Journal Issue
Finance & Development, March 2007

Book Reviews

International Monetary Fund. External Relations Dept.
Published Date:
March 2007
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Europe’s golden age

Barry Eichengreen

The European Economy Since 1945

Coordinated Capitalism and Beyond

Princeton University Press, Princeton, New Jersey, 2006,504 pp., $35 (cloth).

Barry Eichengreen is well known in IMF circles as a leading economic historian of the international monetary system and as an economist who delivers incisive analysis of the current international financial architecture. To economic historians, however, he is more renowned for his influential work on the Marshall Plan and the postwar golden age of European growth. On that topic, he developed the argument that in the most successful countries, which included West Germany, fast growth was based on a cooperative equilibrium between capital and labor that delivered wage restraint in return for high investment—a combination that facilitated rapid catch-up growth. Countries that never managed to find this equilibrium, such as the United Kingdom, did less well in exploiting the opportunities of the golden age. This book is primarily a return to and major extension of that analysis. International monetary developments feature not as a central focus but rather as an aspect of European integration that, in turn, is considered in terms of its implications for growth.

Whereas Eichengreen’s earlier work was firmly anchored in the golden age, here he brings the story forward to the present day. He therefore gets to review the distinctly less impressive European growth performance that has ensued since the golden age. His central explanation for this lack of growth is that the corporatist European model that was so well suited for rapid catch-up because it was based on the long-term relationships that underpinned factor accumulation in the early postwar years was much less appropriate for a later era when catch-up was largely complete and growth required institutions and policies geared toward radical innovation and restructuring. Thus, features such as capital markets based on bank rather than equity finance and human capital formation focused on vocational rather than college education outlived their usefulness and became disadvantages, yet resisted reform.

More generally, Eichengreen provides a persuasive historical context for the common American critique of modern Europe—namely, that it has too much taxation, too much regulation, and too little competition to exploit the growth potential of information and communications technology. With regard to the future, he argues that Europe will need to adapt to address the pressures of globalization and exploit the opportunities of science-based, production-relevant technological change.

This is a splendidly delivered analysis that helps us make sense of the reversal of growth fortunes experienced by the United States and Europe since the mid-1990s. Although Eichengreen does not press this point, his analysis also offers insights into the relative economic decline of the United Kingdom in the golden age and its subsequent revival. Nevertheless, the narrative flows just a bit too smoothly at times, and the skeptic might ask whether the evidence can entirely bear the weight of the interpretation. For example, although centralized wage bargaining is held up as a crucial advantage underpinning the golden age, its role has not been confirmed by growth regressions. Indeed, some countries that were very successful in the early postwar period, like France, seem much harder to fit into Eichengreen’s account than, say, Sweden, which seems to match the template perfectly.

A fully successful explanation of how the cooperative equilibrium was sustained should also be able to account satisfactorily for its demise and for the end of the golden age in the 1970s. But a bold attempt by Gavin Cameron and Chris Wallace (“Macroeconomic Performance in the Bretton Woods Era and After,” Oxford Review of Economic Policy, 2002) to address these issues by converting Eichengreen’s argument into a formal game-theoretic model showed that answers were not easy to obtain. In a book that has clearly been written for a wide audience of students and nonspecialists, it is understandable that such technical issues are not given prominence. But it is a worry that the empirical and theoretical foundations of the grand design are perhaps less secure than the general reader might realize.

The European Economy is beautifully written and will be widely read. It offers a powerful analysis and deserves to be a great success. But it probably isn’t the final word on European growth in the second half of the 20th century.

Nicholas Crafts

Professor of Economic History University of Warwick

Power of the sun

Travis Bradford

Solar Revolution

The Economic Transformation of the Global Energy Industry

MIT Press, Cambridge, Massachusetts, 2006, 248 pp., $24.95 (cloth).

To many people, the idea that solar energy could become a serious energy source has always been farfetched. This book not only presents a plausible case against this thinking, but takes it one step further by arguing that a major shift toward solar energy in the coming decades is inevitable.

The current resurfacing of the energy issue, Bradford argues, should be seen in a historical context.

Development of human societies has been shaped, in large part, by an incessant search for new energy sources as previous ones have dried up, a process that has at times resulted in war. Our prospects for cheap fossil fuels are far from promising. Conventional oil discoveries have declined over time; natural gas is hard to transport; and Canadian tar sands, which could, in principle, provide energy for many decades, are not desirable from an environmental perspective, in part because they are too energy-intensive to exploit on a massive scale.

The consequence of continuing reliance on fossil fuel, in addition to further—possibly dramatic—climatic change, could therefore be increased conflict among countries over energy resources. Eventually, of course, Bradford notes, humans always find alternative energy sources. But what form is the alternative likely to take this time around, what are the likely catalysts, and how proactive should governments be?

To answer these questions, Bradford argues that most alternatives to fossil fuel have their own problems. Hydroelectricity has hidden environmental and social costs—for example, it often leads to the displacement of large communities. Nuclear energy entails well-known safety and security issues, the large-scale use of wind power is limited, biomass energy requires too much water and soil, and hydrogen fuel cells are too costly.

In contrast, solar energy has a lot of potential, as demonstrated by its current use in Japan and elsewhere. According to studies by the U.S. Department of Energy, one day of sunlight on earth can produce sufficient energy to satisfy total global energy needs for 27 years. This knowledge leads Bradford to conclude that solar energy will become a major source of energy in the coming decades. He underpins his prediction with two basic arguments. First, self-interested consumers will seek out solar energy because it is cost-effective rather than because it is environmentally sound. Government intervention can encourage this process but will not be decisive.

Second, what makes solar energy viable is that individual houses and businesses can have their own source of supply using photovoltaic cells, which can be connected to a grid for more efficient production and storage. This, Bradford argues, is crucial. The view that electricity can be provided economically only on a mass scale and through grids is faulty: although there are economies of scale in the current system of centralized electricity generation, a lot of them are offset by transportation costs—which, in the United States, represent about half the total cost. The projected switch from largescale production to grid-connected systems can be likened to the switch from mainframes to personal computers in the past two decades.

Solar Revolution predicts a necessary and desirable shift away from fossil fuel and a shift in the type and location of energy sources. What makes solar energy attractive is that it satisfies both of these criteria: it is renewable and it can be produced on-site. The world’s energy needs will no doubt continue to be met by a variety of energy sources, but solar energy will, over time, play a dominant role. Bradford thinks the trend toward solar energy is inevitable, but he would like to see policymakers help the process by leveling the competitive playing field, increasing the penalties for pollution, and increasing spending on research and development.

This well-written book offers a lot of useful information and persuasive analysis about the current energy situation and possible future trends. Although its prediction regarding the inevitable dominance of solar energy may well be too optimistic—especially when it comes to the transportation sector, which remains heavily dependent on gasoline and other oil-related products—Bradford provides a convincing case for the viability of solar energy in electricity generation.

Hossein Samiei


IMF Research Department

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1. Title: Finance & Development. 2. Publication No. 123-250. 3. Date of filing: February 12, 2007. 4. Frequency: Quarterly. 5. Number of issues published annually: four. 6. Annual subscription price: NA. 7/8. Complete mailing address of known office of publication/publisher: Finance & Development, International Monetary Fund, 700 19th Street, N.W., Washington, DC 20431.9. Full names and complete mailing address of the headquarters of general business offices of the publisher and editor: International Monetary Fund, Washington, DC 20431; Editor-in-Chief: Laura Wallace, same address. 10. Owner: International Monetary Fund, 700 19th Street, N. W., Washington, DC 20431.11. Known bondholders, mortgagees, and other security holders owning or holding 1 percent or more of the total amount of bonds, mortgages, or other securities: None. 12. Tax status: has not changed during preceding 12 months. 13. Publication title: Finance & Development. 14. Issue date for circulation data below: December 2006.

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Rise and fall of monetary paradigms

Filippo Cesarano

Monetary Theory and Bretton Woods

The Construction of an International Monetary Order

Cambridge University Press, New York, 2006, 262 pp., $80 (cloth).

During the 1990s, many universities abandoned the study of the history of economic thought and economic history to make room for more mathematical training. Cesarano’s book serves as a welcome reminder of the importance of understanding how the evolution of economic theory relates both to the historical context and to the political and institutional realities of policymaking. In explaining how the gold standard was gradually abandoned in favor of an international monetary system based on fiat money, Cesarano demonstrates how economic shocks such as the interwar depression led to revolutions in economic theory. In doing so, he also reminds us of the difficulties of translating theory into policy.

Paradoxically, although the book makes the argument that, throughout history, the shape of monetary institutions has been powerfully influenced by the prevailing theory of money, the Bretton Woods system is an example of monetary theory providing an inadequate basis for policy, leaving the system vulnerable to fatal compromise. In the 1940s, policymakers had no firm theoretical consensus to guide them. Indeed, in the United Kingdom, the Radcliffe Committee Report proclaimed in 1959 that there was insufficient understanding of the impact of monetary policy to allow it to be used effectively. Instead, as Cesarano shows, the politically attractive Keynesian priority of full employment was allowed to prevail over the longer-term—and politically more painful—goal of price and exchange rate stability. This is the standard interpretation of the weaknesses of the adjustable peg system of the 1960s. Cesarano takes it one step further by relating the systemic weaknesses of the 1960s to the evolution of monetary theory from the late 19th-century classical gold standard to the crisis of the interwar years. The transition from a commodity to a fiat standard was completed only when the Bretton Woods compromise collapsed.

In the early 1960s, the foundations for a stable fiat money standard were in place: the United States followed a low and stable inflation policy, and private markets were happy to take advantage of the intermediary function of the dollar and accumulate liquid dollar assets. But as central bankers continued to cling to classical theory by pursuing a gold standard while politicians opted for new Keynesian-style demand management, the system began to fall apart, stymieing the evolution from a gold-exchange standard to a pure dollar standard. Fiscal expansion in the United States from 1965 onward and the accumulation of gold reserves in Europe created a crisis that formally removed gold from the system in 1968. But by then it was too late to save the pegged exchange rate system.

Cesarano effectively synthesizes a range of literature in an elegant and cogent analysis that should be accessible even to those readers who do not have a highly developed understanding of monetary theory. His emphasis on narrative style rather than formalized modeling reflects the 19th-century and interwar economic theory that is his subject. Hopefully, this will ensure wider readership than is the norm for more technical analyses.

I do have a few quibbles, however. Readers should know that the Bretton Woods agreements are not discussed until the penultimate chapter. As a result, there is much more detail on the theory behind the classical gold standard and the interwar monetary system (on which there already exists a large secondary literature) than on the economic theory of the postwar system and the 1960s (which is still an emerging topic). For example, it would have been interesting to see the analysis of postwar planning move beyond the familiar Keynes and White plans to the alternatives put forward by other countries.

Cesarano reminds us of the difficulties of translating theory into policy.

But Cesarano neither reflects on the intense discussions aimed at reforming the system that took place over the course of the 1960s, nor explains how the creation of the SDR, the IMF’s international reserve asset, reflected theories of international currency developed in the interwar period. He also does not explain why policymakers continued to doggedly pursue stable exchange rates. This policy inertia is perhaps most surprising in the repegging of the system in 1971 following the announcement by the United States that it was suspending the convertibility of dollars into gold. But these quibbles should be taken less as a criticism of this book and more as a plea for additional research.

Catherine R. Schenk

Professor of International Economic History University of Glasgow

Camilla Andersen is Book Review Editor.

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