Abstract
If each country of a world economic system keeps a fixed “internal” exchange rate between its national currency and some units of a reserve asset (e.g. gold), an international parity grid of fixed exchange rates between these paper currencies is established, without any further institutional or political agreement, which works by simple market forces.
The gold standard is the currency system of a free market economy.
Friedrich A. Lutz1
In the good old times of the gold standard, the problem of the stability of the value of money, defined in modern terms, was no issue. […] Changes of prices were attributed to the sphere of goods, not of money. The currency was regarded as stable if the exchange rates were stable, and this was provided by the automatic mechanism of gold flows. […] The gold standard did not guarantee absolute price stability. There were times when prices were falling, and there were times when they were rising. […] This up and down of the price level, like booms and depressions in the business cycle, was accepted, more or less, as God-given. […] Nobody hit upon the idea that money should be regarded as of a higher value in times of falling prices, and had a lower value when prices were on the rise.
Karl Blessing (former president of the Bundesbank)2
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References
Lutz 1935: 22.
Blessing 1962: 159–60.
It has already been shown that — even in the best case — it would take some time until a possible monetary expansion abroad would turn the foreign exchanges again in favour of a gold-exporting country (see ch. 3.4).
Cooper’s assessment (1982: 7), “Price stability was not attained, either in the short run or in the long run, either during the period of the gold standard proper or over a longer period during which gold held dominant influence”, throws too bad a light on the gold standard, particularly if contrasted with the empirical evidence reproduced in figure 4.2. Bordo (1993) also emphasizes the high degree of price stability in the era of the gold standard.
Reproduced from McKinnon 1993: 4.
The dominant and overriding objective of monetary policy […] was to maintain the convertibility of the national currency directly or indirectly into gold at the legal parity. […] The major criterion or guide of policy was […] the behavior of the reserve ratio of the central bank […]. Decreases in the reserve ratio […] characteristically led to increases in the discount rate […]. On the other hand, when reserve ratios rose, central banks were under no similar compulsion to take measures of the opposite kind“ (Bloomfield 1959: 23, cf. Lutz 1935 ).
Cf. McKinnon 1993.
Cf. Andréadès 1909: 314, Lutz 1936.
Cf. Bloomfield 1963: 7, Kindleberger 1984: 68.
Keynes 1930: 306–7.
McCloskey/Zecher 1976: 65.
Because of the bad state of recorded statistics, American economists later envied the “lucky British”: “When sterling was the leading key currency, their statistics were so bad that they did not even know when they had a balance-of-payment problem” (Strange 1971: 223, cf. Lindert 1969: 36 ).
Data from Fischer 1981.
Fischer 1981: 165.
Cf. McCloskey/Zecher 1976.
Financial distinction appears to have followed temporally after supremacy in trade and to have been causally connected with the decline in trade“ (Kindleberger 1983: 79, cf. Kindleberger 1996, Schwarzer 1993).
Cf. Andréadès 1909: 385, Hawtrey 1923: 159–61, Bloomfield 1959: 21, Lindert 1969: 37–8.
Stadermann 1994: 92, cf. Bloomfield 1963: 71–7, Lindert 1969: 58–68, Feis 1974: 17. For an early analysis of the English balance of payments, distinguished by its farsightedness, see Goschen (1861).
Stylized record, data from Lindert 1969: 39, 64n, 69.
Cf. Hawtrey 1923: 115–123, Minsky 1979.
Bloomfield 1959: 42.
Bordo 1993: 182.
Cf. McCloskey/Zecher 1976.
Lindert 1969: 74.
The most important element in the success of any national gold standard is the public’s confidence that the government’s fiscal soundness and political imperatives will enable it to pursue indefinitely a monetary policy consistent with long-term price stability and continuous convertibility“ (Hamilton 1988: 69–70, cf. Bloomfield 1963: 76–7, Eichen-green 1985, Eichengreen 1989).
Cf. Bloomfield 1959: 29–40, Eichengreen 1987, Giovannini 1989, Tullio/Wolters 1996, Tullio/Wolters 2000.
Data from Helfferich 1919: 614.
Cf. Kindleberger 1986: 289–300, Kindleberger 1996. A critical comment is given by Skidelski/Nikolov (2000).
Eichengreen 1987: 7.
The methodology of the following study and the architecture of the model are basically the same as in Eichengreen (1987), although his results are being rejected. A short and preliminary version of chs. 5 and 7 is contained in Spahn (1998). Models of the gold standard and other key currency systems have been presented by Barro (1979), Giovannini (1989) and Jarchow (1997). Hamada (1979) and Cooper (1985) give surveys on the topic of strategic interaction and international economic policy coordination. See also the policy games modelled by Eichengreen (1984), Canzoneri/Gray (1985) and Barsky et al. (1988).
Eichengreen (1987) seems to favour an alternative institutional set-up: the central bank and the commercial banks are integrated, money consists of bank deposits, which the public obtains by selling bills to, or demanding short-term credit from, the banking system. Both operations are controlled by the (official) bank or discount rate, which — as in the above model — is distinct from the long-term rate on the capital market (thus the term structure of interest rates is supposed to be variable in both countries). Equation [5.5] then is the money supply of the consolidated banking system. Eichengreen’s approach has been modified in the text above (which has no bearing on the model’s results), because it seems more appropriate to regard central banks as economic policy agents, which are separated from the private (banking) sector.
Thus speculation was stabilizing (cf. McKinnon 1993 ). The conclusions drawn in this chapter do not change however, if expected exchange rate changes, for example leading to r“ = r + 6 (p” — p), are taken into account.
Bloomfield 1959: 24.
The loss functions [5.11] and [5.12] attach the same weight to missing the reserve target in both directions, which might appear unconvincing. A reformulation which attaches a smaller weight to an overshooting leads to an increase of the level of interest rates; but this modification has no bearing on the problem of leadership. Choosing different reserve targets qT for each country also does not alter the main conclusions of the model, as this resembles the case (which will be analyzed below) of attaching a different weight to the goal of external equilibrium.
Bagehot 1873: 22.
Eichengreen 1985: 18, cf. Eichengreen 1987, Bloomfield 1959: 42, Hawtrey 1923: 1212, Lindert 1969: 48–57, 78.
If in response to a discount rate increase abroad, the domestic central bank responds in kind, the increase in interest rates world-wide will provide an incentive for the foreign country to augment its stock of interest-bearing foreign exchange reserves. The supply of money available to domestic residents will be correspondingly reduced [sic!], requiring domestic money demand to decline to the level of supply through the reduction of prices, output and employment“ (Eichengreen 1987: 23).
Sayers 1957: 61.
Cf. Eichengreen 1987, Bordo 1993.
The fact that British monetary policy seemed to neglect the sphere of trade and commerce has even been criticized as a result of an institutional defect: “The Bank of England, because of its organizational structure and the social composition of its management, is almost a classical example for the hypothesis, that, at least up to the First World War, England failed to build a way of economic policy making, which rested on a consensus between agrarian, industrial and commercial interests” (Ziegler 1990: 142, cf. Bloomfield 1959: 32).
This aspect is neglected in England because of the b = 0 assumption. If b 0,a conflict would arise anyhow, because a monetary restriction, necessary to contain goods market dynamics, would induce further capital imports via the interest rate channel. If sterilization is precluded, the increase of interest rates is “self defeating” as it induces an involuntary monetization of gold inflows.
Quoted from Kindleberger 1984: 341.
Keynes 1943a: 31–2.
Bernanke 1993: 261.
For diverging opinions on the stability of the international gold standard see Bordo (1993) and Pierenkämper (1999).
Lindert 1969: 74–5, cf. Emminger 1934, Eichengreen 1989. The conclusion that England failed because of a “wrong” industrial policy however, can be countered by the consideration that the U.S. resource-intensive way of production on a large scale for the U.K. was simply not an available and appropriate strategy (cf. Crafts 1998 ).
Bordo 1993: 161, cf. Giovannini 1993.
I think it would not be too high a price to pay for the substantial benefit of the trade of this country and its working classes, and also, although I put it last, for the recovery by the City of London of its former position as the world’s financial center“ (quoted from Moggridge 1972: 41–2).
Keynes 1925: 212, cf. Stadermann 1994: 162–5. A view on figure 4.2 reveals the severe, and useless, deflation which England had to endure after the First World War.
Keynes 1923: 197–8, cf. Crabbe 1989.
In case of b* = 0 the multiplier di*/dw,contrary to the regime represented in table 5.4,is unambiguously negative.
Cf. Eichengreen 1984: 80.
The nominal wage and not the quantity of money establishes the national character of a currency. […] The basic reason for the gradual erosion of the gold standard thus is to be found in the strengthening of unions, as an autonomous fixing of nominal wages contradicts the conditions of a proper working of the gold standard. Free collective bargaining, the sacred cow of national economic policy, therefore precludes the existence of a currency, the international character of which corresponds to the working of free world trade. From this point of view, the erosion of the gold standard implies the enthronement of a wage standard and the transition to a world economic regime where the genuine money of wealth owners no longer plays the dominating role“ (Riese 1986: 285–6, cf. Keynes 1923, Eichengreen 1992 ).
Quotation from Artis/Lewis 1993: 50.
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Spahn, HP. (2001). The Hegemony of Pound Sterling in the Gold Standard. In: From Gold to Euro. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-04358-5_6
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