The Borrower of Last Resort: International Adjustment and Liquidity in a Historical Perspective

If the operation of gold standard from the last two decades of the nineteenth century, till the outbreak of the world war was in essence a sterling standard, the Bretton Woods system instituted after the second world war was in effect a dollar standard. The paper compares and contrasts the actual workings of the international monetary arrangements in the two periods. The pyramiding of official liabilities on a disproportionately small reserve base, and the parallel emergence of unregulated monetary mechanisms based on an explosion of private liabilities generated international liquidity in both periods. It has been argued that Britain in the period of the international gold standard and USA after the post war period were in effect acting as the international lender of last resort, and injected liquidity through their central role in international financial intermediation. The efficacy of this mechanism, however, hinges on the ability of the ‘leading ’ country to draw short term capital flows and stem the efflux of capital in the face of growing trade deficits and dwindling reserves, in short to act as a ‘borrower of last resort’. Imperial hegemony, it is shown, played a critical role, historically, in the institutional mechanisms that underpinned financial intermediation by the leading country in the two periods.