consider the following example. There are two major nation-states in the world,
state A and state B. State A prefers stable currency while state B is inclined toward
domestic monetary independence. These heterogeneous preferences reflect
differences in domestic political situations: the dominant political coalition in
state A prefers that its government maintain stable currency over competing
macroeconomic goals; the dominant coalition in state B prefers domestic
macroeconomic policy flexibility over stable currency values. If we assume that
state A is a large state in global economic terms, its preference for stable currency
can be expected to have important and beneficial global spillovers: its strong
commitment to sound money means, for example, that its national currency is
well positioned to serve internationally as a medium of exchange and a reliable
store of value. State B, however, can also be expected to take on a system-sustaining
role—if only as a means of advancing its preference for domestic macroeconomic
autonomy. Because disruptions to the flow of capital in the international economy
can threaten state B’s domestically oriented macroeconomic agenda (including,
for instance, stable interest rates, a steady rate of economic growth, low
unemployment), state B may find it advantageous to play a stabilizing role alongside
state A—by acting as the system’s emergency source of liquidity, for example.
Since its dominant preference is to remain as free as possible to run the domestic
macroeconomic policies it chooses, undertaking the role of systemic lender of
last resort can serve this end by forestalling sudden and destabilizing capital flows.
A division of labor results in the provision of the regime’s sustaining functions:
state A provides the international system with a key currency while state B serves
as the system’s lender of last resort. In both cases these are the positive international
externalities of disunited, domestically determined preferences. They are externalities
because the governments that actually run system-sustaining policies have no special
desire to help stabilize the international system. Instead, governments are driven
by domestic imperatives, to satisfy the dominant coalition. The result is a state of