Once upon a time, in the 1990s, it was widely agreed that neither Europe nor the United States was an optimum currency area, although moderating this concern was the finding that it was possible to distinguish a regional core and periphery (Bayoumi and Eichengreen, 1993). Revisiting these issues, we find that the United States is remains closer to an optimum currency area than the Euro Area. More intriguingly, the Euro Area shows striking changes in correlations and responses which we interpret as reflecting hysteresis with a financial twist, in which the financial system causes aggregate supply and demand shocks to reinforce each other. An implication is that the Euro Area needs vigorous, coordinated regulation of its banking and financial systems by a single supervisor—that monetary union without banking union will not work.

We analyze the motives for China’s campaign to secure the addition of its currency, the renminbi, to the basket of currencies comprising the International Monetary Fund’s Special Drawing Rights. Our argument is that the campaign to add the renminbi to the SDR basket was not just a vanity project; it was a strategy used by the advocates of financial liberalization in China to force the pace of reform. It was also a strategy with significant risks.

Do central banks with private shareholders differ in their financial behavior from purely public central banks? Private shareholders might bias central banks toward focusing excessively on profits, dividends and risks to their balance sheets, but their influence may also be mitigated by governance rules. We study 35 OECD central banks, including eight with private shareholders, using new data on governance rules. We find that central banks with private shareholders do not differ from their purely public counterparts in their profitability, nor are they more financially cautious in the sense of building more loss-absorbing capacity. Surprisingly, their transfers to governments out of current profits tend to be higher, not lower. We find that broader governance rules matter for financial payouts.

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We analyze the impact of technology on production and trade in services, focusing on the foreign exchange market. We identify exogenous technological changes by the connection of countries to submarine fiber-optic cables used for electronic trading, but which were not laid for purposes related to the foreign exchange market. We estimate the impact of cable connections on the share of offshore foreign exchange transactions. Cable connections between local markets and matching servers in the major financial centers lower the fixed costs of trading currencies and increase the share of currency trades occurring onshore. At the same time, however, they attenuate the effect of standard spatial frictions such as distance, local market liquidity, and restrictive regulations that otherwise prevent transactions from moving to the major financial centers. Our estimates suggest that the second effect dominates. Technology dampens the impact of spatial frictions by up to 80 percent and increases, in net terms, the share of offshore trading by 21 percentage points. Technology also has economically important implications for the distribution of foreign exchange transactions across financial centers, boosting the share in global turnover of London, the world’s largest trading venue, by as much as one-third.

This paper extends the literature on the open-economy trilemma by developing a consistent set of indicators of exchange rate stability, monetary autonomy and capitalaccount openness for a large sample of countries, starting in 1890 and extending into the second decade of the 21st century. Analysis of these indicators confirms stylized facts in the literature on international monetary and financial history and is consistent with the trilemma paradigm

The euro crisis may have been an inevitable result of the ideologically driven arguments for adopting the common currency—or of incompatible national economic philosophies.

A prominent feature of the Maastricht Treaty on European Union is the restrictions it places on fiscal policy. Under the provisions of the Excessive Deficit Procedure, or EDP, the success of member states in avoiding during the transition to economic and monetary union (EMU) is one of four criteria governing admission to the monetary union. Once monetary union has begun, member states are unconditionally required to avoid deficits. A state has an when it is so declared by the European Council upon a report by the European Commission and a judgment by the Monetary Committee. The EDP is set in motion if a country's deficit and general government debt respectively exceed 3 percent and 60 percent of GDP.' The justification for these procedures is that member states participating in the monetary union must be restrained from overborrowing to avoid destabilizing the common currency. If excessive deficits cause a debt crisis, the European Central Bank (ECB) will come under pressure to bail out the imperiled government. The bailout could be ex post (in which case the ECB would monetize the government's debt) or ex ante (in which case it would keep interest rates low to lighten the debt-service burden). Either way, unfettered fiscal policies could create inflationary pressures that the ECB will find difficult to resist.

Financial History, Historical Analysis, and the New History of Finance Capital1 Barry Eichengreen The traditional way of starting an essay on the history of capitalism is by not defining the term. The practice is regrettable, since it elides multiple definitions of which two most obviously stand out. For Karl Marx, the essence of capitalism was the separation of labor from the means of production, the concentration of the latter in the hands of the capitalist class, and the development of a political superstructure to secure property rights.2 For Milton Friedman, who positioned himself as the Marxist's mid-twentieth-century bête noire, capitalism was synonymous with markets and their association with private property and voluntary exchange.3 The Marxian portrait lends itself to a characterization of the economic system as unequal, exploitative, and unstable, whether due to a falling rate of profit or, in its twenty-first-century variant, an ever-increasing concentration of wealth and power in the hands of the 1 percent. Friedman and his followers, on the other hand, see unregulated market exchange as expressing freedom of choice, as a vehicle of opportunity and self-improvement, and as a mechanism for competing away inefficiencies. Both conceptualizations are of ideal types. Both are ahistorical since they treat capitalism as a disembodied system detached from time and place. For Marx, the dynamics of the system arise out of a struggle between classes that occurs independently of the particulars of the setting. For Friedman, the magic of capitalism is its extraordinary facility at aggregating the decisions of self-interested individuals—homos [End Page 20] economicus—into a social optimum in any context in which an unregulated market exists. This analysis of ideal types, whether undertaken by neoclassical economists or class theorists, appeals to neither the "new economic historians" who reside in economics departments nor to "new historians of capitalism" whose disciplinary home is history.4 Both are dissatisfied with the disembodied nature of such analyses. Both are concerned to understand how the response of individuals to the economic problems that they confront is shaped by a particular historical setting. Economic historians respond to this dissatisfaction by assembling large data sets that can expose the particularities and historically contingent nature of economic behavior. They use these data points of historical information on, inter alia, individual consumers, investors, and entrepreneurs, together with statistical techniques, to document actual economic behavior, dispensing with the economist's assumption of convenience, utility maximization. They use historical data to contextualize economic behavior and demonstrate how it is shaped by the specific context. Historians of capitalism substitute narrative for statistical methods in an effort to make their portrayal of historical action more vivid and context-specific. They invoke global history to demonstrate how national cases are embedded in a larger social and economic setting and a broader set of power relations. They embed their analyses of economic processes in the twenty-first-century historian's framework, emphasizing race, gender, and ethnicity in order to show how the dynamics of the economic order are contingent on its social underpinnings.5 Thus, economic historians and historians of capitalism see economic structure and organization as contingent. Both see it as contextually and historically specific. Both challenge the economist's conception of an ideal, rarified market. Both seek to denaturalize the economic order. In their common emphasis on how economic relations are shaped by historical context, the two schools are natural allies. [End Page 21] That's the positive take, anyway.6 The negative take is that economic historians, concentrated in economics departments, have been corrupted by that discipline's obsession with statistical technique, causing them to focus on ever-narrower questions to which such technique can be neatly applied to the exclusion of aspects of economic behavior that are not easily measured and quantified. They narrow their audience to that small subset of historical scholars with advanced training in mathematics. Historians of capitalism, lacking that training, disregard their colleagues' statistical analyses and, all too often, the findings of a half-century of scholarship in economic history. Lacking a statistical mindset, they use evidence selectively, in a manner consistent with their grand narrative. In this view, the two...