232 Hegemonic Stability Theories of the International Monetary System
1930s and 1940s, during the 1920s central banks placed increasing weight on
internal conditions when formulating monetary policy. The rise of socialism and
the example of the Bolshevik revolution in particular provided a counterweight to
central bankers’ instinctive wish to base policy solely on external conditions. External
adjustment was rendered difficult by policymakers’ increasing hesitancy to sacrifice
other objectives on the altar of external balance. Britain’s balance-of-payments
problems, for example, cannot be attributed to “the existence of more than one
policy” in the world economy without considering also a domestic unemployment
problem that placed pressure on the Bank of England to resist restrictive measures
that might strengthen the external accounts at the expense of industry and trade.
Under Bretton Woods, the problem of adjustment was exacerbated by the
difficulty of using exchange rate changes to restore external balance. Hesitancy
to change their exchange rates posed few problems for countries in surplus. However,
those in deficit had to choose between aggravating unemployment and tolerating
external deficits; the latter was infeasible in the long run and promoted an increase
in the volume of short-term capital that moved in response to anticipations of
devaluation. Although the IMF charter did not encourage devaluation, the hesitancy
of deficit countries to employ this option is easier to ascribe to the governments’
tendency to attach their prestige to the stability of established exchange rates than
to U.S. hegemony, however defined. Where the singular role of the United States
was important was in precluding a dollar devaluation. A possible solution to the
problem of U.S. deficits, one that would not have threatened other countries’
ability to accumulate reserves, was an increase in the dollar price of gold, that is,
a dollar devaluation. It is sometimes argued that the United States was incapable
of adjusting through exchange rate changes since other countries would have
devalued in response to prevent any change in bilateral rates against the dollar.
However, raising the dollar price of gold would have increased the dollar value of
monetary gold, reducing the global excess demand for reserves and encouraging
other countries to increase domestic demand and cut back on their balance-of-
payments surpluses. But while a rise in the price of gold might have alleviated
central banks’ immediate dependence on dollars, it would have done nothing to
prevent the problem from recurring. It would also have promoted skepticism about
the U.S. government’s commitment to the new gold price, thereby encouraging
other countries to increase their demands for gold and advancing the date of future
difficulties.
Does this evidence on adjustment support hegemonic theories of international
monetary stability? The contrast between the apparently smooth adjustment under
the classical gold standard and Bretton Woods and the adjustment difficulties of
the interwar years suggests that a dominant power’s policies served as a fixed
target that was easier to hit than a moving one.... [W]hat mattered was not so
much the particular stance of monetary policy but that the leading players settled
on the same stance. The argument...is that a dominant player is best placed to
signal the other players the nature of the most probable stance. The effectiveness
of the adjustment mechanism under the two regimes reflected not just British and
American market power but also the existence of an international consensus on
the objectives and formulation of monetary policy that permitted central bank