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more subject to the forces of international trade than it was a century ago.
A BRIEF HISTORY OF MONETARY SOVEREIGNTY 93
Figure 4.3. Trade in the U.S. economy.
Source: Bordo, Eichengreen, and Irwin (1999).
With the rapid growth of the service sector since the 1960s, U.S. service
exports have risen from a mere 1% of GDP and 30% of merchandise ex-
ports to 3.2% of GDP and 41% of merchandise exports. Services were a
miniscule portion of trade in the early 1900s. Finally, U.S. direct invest-
ment abroad was stable at about 6% of GDP in 1914 and 1960, but has
since tripled. Similarly, foreign direct investment in the United States rose
dramatically in the 1990s.72
In short, the world is indeed more integrated today in terms of trade
than it had ever been previously, but the pace of integration in the late
nineteenth century was certainly impressive by today s metrics. The more
interesting findings come from the financial flows data.
Capital exports from Western Europe in the late nineteenth and early
twentieth centuries were enormous by historical metrics, notwithstanding
the hyperbole lavished on today s global capital by its fans and detrac-
tors. Mean current account surpluses and deficits as a percentage of GDP
in 1880 were roughly twice as high as they are today. British net foreign in-
vestment reached 7.7% of GDP in 1872, and a high of 8.7% in 1911 nearly
twice Japan and Germany s peaks in the late 1980s. Most of this was port-
folio investment stocks and bonds; 79% for Latin America, and 85% for
94 A BRIEF HISTORY OF MONETARY SOVEREIGNTY
North America and Australia in 1913. And most of the debt held was gov-
ernment issued, as it is today for most of the developing world s foreign-
held debt. Studies have also shown that domestic investment was less
constrained by domestic savings, meaning that capital flows were doing
more of the job of matching available capital to investment needs than
they are today.73
Purchasing power parity, measured according to wholesale (that is,
tradable goods) prices, and equalization of real interest rates across the world
held to a degree not seen previously or since.74 Commodity prices were
aligned internationally about as well as they were across regions within
countries.75 Today, in contrast, we are so accustomed to a world of autar-
kic national currencies that we consider it right and normal not for com-
modity prices to align internationally, but for the entire structure of prices in
each country to shift up and down, often dramatically, against the entire
structure of other countries prices. Thus a fall in the global (dollar) price
of a commodity like coffee tends not to produce necessary diversification
away from inefficient types of coffee production, but rather an engineered
economy-wide inflation and devaluation in countries in which coffee ex-
porters are politically powerful. The coffee price fails to perform its func-
tion of adapting coffee supply to demand; rather, the central bank distorts
all other prices in the economy to prevent adaptation. This practice, virtu-
ally unique to the late twentieth century, is at the root of development
stagnation for so many poorer countries.
There are many reasons why economies became dramatically more inte-
grated after 1870, both within and across countries. Among these are
tremendous technological advances in transportation and communica-
tion, particularly the railroad, steamship, telegraph, cable, and refrigera-
tion. The spread of free-trade thinking from Britain to the European
continent, underpinned by vested interests in Germany and France which
saw greater export opportunities afforded through trade liberalization,
also contributed to large declines in some import tariffs. But the disinte-
gration of markets internationally, particularly capital markets, coincided
strongly with the tribulations and eventual collapse of the classical gold
standard after 1914. The heyday of globalization was an historical period
in which monetary nationalism was widely seen as a sign of backwardness;
adherence to a universally acknowledged standard of value a sign of
A BRIEF HISTORY OF MONETARY SOVEREIGNTY 95
abiding among the civilized nations. And those nations that adhered most
reliably to the gold standard (such as Canada, Australia, and the United
States) paid lower borrowing rates in the international capital markets than
those which adhered less (such as Argentina, Brazil, and Chile).76 The
gold standard not only reduced exchange risk, but country default risk.
The evidence suggests strongly that being on the gold standard represented
the most credible form of commitment to pursuing prudent fiscal and
monetary policies over time, given the ever-present temptation to inflate
away the burden of debt and manufacture seigniorage revenues.
As notable an opponent of the gold standard as Karl Polanyi took it as
obvious that monetary sovereignty was incompatible with globalization.
Focusing on nineteenth-century Britain s interest in growing world trade,
he stated that nothing else but commodity money could serve this end
for the obvious reason that token money, whether bank or fiat, cannot cir-
culate on foreign soil. Hence the gold standard the accepted name for a
system of international commodity money came to the fore. 77 Yet what
Polanyi considered nonsensical global trade in goods, services, and capi-
tal intermediated by national token monies is exactly the way in which
globalization is advancing today. And national token monies, we argue,
have turned out to be the Achilles heel of globalization. Were it not for
the regular recurrence of devastating national financial crises, of which to-
ken monies in open economies are the root cause, resistance to globaliza-
tion would be far less virulent and carry far less resonance.
To be sure, financial crises were not invented in the late twentieth cen-
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