The International Monetary System: Theories from Eichengreen and Cohen

Benjamin J. Cohen’s essay, “A Brief History of International Monetary Relations” and Barry Eichengreen’s essay, “Hegemonic Stability Theories of the International Monetary System” appear in consecutive order within the 1995 anthology International Political Economy: Perspectives on Global Power and Wealth edited by Jeffery A. Friedman and David A. Lake. Cohen, a professor of international political economic at University of California, Santa Barbara, elucidates on the progression of the international monetary system from an international political economy perspective while Eichengreen, a professor of economics and political science at the University of California Berkeley, goes a step further by analyzing the applicability of hegemonic stability theory on the genesis of the international monetary system but especially specific functions of the various systems. The Cohen article and the Eichengreen article offer different perspectives of the historical development of the international monetary system but their discussions complement each other creating a comprehensive analysis.

Cohen provides an historical analysis of the evolution of the international monetary system from the classical gold standard through the collapse of the Bretton Woods system of fixed exchange rates. He immediately begins to construct the history beginning with the establishment of the international gold standard in the 1870s. Traditionally the era of the gold standard, from the 1870s to World War I, was characterized as “The Golden Age”. However, Cohen develops the argument that “The Golden Age” was a deceptive façade due to misconceptions about the practice of adjustment and the roles of national monetary policies. The interwar period, which attempted to economize the gold standard, was “doomed from the start,” due to the fundamental misconceptions of the prewar monetary system conditions. Cohen’s analysis of the Bretton Woods System is contrived from the compromises between the plans of Harry D. White and John M. Keynes for monetary reconstruction. Finally, Cohen categorizes the Bretton Woods era into two periods, firstly, the period of “dollar shortage”, which led to a beneficial disequilibrium of the international monetary system and secondly, the period of “dollar glut”, where global inflation led to the eventually collapse in 1971 of the fixed exchange rate system.

Eichengreen extrapolates on the evolution of the international monetary system by analyzing the applicability of hegemonic stability theory (HST) on three operations of the monetary system: adjustment, liquidity and the lender of last resort. Britain, during the classical gold standard, and the United States (US), during the Bretton Woods era, acted as the focal point for global adjustment harmonization due to their hegemonic power. The non-cooperative struggle for gold, during the interwar period, caused a liquidity shortage which was attributed to the lack of a strong central bank. Eichengreen claims that the hegemonic power of either Britain or the US was not necessary solely responsibility for ensuring the adequate provision of liquidity. However, the liquidity shortage during the interwar period provides strong evidence for HST. Eichengreen argues that because the basis international financial system was vulnerable to losses of confidence the notion of lender of last resort was necessary for economic stability. Eichengreen refers to Charles Kindleberger argument that only a hegemonic power can carry out the lender of last resort functions, providing countercyclical long-term lending and maintaining an open market for distress goods, on the requisite scale.

These articles, even though appear in consecutive order in Friedman and Lake’s anthology, were written many years apart from each other. The Cohen article is an excerpt from his book, Organization the World’s Money: the Political Economy of International Monetary Relations which was written in 1977 and was one of the first books to utilize the relationship between the economy and politics to describe the current state of the international money system. The Eichengreen article was from a Brookings Institute report entitled “Can Nations Agree? Issues in International Economic Cooperation” written in 1989 was able to utilize the developing theories of HST to evaluate the evolution of the international monetary system. The article’s inherit relationship, however, fabricates a thorough analysis of the international monetary system which justifies their consecutive orientation within the anthology.