CENTER FOR AMERICAN POLITICS AND PUBLIC POLICY OCCASIONAL PAPER SERIES (93-2) Economic Integration and the Politics of Monetary Policy in the United States Jeffry A. Frieden October 1992 PRELIMINARY DRAFT: DO NOT QUOTE The author acknowledges support from the Center for American Politics and Public Policy and the Center for International Businesss Education and Research at UCLA. Center for American Politics and Public Policy University of California, Los Angeles 310 GSLIS Building, 405 Hilgard Avenue Los Angeles, California 90024 (310) 206-3109 1300 19th Street, NW, Suite 300 Washington, D.C. 20036 (202) 296-8226 There was a time when monetary policy was at the center of American politics. Before the 1930s, "The Money Question" was, along with the tariff, the great constant of political debates in the United States. It brought forth messianic populist fervor, terrified elite defenses, one of the most successful third parties in the nation's history, and impassioned speechifying from the floor of Congress to the wheat fields of Kansas. There are reasons other than nostalgia for those of us interested in the politics of macroeconomic policy to look back carefully on the fabled days when monetary issues gave rise to florid cross-of-gold metaphors rather than scholarly and popular boredom. Both theory and history indeed imply that the great salience of monetary policy in the nineteenth and early twentieth centuries was due to structural characteristics of the U.S. economy that may be recurring today. This paper argues that a major part of the political prominence of monetary policy before 1930 was a result of the great integration of the United States into the rest of the world economy. Extremely high levels of capital mobility meant that monetary policy implied movements in the exchange rate; the importance of world trade for many American economic agents meant that the exchange rate was a critical price for much of the country's population. Between about 1930 and 1970, neither condition held, and monetary policy faded into popular oblivion and scholarly tedium. Since about 1970, however, the international financial and commercial integration of the United States have increased dramatically. This gives rise to the possibility that monetary policy may become more politically important. Even if it does not, there are grounds to believe that economic integration will change existing patterns of political divisions and institutional settings in which monetary policy is made. In this paper, I evaluate the impact on the politics of monetary policy of the increased and increasing degree to which American financial and goods markets are linked to those abroad. In section 1, I summarize what open-economy macroeconomics leads us to expect about the impact of monetary policy on an economy open on the capital and current accounts. Section 2 surveys the American experience with monetary policy in an open economy between the Civil War and the 1930s. Section 3 describes how the politics and institutions of monetary policy changed as the economy closed financially and commercially after 1930. In section 4, I look at how the growing economic internationalization of the United States has affected monetary politics since 1970. Section 5 discusses some of the implications of the study, and is followed by a conclusion. 1. Monetary politics in closed and open economies Open economy macroeconomics has relatively clear predictions about the impact of economic integration on monetary policy; effects on the politics of monetary policy can also be inferred. Perhaps the clearest way to see this is to look at two polar cases, of very low and very high levels of economic integration. In a closed economy, monetary policy takes effect by way of its impact on interest rates. A monetary stimulus reduces interest rates, lowers borrowing costs and encourages both investment and credit-financed consumer spending. However, in an economy that is financially integrated with the rest of the world, interest rates are constrained to world levels.[1] In such an open economy, monetary policy affects the exchange rate rather than the interest rate: monetary expansion leads people to sell off the currency, drives the exchange rate down, makes locally produced goods cheaper in comparison to imports, and stimulates the demand for domestically produced tradable goods. In other words, national monetary authorities can only stimulate a financially open economy by allowing the currency to depreciate; if the exchange rate is fixed, increased money supply growth and temporarily lower interest rates will simply lead to an outflow of funds until domestic interest rates go back to world interest rates. This in turn implies that there is a tradeoff between national monetary policy independence and exchange-rate stability: either a financially integrated country allows its currency to fluctuate or it accepts the loss of monetary policy as an instrument. The difference between monetary policies in closed and open economies implies that the two will be characterized by different constellations of socio-economic pressures on policymakers.[2] When monetary policy involves interest rates, the consequent political divisions can be expected to be primarily between borrowers and savers. A few specific industries--especially housing construction and major consumer durables--are more sensitive, as their products are typically purchased on credit; the financial sector typically supports higher interest rates. However, the impact of interest rates on relative prices and demand for most goods and services is limited, and the debtor- saver cleavage is typically diffuse. For these reasons, it is reasonable to expect the politics of monetary policy in a closed economy to be subdued, and the divisions to be relatively broad- gauged. In this context, we might best analyze closed-economy monetary policy in terms of such aggregate political considerations as electoral cycles. On the other hand, in an open economy monetary policy leads directly to exchange rate movements, with immediate effects on many relative prices. Currency movements, in fact, have a focused and first-order impact on economic actors exposed to international trade and payments, such as exporters, import- competers, international banks, and multinational corporations. They also have a more diffuse, second-order impact on producers of non-tradable goods and services. In this case, such policies can be expected to call into play well-defined economic interests. Tradables producers will favor a depreciation of the currency which raises the (domestic-currency) price of imports on the domestic market and lowers the (foreign-currency) price of their goods on world markets. Nontradables producers will favor an appreciated currency that raises the price of their products relative to the price of tradable goods. Preferences about the level of the exchange rate may well vary in intensity. Producers of standardized goods are probably most sensitive to exchange rate movements: they compete on price alone, and small movements in currency values can mean the difference between profitability and bankruptcy. Those whose products are tradable but compete on quality and other non-price variables are likely to be less concerned. Put differently, the sensitivity of tradables producers to exchange rate movements is a function of the price elasticities of demand for their products. The influence of exchange-rate movements on producers of nontradable goods and services is less direct than on tradables producers: while an appreciation raises the price of nontradables relative to tradables, the process can be gradual (as in the United States in the early and mid 1980s). And in all instances, whatever positive impact price increases may have on profitability have to be measured against the negative effects of higher prices on demand and the entry of new competitors. Other peculiarities are also important. For example, intensive consumers of imports will be hostile to depreciation; these consumers may be concentrated industrial users of imported inputs. Overseas investors appreciate the added purchasing power that an appreciated currency gives them, but this appreciation also erodes the home-currency value of their overseas earnings.[3] Currency values are often linked to the overarching regime of exchange-rate determination. This is most obvious in the case of a fixed-rate regime such as the gold standard or the European Monetary System.[4] In these instances, preferences over the level of the exchange rate are tied to preferences over the desired exchange-rate system. Those with important cross-border interests for whom currency fluctuations create undesirable uncertainty are likely to favor fixed rates, even where this implies giving up monetary policy independence. On the other hand, those oriented toward the domestic market or otherwise insulated against exchange risk are more likely to be unwilling to forgo monetary independence in favor of currency stability. Again, nuances can be important and the two issues--the level of the exchange rate and its variability--can cut in different directions. Exporters weigh the relative importance of the increased competitiveness given by a devaluation against the uncertainty that devaluations introduce. For some--especially with long-term contracts where hedging is difficult--variable exchange rates may lead to a loss of business or desirable predictability. For others, the added competitive edge dominates the increased uncertainty. To take another example, international investors may care less about the level of the exchange rate than about its variability. Firms with globally diversified production may be insensitive to particular levels of the exchange rate--the negative impact of a strong franc on French operations is presumably counter-balanced by the positive impact of the mirror-image weakness of other currencies on non- French operations--but their ability to formulate investment plans may be very sensitive to exchange-rate instability. There is little doubt that the distributional implications of exchange rates are complex. My point here is somewhat simpler. There is a difference between the politics of monetary policy when monetary policy implicates the exchange rate, and when it does not. In the latter case, in which monetary policy involves interest rates, the relative price effects on specific and concentrated interests are quite limited, so that the pattern of political activity can be expected to be diffuse. In the former case, in which monetary policy involves the exchange rate, relative price effects are immediate and significant for specific interests, so that political pressures from concentrated groups can be expected. The form of these pressures is hard to specify fully, but the overall argument holds regardless of its exact application--exchange rate movements affect relative prices more directly and for more concentrated interests than interest rate movements. This in turn ties into an evaluation of the impact of economic integration on monetary politics, as financial openness drives monetary policy toward the exchange rate. While internationalization of financial markets changes monetary-policy tradeoffs, increased levels of trade affect the intensity with which these tradeoffs are felt by economic actors. Greater exposure to world trade, both on the import and on the export side, swells the ranks of those sensitive to levels and movements in the real exchange rate. Trade liberalization makes more goods tradable, especially if it removes quotas or other prohibitive barriers. This has two effects: directly and almost by definition, it expands the tradables sector, and indirectly it increases local consumption of imported tradables. Tradables producers are especially sensitive to the real exchange rate; as more goods become tradable, more producers are more concerned about currency values. Even nontradables producers care more about real exchange rates as the economy is opened to trade, for the import component of their inputs rises, as does the effect on them of the expenditure-switching caused by real exchange rate movements. Increased trade intensifies the interest of producers in monetary policies that move real exchange rates in their favor. Financial and commercial integration, then, can be expected to shift the terms of debate over monetary policy. A tradeoff develops between monetary policy autonomy and exchange-rate stability, with political divisions over both the tradeoff and the most desirable monetary policy stance--level of the exchange rate--within it. The distributional effects of monetary policy change in line with the greater importance of the exchange rate, and these new effects in turn have an impact on the political lineup. Inasmuch as there is a tradeoff between exchange rate stability and monetary independence, those with more of an interest in a stable exchange rate (especially international investors and traders) will square off against those primarily concerned about national monetary conditions (especially those oriented to the domestic market). By the same token, conflict will ensue between supporters of a higher and lower exchange rate, especially tradables and nontradables producers. Put somewhat differently, in a financially and commercially open economy the politics of monetary policy will tend to be organized more around the distributional effects of exchange rate movements than around the effects of interest-rate changes.[5] As interest rates have quite a diffuse impact, it may be appropriate to examine them from the standpoint of electoral or other broad political trends. The exchange rate, however, has a direct and concentrated impact on the relative prices facing international investors and traders, as well as tradables (and some nontradables) producers. Politics concerning the exchange rate are more likely to resemble typical interest-group politics involving such things as tariffs (for which, after all, a real depreciation can be a substitute). Inasmuch as economic integration drives monetary politics toward the exchange rate, and implicates more focused interest groups, I expect the shift to have an impact on institutions as well as political divisions and debates. A simple picture of the institutional setting might be as follows. Members of Congress, with their geographically defined electoral concerns, are especially susceptible to pressures from well-defined groups with relatively large numbers--such as labor unions or farmers. Agencies with targeted responsibilities are especially susceptible to capture by smaller, more concentrated interest groups--such as the financial community. The executive, with its national constituency, is especially focused on issues of aggregate economic concern, such as growth and inflation.[6] If this stylized picture is reasonable, some regularities should emerge as the United States goes from openness to closure and back. In an open economy, monetary policy implicates the value of the dollar and therefore draws into the political fray the direct interests of large numbers of well-defined producers. This is especially true of tradables producers who can be helped (harmed) by depreciation (appreciation). This should lead Congress to want to play a major role in monetary policy, as large groups--workers, manufacturers, farmers--are mobilized on the issue. In a closed economy, however, the principal concerns are either of relatively small groups--the housing construction industry, the financial sector--or of broad macroeconomic aggregates. The former are more likely to concentrate their efforts on such agencies as the Federal Reserve System, while the latter problem should lead the President to play an important part in formulating monetary policy with an eye to national electoral considerations. Debates over monetary policy should take place primarily behind the closed doors of the Fed and the Executive in a closed economy, but economic openness should lead to more visible Congressional involvement. A final factor is that when monetary policy is associated with currency values, a link is drawn between monetary and trade politics. Depreciation is functionally equivalent to an increase in tariff or non-tariff barriers to trade, while appreciation has effects similar to a trade barrier reduction. However, a simple rise or fall of domestic interest rates has no direct and systematic impact on the relative price of traded goods, and therefore is unrelated to trade policy. Put somewhat differently, in a financially open economy, trade protection can be used to mitigate pressure for monetary expansion, but this is not true in a financially closed economy. The process of financial integration, then, should be accompanied by a progressive linking of monetary and trade policies; the process of financial closure, with their separation. With these analytical considerations in mind, we can look at the historical and contemporary record. The United States in the last century has in fact gone through three phases. From the Civil War through the 1920s it was a relatively open economy, especially on the capital account. Between the 1930s and the 1960s it was a relatively closed economy on both current and capital accounts. Since the 1960s the U.S. economy has become increasingly open to both goods and capital movements. The above discussion leads me to expect that these shifts should be accompanied by changes in the politics, and eventually in the institutional characteristics, of monetary politics in the United States. I now turn to an evaluation of this possibility. 2. Monetary politics in an open economy, 1870-1930 In the years between the Civil War and the 1930s, the U.S. economy was closely integrated with the rest of the world. This is not the common view of the era, so it is worthwhile to present some analytical and empirical support for this assertion. First it is important to keep in mind that actually measuring capital and goods market integration is very difficult, especially as there is no necessary correlation between levels of integration and flows of goods and capital. Nonetheless, some suggestive evidence is available. Financially, several careful studies provide support for the notion that American capital markets were very tightly tied to those on the other side of the Atlantic, especially in London. Typically the studies focus on the covariation of interest rates in the London and New York markets, and find the two markets very closely linked.[7] By the same token, more recent studies tend to indicate that American capital markets were not particularly closely integrated into world capital markets until about 1980, from which time on they became increasingly integrated.[8] Figures on capital flows reinforce the studies of capital market linkages. Before 1900 the United States was a net capital importer; between 1884 and 1893 the net capital inflow averaged 1.4 percent of Net National Product, and 7.3 percent of Net Capital Formation. In the 1920s, after the United States had gone from a major capital importer to a major capital exporter, American foreign investment grew very rapidly, reaching $21 billion by 1929--equivalent to over one-fifth of American GNP.[9] Both of these sets of measures are much higher than analogous figures for the United States in the 1970s. The capital inflow numbers were surpassed, of course, by those of the 1980s, but still they indicate that the United States was quite tightly integrated into global financial markets before 1930, certainly far more than between 1930 and 1980. On the commercial side, merchandise trade in the decades before World War One and again in the 1920s averaged about 12 percent of GDP. In the years after World War Two, the figure was barely half this, and it was not until the early 1970s that it reached the earlier number. American trade patterns were very different before World War One than they have been since 1970, of course: the country was essentially an exporter of primary products in the former period. Along these lines, exports were very important to American farmers and miners: in the 1880s a fifth of the country's farm output was exported, and in 1879 exports were 30 percent of American production of wheat and 60 percent of cotton production. The overall picture is one of a country for which the export of farm and mine products was very important. The analytical discussion above has four implications. First, monetary policy issues should have been closely related to exchange-rate issues. Second, the political cleavages on monetary policy debates should track the group interests outlined above. This means that tradables producers should want a weak (depreciated) currency, nontradables producers a strong (appreciated) currency; and on a related dimension, domestically oriented economic actors should be favorable to a floating exchange rate, internationally oriented actors to a fixed exchange rate. Third, the making of monetary policy should have been of great concern to Congress, as it implicated the interests of well-defined groups of electoral importance. Fourth, there should have been a connection between monetary and trade politics in this period. A look at the historical record indicates that all four of these expectations are in fact borne out.[10] The period from 1865 through the early 1930s was characterized by major debates over monetary policy. In all instances, the issue in play implicitly or explicitly involved the dollar's exchange rate. By the same token, although debtor- creditor differences played a role in the debates (and help explain the divisions), the cleavages I identify above were extremely important. The standard histories of this period focus on the distinction between indebted farmers and creditor bankers, and I do not dispute the importance of this division; but this is not sufficient to explain the character of the debates. On the third factor, Congress was deeply involved in monetary policy throughout this period--often to the chagrin of the Executive and, after 1913, of the Federal Reserve System. And finally, at several crucial points of the story, the link between trade and monetary policies was made explicitly and with great impact. Throughout the seventy-year period, the distributional divisions were as projected. Those directly involved in international trade and payments wanted stability in the value of the dollar. In the context of the gold standard, traders and investors from a country whose exchange rate fluctuated were disadvantaged compared to those from countries with predictable currencies. On the other hand, those who sold primarily to the domestic market cared little about the exchange rate and regarded a fixed rate as an unnecessary limit on government ability to stimulate the domestic economy. Preferences about fixing the exchange rate were elided with views on whether to devalue the dollar. Inasmuch as dollar devaluation implied going off gold, those who wanted a weaker currency opposed the gold standard--even where they might have been indifferent or favorable to it in principle. So tradables producers, especially farmers and manufacturers, wanted dollar depreciation--even though this meant going off gold. On the other hand, those heavily involved in international trade and investment wanted the predictability of a gold dollar. Interest groups divided into two broad camps over the course of the decades. "Hard money" interests wanted unshakable commitment to gold, with no devaluation; support for hard money came from Northeastern traders, bankers, and investors, and the most export-oriented manufacturers. "Soft money," devaluation and going off gold, was preferred by farmers and manufacturers from the interior, whose markets were domestic and who worried primarily about the low domestic prices of their products. The division persisted throughout decades of conflict. I now turn to a brief survey of the most significant episodes in this period. Greenback populism and resumption. During the Civil War the United States went off gold, as prices more than doubled under a paper currency ("greenback") standard. From 1865 until 1879 battles raged over whether, and how, the dollar should return to a fixed rate against gold ("resume"). After the Civil War, the Treasury shrank the money supply to appreciate the dollar and move toward resumption of gold convertibility at the pre-war rate. This real appreciation put pressure on tradables producers, especially manufacturers, as the data in Table 1 indicate. The Greenback movement developed as a response among the iron and steel manufacturers of Pennsylvania. They were the country's leading protectionists, and recognized that devaluation cum reflation would reverse the relative price decline. This could only be accomplished if the country stayed off gold. The railroadmen concurred, as did investment bankers and others tied to these industries. Soft-money advocates worried little about the international credibility gold might bring, for they bought and sold next to nothing abroad. As a Chicago merchant put it, "these gentlemen on the seaboard base all their calculations on gold, to bring them to par with foreign countries, leaving us in the West to take care of ourselves."[11] Around 1873 two important groups were drawn into the soft money camp. Farmers were originally indifferent, for farm prices held up quite well in the first years after the Civil War. However, the Panic of 1873 initiated a secular decline in farm prices. Like manufacturers, farmers recognized that devaluation would raise the domestic price of imported farm products, and would raise farm prices relative to the prices of such nontradables as transportation and financial services. The second important group brought into play after 1873 was silver miners. In 1873 silver was removed from circulation. At around that time, the price of silver began to decline relative to gold. Miners and Greenbackers devised a common program to meet both their needs. If silver were "re-monetized" at the old 16:1 rate against gold, the government would be forced to buy silver at well above the market rate. This would act as a subsidy to the miners; it would inject money into the economy as the government bought up silver; and it would force the country off gold and onto a de facto silver standard. A powerful alliance of Midwestern manufacturers, farmers, associated nontradables producers, and miners opposed the return to gold under the banners of greenback issue and free silver. Supporters of gold were concentrated in the Northeast, among the financial and commercial communities with strong ties to European trade and payments. New England textile manufacturers, heavily oriented toward world markets, also backed the exchange rate predictability that gold implied. As the New York Chamber of Commerce put it, in complaining about the risk attached to a floating exchange rate: "Prudent men will not willingly embark their money or their merchandise in ventures to distant markets...with the possibility of a fall [in gold] ere their return can be brought to market."[12] This fundamental disagreement caused bitter political battles. In April 1874 Congress passed an Inflation Bill by a wide margin. The vote on the bill, which would have mandated expansion of the supply of paper money, illustrated the overlap of economic and regional differences. Over 954 of Northeastern Congressmen opposed the bill, while over three quarters of Congressmen from the agrarian South and the agrarian and industrial West (including Pennsylvania) supported it. Northeastern hard-money interests immediately mounted a furious campaign to overturn the bill. President Ulysses Grant came through with a veto, but this cost the Republicans the congressional elections of 1874. After the Republican electoral debacle, Grant and Republican Party leaders attempted a display of party unity to salvage their chances for the 1876 presidential elections. In January 1875 they convinced lame duck Republicans to vote for the Resumption Act, mandating a return to gold on January 1, 1879. In 1876 Republican Rutherford B. Hayes, a supporter of hard money, was elected. Congress remained dominated by soft-money interests, and one of its first acts in February 1877 was to pass the moderately silverite Bland-Allison Act; President Hayes' veto was overridden. However, in late 1877 an attempt to repeal the Resumption Act was barely defeated: it passed the House and failed by one vote in the Senate. Hayes' Treasury Secretary, John Sherman, had in fact worked with Republicans and Democrats alike to find a compromise, and had determined that Bland-Allison was the price of defeating repeal of the Resumption Act. Even so, Hayes was forced to wield the blunt instrument of patronage in order to gather enough votes to save the gold standard.[13] In the meantime, some soft money supporters became disgusted with the two major parties. They founded the Greenback Party, which stood strongly for devaluation and a flexible exchange rate. The party ran Peter Cooper for president in 1876, with little success, but did better in 1878 congressional elections. However, by then Hayes and Sherman had traded for or bought enough votes in Congress to save resumption, and the country want back to gold at the beginning of 1879. Populism and the cross of gold in the 1890s. Anti-gold sentiment erupted once more amid the agricultural depression that began in 1888. Farm prices dropped precipitously, and--unlike in manufacturing (see Table 2)--productivity advances were not sufficient to counteract this trend. Agriculture was in crisis, as indicated by the fact that between 1890 and 1896 production of farm equipment dropped 39 percent in constant-dollar terms, while output of industrial machinery and equipment rosa 62 percent and total output rose 23 percent.[14] Reflation and devaluation under the silverite banner would have mitigated the farm crisis, and farmers were well aware of this. The silver miners, for obvious reasons, continued to support silver monetization. The most striking reflection of agrarian interests was the rise of Populism, and devaluation cum inflation ranked at the top of the Populists' demands. They called for a paper money-silver standard, with the dollar fluctuating against gold. The Treasury would have been directed to regulate the money supply to avoid deflation. Gold clauses, tying contracts to the value of gold as a hedge against devaluation, would have been made illegal. As one Populist put it: "It is the cardinal faith of Populism...that money can be created by the Government in any desired quantity, out of any substance, with no basis but itself." Populist orator Mary Elizabeth Lease, who advised farmers to "raise less corn and more Hell," was inflammatory: "Wall Street owns the country....Money rules, and our Vice President is a London banker."[15] The Populists' 1892 Omaha Platform charged: "the supply of currency is purposely abridged to fatten usurers, bankrupt enterprise, and enslave industry. A vast conspiracy against mankind has been organized on two continents, and it is rapidly taking possession of the world."[16] In the opposing corner, Northeastern commercial and financial interests remained at the core of the hard-money camp. The bankers' position had if anything hardened: many on Wall Street had come to hope that New York would soon be an international financial center, for which ironclad commitment to gold was a prerequisite. Manufacturers were more receptive to hard-money arguments than they had been in the 1870s, for three reasons. First, as the data in Table 2 indicate, declining prices of manufactured products were more than compensated by rapid productivity increases, so that few manufacturers felt substantially disadvantaged by the real appreciation. Second, by the 1890s some of American industry had become internationally oriented: manufactured exports had expanded and foreign direct investment was increasing.[17] Third, import-competing manufacturers' interest in the money question had become secondary to their concern to defend tariff protection, which was under attack from agricultural interests. They were willing to forgo support for silver if tariff protection were continued. Republican Benjamin Harrison beat Eastern Democrat and gold supporter Grover Cleveland in the 1888 election by promising support for silver. Harrison made good on his promise with the 1890 Sherman Silver Purchase Act. This doubled the amount of silver purchased by the Treasury under the Bland-Allison Act. The bill was too mild to satisfy anti-gold interests, and it was coupled with the prohibitive McKinley Tariff of 1890, which generated agrarian opposition. The result was that the Republicans lost the House in the 1890 elections, then lost both chambers and the Presidency to Grover Cleveland in 1892. The Democrats had run on a silverite platform, but Cleveland was known as a gold supporter--a "Gold Democrat," in contemporary parlance. In 1893 the country was hit by a severe panic, which the financial community blamed on uncertainty about commitment to the gold standard. Despite his party's platform, President Cleveland pushed Congress to repeal the Sherman Act. Cleveland allied with gold Republicans against the majority of his own party, and as Grant and Hayes before him, used patronage to bludgeon key Democrats into submission. This repudiation of soft money was responsible for the Democrats losing the 1894 midterm elections. In turn, the gold conservatives lost the battle for control of the Democratic Party to free silver supporters. The 1896 election was fought largely over the gold standard. Democrats and Populists jointly fielded William Jennings Bryan, who ran against the "cross of gold" upon which, Bryan thundered, the country was being crucified. The Republicans, in response, cobbled together a hard money- high tariff coalition. Presidential candidate William McKinley provided the link. He had impeccable protectionist credentials, having designed the tariff of 1890; despite long-standing support for silver, he switched to gold in 1896. This made the McKinley candidacy a coalition of hard-money Eastern trading and financial interests, and high-tariff Midwestern manufacturers. McKinley's reversal on gold lost him the Western states' silver Republicans. However, once the election became a referendum on money, the Republicans received millions of dollars in Eastern business contributions to ensure the victory of gold.[18] The narrow defeat of Bryan effectively sealed the fate of silver, and in any event anti-gold sentiment dampened over the next few years as farm prices recovered. In 1900 Congress passed the Gold Standard Act, Bryan was defeated a second time, and the country's commitment to the gold standard was firm. The struggle for control of monetary policy. 1920-1935. In the early twentieth century much of the debate over monetary and exchange rate policy shifted to considerations of institutional and jurisdictional responsibility. At the center of the conflict was Congressional influence on monetary policy. The distributional cleavages carried on the pre-World War One pattern. The 1920s indeed saw pressure for looser monetary policies. "Price stability," that is government policy to reverse deflation, was an important demand of farm groups and much of manufacturing. Farmers and others felt that the Fed was pursuing an excessively tight monetary policy that depressed the price of traded goods.[19] Between 1919 and 1928 farm prices dropped 33 percent and prices of metal products 25 percent, while building materials fell 18 percent (see Table 3). The soft-money position was clearly expressed by farm leader (later Roosevelt's Secretary of Agriculture) Henry Wallace in 1929: "...the people who work with money, the bankers, the bond companies, the insurance people, all have an instinctive and unconscious bias toward enhancing the purchasing power of money." Wallace was echoed by Kansas farm representative Andrew Shearer: "You take the salaried class, the fixed income class, the class who are dealing in credit paper, and they naturally fear inflation. It makes their income worth less. On the other hand, we who are producers fear deflation...and consequent price reduction."[20] The farmers were joined by much of midwestern business; one prominent reflationist group was the Committee for the Nation, on which manufacturers were heavily represented. Once the Depression hit, much of the sentiment for reflation and devaluation coalesced around the ideas of George Warren, a Cornell economist who believed devaluation would raise commodity prices.[21] Soft money was especially popular in Congress. On the other hand, support for more orthodox monetary policies came, as before, from the Northeastern financial and commercial sectors and the country's more internationally- oriented industrialists. These were the core of the "internationalist" bloc on foreign economic policy, for whom the international role of the dollar was very important. The international financial community wanted a hard-money policy that gave priority to strengthening the gold standard and European stabilization, and the Treasury and the New York Fed agreed.[22] The fifteen years after World War One were especially consumed by conflict over the institutions of American monetary and exchange-rate policy. Early battles over the Federal Reserve Act presaged the cleavages, in which money center banks squared off against farmers and manufacturers from the interior over the degree to which the Fed would be influenced by the New York financial community.[23] Congress eventually wrote a bill that appeared to limit the influence of New York bankers, but the Fed evolved differently than anticipated--or desired by Congress. These discussions, though, took place in a broader context. The Constitution (Article I, Section 8, Paragraph 5) gives Congress the authority "to coin money, regulate the value thereof, and of foreign coin." Over the course of the antebellum period Congress tended to delegate this authority, which largely amounted to ensuring the gold parity of the dollar, to the Treasury. Nonetheless, ultimate authority for domestic and international monetary policy rested with Congress, which was part and parcel of the process by which such issues as the gold standard, the exchange rate, and the money supply were thrown into the thick of legislative battles and electoral politics.[24] The ambiguous division of responsibility between Congress and the Treasury led to agitation against Treasury involvement by those with more influence in Congress than the Executive. Indeed, free silver was often presented as a way of forcing a more expansionary monetary policy on the Treasury. Richard Timberlake observes, One free-silver-Republican-turned Populist, Preston Plumb of Kansas, stated that the advantage of free coinage would be to "release the money supply from the arbitrary control or suggestion of control of anybody...." The "anybody" Plumb referred to was anybody who was secretary of the treasury. His statement...provides an interesting contrast with an earlier statement by Senator Jones of Nevada (also a free silver Republican) on the benefits that would be derived in monetary affairs "by the guidance of human wisdom." Jones had implied that Congress should supply the "wisdom." Plumb only objected to such "wisdom" when it was supplied by the secretary of the treasury.[25] The 1920s and early 1930s were the height of debate over the structure of the Federal Reserve, and related institutional aspects of monetary policy. Attention focused on control of open market operations. These were not provided for in the Fed's founding documents, but their usefulness for monetary policy was soon discovered. The New York Fed immediately took the lead, and created an Open Market Investmant Committee (OMIC) in 1923, which effectively gave the New York Fed control of monetary policy.[26] Objections to New York Fed control of open market operations came from two directions. Congressional soft-money advocates wanted policy to be set by the Board in Washington, and they wanted to change the composition of the Board--than made up of five presidential appointees, the Treasury Secretary, and the Comptroller of the Currency--to make it mora responsive to Congress. The regional reserve banks wanted open market operations to be shared among them, rather than run out of New York. In 1928 these two groups allied to eliminate the OMIC and replace it with an Open Market Policy Conference of the twelve reserve bank governors. Conflict over monetary policy and institutions increased during the Depression.[27] The Fed found itself torn between the demands of the gold standard and the ravages of domestic deflation. In 1930-1931, in response to pressure on the dollar, it raised interest rates. This however exacerbated the domestic downturn, leading the central bank to reflate in 1932, although hardly enough to satisfy soft-money advocates.[28] Among the hardest-hid victims of deflation in the early Depression were producers of traded goods. Between 1929 and 1933, as GNP fell 46 percent in nominal terms, output of durable goods fell 67 percent and that of farm products 53 percent; services output fell 28 percent. In 1933 net farm income was 58 percent below already-depressed 1929 levels, and durables manufacturers realized $400 million in losses. As shown in Table 3, from 1929 to 1933, while prices of building materials (typically nontradable) fell 18 percent, those of farm products dropped 52 percent and of metal goods by 23 percent. Congress remained the stronghold of reflationist sentiment. Representative T. Alan Goldsborough, who dominated the House Banking and Commerce Committee, led repeated attempts to force reflation and devaluation on the Fed; in May 1932 his Price Stabilization Bill, which mandated inflation and going off gold, passed the House 289-60.[29] Arrayed against Congress were the Administration, the Fed, and the Senate, which was dominated by financial conservative Carter Glass of the Senate Banking and Commerce Committee. After the 1930 midterm elections, the Democrats controlled the House, but were unable to get easy-money proposals past Glass, the Senate, and the Hoover administration. However, hard-money sentiment softened as the Depression dragged on, especially after the British went off gold in 1931. J.P. Morgan backed the British decision,[30] and by the end of 1932 was sympathetic to an American devaluation. The world economy was collapsing, international trade and payments held out few hopes of early recuperation, and the first order of business was domestic recovery. As a leader of the Northeastern commercial sector, Edward Filene, put it, "all European countries are headed for a regime of autarchy--that is, of economic isolation and intense nationalism, and American can do no better than to do likewise."[31] Although Wall Street was not unanimous, many hard- money men were willing to go off gold, at least for a time.[32] In other words, while the strongest support for reflation and devaluation continued to come from tradables producers, many paragons of of gold-standard orthodoxy had by early 1933 come to regard easier money as a temporarily necessary evil. Franklin Roosevelt ran for president without clarifying his position on the dollar.[33] After his election, uncertainty about Roosevelt's intentions--and the increasing belief that he would devalue--eventually led to a run on the dollar. In the month before the inauguration the New York Fed lost nearly two-thirds of its gold reserve, and devaluation risk was a major factor in the banking crisis of early 1933.[34] Almost immediately after taking office on March 4, 1933, Roosevelt prohibited the export of gold, signalling that the United States was moving off the gold standard.[35] In the interim, Congressional pressure for reflation gathered steam. By April 1933, the Senate had before it a series of anti-gold amendments to an agricultural control bill. An extreme one (the Wheeler Amendment) was defeated only by heavy administration lobbying; there was no doubt that an inflationist amendment probably that of Oklahoma Senator Elmer Thomas, would pass.[36] In this setting, on April 18, 1933 President Roosevelt endorsed the Thomas Amendment, took the dollar off gold, and let it find its own level on the foreign exchanges. Roosevelt's course of action represented a moderate version of the soft-money position. As Raymond Moley, one of the president's chief advisers, recalled about the backdrop to going off gold, "The cold fact is that the inflationary movement attained such formidable strength by April 18th, that Roosevelt realised he could not block it....The decisions of April 18th, and 19th, were the prosaic results of a counting of noses in the Senate....I still believe that Roosevelt accepted the Thomas amendment only to circumvent uncontrolled inflation by Congress."[37] In October the monetary authorities began pushing the dollar down purposely until by January 1934 its gold value had dropped from $20.67 to $35 an ounce; by then the dollar had fallen 44 percent against the pound from its March 1933 level. The stock market jumped ten percent the day after the April 1933 depreciation was announced, and by July 1933 had risen 76 percent.[38] Reflation ensued, as the wholesale price index rose 31 percent between March 1933 and January 1935.[39] Summary. All three of these episodes bear out the expectation that monetary policy be closely related to exchange rate issues (the gold standard), that it pit tradables against nontradables producers and internationally against domestically oriented sectors, and that it be a focus of congressional attention. The link between gold and the tariff was explicit in the 1870s and the 1890s, but not in the 1920s. This may have something to do with the fact that trade barriers are a good substitute for depreciation for import-computers (such as manufacturers and some farmers), but not for exporters (such as most American farmers); as manufacturers got tariff protection they became less adamant about soft money, leaving only farmers as the most consistent lobby for devaluation. These characteristics of monetary politics in the financially and commercially open American economy are especially striking in contrast to those that came as the economy closed. 3. Monetary politics in a closed economy, 1935-1970 For at least thirty years after the mid-1930s, the United States was largely closed to world trade and payments. Over the course of the period the country's commercial and investment ties grew, but it was not until the late 1960s that economic integration became significant. Certainly during the Depression, World War Two, and the early post-war years, neither world trade nor world financial markets were important. During the 1950s, trade began growing, but remained at very low levels by historical standards; international financial transactions remained negligible. By the mid-1960s, the United States was more open on the trade account, but capital movements remained quite small--and when they threatened the autonomy of American monetary policy, the monetary authorities slapped on exchange controls that were not removed until 1974. The analytical framework of this paper leads us to expect certain patterns of monetary policymaking in this era. First, monetary and exchange-rate policy should have been essentially delinked. Second, political divisions over monetary policy should have tracked broad macroeconomic (rather than tradables- nontradables, or international-domestic) considerations. Third, most of the attention to monetary policy should have been paid by the Fed and the Administration; Congress should have been relatively uninvolved. Finally, there should have been few ties between monetary and trade policy. These expectations are in fact borne out by the historical record. Much of the evidence along these lines is negative. There was little discussion of exchange rates in the United States from the mid-1930s until about 1970--and one could hardly expect that monetary policy would be debated in the context of a non-issue. Consensus about the dollar's value is generally ascribed to the strictures of the Bretton Woods system within which the dollar's value was essentially fixed at $35 per ounce of gold. This is too facile: while the existence of an exchange rate system based on a fixed dollar certainly raised the costs of devaluation, in the early 1970s the U.S. did in fact devalue, Bretton Woods or no. The point is that few political actors appear to have cared enough to make the exchange rate a policy issue until the 1970s. By the same token, there is no evidence of any explicit or implicit link between monetary and trade policy until the late 1960s. On the other hand, during this period the politics of monetary policy may have responded to broad electoral considerations. This is a controversial issue, implicating the voluminous literature on political business cycles, but for our purposes it is enough to observe that in the 1950s and 1960s there is some evidence that the identity of the party in power, or the approach of an election, affected monetary policy; there is little evidence of interest-group lobbying.[40] The most striking evidence of a sea change in the making of American monetary policy between 1935 and 1970 is the adoption and persistence of new institutional arrangements. During the New Deal a series of institutional reforms distanced monetary and exchange rate policies from the purview of Congress and concentrated them in the Federal Reserve and the Treasury, respectively. This institutional pattern persisted and was indeed strengthened over the course of the 1950s and 1960s. While there is little evidence that Congress was fully cognizant of how long-lasting the reforms would be, the fact that it made few efforts to reverse the institutional changes until the 1970s is in itself some indication that monetary and exchange rate policy had become of little interest to the legislature. This, too, is in keeping with my expectation that in a closed economy monetary and exchange rate policy is of only diffuse interest to the electorally influential groups to which Congress tends to listen most closely. The Roosevelt administration's changes in domestic and international monetary policies were linked to changes in the institutions charged with making these policies.[41] The Banking Acts of 1933 and 1935 reorganized the Federal Reserve to diminish the authority of the regional banks (including the New York Fed) and increase that of the Board in Washington, whose composition was altered to expand the influence of the Executive. The second change came with the Gold Reserve Act of 1934, which vested control of the gold value of the dollar (the exchange rate) in the Secretary of the Treasury. This authority has been renewed, and slightly revised, since then.[42] The ultimate effect of these and other measures was to limit the direct influence of Congress over domestic and international monetary policy. From the 1930s until the 1970s, Congress regarded the Fed as the source of monetary policy and the Treasury as the source of exchange-rate policy. Exactly how this delegation came to pass, and why it has been respected, are beyond the scope of this paper.[43] Nor should the fact of delegation be taken to imply necessarily that Congress does not influence policy.[44] However, for whatever reasons and in whatever ways, Congressional activism on monetary policy appears fundamentally different after the New Deal reforms than before.[45] The immediate reason for the institutional change was probably straightforward. The administration agreed with the Congressional majority on the need for devaluation and reflation, but was not as extreme in this belief as was Congress. It thus appropriated monetary policy to itself rather than leaving it to Congress, as many inflationists preferred. This was nonetheless acceptable to the Congress of the early New Deal, which regarded the Administration as essentially reliable in monetary and exchange rate policy. As the Treasury and the Fed carried out policies well within the bounds of Congressional acceptability, the institutional issues faded from view. The Treasury's gold policy and Federal Reserve monetary policy faithfully reflected Roosevelt's moderate reflationism, all the while guarding Treasury and Fed independence from Congress. When the American monetary authorities negotiated a stabilization agreement with the British and French in 1936, Congress paid little attention.[46] In the 25 years after World War Two, the institutions of American monetary and exchange rate policy continued to evolve in relative isolation from Congressional scrutiny. Two institutional developments are worth mentioning. The first was the 1951 Treasury Accord, in which the Fed was released from its wartime obligation to purchase Treasury securities at a fixed (and below-market) interest rate. This essentially gave the Federal Reserve formal authority to engage in monetary policy for stabilization (rather than fiscal needs) purposes.[47] The second change came in 1961, when instability on foreign exchange markets led to the creation of bilateral "swap" arrangements among major economic powers. The mechanism authorized by the Gold Reserve Act, the Treasury's Exchange Stabilization Fund, did not have sufficient reserves for this purpose, and so the Treasury and the Fed worked out an agreement under which the Fed would operate in currency markets with its own funds. It is believed by some that this arrangement was devised explicitly to avoid Congressional influence on exchange- rate policy;[48] in any event it certainly removed currency policy even further from the legislative arena. By the early 1970s, when the issue began coming back into public view, the Treasury and the Fed were firmly in control of exchange rate policy.[49] For all intents and purposes, Congress virtually neglected monetary and exchange rate policy for nearly forty years after the New Deal reforms.[50] A number of reasons for this might be adduced. One possibility--often mentioned in the analogous literature on trade policy as well as in discussions of central bank autonomy--is that Congress recognized the efficiency gains to be made by delegating responsibility to an independent agency. Not only could the agency pursue welfare-improving policies without having to pay attention to political pressures, but Congress was provided with an ideal scapegoat to avoid direct blame. In this view the Fad was in fact implementing true Congressional preferences, just in a way that protected Congress from responsibility for unpopular monetary policies.[51] While this explanation may be accurate, it does not accord with the observation that apparent Congressional willingness to give the Fed full responsibility for monetary policy rose rapidly in the 1930s and declined precipitously after 1970. My view is that Congress ignored monetary and exchange rate policy so long as they did not implicate the interests of constituencies of electoral importance--which was the case in the closed U.S. economy of the 1950s and 1960s. As commercial and financial integration altered the distributional incidence of monetary policy after the late 1960s, Congress got back into the business of attempting to affect monetary and exchange rate policy. In any case, between the 1930s and the early 1970s the politics of monetary policy in the United States looks very different indeed from previous patterns. There was no connection drawn between macroeconomic conditions and the exchange rate--no assault on the gold barricades. There was little attention to the issue area by major interest groups--no return to the crackling politics of the 1890s or the 1920s. Trade and monetary policy evolved on apparently separate tracks. And Congress paid little attention to the monetary arena. While I do not claim that the relative closure of the U.S. economy was the sole cause of this trend, I do argue that it goes a long way toward explaining it. Indeed, the reversal of the trend starting in the late 1960s, associated as it was with the commercial and financial opening of the U.S. economy, provides some indication that this argument is not far-fetched. It is to an evaluation of this last set of developments that I now turn. 4. Monetary politics in an increasingly open economy, 1969 to the present It is unarguable that the U.S. economy has become more integrated into world trade and payments since the 1960s. A few figures are sufficient to reinforce this common observation and received wisdom. As mentioned above, careful studies of the correlation between the prices of financial assets between the United States and elsewhere demonstrate that, especially after 1979, American financial markets have been extremely tightly tied to world financial markets.[52] American imports plus exports of goods and services went from the equivalent of 10 percent of American GNP in 1955 to 23 percent in 1985. The increased integration of the United States into world goods and financial markets should have driven the country back toward the sorts of monetary politics observed before 1935. This does not mean that history would repeat itself, only that there should have been movement in this direction. Specifically, I expect to see an increasing link between monetary policy and the exchange rate; greater interest-group activity on this topic; more congressional interest in the issue; and ties made between monetary and trade policy. In this section, I argue that this is more or less what we observe. Inasmuch as American international economic integration has been growing since the late 1960s, the change has been gradual, but I do believe that it is taking place. Three episodes are illustrative: the period from 1969 to 1973 during which the dollar went off gold, the late 1970s in which the dollar depreciated substantially, and the early and mid-1980s in which the dollar appreciated even more substantially. I go through the three experiences briefly in order to indicate the increased and increasing importance of the factors outlined above. Devaluation and the end of Bretton Woods. 1969-1973. Over the course of the late 1960s, prices in the United States tended to rise more rapidly than those in its principal trading partners.[53] The real appreciation of the dollar had its most significant impact on American producers of import-competing tradables. As the data in Table 4 show, between 1967 and 1970 nontradables prices increased more than twice as rapidly as tradables prices. As the dollar appreciated in real terms,[54] imports surged. Between 1967 and 1971, while American merchandise exports rose 24 percent in real terms, merchandise imports rose 47 percent and durable goods imports rose 55 percent.[55] The automotive trade balance, which had been strongly positive throughout the postwar era, turned negative in 1968, and by 1971 it was $2.9 billion in deficit; total merchandise trade went into deficit for the first time in years in 1971. Conditions were exacerbated by the recession of 1970, as unemployment rosa from from 3.5 percent in 1969 to 5.9 percent in 1971. In the durable goods manufacturing sector, output for 1970-1971 fell below 1966 levels, capacity utilization dropped from 86 percent in 1969 to 73 percent in 1971, and 1970 corporate profits were at their lowest level since 1958, less than half their average level for the late 1960s. In the midst of a generalized recession, traded goods producers were facing ever stiffer import competition. Most of the nation's industries were very concerned about the surge of imports. Some of this concern took the form of a belief that monetary policy was too tight and that the currencies of America's trading partners (especially Germany and Japan) were undervalued. However, most of the action was on trade policy. Many manufacturing firms, especially in such heavily affected sectors as textiles, footwear, and steel, clamored for protection from imports. In the late 1960s, the AFL-CIO switched dramatically from general support for trade liberalization to pressure for trade protection, and protectionist political activity reached its highest point since World War Two. The country's internationally oriented banks and corporations generally supported stable exchange rates and were favorably inclined to maintaining the Bretton Woods system. But there were two confounding realities. The first was that it was widely agreed that maintaining the value of the dollar implied keeping in effect the capital controls that were imposed beginning in 1963, and which international firms hated.[56] The second was the upsurge in protectionist pressure. This was particularly worrisome, because many financial and non-financial firms had developed important overseas investments. These global firms had strong reasons to oppose any reversal of post-war trade liberalization, and they entered the political arena to attempt to counter the growing protectionist pressures.[57] As the dollar came under increasing attack, many of the free traders began to see a dollar devaluation as the lesser of two evils: better a depreciated dollar than either trade protection or capital controls, or both. As Peter Peterson, a Wall Street fixture who served as Commerce Secretary during the first Nixon administration put it a couple of years after the events, "It was my view then that had we not taken that very vigorous action on the dollar, it was the sure road to protectionism."[58] Directly electoral concerns were also significant. President Richard Nixon had, in his view, lost the 1960 presidential election due to tight monetary policy, and wanted to avoid a repeat of this unhappy experience. In the troubled conditions of 1970 and 1971, he was motivated in much of his economic policymaking by the desire to ensure recovery before the 1972 presidential election.[59] He wanted stimulative monetary policy, and may have come to regard the fixed-rate system (and the value of the dollar within it) as an impediment to his electorally driven policies. Electoral considerations thus had an indirect impact on international monetary policy, given the perception that the commitment to gold was restricting America's economic policy autonomy in the runup to an important election.[60] As for the involvement of Congress, the legislature was increasingly active as the dollar appreciated in real terms. There was Congressional pressure for easier money, and for action on the exchange rate. In June 1971, Henry Reuss of the Congressional Subcommittee on International Exchange and Payments proposed legislation to float the dollar, and on August 6 a Subcommittee report called for devaluation--developments which may have pushed the Administration toward the eventual August 15 devaluation. Congress exerted pressure for easier money and devaluation, albeit less vocally than in earlier episodes. Congress's most important role in the dollar crisis was its incessant clamor for trade protection. In 1970 the protectionist "Mills Bill" was voted out of the House Ways and Means Committee, but did not pass the Senate. In 1971 Congressional action centered on the Foreign Trade and Investment Act, better known as the Burke-Hartke bill. This would have imposed stiff restrictions on many imports, and represented the most serious challenge to liberal American trade policy since the Depression. Although Burke-Hartke failed of passage, the battle over it revealed the depth and breadth of protectionist sentiment. Over the longer term, the problems of the early 1970s did indeed give rise to increased Congressional activism on monetary policy. After his appointment as chairman of the House Banking Committee in 1975, Henry Reuss led a series of charges to reduce Fed independence. In March 1975 Congress passed House Concurrent Resolution 133, which asked for a much higher level of Fed reporting to Congress than had previously bean the case; in November 1977 the Federal Reserve Act was amended in line with this resolution. Congressional intent was clearly to get looser monetary policy and more Fed responsiveness, but the Fed and its supporters were able to make the requirements as enacted relatively lax. In any case, this did indicate a higher level of Congressional involvement in monetary policy than had been the case since the middle 1930s.[61] Eventually the Nixon adminstration gave vent to some trade protection but essentially beat back the protectionists, devalued the dollar, and removed capital controls. Over the course of 1970, the Administration, led by Treasury Secretary John Connally, took an increasingly aggressive stand against import competition, especially from the Japanese and the Germans. On August 15, 1971, President Nixon took the dollar off gold, as part of a package that included domestic wage and price controls and a ten-percent surcharge on imports. By December 1971, the principal monetary powers had negotiated a revision of exchange rates that included an 8 percent dollar devaluation. This agreement did not last, and in February 1973 Nixon devalued the dollar a further ten percent, as the Bretton Woods system collapsed definitively. The pattern revealed here is contradictory. On the one hand, debates over monetary policy were inevitably tied to the value of the dollar. And the general interest-group lineup was more or less as expected. However, a number of other issues appear to have dominated international monetary policy. Tradables producers focused their attention far more on trade policy than on the dollar; internationalist groups concentrated on opposing protection and trying to get capital controls removed. In this battle, a dollar devaluation was regarded by international sectors as a small price to pay to stave off protectionism and to allow for the removal of capital controls. By the same token, while Congress was more active on international and domestic monetary policy than it had been for over thirty years, it devoted most of its energy to trade policy. And broad electoral considerations were quite important to the policy outcomes. All in all, this a case sits somewhere between the general disregard of exchange rates that reigned between 1935 and 1970, on the one hand, and the strong and explicit attention paid to exchange rates before 1935, on the other. Dollar depreciation and defense. 1977-1979. Jimmy Carter became president at a time of general economic stagnation and increasing vulnerability of American industry to imports. Especially given the influence of the labor movement in the Democratic Party of the 1970s, and organized labor's concentration in import-competing industry, it is not surprising that the Carter Administration oversaw a depreciation of the dollar. In this episode, indeed, explicit links were drawn by policymakers between domestic monetary conditions and the value of the dollar. However, there was little visible interest-group or Congressional activity on the topic. This probably reflects the fact that in the context of a dollar depreciation the groups that typically lobbied Congress most heavily, tradables producers, were satisfied with developments. Most of the political pressure on domestic and international monetary policy in this period came from internationally-oriented businesses, and more generally from the financial markets, which were wary of the administration's apparent willingness to let the dollar drop continually on the foreign exchanges. The Carter campaign against Gerald Ford was fought in large part over the generally slow growth of Ford's truncated term in office. In this context, almost immediately after taking office, Carter undertook policies to ease macroeconomic conditions. Early Carter policy was motivated by two interconnected beliefs: first, that the German, Japanese, and American economies could be stimulated to expand simultaneously (the "locomotive" approach), and second, that the mark and the yen were undervalued relative to the dollar. On the first front, the Administration pushed with limited success for coordinated reflation in the "trilateral" economies, primarily by fiscal means. On the second front, the general view that the dollar was too strong led to a willingness to allow depreciation in order both to help American tradables producers and to stimulate the economy more generally. Carter-era monetary and exchange-rate policy is somewhat opaque, but certain general trends are clear. Through Carter's first year in office, Nixon appointee Arthur Burns was still Chairman of the Fed Board, but Treasury Secretary Michael Blumenthal was outspoken in his expressions of Administration opinion. The result was a gradual depreciation of the dollar by 4 percent in real terms between the election and August 1977.[62] On world financial markets, the Administration was viewed as engaged in a conscious operation to "talk down" the dollar--also labelled "malign neglect" or "open mouth operations." Blumenthal denied a purposeful attempt to bring the dollar down, but he evinced little concern about its decline and thus indicated that the Administration was likely to pursue soft-money policies.[63] In October 1977 the dollar began to fall precipitously, and by January 1978 it had dropped by a further 10 percent against the mark and yen; the real effective exchange rate shows a 7 percent decline between September 1977 and February 1978. The fall was not eased by the appointment of G. William Miller to succeed Burns in December 1977, for Miller was widely expected to follow Carter's orientations--indeed, the announcement of his appointment led the mark and the Swiss franc to rise two percent against the dollar in one day.[64] Through this all there was little Congressional discussion of monetary policy. In the late Ford administration, Henry Reuss had called for a dollar depreciation against the yen, and the Carter team pushed the Japanese for this and other measures to help redress the American trade deficit with Japan, but the dollar depreciation was not widely remarked on in Congress. It was, however, a cause of consternation on world financial markets, and among the major internationally-oriented American businesses. As the Carter administration allowed the dollar to decline, representatives of the financial community began to argue that a weak dollar was not desirable. Little of this discussion found its way into Congress, and the Executive was not particularly sympathetic to demands that it slow domestic growth in the interests of a strong dollar. Cautionary notes were sounded by the President of the Federal Reserve Board of New York, but Paul Volcker appeared to have little influence on Fed policy. In short, the domestic macroeconomic and relative price effects of the dollar depreciation seemed popular, especially as the currency stabilized over the summer of 1978. Eventually, however, the dollar began to drop yet again, and its decline threatened to become a free fall. In late October 1978 President Carter unveiled an anti-inflation program that currency markets found sorely wanting, and the dollar plummeted. This time, the Administration came under intense pressure from the international business community, and from other major OECD nations, to support the dollar. In response, on November 1 Carter announced a dollar defense package that included tighter monetary policy and $30 billion to bolster the dollar on the foreign exchanges. While the dollar stabilized, inflationary fears were not assuaged. In July 1979 Carter replaced Miller with Paul Volcker, a move taken to presage a more stringent monetary policy and an aggressive defense of the dollar--as indeed it did. This episode is difficult to analyze, for the politics of American monetary and exchange rate policy in the Carter administration have never been thoroughly investigated. A few broad tendencies present themselves, however. Price trends in the late 1970s can be observed in Table 5. Tradables prices rose roughly in tandem with nontradables prices in the period. Some tradables sectors, notably autos and agriculture, faced difficulties for specific reasons--and indeed both clamored for and obtained support in the early 1980s. However, the broader measures are more representative, and finished goods prices and services prices increased at virtually the same pace between 1976 and 1980. This is indeed largely due to the fact that the fall of the exchange rate kept up with or exceeded the inflation differential between the United States and its principal trading partners. For example, between 1976 and 1980 consumer prices in the United States rose by 45 while in Germany they went up 17 percent and in Japan by 26 percent. However, over these years the dollar dropped 28 percent against the mark and 24 percent against the yen. More generally, one set of figures shows the dollar depreciating by 12 percent between the first quarter of 1977 and the second quarter of 1980, so that U.S. import prices rose by 9 percent more than the U.S. GNP deflator.[65] As the real exchange rate depreciated, U.S. manufacturing expanded. In fact, 1979 represents the high point of industrial employment in the United States. However, the dollar depreciation was associated with an increase in American inflation, and this inflationary path contributed to the reversal of monetary policy in 1980. Politically, there is little evidence of positive pressure in support of the Carter-era dollar depreciation, in Congress or elsewhere. Early in the Administration there had been some lobbying for a weaker dollar, especially relative to the yen, but as this was achieved tradables producers appeared satisfied. In the context of the real depreciation, trade policy disputes moderated, although a few sectors (notably steel) continued to lobby for protection. The major political pressure on the Administration's exchange rate policies came from American international banks and corporations uneasy about or opposed to rapid depreciation. These political pressures were reinforced by assaults on the dollar on international currency markets, and by insistence from European and Japanese governments that the U.S. support the dollar. From Carter's standpoint, these were probably secondary to the general popular dissatisfaction that built up late in his term, which centered first on growing inflation and later on the recessionary impact of anti- inflationary monetary policies. In a roundabout way, the Carter experience tends to reinforce some of my expectations. Tradables producers were silent, presumably satisfied, with the dollar depreciation, while internationally-oriented firms--especially the international financial community--protested the dollar's decline. But there was little or no open politicization of monetary or exchange-rate policy, within Congress or without, and trade policy faded in general importance during the period. One conclusion that suggests itself does in fact fit with my arguments, which is that inasmuch as tradables producers get what they want the exchange- rate issue tends to drop out of public view. This is something of a corollary of the view that tradables producers have especially easy access to Congress, and that their discontent is principally responsible for making exchange rate issues politically visible. Between 1977 and 1979 the dollar depreciated, tradables producers did well, and monetary politics virtually hibernated except for back-channel lobbying by the financial community on the Fed and the Administration. This process is especially striking when compared to the great attention paid to exchange rate issues in early 1980s, as the dollar appreciated very substantially. Dollar appreciation. 1981-1985. The dollar rose continually from late 1980 through the middle of 1985. This appreciation had two sources. The first was the Federal Reserve's restrictive monetary policies, initiated after the appointment of Paul Volcker as Fed chairman in July 1979 and tightened continually through the early 1980s. The second was the large federal budget deficits caused largely by the Reagan Administration's tax reductions and increases in military spending. Both policies tended to raise interest rates in the United States, draw funds toward the dollar and boost the value of the American currency. Although figures vary according to how they are calculated, one series shows a real appreciation of the dollar of 64 percent between the inauguration of Ronald Reagan in January 1981 and its peak in March 1985, after which it declined 12 percent to September 1985, when the major financial powers agreed to coordinate attempts to bring the dollar.[66] Another series indicates a 64 percent nominal effective appreciation, and a 56 percent real effective appreciation, between 1980 and 1985.[67] Relative prices in the United States reflected the dollar appreciation, as tradables prices fall dramatically relative to nontradables. Table 5 presents representative statistics. The index of finished goods prices rose 19 percent between 1980 and 1985, while the index of all services prices rosa more than twice as much, by 41 percent. Specific goods and services show some variation, of course. With import quotas imposed, automobile prices rose more rapidly than other tradables, while farm prices actually dropped by 8 percent; public transportation and medical care prices rose even more rapidly than other nontradables. Producers of tradable goods came under severe price pressure as the dollar appreciated. By one broad measure the dollar appreciated 46 percent between the second quarter of 1980 and the first quarter of 1985, during which time U.S. import prices dropped by 29 percent relative to the American GNP deflator.[68] Similarly, between 1980 and 1985 manufactured imports went from 20 to 32 percent of total manufactured output, while manufactured exports dropped from 26 to 18 percent of output; manufacturing trade went from a surplus equal to 6 percent of output in 1980 to a deficit equal to 14 percent of output in 1985. At a more aggregate level, during these years the American trade deficit went from $22 billion to $120 billion in current dollars, from $12 billion to $136 billion in 1982 dollars. Heightened foreign competition contributed mightily to a 5 percent drop in tradables employment between 1980 and August 1985, at a time when nontradables employment grew 13 percent.[69] Virtually all of my analytical expectations were borne out in this period. American monetary and exchange-rate policy were inseparably linked in both markets and politics. Interest group activity on the dollar was fiercer than at any time since the 1930s, and found its outlet through major Congressional initiatives on the exchange rate. And trade policy was almost immediately drawn into the monetary and exchange-rate debate.[70] As the dollar rose, American tradables producers became increasingly desperate for relief from a surge of ever-cheaper imports. Not only were American goods being priced out of third markets, they were losing major market share in the home market. The charge against the strong dollar was led by Lee Morgan, president of Caterpillar Tractors, beginning in late 1982. Calling the strong dollar "the single most important trade issue facing the U.S,"[71] Morgan mobilized American industry around demands to bring the currency down. Agitation to weaken the dollar grew as the currency rose continually: in the middle of 1983 the Business Roundtable supported Morgan, and the National Association of Manufacturers followed suit in February 1984. By 1985 even those who had previously supported the Administration had become hostile or neutral.[72] Congress was deeply involved at every step of the way. Indeed, congressional activism on monetary policy reached a high point in the early 1980s. Between 1979 and 1985, an annual average of 65 bills, resolutions, and proposals concerning monetary policy were introduced into Congress; after the dollar declined, between 1986 and 1989, the number went down to ten a year.[73] In perhaps the most striking instance, in 1982 Congress very nearly defeated an Administration bill to increase the American quota in the International Monetary Fund, generally a pro forma procedure agreed upon by all member states. The IMF quota bill took on the character of a referendum on the Administration's international monetary policies, and was only passed after a deal with the Democratic leadership tied the quota increase to funding for public housing. Soon after, Republican Senator Charles Percy of Illinois, a major manufacturing state and Caterpillar's home state, introduced a resolution calling on the Administration to negotiate a coordinated reduction in the value of the dollar; the resolution passed the Senate unanimously. The Reagan Administration was not responsive, and in May 1985 the Senate passed another resolution explicitly calling on any measures necessary, including unilateral exchange market intervention, to depreciate the dollar. By late 1985, there were seven bills before Congress that included specific reference to exchange rate issues.[74] As tradables producers were frustrated by their apparent inability to affect exchange-rate policy, they turned their attention to trade policy. The connection was clearly perceived and widely remarked upon, as in the words of Republican Senator John Danforth: "No trade agreements, however sound, no trade laws, however enforced, will give Americans a fair chance to compete in the international marketplace if an overvalued dollar has the same effect as a 25-50 percent tariff."[75] Although a dollar depreciation would have had the desired effect, it seemed that no amount of private and Congressional pressure would induce Paul Volcker to loosen Fed policy, or the Reagan Administration to raise taxes and reduce spending, or the monetary authorities to intervene to drive the dollar down.[76] Congress could hope to affect trade policy more directly, however, and import-competing manufacturers turned their attention to this arena. A flurry of trade bills was introduced, leading up to major protectionist legislation sponsored in 1985 by Democrats Lloyd Bentsen in the Senate, and Dan Rostenkowsi and Richard Gephardt in the House. Affected manufacturers also used administrative means to obtain relief from import competition. They filed an unprecedented number of complaints with the International Trade Commission: anti-dumping cases, for example, rose from an annual average of 24 between 1977 and 1981, to an annual average of 61 between 1982 and 1984.[77] Internationally-oriented sectors in the United States were increasingly threatened by the growth of American economic nationalism. As in the last years of Bretton Woods, Americaan international banks and corporations were unconcerned by the strong dollar--and may have appreciated its impact on their businesses.[78] Certainly they regarded the strong dollar as a small price to pay to bring inflation down. Support for (or indifference to) the dollar appreciation was tempered by the realization that it was inflaming protectionist sentiment in the United States. Inasmuch as bringing the dollar down staved off American economic nationalism, it was the lesser of two evils. The preferred way to moderate the dollar's rise, in the view of the international business community, was to reduce the fiscal deficit. A loosening of monetary policy threatened to reignite inflation, while exchange-market intervention raised the specter of a Carter-style dollar depreciation. The budget deficits, on the other hand, were not beneficial to global businesses and indeed came close to implying future monetary laxness.[79] Better to increase taxes and reduce spending than to risk future inflation. Led by Peter Peterson, then, major leaders of the country's internationally-oriented banks and corporations began in early 1983 to lobby for a reduction in the budget deficit. This "Bipartisan Appeal" was signed by five former Treasury secretaries, along with representatives of the country's most important financial institutions and many multinational firms.[80] The major import-competing industries were conspicuously underrepresented. Although the effort did not meet with striking public success, it is possible that the very visible nature of the enterprise contributed to eventual legislative and executive attempts to control the deficit. Nonetheless, the dollar remained strong through 1984 and into 1985. At this point, pressure for policies to protect American tradables producers was increasingly intense. In a major shift, in early 1985 the Administration began to indicate that it regarded the dollar as "too strong." In January 1985 the Group of Five made some mild statements that were taken to imply general agreement on the desirability of a dollar depreciation. Whether in response to these changes in policy or to economic fundamentals, the American currency began declining in March 1985. By August it had gone down about ten percent, but began moving upward again in the late summer. Finally, in September 1985, meeting at the Plaza Hotel in New York, the Group of Five finance ministers announced that they would undertake coordinated intervention to reduce the value of the dollar. Over the succeeding twelve months the dollar fell by over 20 percent, and by the end of 1987 it was back near the levels of 1980. This episode provides dramatic evidence for my analytical expectations. The link between domestic macroeconomic policy and the exchange rate was drawn by all political actors involved in the debate, and the topic was extremely visible. Interest group activity on monetary and exchange rate issues was indeed more significant that at any time since the 1930s. Congressional attention to the problem was similarly concentrated, as were the links connecting this to trade policy. All in all, the early 1980s saw something of a resurgence of the sorts of distinctive interest group and Congressional involvement in monetary policy that characterized the decades before 1930. To summarize the period since the late 1960s, it would be a great exaggeration to argue that American monetary politics has come to look anything like what it did in the 1890s. However, I believe that there is a clear trend away from the subdued and diffuse discussions of monetary policy that prevailed between the 1930s and the 1960s; and that the trend is toward the patterns of the earlier era. This is not to insist on the repetition of history, only on the utility of common analytical tools. As the United States has become more open to international financial and commercial flows, American monetary policy has changed. It has come to implicate the exchange rate, and in this process monetary politics in the United States are becoming more conflictual, more dominated by clear interest group pressures, more the stuff of Congressional activity, and more closely associated with trade policy. All of these trends are visible in the gradual evolution of U.S. monetary policy described above. 5. Observations and implications Without repeating what I have said up to here, the historical evidence provides a great deal of support for the notion that financial and commercial integration have a strong and systematic impact on the making of American monetary policy. Economic integration affects the interests of economic agents, the patterns of political activity in which they engage, and the ties among different economic policy issue areas. Several other observations come to mind. First, it is striking--and somewhat puzzling--that political activity is so assymetrical. That is, while both real currency appreciations and depreciations have distributional effects, it appears that only appreciations give rise to a significant political response. As the dollar fell in the late 1970s (and indeed again, in the late 1980s), there is little doubt that this process affected the economic interests of many groups in society. However, it gave rise to very little political response. Only the international financial community and the country's largest globally-oriented firms exerted any significant pressure on monetary policy as the dollar slid, and even that was not exerted with much insistence. On the other hand, the real appreciations of the late 1960s and early 1970s, and again of the early 1980s, brought forth a major reaction in the realms of both monetary and trade policies. It would thus appear that the effects of a real appreciation are far more politically significant than the effects of a real depreciation. This probably has to do with the fact that an appreciation has concentrated negative effects, while the negative effects of a depreciation are quite diffuse. Indeed, the economic impact of a depreciation is positive for most of those with a concentrated interest in it--tradables producers-- giving them little reason to protest. A depreciation does generally harm intensive consumers of imports directly, but the negative impact on most other groups is quite indirect.[81] A second observation is worth making. A common objection to the sort of analysis presented above is that the actors themselves did not speak in the terms used here. That is, we see no Alliance of the Tradables in the 1890s or the 1980s; and very few people talk directly about the real exchange rate in the former period. This misses the point of the exercise, which is analytical. I make an argument about the political cleavages I expect to observe given a set of economic conditions. This obviously depends on socio-economic and political actors having some sense of what their interests are, and acting accordingly. It does not depend on their defining their interests as I do after the fact. My framework explains why farmers and manufacturers preferred certain common policies in the 1870s, 1890s, 1920s, and 1980s; it does not explain why these demands took different forms at different times, or why they met with different amounts of success, or why they phrased their demands differently across the decades. Put differently, the framework used here is a heuristic device for the analyst; it is not meant to describe the way the relevant political actors thought or talked about the issues. Finally, I have said relatively little about the relationship among policy preferences, institutions, and outcomes. One thing appears clear from the historical record: Congress has typically been especially sensitive to the demands of tradables producers, while the Executive and the Fed have tended to be more responsive to the international business community. I presented some conjectures above as to why this might be the case, but they are not rigorously derived. Similarly, I presented a plausible story about how and why Congress delegated exchange-rate policy in the 1930s, but again the explanation was not rigorous. For now the institutional characteristics of American monetary policy, and the evolution of these institutions over time, remain to be fully explained. Conclusions The impact of national monetary policy depends fundamentally on whether the country is financially integrated with the rest of the world or not. This much has long been known. In this paper, I have argued that financial integration, and with it commercial integration, have similarly systematic effects on the politics of monetary policy. Specifically, increased capital mobility drives monetary policy to take effect by way of the exchange rate rather than interest rates; and increased trade openness makes more economic agents sensitive to exhange rates. Both together imply that a process of financial and commercial integration will lead monetary politics to focus mora on the exchange rate. Given the greater direct impact of exchange rates than interest rates on relative prices, they also imply that the politics of monetary policy will become more heavily influenced by specific concentrated interests rather than diffuse considerations. Inasmuch as Congress is especially responsive to electorally important interest groups, and the Executive to broad macro- political trends, the increasing importance of exchange rates and their impact on the relative prices facing powerful interest groups should tend to mobilize Congress more than in the closed- economy case. And finally, because the exchange rate is obviously related to import competition, it should be related in political debates to trade policy. To examine these conjectures, I compared American monetary policy in three periods: one of unquestionably high levels of capital and goods mobility before 1930, one with relatively low levels of financial and commercial integration between the 1930s and the late 1960s, and one of increasing integration after 1970. As anticipated, economic integration was associated with the migration of monetary policy toward the exchange rate and a consequent mobilization of interest groups, especially when the dollar appreciated in real terms. By the same token, this process was also connected to increasing Congressional attention to the issue area, and to growing ties between trade and exchange-rate policy in the public arena. Of course, the conclusions drawn here about the future of American monetary policy are tentative. Current levels of financial and commercial openness, although high, may not be as high as those during the classical gold standard. Perhaps more important, these levels may not be stable, as macroeconomic and sectoral difficulties inflame the desire of many to impede the free movement of goods and capital across borders. Nonetheless, if the United States continues to become increasingly linked to the rest of the world economy, it is likely that the sorts of monetary policy trends discussed here will become more and more significant. Notes 1. To be precise, it is covered (exchange rate-adjusted) interest rates that are constrained to be equal. The insight is that of the famous Mundell-Fleming approach, which originated with Robert A. Mundell, "The Appropriate Use of Monetary and Fiscal Policy under Fixed Exchange Rates," IMF Staff Papers 9 (March 1962), pp. 70-77; see also his "Capital Mobility and Stabilization Policy Under Fixed and Flexible Exchange Rates," Canadian Journal of Economics and Political Science 29, No. 4 (November 1963), pp. 475-485. The basic model can be found in any good textbook discussion of open-economy macroeconomics; a useful survey is W.M. Corden, Inflation. Exchancre Rates. and the World Economy 3rd edition (Chicago: University of Chicago Press, 1986). 2. For a more detailed discussion of these issues, see my "Invested interests: The politics of national economic policies in a world of global finance," International Organization 45, No. 4 (Autumn 1991). 3. There is surprisingly little empirical work on these issues. One study found that output fluctuations in the consumer and producers' durables industries were two-thirds due to exchange rate changes and one-third to interest rate changes, while fluctuations in residential construction were entirely due to interest rate changes. M. A. Akhtar and Ethan S. Harris, "Monetary Policy Influence on the Economy--An Empirical Analysis," Federal Reserve Bank of New York Quarterly Review (Winter 1987), pp. 19-34. See also J. Ceglowski and S. Hilton, "Interest Rate and Exchange Rate Effects in Selected Manufacturing Industries," in Federal Reserve Bank of New York, Research Papers on International Integration of Financial Markets and U.S. Monetary Policy (New York: Federal Reserve Bank of New York, 1987), pp. 403-500. William Branson and James Love, "U.S. Manufacturing and the Real Exchange Rate," in Misalignment of Exchange Rates: Effects on Trade and Industry Ed. Richard Marston (Chicago: University of Chicago Press, 1988), pp. 241- 270, focus on the differential impact of exchange rate movements. Suggestive results along similar lines are reported in Linda Goldberg, "Nominal Exchange Rate Patterns: Correlations with Entry, Exit, and Investment in U.S. Industry," NBER Working Paper No. 3249 (Cambridge, 1990). 4. For one analysis of these considerations in historical perspective, see my "The dynamics of international monetary systems: International and domestic factors in the rise, reign, and demise of the classical gold standard," in Coping with Complexity in the International System Eds. Robert Jervis and Jack Snyder (Boulder: Westview Press, forthcoming). 5. It is probably worth noting that my focus throughout this paper is on nominal exchange rates and interest rates. The distinction, pace the rational expectations revolution, is probably not particularly important for most of the American experience. As inflation was relatively low and not widely anticipated, nominal and real variables tend to track quite closely. The principal exceptions are in times of severe currency or financial crises, in which deflation led to important upturns in real interest and exchange rates. But I deal with these episodes as I come to tham. The broader problem of describing preferences over nominal rates--sure to raise the hackles of many economists--could be addressed by requisite references to assumptions of some wage or price stickiness, or some other set of assumptions. Rather than complicate the story with such nuances, thereby making it even more controversial and obscure for no substantive reason, I prefer to content myself with the observation that real and nominal rates move together at almost all times in our story, and when they do not I will point this out. 6. There is no particular reason that these imputations should be given credence. The burgeoning and important literature which applies modern political economy to American politics tends to assume institutional preferences in a variety of different ways. The variety assumed here is meant to be illustrative rather than rigorously deduced; whether it holds in practice will be seen in the historical narrative. For examples of other treatments, with various specifications of the preferences of different political institutions of the Federal government, see Mathew McCubbins, Roger Noll, and Barry Weingast, "Administrative Procedures as an Instrument of Political Control," Journal of Law. Economics. and Organization (1987); and Barry Weingast and Mark Moran, "Bureaucratic Discretion or Congressional Control? Regulatory Policymaking by the Federal Trade Commission," Journal of Political Economy (1983). 7. For a couple of representative studies, see Larry Neal, "Integration of International Capital Markets: Quantitative Evidence from the Eighteenth to Twentieth Centuries," Journal of Economic History 45, No. 2 (June 1985), pp. 219-226; and Lawrence Officer, "The Efficiency of the Dollar-Sterling Gold Standard, 1890-1908," Journal of Political Economy 94, No. 3 (1986), pp. 1038-1073. 8. An early demonstration of the relatively low levels of international capital mobility in the postwar era was M. Feldstein and C. Horioka, "Domestic Saving and International Capital Flows," Economic Journal 90 (1980), pp. 314-329. Jeffrey A. Frankel, "Quantifying International Capital Mobility in the 1980s," in National Saving and Economic Performance Ed. Douglas Bernheim and John Shoven (Chicago: University of Chicago Press, 1991), brings the data up to date and shows significant increases in American financial integration after 1979. Another recent test is Tamim Bayoumi, "Saving-Investment Correlations: Immobile Capital, Government Policy, or Endogenous Behavior?" IMF Staff Papers 37, No. 2 (June 1990), pp. 360-387. 9. Raymond Goldsmith, A Study of Savings in the United States Volume 1 (Princeton: Princeton University Press, 1955), p. 1093. 10. For reasons of space, in this paper I do not go into great detail about these historical events. For more evidence see my "Greenbacks, gold, and silver: The politics of American exchange-rate policy, 1870-1973," CIBER Working Paper 91-04, Los Angeles, 1991; and, especially on international trends, my "The dynamics of international monetary systems." 11. Cited in Irwin Unger, The Greenback Era: A Social and Political History of American Finance. 1865-1879 (Princeton: Princeton University Press, 1964), p. 157. 12. Cited in Unger, p. 151. 13. Irwin Unger, The Greenback Era: A Social and Political History of American Finance. 1865-1879 (Princeton: Princeton University Press, 1964), p. 371. Against the argument that resumption of gold payments at the pre-Civil war parity was economically or morally inevitable, we can cite a source above suspicion for its monetary responsibility: "Our own judgement in retrospect is that, given that a gold standard was to be reestablished, it would have been preferable to have resumed at a parity that gave a dollar-pound exchange rate somewhere between the pre-Civil War rate and the rate at the end of the war" (Milton Friedman and Anna Schwartz, A Monetary History of the United States. 1867-1960 (Princeton: Princeton University Press, 1963),, p. 82n). This would put Friedman and Schwartz somehwere between the moderate greenbackers and the strong silverites. 14. Calculated from Charles Hoffman, "The Depression of the Nineties," Journal of Economic History 16 No. 2 (June 1956), p. 143. 15. Cited in John Hicks, The Populist Revolt (Minneapolis: University of Minnesota Press, 1931), pp. 316-317 and p. 160 respectively. 16. The platform is in Hicks, pp. 439-444. 17. See David A. Lake, Power. Protection. and Free Trade (Ithaca: Cornell University Press, 1988), pp. 91-118, for a survey of American trade policy in this period. 18. How many millions is not clear; the formal audit showed $3.5 million, with $3 million from New York; the actual figure could have been twice or three times this. Herbert D. Croly, Marcus Alonzo Hanna (New York: Macmillan, 1912), p. 220. For details of these two episodes--Republican commitment to gold and reliance on corporate contributions--see pp. 192-204 and pp. 209-227. 19. Friedman and Schwartz, Monetary History, p. 298, agree. It should again be noted--in parallel to previous observations about gold in the 1870s and 1890s--that they, and many others since them, blame excessively tight monetary policy for much of the Great Depression. I do not want to engage the long-standing debate about the relative importance of monetary and other factors in the Depression; it is sufficient to note that one need not be a fan of the New Deal to regard Roosevelt's domestic and international monetary policies as economically justified. For the record, my own view on the collapse is close to that expressed in Peter Temin, Lessons from the Great Depression (Cambridge: MIT Press, 1989). 20. U.S. House of Representatives, Committee on Banking and Currency, Stabilization Hearings (Washington: GPO, 1929), p. 198 and p. 204. 21. "Rubber-dollar Warren," as his detractors called him, has received something of an undeservedly bad press. As Eichengraen, Golden Fetters, chapter 11, notes, there were two sources of slippage in Warren's mechanism--between the gold price and the exchange rate, and between the exchange rate and commodity prices--so that the relationship was not unproblematic. Nonetheless, devaluation did in fact serve to raise commodity (and, more generally, tradables) prices. In some ways Warren's ideas were closer to modern real exchange rate analysis than those of his more orthodox contemporaries. For a flavor of his views, see George Warren and Frank Pearson, Gold and Prices (New York: John Wiley and Sons, 1935). 22. On the background to these debates, see Jeff Frieden, "Sectoral conflict and U.S. foreign economic policy, 1914-1940," International Organization 42, No. 1 (Winter 1988), pp. 59-90. 23. On which see Lawrence Broz, "Wresting the Sceptre from London: The International Political Economy of the Founding of the Federal Reserve" Ph.D. dissertation, UCLA, 1992. 24. An interesting discussion of these issues is Walker Todd, "Disorderly Markets: A Fresh Look at the Law, History, and Economics of the Exchange Stabilization Fund (ESF) and United States Foreign Exchange Market Intervention," Research in Financial Services 4 (forthcoming 1992). A good survey of developments is Richard Sylla, "The Autonomy of Monetary Authorities: The Case of the U.S. Federal Reserve System," in Central Banks' Independence in Historical Perspective Ed. Gianni Toniolo (Berlin: Walter de Gruyter, 1988), pp. 17-38. 25. Richard Timberlake, "Repeal of Silver Monetization in the Late Nineteenth Century," Journal of Money. Credit. and Banking 10, No. 1 (February 1978), pp. 30-31. 26. The outstanding source on this period is U.S. House of Representatives, Commitee on Banking and Currency, Subcommittee on Domestic Finance, Federal Reserve Structure and the Development of Monetary Policy: 1915-1935 (Washington: GPO, 1971). The report was prepared by Jane D'Arista. Other sources include John T. Woolley, Monetary Politics: The Federal Reserve and the Politics of Monetary Policy (Cambridge: Cambridge University Press, 1984), pp. 30-47; and Donald F. Kettl, Leadership at the Fed (New Haven: Yale University Press, 1986), pp. 18-44. 27. For surveys of the events leading up to, and through, the first stage of the Great Depression, see William J. Barber, From new era to New Deal (Cambridge: Cambridge University Press, 1985); Barrie Wigmore, The Crash and its Aftermath (Westport, Connecticut: Greenwood Press, 1985); Ronald Batchelder and David Glasner, "Debt, Deflation, the Great Depression, and the Gold Standard," in Money and Banking: The American Experience Ed. John Rollins (Virginia: Durell Foundation, forthcoming 1992); Frank Freidel, Franklin D. Roosevelt: A Rendezvous with Destiny (Boston: Little, Brown and Company), pp. 88-91, 100-105, and 133-134; D'Arista, pp. 117-131; Friedman and Schwartz, pp. 299-419; and Kettl, pp. 29-44. 28. On which there is a small political-economy literature, which tends to argue that Fed policy responded to the needs of its member banks rather than the macroeconomy. See Gerald Epstein and Thomas Ferguson, "Monetary Policy, Loan Liquidation, and Industrial Conflict: The Federal Reserve and the Open Market Operations of 1932," Journal of Economic History 44, No. 4 (December 1984), pp. 957-983; and Gary Anderson, William Shughart II, and Robert Tollison, "A public choice theory of the great contraction," Public Choice 59, No. 1 (October 1988), pp. 3-23. 29. Arthur Crawford, Monetary Management under the New Deal (Washington: American Council on Public Affairs, 1940), p. 14; Batchelder and Glasner. 30. Diane Kunz, The Battle for Britain's Gold Standard in 1931 (London: Croom Helm, 1987), p. 147. 31. Wigmore, The Crash, p. 519. 32. In March 1933, the Chairman of the Clearing House Association and President of Central Hanover Bank and Trust recognized that the gold standard could not be sustained: "in the face of today's figures we are already off the gold standard whether the fact is legally recorded or not" [Barrie Wigmore, "Was the Bank Holiday of 1933 Caused by a Run on the Dollar?" Journal of Economic History 47, No. 3 (September 1987), p. 748]. After the crisis had receded, the bankers desired stabilization-- and they got it, culminating in the Tripartite Agreement of 1936. See Frieden, "Sectoral conflict," pp. 85-87. An interesting incident was the involvement of Walter Lippman. Lippman was prevailed upon by Morgan's two leading partners to write a column about the need to go off gold; the column appeared on April 18, 1933, and was referred to repeatedly by Roosevelt in his justifications of his decision. See Ronald Steel, Walter Liggman and the American Century (Boston: Little, Brown and Company, 1980), pp. 302-309. 33. Crawford, pp. 19-24. 34. Wigmore, "Was the Bank Holiday"; Wigmore, The Crash, pp. 445-449; and Brendan Brown, The Flight of International Capital (London: Croom Helm, 1987), pp. 24-41. 35. On American domestic and international monetary policy in this period (1933-1935) see Barry Eichengreen, Golden Fetters (New York: Oxford University Press, 1992), chapter 11; Crawford, pp. 27-163; Friedman and Schwartz, pp. 420-492; and Kettl, p. 45-59. 36. Eichengreen, chapter 11; Crawford, pp. 40-46. 37. Raymond Moley, After Seven Years (New York: Harper and Row, 1939), p. 157 and 161. 38. Wigmore, The Crash, p. 456. 39. Crawford, pp. 337-341. 40. Representative examples of the literature are Alberto Alesina and Jeffrey Sachs, "Political Parties and the Business Cycle in the United States, 1948-1984," Journal of Money. Credit. and Banking 20, No. 1 (February 1988); Nathaniel Beck, "Domestic Political Sources of American Monetary Policy: 1955-1982," Journal of Politics 46 (1984); and Kevin Grier, "Presidential Elections and Federal Reserve Policy: An Empirical Test," Southern Economic Journal 54, No. 2 (October 1987). 41. A detailed review of these and other related measures is in Crawford. See also George Green, "The Ideological Origins of the Revolution in American Financial Policies," The Great Depression Revisited Ed. Karl Brunner (Boston: Martinus Nijhoff, 1981), pp. 220-252. 42. Todd presents a detailed description and analysis. 43. In fact, Todd concludes that the Treasury's powers in this regard are not in accord with Constitutional provisions, and that Congress could presumably reclaim its authority. 44. For one approach to delegation to regulatory agencies, see Matthew McCubbins, Roger Noll, and Barry Weingast, "Structure and Process, Politics and Policy: Administrative Arrangements and the Political Control of Agencies," Virginia Law Review 75 (1989), pp. 431-482.