Conclusions

This chapter summarizes key findings. This book makes a simple theoretical argument about the distributional implications of exchange rate policy. It suggests that economic actors with important cross-border interests, exposed to currency volatility, will tend to prefer more stable and predictable exchange rates. It also claims that tradables producers will, all else being equal, tend to prefer a depreciated real exchange rate. These concerns will be tempered by the extent of exchange rate pass-through—that is, the degree to which currency movements affect domestic prices. The analysis in this book shows that countries whose economic agents are more involved in cross-border trade are more likely to fix their exchange rates in order to reduce currency volatility. Countries with large groups susceptible to import or export competition—import-competing manufacturers and export farmers—are more likely to choose flexible exchange rates that allow currency depreciations. Governments facing an election encourage or allow currency appreciation that increases the purchasing power of consumers.

The Politics of Exchange Rates: Implications and Extensions

The previous chapters provide an empirical evaluation of the theoretical propositions put forth in Chapter 1 about the expected policy preferences of economic groups in society. These investigations, however, also suggest a series of related observations—some of which harken back to points made in Chapter 1—that are worth making explicit. These include the relationship between currency politics and the level of economic integration, trade policy, international cooperation, and economic development. This chapter discusses some of the broad patterns of interest as a partial antidote to the narrower empirical implementations that have preceded it. It considers some general trends in the politics of exchange rates over the past 150 years and across a wide range of countries. It cannot but do this discursively and somewhat superficially. Nonetheless, the breadth of the comparisons may compensate for their lack of depth.

The United States: Silver Threats among the Gold, 1880–96

This chapter surveys US currency policy in the 1890s. The United States was on the gold standard from 1879 until 1933. For almost all that time, US currency policy was politically controversial. The controversy became particularly heated during periods of economic distress, especially in the 1890s. In what is perhaps the most famous modern political conflict over exchange rate policy, the Populist movement launched a concerted attack on the gold standard, which led up to a presidential election fought largely over gold. The rise of the Populist movement came at a pivotal time as the country had matured industrially while remaining predominantly agrarian. The battle of the standards was also a fight over whose vision of society would dominate: the big cities with their booming finance, commerce, and industries, or the countryside with its thriving cotton, tobacco, and wheat farms whose products dominated world markets.

Latin American Currency Policy, 1970–2010

This chapter gives an overview of Latin American currency policy since the collapse of the Bretton Woods monetary order in the early 1970s and provides a statistical analysis of exchange rate choices. It starts with a reminder of the author's analytic expectations, especially as relevant to Latin America, and then goes on to give a historical background to the region's experience and provide a narrative analysis of regional currency policy developments, emphasizing special interest and electoral factors. First, it evaluates the impact of the sort of special interest pressures examined in the US and European cases. It presents evidence that reinforces the idea that internationally oriented economic actors favor a more stable currency. The second set of political factors is related to elections. The evidence seems clear that governments do indeed encourage or allow the currency to appreciate in the run-up to an election, and similarly delay going off a currency peg during that period.

European Monetary Integration: From Bretton Woods to the Euro and Beyond

This chapter analyzes the process of European monetary integration, focusing on the decades that led up to the creation of the common currency. This is because this period is one in which, as in the gold standard era, national governments had to decide on their currency policy, and, again as in the gold standard period, there were major domestic political conflicts over this choice. The battles over exchange rate policy in Europe since the early 1970s were at the center of the broader process of European integration. The eventual adoption of the euro was perhaps the crowning achievement of prointegration forces, and both the process and result reflect the central realities of contemporary Europe's political economy.

Introduction

This introductory chapter begins with discussions of currency choices, currency trade-offs, politics of currency policy, currency policies in open and closed economies, and currency politics applied across time and space. It then sets out the book's purpose, which is to analyze the politics of exchange rates. The book has both theoretical and empirical ambitions. Theoretically, it focuses on identifying the distributionally motivated currency policy preferences of economic actors—firms, industries, and groups. Empirically, it evaluates the accuracy of its theoretical arguments in a variety of historical and geographic settings. From a historical perspective, it looks at the politics of the gold standard, particularly in the United States. In a more contemporary mode, it examines the political economy of the process of European monetary integration. It also analyzes the politics of Latin American currency policy over the past forty years.

The Political Economy of Latin American Currency Crises

This chapter looks specifically at the political economy of currency crises. This requires attempting to answer questions such as, why do governments so often delay depreciations until it is too late—until the (inevitable) depreciation causes a major crisis? Why do governments sometimes choose to depreciate before it is too late? An arresting example of this set of questions was given by the behavior of the Argentine and Brazilian governments in the late 1990s. Faced with hyperinflation, both governments had adopted a one-to-one currency peg with the US dollar in the early 1990s. The chapter starts with a general description of how such currency crises unfold. It then provides an in-depth analysis of the Mexican currency crisis of 1994 and of Argentine and Brazilian developments between 1991 and 2001.

The United States: From Greenbacks to Gold, 1862–79

This chapter surveys US currency policy from the Civil War until the country returned to the gold standard in 1879. It shows that economic interests played a major role in the politics of US currency policy in this period. In particular, they appear consistent with the idea that those most likely to benefit from a weak dollar—farmers producing tradable crops and manufacturers facing import competition—were strong supporters of either staying off the gold standard or going to a depreciated silver standard. There is no question that the data are of questionable quality, and the evaluations of the arguments are indirect. Nevertheless, the results seem consistent over a series of votes that took place over a period of about ten years. And they served as a precursor to an even more striking and much better-known US debate over the gold standard in the 1890s.

A Theory of Currency Policy Preferences

This chapter sets forth a theoretical framework for the analysis of the politics of exchange rates. It relies on three factors—international exposure, tradability, and pass-through—to explain as much of currency policy preferences as possible. This can provide building blocks for a broader analysis of the politics of exchange rates. The chapter begins with a statement of the dependent variables of the study. It then presents the author's reasoning and the empirical expectations that flow from it. This is followed by a brief summary of other scholarly studies of the economics and politics of exchange rates in order to situate this study within the broader literature.