Abstract: The International Monetary System, 1890-1910: A Microeconomic Perspective
Conventional studies of the late nineteenth century international monetary system distinguish between "core" and "peripheral" countries. The main motivation for this dichotomy is heuristic and descriptive. The external adjustment, it is often argued, worked differently depending on the group to which countries belonged: adjustment was smooth in the core, but painful in the periphery, which displayed a cohort of crises. The general presumption is that these problems were rooted in macroeconomic defects, including inadequate monetary, fiscal, and budgetary policies, economic backwardness, inconvertible currency regimes, and so forth. In this article, we challenge this view. We argue that the difference between core and peripheral nations had microeconomic foundations. The currencies of peripheral countries, we argue, had shallow foreign markets, while those of core countries enjoyed a wide circulation. Moreover, broad international circulation of domestic currencies does not seem to have been correlated with good macroeconomic performance. Rather, it was related with the classic factors of search theoretic models of the emergence of international currencies: the share of a given country in global trade and the inventory costs of holding its currency are almost the only variables that correlate well with that currency's popularity.