234 Hegemonic Stability Theories of the International Monetary System
of currency devaluation could have taken place, therefore, was if Britain had
stabilized in 1925 at a lower level. But had her dominance of the international
economy not eroded over the first quarter of the twentieth century, the political
pressure on Britain to return to gold at the prewar parity would have increased
rather than being reduced. It seems unlikely, therefore, that a more successful
maintenance of British hegemony, ceteris paribus, would have alleviated any gold
shortage.
An alternative and more appealing explanation for interwar liquidity problems
emphasizes mismanagement of gold reserves rather than their overall insufficiency.
It blames France and the United States for absorbing disproportionate shares of
global gold supplies and for imposing deflation on the rest of the world. Between
1928 and 1932, French gold reserves rose from $1.25 billion to $3.26 billion of
constant gold content, or from 13 to 28 percent of the world total. Meanwhile, the
United States, which had released gold between 1924 and 1928, facilitating the
reestablishment of convertibility in other countries, reversed its position and imported
$1.49 billion of gold between 1928 and 1930. By the end of 1932 the United
States and France together possessed nearly 63 percent of the world’s central
monetary gold....
The maldistribution of reserves can be understood by focusing on the systematic
interaction of central banks. This approach builds on the literature that characterizes
the interwar gold standard as a competitive struggle for gold between countries
that viewed the size of their gold reserve as a measure of national prestige and as
insurance against financial instability. France and the United States in particular,
but gold standard countries generally, repeatedly raised their discount rates relative
to one another in efforts to attract gold from abroad. By leading to the accumulation
of excess reserves, these restrictive policies exacerbated the problem of inadequate
liquidity, but by offsetting one another they also failed to achieve their objective
of attracting gold from abroad....
The origins of this competitive struggle for gold are popularly attributed to the
absence of a hegemon. The competing financial centers—London, Paris, and New
York—worked at cross-purposes because, in contrast to the preceding period, no
one central bank was sufficiently powerful to call the tune. Before the war, the
Bank of England had been sufficiently dominant to act as a leader, setting its
discount rate with the reaction of other central banks in mind, while other central
banks responded in the manner of a competitive fringe. By using this power to
defend the gold parity of sterling despite the maintenance of slender reserves, the
bank prevented the development of a competitive scramble for gold. But after
World War I, with the United States unwilling to accept responsibility for leadership,
no one central bank formulated its monetary policy with foreign reactions and
global conditions in mind, and the noncooperative struggle for gold was the result.
In this interpretation of the interwar liquidity problem, hegemony—or, more
precisely, its absence—plays a critical role.
In discussing the provision of liquidity under Bretton Woods, it is critical to
distinguish the decade ending in 1958—when the convertibility of European
currencies was restored and before U.S. dominance of international trade, foreign
lending, and industrial production was unrivaled—from the decade that followed.