How do small states choose their exchange rate regimes? This is the question addressed by Tobias Straumann in his recent book, Fixed Ideas of Money. The purpose of the book is to provide a new perspective on the often forgotten monetary history of small European countries from the disorder that followed World War I to the advent of the euro. European monetary history is often presented from the perspective of the large states but, as Straumann convincingly argues, their constraints are very different from those of small countries. Moreover, although many papers have studied the individual trajectories of small states, few attempts have been made so far to analyse them in a unified way. This big picture of the small countries is the great contribution of this book.

Straumann's approach also differs from that of other studies using cross-country or panel datasets in order to identify the determinants of exchange rate policies. Since his work focuses on seven states only (Austria, Belgium, Denmark, the Netherlands, Norway, Sweden and Switzerland) and the number of variables possibly influencing the choice of exchange rate regimes is manifold, any cross-country econometric analysis would inevitably have been subject to an identification problem. The author therefore adopts a different strategy; he isolates major episodes of the monetary history of these countries and studies them in great detail, in the light of documents newly discovered in archives, central bank publications and contemporary press articles. This allows him to directly identify the stakeholders' motivations and to critically examine the various hypotheses advanced in the literature for explaining the persistence and changes of exchange rate regimes.

These very different pieces of evidence add up to a comprehensive picture. First, the monetary history of small European states, Straumann argues, is marked by a persistent ‘fear of floating’ which has its roots in the ‘fixed idea’ (the preconception) that flexible exchange rates are not suited for small countries. Second, the author downplays the importance of domestic politics and institutions in explaining differences between countries. Second-generation models of currency crises assume that the credibility of a peg depends on how the government weighs fixed exchange rates in its objective function. These models, together with the international political economy literature, have therefore put domestic politics at the centre stage of research on exchange rate regimes. But Straumann argues that domestic politics mattered much less than external constraints for the small European players. Policymakers in these countries were in fact fundamentally (stubbornly?) attached to fixed exchange rates and they only shifted to more flexible regimes when they were constrained to do so by external factors. So contrary to what a whole strand of the literature assumes, the author's implicit conclusion here is that small countries did not really have a choice regarding their exchange rate regime (in other words, their preference for fixed exchange rates was so strong that they did not consider any other option seriously).

The book is divided into two parts. The first part focuses on the interwar period. It revisits the trajectories of small European states in a tumultuous era of monetary history from the exchange rate instability of the 1920s to the restoration and, then, collapse of the gold standard. This period offered opportunities for small countries to conduct innovative monetary policies but they failed to seize them. If Denmark and Norway experienced larger exchange rate depreciation than other small states in the early 1920s, it was mostly due to their trade deficits (a consequence of the closing of the British market for their exports), not because their monetary policies were more expansionary. Later on, the Danish and Norwegian governments even imposed a huge deflationary shock on their economy because they believed in the virtues of returning to the gold standard at the pre-war parity. Scandinavian countries were subsequently forced to follow Britain off gold in 1931 but, although Sweden formally adopted price-targeting, monetary policy did not change much in practice after this episode and central banks continued to behave as if exchange rates were fixed. At the other end of the spectrum, Belgium, Switzerland and the Netherlands maintained the gold standard until 1936 against all economic logic and at a huge macroeconomic cost.

The second part looks at the post-Bretton Woods period. Straumann describes the persistence of fixed exchange rates in an era of floating exchange rates. In the 1970s and 1980s, small countries remained reluctant to leave their currency at the mercy of market forces. Unlike large European countries, which voluntarily abandoned their pegs on several occasions for the purpose of conducting an independent monetary policy, few small states switched to floating exchange rates (Switzerland in 1973, Norway and Sweden in 1992), and these moves were always imposed by external factors. Switzerland and the Nordic countries were indeed more vulnerable to speculative attacks because they were financially open and did not belong to the EC. But even after they switched to a float, the idea of re-establishing an exchange rate targeting system persisted in these countries and it took a long time for policymakers to completely get rid of it.

This strong reluctance is attributed by the author to a ‘sense of vulnerability’ specific to the small countries and which would only have vanished at some point in the 1990s. The precise meaning of this vulnerability remains to be established though. To what extent was it related to ‘original sin’, a problem particularly acute for small countries and often invoked for explaining their ‘fear of floating’? A comment (quoted on page 133) by the Governor of the National Bank of Belgium in 1935 suggests this might have been an issue, but the author presents little evidence on the foreign currency debts of small European states throughout the twentieth century. This question should certainly be examined in greater detail in future research.

Nevertheless, the new archival and statistical evidence presented in this book is already impressive. Straumann provides an original (and homogenous) perspective on several historical debates and his thesis is very well argued. The reader of 2011 will undoubtedly be tempted to draw parallels with the current eurozone debt crisis and wonder with anxiety whether, at this critical time, Europe's destiny is not still governed by other kinds of ‘fixed ideas’.