Globalizing Capital Book Review

Globalizing Capital is a book by Barry Eichengreen that explores the past of the monetary system worldwide. The book gives a timeline of how the currencies of the world had evolved from a time when people used metals such as silver as currency to the current time where different countries have different currencies which are engaged in foreign exchange trades. The book further explains the role of politics in the formulation and growth of currencies.

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"Globalizing Capital" is relevant in the study of economics today. The book combines the field of economics and political science. This paper presents the main topics that Eichengreen has focused on which are the old standard, interwar instability, the Bretton Woods System and the period following the Bretton Woods era. The paper further discusses theses that concern issues of macroeconomics, money, and banking, economic growth and development, and the development of economic institutions and how these fields have been explored in "Globalizing Capital."

Gregory Mankiw, a Macroeconomics expert, came up with major principles that guide the study of economics, these include; in economics everything comes at a price, sacrifices to access an item or service comprise the value of the item, trade is crucial in improving living standards, markets are tools for economic planning, states have the power to change market outcomes, the capability of producglobtion of a state determines living standards in the country, inflation and unemployment are opposite ends of a scale.

On the second chapter of the book, Eichengreen looks at the gold standard. Before 1870, all countries apart from Britain were operating on bimetallism. Bimetallism is where the countries used two forms of metal in their currency. The two metals were gold and silver. The use of gold as the sole currency form was only used in Britain. After 1870 Germany also adopted the gold standard (Eichengreen 18).

Four main factors led to the stability of the gold standard. The first is British pre-eminence. The British Empire was a superpower in the world. The gold standard started in Britain, and the dominance of the British Empire made it easier for the country to impose the gold standard on other countries (Eichengreen 37). The other factor was international solidarity, corporation between countries and the collective will to implement the gold standard promoted its adoption in many countries. The third factor that was crucial in its sturdiness was the openness of international markets. The use of a common measure of currency secured the value of the goods across borders. Insulation of the gold standard from internal politics was also a factor in its success. The gold standard was not caught up in domestic political agendas and therefore leading to a more focused approach to the implementation of the gold standard.

Principles stated by Mankiw are reflected in the gold standard. The gold standard shows the principle of economic tradeoffs (Mankiw 42). To adopt the gold standard, countries had to give up the use of silver coins. The advantages of the gold standard were realized after active efforts were made to promote the use of gold currency. The use of gold currency came at a cost. The sacrifices that were made in the adoption of the gold standard were the main cost of the gold standard. Mankiw states that the true cost of a product or a service is the things that are foregone in order to acquire the product. Countries had to put up with a foreign currency that they had not gotten used to. The lack of existence of rules and regulations that were customized to the gold standard further increased the cost of its adoption. The gold standard benefits that were realized included the ease of trade across borders.

The end of the gold standard occurred during the war period. Countries adopted a floating system of currency exchange. Efforts to get back to the gold standard between the years of 1926 and 1931 were not successful (Eichengreen 46). Eichengreen stated four reasons why the second gold standard failed. The first reason was lack of international cooperation. The period was right after the First World War. Although the war was over, countries were still holding back regarding unity efforts. There was tension that was brought about by the rush for weapon accumulation. In Europe, there was a rift between the east and Western Europe. This rift brought about distrust among governments which was characterized by a reluctance to cooperate. In 1931, countries got back to the floating exchange system. The reversion came after suspension of the sterling pound as the standard of foreign conversions. The gold standard was based upon the sterling. The sterling was overvalued (Eichengreen 64). 1931, therefore, marked the end of the gold standard. The monetary system during the interwar period experienced three main changes. The first was the issue of unemployment that took center stage in the economic field. The predictability of finance markets also declined. Central banks were unable to assure the stability of financial markets. Central banks were also less committed to the maintenance of international exchange rates. Another change that occurred during the period is the decline of Britain as a financial powerhouse.

Mankiw's principle that economies face alternation between inflation and unemployment is clear during the interwar period (Mankiw 56). This era was described by an increase in unemployment. Germany was also faced with inflation as a result of the printing of too much money in the 1920's. Employees in factories were paid insufficient wages, and the industries could not accommodate the people seeking jobs after the First World War. Inflation occurred during the interwar period where there was an increase in the prices of goods and services. The existence of a lot of money in the economy reduced the value of the currency.

In the period following the Second World War, there was an increase in the need to integrate the economies of the world. The efforts to rearrange the world economy was made particularly difficult due to less need for pegging of exchange rates. Most countries did not adopt the Bretton Woods system. The system was only adopted by small countries that felt the need for balancing volatilities in their economies. Small countries needed to secure their economies which at the time were unstable (Eichengreen 102). The economies of bigger countries, on the other hand, were relatively stable and therefore there was no much need for pegging of their currencies. The International Monetary Fund is a feature that exists today that began with the Bretton Woods system. The Bretton Woods agreement had 45 member countries. The agreement was signed in 1944. Capital controls were the only factor out of the Bretton Woods system that was practical. The implementation of the capital controls was however dependent on the financial environments that were existing. There was an increase in the intervention of government in the financial markets (Eichengreen 110). The interventions happened through the formulation and implementation of regulations to control the activities in the financial markets.

The Bretton Woods system is a demonstration of Mankiw's principle that markets are an effective way of growing economic activity (Mankiw 52). Markets were used as a tool in many countries after the world war to increase economic growth rate. More freedom in the market led to the increase in the number of privately owned businesses. During the Bretton Woods era, economic growth initiatives were dependent on the availability of markets for products. The growth in industrialization at the time ensured that there was enough supply to cater for local needs and more products to go into international markets. At the Bretton woods time, there was also an increase in the efficiency of transport systems which led to the ease of transport of goods to foreign markets. Planes were used mainly for the transport of perishable goods. Ships and trains were used to transport bulky goods.

The Bretton Woods system ended in 1973. Before then, countries aimed at the stability of exchange rates. In the 1970's the direction changed, central banks now aimed at the unification of their monetary forms. Eichengreen listed four main occurrences that transformed currency systems after 1973. These transformations are; the European snake, the European monetary system, currency boards and monetary union (Eichengreen 134).

To break away from the domination of the American dollar, European countries attempted to peg their currencies. The pegging was facilitated by operating their currencies collectively. The unification of the currencies had a 2.25% allowance for fluctuation (Eichengreen 140). An intense increase in the prices of commodities such as oil in 1973 made the operation of the European snake challenging. Disparities in the economic conditions of European countries further made the implementation difficult.

The European Monetary System was created in 1979. The system was formed to reduce economic fluctuations in Europe. The system was also formed to reduce the domination of Germany in Europe. The snake limited the monetary autonomy of member countries, and therefore the EMS was meant to increase the autonomy of member states to form policies concerning their economies. The decline of the EMS came in 1980's after the scrapping off of capital controls. European countries in the late 1980's and early 1990's also experienced setbacks in their economies which further led impracticality in the implementation of EMS policies. In 1993, the fluctuation allowance was increased from 2.25% to 15% (Eichengreen 142). After the Bretton Woods, countries such as Argentina established currency boards. Currency boards were ideal especially for small developing countries since they promoted close associations. This coupled with foreign connections made the currency boards ideal for the economic situations of the developing countries.

After the Bretton Woods system countries started making decisions based on their own best interests. This is a demonstration of the Mankiw principle that economic decisions are based on the rationale and interests of the party making the decision (Mankiw 42). Unlike in the period in the Bretton Woods system, countries no longer followed the precedence set by powerful players. After the Bretton Woods, smaller countries started joining efforts to fulfill the needs of their citizens; these countries wanted to avert the dominance of World power players.

The history of international monetary systems has shaped the current macroeconomic trends. The principles of Mankiw have been shown in the history of money systems. Aspects such as markets have been demonstrated to have been powerful parts in the evolution of economic systems (Mankiw 48). The increase in the encouragement of trade within countries and between countries was crucial in economic growth. Unlike in the gold standard when governments had absolute control over markets, increase in market freedoms over time has increased economic activity leading to economic growth. The lack of balance in the economic factors among countries meant that there were vast differences in the economic priorities and needs across different countries making it difficult to adopt the gold standard.

The decline of the sterling pound led to the decline in the ability of Britain to control the international economic climate. The decline of the sterling caused ripple effects in the political climate in international politics where Britain yielded less power than before. Whereas, before the war, Britain had determined the economic direction of international markets, during the post-war period the influence of Britain was minimal. The US took over as a world superpower.

The Bretton Woods system was different from th...