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Are monetary and banking problems due to a few misguided policies or incompetent managers? Or are there fundamental flaws in monetary and financial institutions, principally central banks and the legal and monetary frameworks that accompany them?
In this comprehensive book, seventeen distinguished scholars examine the history of modern monetary and banking arrangements, their major problems, and possible reforms. They also explore how political interference in monetary institutions has undermined economic stability and prosperity and produced international conflict as a by-product. They show how monetary nationalismthe promotion of the monetary goals of the nation statenecessarily invites economic discoordination because it interferes with the equilibrating operation of market forces.
The authors also outline the reforms necessary to create monetary, financial, and banking systems free of the episodic inflation, devaluation, debt crises, and exchange rate volatility that have plagued the twentieth century.
This book is an invaluable resource for scholars, students, policy makers, business leaders, and everyone interested in economic progress.
Table of Contents
- Section I: History of the Modern International Monetary System
- Chapter 1: An Evolutionary Theory of the State Monopoly Over Money
- Chapter 2: National Sovereignty and International Monetary Regimes
- Chapter 3: The History of the International Monetary System
- Chapter 4: Gold Exchange Standard in the Inter-War Years
- Chapter 5: Gold Standard Policy and Limited Government
- Section II: Modern Money and Central Banking
- Chapter 6: Financial Policy in the Post-Bretton Woods Period
- Chapter 7: Banking and the Global Evolution of the 100% Deposit Guarantees
- Chapter 8: The IMFs Destructive RecipeRaising Tax Rates and Falling Currencies
- Chapter 9: Global Economic IntegrationTrends and Alternative Policy Responses
- Section III: Foundations for Monetary and Banking Reform
- Chapter 10: The Political Economy of Discretionary Monetary Regimes
- Chapter 11: The Misguided Drive Toward European Monetary UnionPitfalls of Monetary Central Planning
- Chapter 12: Monetary Nationalism Reconsidered
- Chapter 13: Currency Boards and Free Banking
HighlightsExperts increasingly acknowledge that the worlds monetary and banking problems are not due to a few misguided policies or incompetent people, but rather to basic flaws in the system of arbitrary government currencies and banking. Government institutions simply lack the knowledge and incentives to effectively replace the decision-making of millions of market participants.
The international gold standard existed from the late 19th century until World War I, a period of unprecedented economic progress. A commodity standard combined with free-market banking would coordinate economic activity even better.
The economic upheaval of the 1930s had its roots in Britains attempt after World War I to restore the prestige of the battered pound sterling and the U.S. Federal Reserve Systems dubious and inflationary campaign of support.
Bank deposit guarantees created in response to the Great Depressionfar from solving problems of the banking industrycreated their own problems. Banking deregulation and the abolition of federal deposit insurance can better protect the safety and soundness of the banking system.
The International Monetary Fund (IMF) has harmed developing countries by insisting they devalue their currencies and maintain high taxes. And, there are no true IMF success stories.
Western Europes move toward monetary integration is ill-considered in the wake of collapsing central planning elsewhere. Instead, a rules-based form of policy coordination is far superior.
Merton Miller writes in his foreword to Money and the Nation State that this book provides the essential framework for those willing to return to first principles in thinking about the role of monetary arrangements in economic life.
This volume, edited by noted financial economists Kevin Dowd and Richard Timberlake, gathers the work of seventeen top scholars on all-important aspects of monetary theory and history. As the editors note in their introduction, a growing list of observers now acknowledges that the worlds financial problems are systemic.
History of the International Monetary System
David Glasner opens by arguing that economists have not seriously challenged governments monopoly on money, which has produced a history of debasement, depreciation, and devaluation. That might be understandable if money were a natural monopoly, but Glasner notes that money has none of the features of one. Thus a better, more political explanation for government monetary sovereignty must be the case.
Frank van Duns chapter then follows by putting the logic of sovereignty under the microscope. Beginning with ancient rulers assumption of the power to coin money, he traces how the theory of state sovereignty has, over time, expanded to justify all state activities, based on the doctrines of implied powers and public interest.
Leland Yeager opens with a brief description of the early metallic standards, noting that, until the Civil War, the United States had issued no paper money. He then moves to an examination of the gold standard and its place in bringing about an unprecedented rise in wealth, up until the intrusions of government regulation and monetary devaluation, beginning in the 1920s and continuing through the post-World War II system of fixed exchange rates known as Bretton Woods.
The late Murray Rothbard discusses in depth Britains decision to restore the pound sterling to its pre-World War I par, despite its inflationary war policies, and the role the U.S. Federal Reserve played in this fateful decision. Rothbard looks closely at New York Federal Reserve Bank Governor Benjamin Strong, who presided over an inflationary policy designed to help Britain. Rothbard relates this story in fascinating detail, revealing the real human drama of inflationary politics.
Richard Timberlake then studies the relationship between gold and limited government, concluding that the framers of the Constitution gave the federal government power only to determine the weight that would constitute a dollar. Timberlake argues that those who read the Constitution to mean the federal government can create paper money are interpreting it frivolously.
Modern Money and Central Banking
Thomas Cargill opens Section II of the book with an examination of U.S. financial policy since the fall of the Bretton Woods regime, which gave way to an era of incomplete and inequitable deregulation which, along with bad tax policy, helped produce the savings and loan crisis. This shameful response to the insolvency of the industryincluding an increase in federal deposit insuranceonly made matters far worse.
Genie Short and Kenneth Robinson focus on the key issue of deposit insurance, tracing the history of deposit guarantees, and arguing that government guarantees have forced the financial sector to price risk incorrectly and make depositors complacent. The authors call for a reassessment of what constitutes an actual financial crisis in order to remove a true stumbling block to financial reform, which would include an end to reliance on government for deposit guarantees.
Alan Reynolds examines this moral hazard problem in the International Monetary Fund, reporting that he can find no example of IMF intervention unambiguously improving an economys performance over a sustained period. Instead, he notes, the IMF typically requires borrowing nations to engage in destructive devaluation and suffocating taxation, destroying economic growth.
Robert Keleher follows up by looking at global economic integration. He attributes the new economic environment to financial deregulation and the telecommunications and information processing revolution. According to Keleher, the choice facing the new world market is, once again, between centralized and decentralized decision-making, with decentralization clearly superior.
Foundations for Monetary and Banking Reform
Richard Burdekin, Jilleen Westbrook, and Thomas Willett point out how monetary expansion benefits politicians through short-run increases in employment and drops in interest rates, all while longer term damage is being done. Focusing on suggested reforms, the authors conclude that exchange rate pegging alone is not a good idea, since it is a rigid price control, but look favorably on central bank independence, so long as governments view it as essentially irreversible.
Kevin Dowd addresses the irony of witnessing collapsing central planning in central and eastern Europe alongside the formation of the European Community super-state. He concludes that the attempt to create a European Federal Reserve System is a classic case study of the fatal conceit of would-be central planners who have the supreme arrogance to think they can impose their will on peoples and markets alike...
Lawrence Whites chapter considers alternative forms of international monetary regimesnamely free banking versus world central banking. While taking up Nobel Laureate economist F.A. Hayeks argument against both monetary nationalism and an international fiat currency, White disagrees with Hayeks endorsement of an international central bank as a solution, noting that problems with national central banking would also be present with an international central bank. White suggests instead that a system of free-market banking is the preferred alternative.
The book concludes with Steve Hanke and Kurt Schulers discussion of currency boardsinstitutions that issue notes and coins convertible into a foreign currency or commodity at a fixed exchange rate. The authors point to these boards excellent records in creating public confidence, even during domestic instability, and argue that currency boards depoliticize the money supply.
Offering practical, proven and economically sound directions for reform, Money and the Nation State is undoubtedly the most comprehensive analysis and critique of international monetary, banking and financial issues available today. The result, as Merton Miller states, is a significant contribution to the careful reconsideration of todays failed monetary orthodoxies [that] is clearly overdue.
Money and the Nation State is superb. It is an extraordinarily valuable and insightful book about the relationship of central banking to a variety of different problems, both domestic and international, and explores in an intelligent way the implications for policy of the fact that governments have asserted a monopoly in the emission and regulation of money during modern times. The book is extraordinarily intelligent, well-informed and insightful. Money and the Nation State provides a useful supplement to much existing work which continues to apply a Keynesian framework to the understanding of money and the nation state.
GEOFFREY P. MILLER, Chairman, Center for the Study of Central Banks, University of Chicago
At a time when Europe is preparing for a single currency managed and controlled by one central bank, the book, Money and the Nation State, is of eminent importance and of extraordinary interest. Whether the European Monetary Union will become a success or a failure will depend very much on the structure and policy of the future European Central Bank. All policymakers who have to take far-reaching decisions in Europe should read this book.
KARL OTTO PÖHL, Former President, Deutsche Bundesbank, Germany
Money and the Nation State is interesting reading. The book should serve as a red flag to government economic policymakers who may be tempted to intervene in markets under their purview in attempts to improve or fine tune the outcomes. Money and the Nation State reinforces the dictum for policymakers to do no harm by trying less and reminds us that, while market failures occur, they tend to be far less severe and damaging than government failures.
GEORGE G. KAUFMAN, John F. Smith, Jr., Professor of Finance and Economics, Loyola University, Chicago
If society defines the rules of the game and sets financial markets free to play, only good things will follow. In the past, not everyone has been entirely comfortable with this argument. However, if the careful scholarship and argumentation between the covers of Money and the Nation State fail to convince the skeptics, nothing will.
BARRY EICHENGREEN, John L. Simpson Professor of Economics and Political Science, University of California
In Money and the Nation State, Dowd and Timberlake have organized a very interesting book that effectively addresses the important monetary and financial issues facing the global economy today. They usefully document the evolution of our modern monetary system and then develop a provocative agenda for change that should be examined at the highest levels of policy making.
MANUEL H. JOHNSON, former Vice Chairman, Federal Reserve System
With continuing advances in technology, moneywho controls its creationhas become a hot topic. Money and the Nation State makes a powerful case that the time has come for the invisible hand of the market to replace the visible hands of central banks in regulating the supply of money. Policymakers may disagree with this view, but they should not ignore the cogently argued positions advanced in this important book.
ROBERT E. LITAN, Director of Economic Studies, The Brookings Institution
Money and the Nation State goes to the heart of an inherent conflict between governments and the private sector over the control of money. Should the government reserve the right to inflate the national currency or should private citizens demand a stable monetary unit of account to serve as the meaningful foundation for voluntary economic transactions? Dowd and Timberlake have brilliantly assembled an impressive array of powerful thinkers at a time when headlines concerning international monetary arrangements are daily appearing in the worlds major newspapers. Timely and compelling, this volume is an indispensable intellectual handbook for serious scholars as well as policymakers and members of the business community; indeed, it lays out the important issues at stake for everyone who uses money.
JUDY SHELTON, Professor of International Finance, DUXX, Monterrey, Mexico
The common theme of the authors of Money and the Nation State is that money has to be removed from politics. Nothing is gained by substituting international for national politics. The issue is how to protect individual freedom against the power of the state. The authors of this volume discuss two types of solutions: monetary constitutionalism and potential competition. The two are not mutually exclusive. They can reinforce each other. The book does not only provide a comprehensive overview of the problem and its solutions. It is bristling with important new ideas. It is an outstanding contribution to a thriving field of politco-economic research.
ROLAND VAUBEL, Professor of Economics, University of Mannheim, Germany
Money and the Nation State represents an important contribution because it provides the essential framework for those willing to return to first principles in thinking about the role of monetary arrangements in economic life. . . . The contributors to the volume all begin from Austrian premises and trace the implication of those premises for modern monetary arrangements. Most show that intervention leads to sub-optimal economic outcomes, and many argue that it leads to usurpation of economic and political rights. In some cases, the point is overstated, but in some of the more reflective sections, the message is clear and powerful.
HOWARD BODENHORN, E-NET Book Review
Money and the Nation State would be a valuable guide for general readers and students not well versed in money and banking history and principles. But even those who are fairly well read in these areas will find something of interest here.
OMOTUNDE E. G. JOHNSON, FINANCE AND DEVELOPMENT, International Monetary Fund
About the Author
Kevin Dowd is Professor of Financial Economics, Sheffield University, and Richard H. Timberlake, Jr., is Professor of Economics (Retired), University of Georgia.
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