Peter Isard's recent book (Globalization and the International Financial System: What's Wrong and What Can be Done?, Cambridge University Press, 2005) provides a thoughtful and balanced review of the scholarly literature on the past operation and potential reform of the international monetary and financial system. The author's approach, from which much can be learned, is to draw lessons from the history of exchange rates and capital flows and, especially, from the financial crises of the 1990s. But this retrospective focus is also revealing of what is new and different about our current international monetary and financial environment and in the ongoing debate surrounding the future of its steward, the International Monetary Fund.

Work on this paper was begun during visits to the International Finance Division of the Board of Governors of the Federal Reserve System and the Research Department of the International Monetary Fund and completed during visits to the Bank of France and the Institute for Advanced Study in Berlin. I gratefully acknowledge the support and hospitality of all these institutions while absolving them of responsibility for the views expressed here. Research assistance was provided by Ansgar Rumler andfinancial support by the Center for German and European Studies of the University of California. For comments on portions of this work I thank Tamin Bayoumi, Lorenzo Bini-Smaghi, Paul De Grauwe, Jeffry Frieden, Alexander Italianer, Peter Kenen, Paul Masson, Thomas Mayer, Ronald McKinnon, Jacques Melitz, Richard Portes, Gianni Toniolo, Jiirgen von Hagen, and Charles Wyplosz.

Four explanations for secular stagnation are distinguished: a rise in global saving, slow population growth that makes investment less attractive, adverse trends in technology and productivity growth, and a decline in the relative price of investment goods. A long view from economic history is most supportive of the last of these four views.

Today's global monetary and financial system, to a remarkable extent, continues to rely on the U.S. dollar for international liquidity. This reflects the currency's historic role, the liquidity of American financial markets, and the absence of alternatives. But with the emergence of emerging markets, the capacity of the United States to provide safe assets will be outstripped by the growth of international transactions. It is thus likely that other large economies, presumably Europe and China, will eventually join the United States as sources of international liquidity and that other currencies will come to share the dollar's reserve-currency status.

Since the crisis of 1997–1998, there has been a proliferation of proposals for fostering Asian monetary integration. Asian countries, it is suggested, should collectively peg their currencies to the dollar, the yen, or a dollar-yen-euro basket, or establish a multilateral currency grid like the European Monetary System (EMS). The resulting exchange rate stability would promote intraregional trade, simplify investment planning, and encourage cross-border participation in local bond markets. Experience with establishing and maintaining a system of stable exchange rates would help ready the region for the introduction of a single currency. Asia, in this view, should emulate Europe’s approach to regional monetary integration. Along with the attractions of the European example, however, there are also dangers. Defending a system of currency pegs in the presence of high capital mobility requires the close convergence of policies and the maintenance of confidence. If either precondition is disturbed, a country will require extensive financial support in order to defend its peg or to undertake an orderly realignment. In practice, Asian countries possess neither the willingness to subordinate other policies to these imperatives nor the solidarity needed to offer extensive financial supports. Absent an appetite for political integration, there is little readiness to create a regional central bank like the European Central Bank, since there is no counterpart to the European Parliament to hold it accountable for its actions. Hence, there is little prospect of early monetary union to tie down expectations. A system of Asian currency pegs would consequently be fragile and crisis-prone. As a road to monetary unification, it would be a dead end. It would be better for governments to create an Asian Currency Unit (ACU), constituted as a weighted average of Asian currencies, and allow it to circulate alongside their national currencies. This would have three advantages. First, it would not be necessary to stabilize exchange rates between the currencies comprising the basket; hence, fragility would be less. Second, the parallel currency would be more stable than any one national currency in terms of aggregate Asian production and exports; it would, thus, be a vehicle for encouraging intraregional trade and investment. Third, the decision to move to a single currency could be driven by economics rather than politics. Only when a critical mass of producers, exporters, and investors had adopted the parallel currency would it be clear that Asian economies were ready for monetary unification.

Since the classic work of Solon Justus Buck (1913) on the Granger Movement, historians have attempted to critically assess the economic roots of agrarian discontent at the end of the nineteenth century.1 farmers themselves complained that the prices they received for agricultural goods had fallen because railroads and grain elevator operators were acting collusively and middlemen were restricting demand, that the prices they were charged for other commodities were being artificially inflated by suppliers with market power, and that the usurious rates charged by moneylenders on farm mortgages were impoverishing the settler in need of credit. In response, the farmers attempted to organize cooperatives to bypass middlemen and lobbied for the regulation of railroad rates and the imposition of interest rate ceilings. Early analyses of nineteenthcentury farm protest, exemplified by John Hicks (1931), while not always taking these complaints at face value, were predicated upon the assumption that farmers were suffering from deteriorating economic conditions. Subsequent writers, starting with Fred Shannon (1945), attacked the traditional interpretation. Douglass North (1966) provides a summary of the revisionist view. To the complaint that the prices of farm products were falling, he offered that other commodity prices were declining as well and that the farmer's terms of trade were actually improving. To the complaint that railroad rates were artificially inflated, he responded that the price of transportation services fell faster than the general price level, and that the spread between farm prices and market prices narrowed over the period. While admitting that a comparison of mortgage interest rates in the eastern states and the rest of the country was the one observation consonant with the farmer's position, he pointed out that it is hard to know how much of this interest differential was due not to capital market imperfections but to the greater riskiness of mortgage loans out on the frontier (see p. 142). subsequent literature went to considerable lengths to elaborate and refine these views.2 traditional economic explanations were undermined to the point where textbook descriptions presented agrarian unrest as The Puzzle of Farm Discontent (Susan Lee and Peter Passell, 1979, p. 292). Left with no explanation for the frequency with which farmers voiced complaints of distress, economic historians engaged in various attempts to rehabilitate the traditional view. Anne Mayhew (1972) portrayed farm protest * Department of Economics, Harvard University, Cambridge, MA 02138. An earlier version of this paper was presented to seminars at the University of Rochester and Baruch College. In addition to those made by seminar participants, I am grateful for the comments of Lee Alston, Peter Berck, Stephen DeCanio, Stanley Engerman, Henry Gemery, Robert Higgs, John James, William Parker, Mark Rush, James Stock, Peter Temin, Jeffrey Williams, and Jeffrey Williamson. 'In addition to Buck, see the references cited below. 2The relevant literature is too extensive to survey here. For examples, see the analysis of railroad rates in Robert Higgs (1970), of farm prices in John Bowman and Richard Keehn (1974), and of agricultural incomes in Robert Fogel and Jack Rutner (1972).

In the 1990s it was widely agreed that neither Europe nor the United States satisfied the conditions for constituting an optimum currency area, although the U.S. came closer (Bayoumi and Eichengreen 1993). Moderating this concern about Europe was the fact that it was possible to distinguish a regional core and periphery. Using updated data, we confirm that the United States remains closer to an optimum currency area. More intriguingly, the Euro Area shows striking changes in correlations and responses. We interpret these as reflecting hysteresis with a financial twist, in which the financial system causes aggregate supply and demand shocks to reinforce each other. An implication is that the Euro Area needs vigorous, coordinated regulation of its banking and financial systems by a single supervisor—that monetary union without banking union will not work.

Reform of the mechanisms and procedures through which problems of sovereign debt sustainability are resolved is at the center of the effort to make the international financial system more resilient and less crisis prone. Governments that default on their debts must embark on lengthy and difficult negotiations. Lenders and borrowers, uncertain of one anothers willingness to compromise, may engage in costly wars of attrition, delaying agreement on restructuring terms. Even if disagreements about the debtors willingness and ability to pay are put to rest, dissenting creditors may continue to block agreement until they are bought out on favorable terms. In the interim, the creditors receive no interest, and the borrowing country loses access to international capital markets. The exchange rate may collapse, and banks with foreign-currency-denominated liabilities may suffer runs. To avert or delay this costly and disruptive crisis, the International Monetary Fund will come under intense pressure to intervene, provoking all the controversy that IMF intervention typically entails. Officials of the borrowing country, for their part, will go to great lengths to avoid seeing the country placed in this difficult situation. They may raise interest rates, run down their reserves, and put their economy through a deflationary wringer, all at considerable cost to society. These costs could be reduced, the implication follows, if countries with unsustainable