Barry Eichengreen 239absorption, Britain’s budget deficit, in conjunction with the collapse of foreign
demand for British exports, weakened the balance of trade. Although the second
Labour government fell in 1931 precisely because of its failure to agree on
measures to reduce the size of the budget deficit, historians disagree over whether
the budget contributed significantly to the balance-of-payments deficit. The trade
balance, after all, was only one component of the balance of payments. The
effect on the balance of payments of shocks to the trade balance appears to
have been small compared with the Bank of England’s capacity to attract short-
term capital. If this is correct and the 1931 financial crisis in Britain reflected
mainly a temporary loss of confidence in sterling rather than a fundamental
disequilibrium, then additional short-term loans from the United States or a
group of creditor countries might have succeeded in tiding Britain over the crisis.
But the loans required would have been extremely large by the standards of
either the pre-1914 period of British hegemony or the post-1944 period of U.S.
dominance.
The international lender-of-last-resort argument is more difficult to apply to
the classical gold standard.... In 1873, as in 1890 and 1907, the hegemonic monetary
authority, the Bank of England, would have been the “borrower of last resort”
rather than the lender. [This fact] might be reconciled with the theory of hegemonic
stability if the lender, Paris, is elevated to the status of a hegemonic financial
center—a possibility to which Kindleberger is led by his analysis of late nineteenth
century financial crises. But elevating Paris to parity with London would do much
to undermine the view of the classical gold standard that attributes its durability
to management by a single financial center.
What does this historical analysis of the lender-of-last-resort function imply
for the validity of hegemonic theories of international monetary stability? It confirms
that there have been instances, notably the aftermath of World War II, when the
economic power of the leading country so greatly surpassed that of all rivals that
it succeeded in ensuring the system’s stability in times of crisis by discounting
freely, providing countercyclical lending, and maintaining an open market. It
suggests, at the same time, that such instances are rare. For a leading economic
power to effectively act as lender of last resort, not only must its market power
exceed that of all rivals, but it must do so by a very substantial margin. British
economic power in the 1870s and U.S. economic power in the 1960s were inadequate
in this regard, and other economic powers—France in the first instance, the Group
of Ten in the second—were needed to cooperate in providing lender-of-last-resort
facilities.
THE DYNAMICS OF HEGEMONIC DECLINE
Might an international monetary system that depends for its smooth operation on
the dominance of a hegemonic power be dynamically unstable? There are two
channels through which dynamic instability might operate: the system itself might
evolve in directions that attenuate the hegemon’s stabilizing capacity; or the system
might remain the same, but its operation might influence relative rates of economic