Barry Eichengreen 231Since fiscal harmonization requires no discussion in an era of balanced budgets,
the stability of the classical gold standard can be explained by the desire and
ability of central banks to harmonize their monetary policies in the interest of
external balance. External balance, or maintaining gold reserves adequate to defend
the established gold parity, was the foremost target of monetary policy in the
period preceding World War I. In the absence of a coherent theory of unemployment,
much less a consensus on its relation to monetary policy, there was relatively
little pressure for central banks to accommodate domestic needs. External balance
was not the sole target of policy, but when internal and external balance came
into conflict, the latter took precedence. Viewed from an international perspective,
British leadership played a role in this process of harmonization insofar as the
market power and prominence of the Bank of England served as a focal point for
policy coordination.
But if the Bank of England could be sure of defeating its European counterparts
when they engaged in a tug of war over short-term capital, mere harmonization
of central bank policies, in the face of external disturbances, would have been
insufficient to prevent convertibility crises on the Continent. The explanation for
the absence of such crises would appear to be the greater market power of European
countries compared with their non-European counterparts. Some observers have
distinguished the market power of capital-exporting countries from the inability
of capital importers to influence the direction of financial flows. Others have
suggested the existence of a hierarchical structure of financial markets: below the
London market were the less active markets of Berlin, Paris, Vienna, Amsterdam,
Brussels, Zurich, and New York; followed by the still less active markets of the
Scandinavian countries; and finally the nascent markets of Latin America and
other parts of the non-European world. When Bank rate was raised in London,
thus redistributing reserves to Britain from other regions, compensatory discount
rate increases on the Continent drew funds from the non-European world or curtailed
capital outflows. Developing countries, due to either the thinness of markets or
the absence of relevant institutions, were unable to prevent these events. In times
of crisis, therefore, convertibility was threatened primarily outside Europe and
North America....
Thus, insofar as hegemony played some role in the efficiency of the adjustment
mechanism, it was not the British hegemony of which so much has been written
but the collective hegemony of the European center relative to the non-European
periphery. Not only does this case challenge the conception of the hegemon,
therefore, but because the stability of the classical gold standard was enjoyed
exclusively by the countries of the center, it supports only the weak form of
hegemonic stability theory—that the benefits of stability accrued exclusively to
the powerful.
The relation between hegemonic power and the need for policy harmonization
is equally relevant to the case of the interwar gold exchange standard. One
interpretation...is that in the absence of a hegemon there was no focal point for
policy, which interfered with efforts at coordination. But more important than a
declining ability to harmonize policies may have been a diminished desire to do
so. Although the advent of explicit stabilization policy was not to occur until the