The Gold Standard Flashcards
Bordo and Rockoff 1996
The Gold Standard as a “good housekeeping seal of approval”. Essentially, the GS was a signal of monetary and fiscal responsibility, and led to increased access to international credit markets at favourable rates. Consistency in repayments (value) as well as economic performance, due to consistent expectations. Also made for a good trading partner.
Countries like RU, JP, CH cited lower rates as reasons for joining the GS. Countries with poor adherence (ARG, BR, CHL) had higher rates. The US got low rates after joining.
Meissner 2005
Why would countries switch to the GS? (All below are significant)
Lower transaction costs in trade, due to a common regime - no need to hedge against EXR uncertainty. Level of trade with other GS members strongly determines time of adoption. Ratio rises after adoption.
Credibility - could not inflate away debts. (B&R)
Development level - GS more advantageous for higher output pc states, who dealt in bigger transactions so saved more. Coincides with gold reserves and financial stability/strength.
Fiscal positions - states without the ability to enforce financial controls could not maintain the GS.
Silver - the more one held of silver, the less one would want to switch due to costs involved. (F)
Debtors vs Creditors - creditors were more powerful, and preferred GS since it had less inflation. Stronger rural (debtor) interests meant a slower switch.
Volatility - current level of EXR volatility is ambiguous in the data and theory. What mattered was simply hedging against fluctuations, not the magnitude of such fluctuations.
Chernyshoff et al 2009
The interwar GS was different, and worse, than the pre-war (classical) GS. Pre-war it was appropriate, but inter-war it was inappropriate and constraining.
Pre-war, nominal flexibility (of prices and wages) was such that a fixed exchange rate was tenable. Keynesian stickiness in the inter-war period undermined this (link to Ohanian?). Nominal rigidities developed over time in developed economies.
Under a floating rate, a shock in the relative prices of countries (terms of trade shock) is adjusted for such that there is little volatility in real EXR. Under a fixed rate, there is no adjustment. Terms of trade shocks are created when the real prices of a country change (due to nominal rigidities).
Evidence - volatility in terms of trade has no significant effect on EXRs pre-war, but does in the interwar period.
Flandreau and Jobst 2005
Analyse the international monetary system around the turn of the century.
Find a three-tier system (rather than core/periphery), as well as regional blocs (strong EU EXR system, emerging Asian system, and lack of links to S America).
Key currencies (pound, mark, franc), periphery (peso), and middle class of other EU states. The would-be core is greater than previously understood (eg including Russia, A-H). The $ ascended through these classes to the top
Key currencies held everywhere, periphery only domestically, and middle countries in limited circulation (ie within blocs).
Implications:
Flandreau 1996
Why did the GS emerge out of bimetallism?
Suggestions:
- Growth in silver production threatened devaluation. But the Cali gold rush in ‘48 did not do the same.
- As did German demonetisation. But FR reserves could stabilise this
- Silver bulkier and costlier to trade in.
- Political economy - wealthy classes preferred the stability of gold. But surveys indicate bankers favoured bimetallism
Background:
- Gold:Silver prices were stable at 15.5:1, with sufficient stock held to buffer depreciations. Resources (FR) remained within the structural limits necessary.
Germany:
- Wanted to switch to a GS, but this required buying G and selling off S.
- Able to buy with 5bn francs from the indemnity on FR after their war.
- The associated devaluation in silver was able to be buffered by FR - it was within structural limits, since FR paid not in silver/specie but in bills.
France:
- Out of anti-German sentiment, they limited silver coinage as soon as indemnity was repaid, such that GER could not sell any more silver.
- But neither could anyone else; no one wanted to buy it
- Generally provoked a flight from silver, even if GER could not actively sell it off. Silver was unstable/became a minority (many states like GB were already G dominant).
- GER and FR held large amounts of S, but traded in G, constituting limping bimetallism.
Obstfeld and Taylor 2003
The GS was attractive to nations because it gave credibility (B&R) and stability. Associated with lower bond spreads pre-war. But inter-war, political dynamics changed (stronger labour parties) such that credibility was uncertain with or without the GS.
Interwar - GS only lowered bond spreads when a country returned at pre-war parity, rather than at current, devalued exchange rates. Markers like debt levels and empire membership became more important. Controlling for trade and debt, devaluers gained 30bp, and inflators none.
Pre-war - GS implies fiscal discipline, and lower debt ratios. Those who inflated away debts would be more unwilling to return to pre-war parity, and thus high debt levels and return at pre-war parity are correlated.
Empire - nations turned to their empires in the period, becoming havens for trade and investment. eg British imperial preference. Constituted perceived stability. Being in the GB empire reduced bond spreads by ~90-150bp
Catao and Solomou 2005
Non-GS states played a key role in maintaining global stability in the pre-war period, as their exchange rate fluctuations were able to impact international relative good prices to respond to crises even when GS states could not.
GS states had policy restrictions in the face of instability. Non-GS states accounted for 2/3 of EU trade, and 40% of US trade. Since rigidities were non-negligible, fluctuations had effects on wages and markets.
Evidence suggests that trade flows are sensitive to changes in real exchange rates in the periphery (with a half life of one year). REER (isolated to exogenous ones, drive by changes to nominal exchange rates) fluctuations were a mechanism of international payments adjustments, allowing trade balance adjustments under shocks without wage or price deflation.
Lopez-Cordova and Meissner 2003
How much did the GS matter for trade?
Two GS countries (no controls) trade together 60% more than two nonGS. >100% for silver (but endogenous and small sample).
With controls, evidence suggests trade flows between countires to be 30% greater when both on the GS
