Frontiers in Economic History


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Frontiers in Economic History
Series Editors Claude Diebolt, Faculty of Economics, BETA, CNRS, University of Strasbourg, Strasbourg, France Michael Haupert, University of Wisconsin–La Crosse, La Crosse, WI, USA

Economic historians have contributed to the development of economics in a variety of ways, combining theory with quantitative methods, constructing new databases, promoting interdisciplinary approaches to historical topics, and using history as a lens to examine the long-term development of the economy. Frontiers in Economic History publishes manuscripts that push the frontiers of research in economic history in order to better explain past economic experiences and to understand how, why and when economic change occurs. Books in this series will highlight the value of economic history in shedding light on the ways in which economic factors influence growth as well as social and political developments. This series aims to establish a new standard of quality in the field while offering a global discussion forum toward a unified approach in the social sciences.
More information about this series at http://www.springer.com/series/16567

Giovanni Battista Pittaluga • Elena Seghezza
Building Trust in the International Monetary System
The Different Cases of Commodity Money and Fiat Money

Giovanni Battista Pittaluga Department of Political Science University of Genoa Genoa, Italy

Elena Seghezza Department of Political Science University of Genoa Genoa, Italy

ISSN 2662-9771

ISSN 2662-978X (electronic)

Frontiers in Economic History

ISBN 978-3-030-78490-4

ISBN 978-3-030-78491-1 (eBook)

https://doi.org/10.1007/978-3-030-78491-1

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

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The function of a coin is originally bound to its material in what is almost a personal union; but when a public authority guarantees its value, it acquires independence and exchange, and trade in the material from which it is made becomes open to everybody, precisely to the extent that its function as money is assured by the collectivity. . . . The value of money is based on a guarantee represented by the central political power, which eventually replaces the significance of the metal. Simmel G., The Philosophy of Money. Routledge, 1978, third ed., p. 184

To Enrica and Stefano

Preface
A few years ago, when writing a paper on the prospects of the euro and the likelihood of its rivalling the dollar, we realized that an answer to this question was not possible without first considering the theory of the origin and evolution of international money.
These two aspects of currency development are profoundly interconnected, since rather than a single type of international money, various types can be distinguished. At one end of the spectrum, we can place commodity money, that is, money whose face value corresponds to its intrinsic value, while at the other extreme we have fiat money, that is, money with no intrinsic value but nonetheless accepted as having value and purchasing power.
It seemed to us that the transition from one type of money to another could be explained in the light of the neo-institutionalist theory. The development of trade, the formation of states with fiscal capacity, changes in their internal socio-political balance, technological development, and other factors lead to a demand for monetary innovation. The nature of this demand, internationally as well as nationally, has been for forms of money with ever greater degrees of flexibility of supply. Such a demand could only be satisfied by ever more “abstract” forms of money, i.e. those with a face value higher than their intrinsic value.
However, for these forms of money to be accepted as a medium of exchange, there has to be confidence in the stability of their value over time. The question therefore arises of who and how this confidence can produce.
At a national level, the solution to this question lies in the existence of a state that accepts fiat money as payment for the obligations of its citizens towards it and therefore has an interest in establishing and maintaining its value. At the international level, the problem of generating confidence in fiat money is more complex, both because there is no supranational authority to do it and because issuing fiat money offers the issuer the possibility of earning revenue from seigniorage, thus strengthening its power.
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Preface

For these reasons, to explain the origin and evolution of international money, we are driven to look to the underlying assumptions of international relations theory. Only taking these into account, it does become clear when the balance of power in the international arena permits the creation of an institutional framework able to meet the demand for certain kinds of monetary innovations and produce trust in them, thereby allowing them to be accepted as a medium of exchange.
This implies that the analysis of the prospect of a currency, the possibility of its becoming or remaining an international money, first requires us to consider the different types of money involved and, ultimately, the different ways of producing trust in it, which makes it possible to accept it as a medium of exchange in international transactions.

Genoa, Italy April 2021

Giovanni Battista Pittaluga Elena Seghezza

Contents
1 Introduction: The Main Features of the International Money’s Evolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2 Money and the International Monetary System: Origins and Evolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 The Functions of the International Money . . . . . . . . . . . . . . . . . 9 2.3 The Main Theories of the Origin of International Money . . . . . . . 11 2.3.1 The International Money in the Hegemonic Stability Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.3.2 International Money and Search-Theoretic Models . . . . . 14 2.3.3 Building Trust in a Fiat Money in the International Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.4 The Evolution of International Money . . . . . . . . . . . . . . . . . . . . 19 2.5 From an International Money to an International Monetary System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.6 Benefits and Costs of the Country that Issues the International Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2.6.1 The Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.6.2 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3 The Classical Gold Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3.2 Bi-metallism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.3 The End of Bi-metallism and the Emergence of the Gold Standard in Advanced Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3.3.1 The Fundamental Theory . . . . . . . . . . . . . . . . . . . . . . . 45 3.3.2 The Flight to a Safe Haven . . . . . . . . . . . . . . . . . . . . . . 46
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3.3.3 The Hypothesis of Transaction Costs . . . . . . . . . . . . . . . 46 3.3.4 The Political Economy Hypothesis . . . . . . . . . . . . . . . . 47 3.3.5 The Hypothesis of the Status Symbol . . . . . . . . . . . . . . 49 3.3.6 The Strategic Hypothesis . . . . . . . . . . . . . . . . . . . . . . . 49 3.3.7 The Commitment Mechanism Hypothesis . . . . . . . . . . . 51 3.3.8 The Neo-Institutionalist Hypothesis . . . . . . . . . . . . . . . . 52 3.4 The Consolidation of the Gold Standard in England . . . . . . . . . . 53 3.5 The Rules of the Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 3.6 The Gold Standard as a System of International Balance of Payments Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 3.7 Cooperation Between States and Central Banks . . . . . . . . . . . . . 62 3.7.1 Cooperation Between States . . . . . . . . . . . . . . . . . . . . . 64 3.7.2 Cooperation Between Central Banks . . . . . . . . . . . . . . . 65 3.8 Did Britain or Its Central Bank Play a Hegemonic Role in the Gold Standard? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 3.9 Macroeconomic Outcomes of the Gold Standard in Advanced Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 3.10 The Gold Standard and the Peripheral Countries . . . . . . . . . . . . . 73 3.10.1 The Reasons for Peripheral Countries Joining the Gold
Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.10.2 The Interdependence Between Core and Peripheral
Countries in the Gold Standard . . . . . . . . . . . . . . . . . . . 78 3.11 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
4 The Gold-Exchange Standard, Its Collapse and the Interwar Lack of an International Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 4.2 The Resolutions of the Genoa Conference and the Establishment of the Gold-Exchange Standard . . . . . . . . . . . . . . . . . . . . . . . . . 89 4.3 The Launch and Functioning of the Gold-Exchange Standard . . . 94 4.4 The Different Assumptions of the Functioning of the Classical Gold Standard and the Gold-Exchange Standard . . . . . . . . . . . . . 98 4.5 The Current Literature on the Failure of the Gold-Exchange Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 4.6 The Ultimate Reasons for the Collapse of the Gold-Exchange Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 4.7 The Gold-Exchange Standard and the Great Depression . . . . . . . 107 4.8 The Demand for Institutions to Protect Trust in an Almost Fiat Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 4.9 The Emergence of Regional Monetary Blocs . . . . . . . . . . . . . . . 111 4.10 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

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Frontiers in Economic History