The International Gold Standard
Topics:
• Monetary standards
• International money: a brief chronology
• Adoption of the Gold Standard from mid-19th century
• Complications: 1. Bimetallism; 2. capital flows & interest rates
• The Gold Standard in practice, 1880−1914
• Financial crises and monetary policies
• `Lender of Last Resort’ & the Bagehot principle
• The mechanism of international adjustment
• Summing up: interpretation and assessment
EC120 week 18, topic 13, slide 0
Monetary standards
• A spectrum of standards between the extremes of:
– Adopt another currency altogether
– Peg currency to a precious metal (“fixed parity”)
– Floating exchange rates with other currencies
• Some currencies were pegged to two (or more) metals
EC120 week 18, topic 13, slide 1
International money: a brief chronology
• Prior to mid/late 19C: various, based on precious metals
• International Gold Standard, c1870−1914
• Interwar period, 1918−39: `Gold Exchange Standard’
• Bretton Woods, 1945−71: Adjustable pegged exch. rates
• Since 1971: mixed `system’,
mostly quasi-floating
EC120 week 18, topic 13, slide 2
Adoption of the Gold Standard from mid-19C
• Move to gold was piecemeal
• How the Gold Standard worked, perhaps:
– Exports>Imports: inflow of gold
– Imports>Exports: outflow of gold
– Hume’s `specie flow’ model:
exports <> imports
 changes in money (gold) stock
 goods’ prices
 exports = imports  `external balance’
EC120 week 18, topic 13, slide 3
Complications, 1: Bimetallism
•
What is `bimetallism’?
– Currency pegged to two metals, e.g. gold and silver
•
Often attractive when precious metals are used as money
•
In practice one metal, gold, became dominant
•
But the silver lobby did not die easily:
“... You shall not press down
upon the brow of labor this
crown of thorns, you shall not
crucify mankind upon a cross
of gold.”
William Jennings Bryan, 1896
EC120 week 18, topic 13, slide 4
Complications, 2: capital flows & interest rates
•
Δ(money stock) = (exports − imports) + net capital inflow
•
Capital flows include borrowing/lending as well as gold
•
`International Trilemma’: allows only two of −
a. Fixed exchange rates (e.g. gold standard)
b. Capital mobility
c. Independent monetary policy
• To uphold the gold standard, (c) was abandoned
EC120 week 18, topic 13, slide 5
The Gold Standard in practice, 1880−1914
• Varieties of `Gold Standard’:
– Only a core group issued gold coins (specie standard)
– Some countries issued a mixture (inc. token currency)
– Many countries held foreign exchange as reserves
• Worldwide deflation: c1873 to c1896 declining price levels
EC120 week 18, topic 13, slide 6
Financial Crises & Monetary Policies
• More sophisticated finance supported expanding trade and industry
– New financial instruments and ways of doing business
– Recurring crises had increasingly widespread impact
• Expanding international trade links increased the need for stable
monetary standards: each government controlled its own currency
• Governments controlled the currency (gold or silver coinage)
But who controlled the financial system (banks and others)?
• Governments sought monetary stability, i.e., to achieve both
– External balance: maintain the currency’s convertibility
– Internal balance: a stable price level and prosperity
• Monetary stability required more than the control of the coinage
• Central banking practices evolved to address a policy dilemma:
– Convertibility (i.e., maintaining gold & silver parities)
– Stability of the financial system, though crises continued
EC120 week 18, topic 13, slide 7
The Bagehot Principle
• Policy dilemma: stabilising banking crises often requires credit
creation, which undermines currency convertibility
• Financial crises take different forms but have common features:
– A panic occurs, triggering withdrawal of funds from banks
– Bank failures spread, gold flows abroad (worsening the problem)
– Confidence restored only when credit has been expanded
• Bagehot principles: a lender of last resort that
– Lends freely
– On good quality collateral, but
– At penal (high) interest rates
• Bagehot problem: moral hazard
EC120 week 18, topic 13, slide 8
The mechanism of international adjustment
• Very little gold was shipped from one country to another
• Were the “rules of the game” obeyed?
– Central banks manipulated interest rates
– Central banks co-ordinated their policies
– In times of `stress’ convertibility was suspended
EC120 week 18, topic 13, slide 9
Stability of the international Gold Standard
• Adherence to the Gold Standard: was seen as a
– “Good Housekeeping Seal of Approval”
• Stability/instability at the periphery: mixed experience
• Stability among the core nations seemed robust
EC120 week 18, topic 13, slide 10
Summing up: interpretation and assessment
•
Why the international gold standard worked:
– Kindleberger’s `theory of hegemonic stability’
– Eichengreen emphasises credibility and co-operation
•
International stability a cause or an effect of the G.S.?
•
How long could it have survived?
EC120 week 18, topic 13, slide 11