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

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

3. 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

4. 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’

5. 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

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 − • Fixed exchange rates (e.g. gold standard) • Capital mobility • Independent monetary policy • To uphold the gold standard, (c) was abandoned

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

8. 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

9. 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

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

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

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.? • How long could it have survived?