Barry Eichengreen 237What does this discussion imply for the role of hegemony in the provision of
international liquidity? The strongest evidence for the importance of a hegemon
is negative evidence from the interwar years, when the absence of a hegemon and
the failure of competing financial centers to coordinate their policies effectively
contributed greatly to the liquidity shortage. In other periods, when a dominant
economic power was present, it is difficult to credit that power with sole
responsibility for ensuring the adequate provision of liquidity. Under the gold
standard, the principal source of incremental liquidity was newly mined gold;
Britain contributed to the provision of liquidity only insofar as its financial stature
encouraged other countries to augment their specie holdings with sterling reserves.
After World War II, U.S. economic power similarly rendered dollars a desirable
form in which to acquire liquid reserves, but the same factors that made dollars
desirable also rendered them difficult to obtain.
The Lender of Last Resort
If adjustment were always accomplished smoothly and liquidity were consistently
adequate, there would be no need for an international lender of last resort to
stabilize the international monetary system. Yet countries’ capacity to adjust and
the system’s ability to provide liquidity may be inadequate to accommodate
disturbances to confidence. Like domestic banking systems, an international financial
system based on convertibility is vulnerable to problems of confidence that threaten
to ignite speculative runs. Like depositors who rush to close their accounts upon
receiving the news of a neighboring bank failure, exchange market participants,
upon hearing of a convertibility crisis abroad, may rush to liquidate their foreign
exchange balances because of incomplete information about the liabilities and
intentions of particular governments. This analogy leads Charles Kindleberger,
for example, to adopt from the domestic central banking literature the notion that
a lender of last resort is needed to discount in times of crisis, provide countercyclical
long-term lending, and maintain an open market for distress goods, and to suggest
that, in the absence of a supranational institution, only a hegemonic power can
carry out this international lender-of-last-resort function on the requisite scale.
Of the episodes considered here, the early Bretton Woods era provides the
clearest illustration of the benefits of an international lender of last resort. The
large amount of credit provided Europe in the form of grants and long-term
loans and the willingness of the United States to accept European and Japanese
exports even when these had been promoted by the extension of special incentives
illustrate two of the lender-of-last-resort functions identified by Kindleberger:
countercyclical lending and provision of an open market for distress goods.
Many histories of the Marshall Plan characterize it in terms consistent with the
benevolent strand of hegemonic stability theory: the United States was mainly
interested in European prosperity and stood to benefit only insofar as that
prosperity promoted geopolitical stability. Revisionist histories have more in
common with the coercive strand of hegemonic stability theory: they suggest
that the United States used Marshall aid to exact concessions from Europe in