EC120 week 18, topic 13, slide 1 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 policy • `Lender of Last Resort’ & the Bagehot principle • The mechanism of international adjustment • Summing up: interpretation and assessment
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EC120 week 18, topic 13, slide 0 The International Gold Standard Topics: Monetary standards International money: a brief chronology Adoption of the Gold.
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EC120 week 18, topic 13, slide 1
The International Gold StandardTopics:
• 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 policy
• `Lender of Last Resort’ & the Bagehot principle
• The mechanism of international adjustment
• Summing up: interpretation and assessment
EC120 week 18, topic 13, slide 2
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 3
International money: a brief chronology
• Prior to mid/late 19C: various, based on precious metals
– 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 6
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 7
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
Financial Crises & Monetary Policy
• More sophisticated finance supported trade and industry– But recurring crises had widespread impact
• Expanding international trade links increased the need for stable monetary standards: unsystematic adoption of gold or silver
• Twin goals of state monetary policies:
– Internal balance: stable price level and prosperity
– External balance: to maintain the currency’s convertibility
• Inadequate financial supervision of banking systems to achieve policy objectives
EC120 week 18, topic 13, slide 8
The Bagehot Principle
• Policy problem: to maintain both internal & external balance
• External balance was threatened if gold flowed abroad
• Internal balance was threatened if banks fail (or in distress)
• Bagehot principles: a lender of last resort that– Lends freely – On good collateral, but– At penal (high) interest rates
• Bagehot problem: moral hazard
EC120 week 18, topic 13, slide 9
EC120 week 18, topic 13, slide 10
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 11
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 12
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.?