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The gold standard as a commitment mechanism

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Abstract

Currency crises in Europe and Mexico during the 1990s provided stark reminders of the importance and the fragility of international financial markets. These experiences led some commentators to conclude that open international capital markets are incompatible with financial stability. But the pre-1914 gold standard is an obvious challenge to the notion that open capital markets are sources of instability. To deepen our understanding of how this system worked, this volume draws together recent research on the gold standard. Theoretical models are used to guide qualitative discussions of historical experience, while econometric methods are used to help the historical data speak clearly. The result is an overview of the gold standard, a survey of the relevant applied research in international macroeconomics, and a demonstration of how the past can help to inform the present.

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... No modern central bank currently targets the gold price in domestic currency, or issues a commodity money, despite that economic historians report that metal currency regimes provided a high degree of nominal stability and firmly anchored inflation expectations. On the one hand, metal currency regimes may have fallen out of favor because they limit discretionary stabilization policies in favor of long-term price stability (Bordo and Kydland 1996). On the other hand, recent research for the USA suggests that the price level was less stable and less predictable under the nineteenth century metal currency regimes than under twentieth century fiat currency regimes (see ). ...
... This subordination acted as a commitment device. Bordo and Kydland (1996) suggest that the commitment to preserve the Gold Standard anchored inflation expectations even during temporary suspensions. ...
... Nevertheless, the model attributes most of the fluctuations during the inter-war period to the transitory component. This is consistent with Bordo and Kydland (1996) and Hoffmann and Woitek (2011) suggesting that the Gold Standard anchored expectations even during supposedly transitory suspensions. Hoffmann and Woitek (2011) analyze the economic dynamics for a set of countries that, similar to Switzerland, devalued during WW1 and repegged their currencies at the previous parity during the inter-war period. ...
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Abstract I assess the stability of the monetary environment in Switzerland over the past two centuries. In order to control for transitory measurement errors, in particular in nineteenth century data, I use an unobserved-components stochastic-volatility model to extract the permanent trends from several nominal variables. The descriptive analysis of these trends suggests that the current monetary regime, flexible inflation targeting, provided a relatively stable monetary environment. Although the trends are quite stable for the nineteenth century, the estimates are imprecise. We should therefore be cautious when characterizing metal currency regimes as providing a stable monetary environment. A discussion of the results shows that the apparent success of flexible inflation targeting poses new challenges for the implementation of monetary policy because the trend decline in inflation was associated with a trend decline in nominal interest rates.
... Despite the persistence of successive budget deficits. Cf., among others, Bordo (1993), Bordo and Kydland (1995) and Bordo and Schwartz (1997). ...
... This was sometimes expressed 32 Cf. Grossman and Van Huyck (1988), Eichengreen (1994), Bordo and Schwartz (1995) and Bordo and Kydland (1995). 33 Target zone. ...
... 33 Target zone. Cf. Bordo and Kydland (1995) and Bordo and MacDonald (1997). 34 Similar results were also found for the growth of the monetary base and currency stock and for longterm interest rates, which were low and stable for the same period. ...
... To satisfy the requirements for a foreign loan, Brazil shifted to a restrictive fiscal policy in 1898 ( Fritsch, 1988 ); in the same year, Greece initiated a stabilization program that likewise aimed to restore the gold standard and, thus, the country's creditworthiness ( Lazaretou, 2003( Lazaretou, , 2014. All these aspirations to a gold-based regime also served, albeit loosely, to constrain deficit monetization in these countries ( Bordo and Kydland, 1996 ) and contribute to explaining the weak relation between deficits and dmb for the sometimes-floaters during 1870-1913. 8 It is noteworthy that this positive effect of deficits on dmb continues to be significant for our group of sometimes-floaters during 1870-1938 when the years of WWI and its aftermath are omitted. ...
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The sovereign debt crisis in the Eurozone has rekindled the use of the North-South (core-periphery) terminology to refer to the heterogeneity of countries belonging to the Economic and Monetary Union (EMU). In the gold standard literature, this geographical partition had already been employed to oppose the fiscal profligacy and subsequent problems of convertibility of southern countries against the fiscal probity and long convertibility records of their northern counterparts. We provide statistical evidence that the group of countries that, with available data for 1870-1938, exhibited convertibility problems during the classical gold standard, for this reason called the pre-WWI "sometimes-floaters ", shared a pattern of fiscal dominance. This finding for the sometimes-floaters (southern European and South American countries plus Japan) differs from the non-fiscal dominance pattern that we obtain for the pre-WWI "never-floaters " (northern Europe and North America countries) when the Great War and its aftermath years are omitted. We also show that the presence of fiscal dominance was partly due to the lower levels of tax efficiency and political stability in the South.
... To satisfy the requirements for a foreign loan, Brazil shifted to a restrictive fiscal policy in 1898 ( Fritsch, 1988 ); in the same year, Greece initiated a stabilization program that likewise aimed to restore the gold standard and, thus, the country's creditworthiness ( Lazaretou, 2003( Lazaretou, , 2014. All these aspirations to a gold-based regime also served, albeit loosely, to constrain deficit monetization in these countries ( Bordo and Kydland, 1996 ) and contribute to explaining the weak relation between deficits and dmb for the sometimes-floaters during 1870-1913. 8 It is noteworthy that this positive effect of deficits on dmb continues to be significant for our group of sometimes-floaters during 1870-1938 when the years of WWI and its aftermath are omitted. ...
Article
Full-text available
The sovereign debt crisis in the Eurozone has rekindled the use of the North-South (core-periphery) terminology to refer to the heterogeneity of countries belonging to the Economic and Monetary Union (EMU). In the gold standard literature, this geographical partition had already been employed to oppose the fiscal profligacy and subsequent problems of convertibility of southern countries against the fiscal probity and long convertibility records of their northern counterparts. We provide statistical evidence that the group of countries that, with available data for 1870–1938, exhibited convertibility problems during the classical gold standard, for this reason called the pre-WWI “sometimes-floaters”, shared a pattern of fiscal dominance. This finding for the sometimes-floaters (southern European and South American countries plus Japan) differs from the non-fiscal dominance pattern that we obtain for the pre-WWI “never-floaters” (northern Europe and North America countries) when the Great War and its aftermath years are omitted. We also show that the presence of fiscal dominance was partly due to the lower levels of tax efficiency and political stability in the South. Keywords Fiscal dominance Panel co-integration Political instability Seigniorage
... To satisfy the requirements for a foreign loan, Brazil shifted to a restrictive fiscal policy in 1898 ( Fritsch, 1988 ); in the same year, Greece initiated a stabilization program that likewise aimed to restore the gold standard and, thus, the country's creditworthiness ( Lazaretou, 2003( Lazaretou, , 2014. All these aspirations to a gold-based regime also served, albeit loosely, to constrain deficit monetization in these countries ( Bordo and Kydland, 1996 ) and contribute to explaining the weak relation between deficits and dmb for the sometimes-floaters during 1870-1913. 8 It is noteworthy that this positive effect of deficits on dmb continues to be significant for our group of sometimes-floaters during 1870-1938 when the years of WWI and its aftermath are omitted. ...
Article
Full-text available
The sovereign debt crisis in the Eurozone has rekindled the use of the North-South (core-periphery) terminology to refer to the heterogeneity of countries belonging to the Economic and Monetary Union (EMU). In the gold standard literature, this geographical partition had already been employed to oppose the fiscal profligacy and subsequent problems of convertibility of southern countries against the fiscal probity and long convertibility records of their northern counterparts. We provide statistical evidence that the group of countries that, with available data for 1870–1938, exhibited convertibility problems during the classical gold standard, for this reason called the pre-WWI “sometimes-floaters”, shared a pattern of fiscal dominance. This finding for the sometimes-floaters (southern European and South American countries plus Japan) differs from the non-fiscal dominance pattern that we obtain for the pre-WWI “never-floaters” (northern Europe and North America countries) when the Great War and its aftermath years are omitted. We also show that the presence of fiscal dominance was partly due to the lower levels of tax efficiency and political stability in the South. Keywords Fiscal dominance Panel co-integration Political instability Seigniorage
... Inflation in turn also reduces the real value of government's debt payments during the war. At the same time, resumption of convertibility shows government commitment to the state-contingent policy (Bordo and Kydland, 1996). Hence, the statecontingent theory of inflation implies that inflation is high at the beginning and during suspensions of convertibility and low when convertibility resumes. ...
... Similar to the interwar gold standard and the Euro, the combination of fixed exchange rates and free capital markets gave rise to large imbalances, with the core countries building up large net asset positions (Obstfeld & Taylor 2004: 231). While orthodoxy has it that due to the greater credibility it derived from its solid political underpinning (Bordo & Kydland 1999), capital flows were stabilising during the Gold Standard, in reality, peripheral countries were vulnerable to sudden stops of capital inflows in reaction to changing conditions in the core countries (Triffin 1964). ...
... The WTO, for example, allows for temporary suspension of concessions if domestic companies are hurt much more than initially expected. Similarly, in the monetary field Bordo & Kydland (1999), have interpreted the pre-1914 Gold Standard as a contingent commitment mechanism which owed its stability in part to the fact that it allowed countries to temporarily exit in case of unforeseen circumstances without losing the policy credibility the arrangement bestowed. The common currency did not include any of such clauses on the argument that contingent commitment was impossible due to moral hazard. ...
... Bordo and Rockoff (1996), for example, employed data for just seven nations, while the aforementioned A'Hearn and Woitek used the same twelve countries that we do. Bayoumi and Eichengreen (1996) examine seven nations, while Bordo and Kydland (1996) study only three, and Bergman and Jonung (2011) use only three countries as well. There are also several papers (Huffman and Lothian (1984), Kaminsky and Klein (1996) and Bordo and White (1991)) which examine only two nations. ...
Article
Previous studies have presented findings suggesting that the gold standard may have led to an increase in business cycle synchronization among its member countries. This follows a growing literature which posits that currency unions in general lead to greater synchronization of business cycles. The previous papers on the gold standard, however, suffer from simultaneity problems, and incomplete measures of just how synchronized output gaps are. We accordingly apply two new measures of business cycle coherence which have recently been applied to the modern Euro zone. These measures account both for differences in the sign as well as the amplitude of output gaps, and can be computed on a period-by-period basis, unlike previous metrics. In addition, we employ two other methods which do not allow for time-varying estimation, but have been employed in other studies of output convergence. We find, contrary to the earlier studies, that the classical gold standard did not appear to increase the coherence of business cycles.
... The convertibility of the lev was de facto interrupted at the beginning of the wars (10 of October 1912) and the unconditional government financing during the wars was suspended by the law in January 1919 (BNB, A Collection of Documents, Vol. 3, Sofia, 2001, p. 55-56). It was assumed that the break of the convertibility rule would be temporary, like some typical short-term interruptions of the gold standard during wars or other extreme events ("rule with an escape clause", Bordo and Kydland, 1996). As a result the lev was devaluated 16.4 times for the period 1915 -1918 (Toshev, 1928, p. 116, p. 172) and respectively 26.65 times over an extended period of years (1912)(1913)(1914)(1915)(1916)(1917)(1918)(1919)(1920)(1921)(1922)(1923). ...
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The objective of this paper is twofold. First, to compare the model of financial stabilization in the interwar period in France (a country in the “core”) with that in Bulgaria (a peripheral country). Second, applying modern econometric techniques (VAR models) we would like to “test “whether the theory designating a dominant role of the exchange rate on inflation (in comparison to that of money in circulation) holds and can be empirically proved by the actual movement of the monetary variables and the direction of their causality. Going back to the history of stabilization in France and Bulgaria in the interwar period and studying it through the theoretical ideas at the beginning of the XX century would provide us not only with new elements in the analysis of the present-day problems of monetary stabilizations but also add to the arguments of the crucial significance of the exchange rate and monetary rules for the efficiency and credibility of the monetary regime.
... In that regime, member countries (most of the world) were locked together by making their currencies convertible into gold. Credible gold standard adherence, in the sense of subsuming domestic monetary and fiscal policy to the dictates of gold convertibility, was enforced for the emerging countries by the desire to have access at favorable terms to the capital markets of the core countries of Western Europe (Bordo and Kydland 1996). ...
... The gold standard was, as the Treasury head Sir Bradbury informed Churchill, 'knave proof' (Moggridge, 1969: 61). It prevented 'individual follies and eccentricities' (Keynes, 1930: 299); or in modern parlance, it created a credible 'commitment mechanism' that ensured that state policies were not 'time inconsistent' (Bordo & Kydland, 1996). ...
Article
This article suggests that the radical historiography of global monetary standards has failed to provide a class-based interpretation, instead offering a radicalised power politics that seeks to explain their rise and fall as being a by-product of the competitive struggle for hegemony by capitalist states. The author proposes an alternative reading, which locates the contradictory and antagonistic class relation between capital and labour as the central dynamic force accounting for the rise and fall of global monetary standards, from the classical gold standard to the collapse of Bretton Woods.
... 55-56, Document No.22, p. 139), and also Ivanov, À. (1929). 50 The lack of convertibility was assumed to be temporary, as was characteristic with the gold standard in wartime or other emergencies ('rule with escape clause, ' Bordo and Kydland, 1996). ...
... The gold standard rule followed in the century before World War I can be viewed as a form of contingent rule or rule with escape clauses (Bordo and Kydland, 1996). The monetary authority would maintain the standard -keep the price of the currency in terms of specie fixed -except in the event of a well understood emergency such as a major war. ...
... 5 The study of the relationship between the balance of payments and the reserve money may be called a "weak" test for presence of the automatic mechanism, and the study of the relationship between the balance of payments and the money supply: a "strong test." 6 These notions reflect the fact that the relationship between reserve money and money M. and F. Kydland touch upon the differences between international monetary rules and monetary rules within a particular country (Bordo, M. and F. Kydland, 1996). 4 Current account and capital account. ...
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Journal des Economistes et des Etudes Humaines, 2001, vol. XI, n 4, pp. 575 – 616, and also as a Document de Recherche, 2001/24, Laboratoire d'économie d'Orléans, www.univ-orleans.fr/DEG/LEO Abstract: The presence of automatic mechanism within the framework of the currency board is often cited as a major counterpoint to the "discretion and subjectivity" of a classical central bank. Since there is no precise definition of the automatic mechanism in the literature, we define it as: "the presence of a positive cointegration relationship between the balance of payments and the reserve money (or money supply) and absence of discretionary variables in the model." When discretionary variables are present in the model in one form or another, we may speak of a "mechanism for adjustment through discretion -conscious or unconscious." Within the framework of the second generation of currency boards, we reduce the channel of discretion to the presence of atypical balance sheet items and employment of a number of monetary policy instruments. In Lithuania and Bulgaria deviations from the orthodox form of CB are significant: the governments of these countries hold their accounts at the central banks and impact reserve money, i.e. conduct a form of monetary discretion (in most cases unconscious). Econometric models confirm that the automatic mechanism operates in Estonia and Lithuania only in its weak test form (between the balance of payments and reserve money). In Bulgaria the operation of the automatic mechanism is more or less reduced to "adjustment through discretion." Government deposit plays a key role in adjustment to balance of payment shocks in a case of Bulgarian currency board. The next logical step of the analysis is to test whether movement in government money has an indirect effect (through reserve money) on interest rates, i.e. for presence or absence of a liquidity effect. Empirical tests confirm the assumption that such an indirect effect is in place both in Bulgaria and Lithuania. mihailov.m@bnbank.org). The study is in the framework of Phare ACE P97-8154-R project, financed by the European Union. The authors are grateful for helpful comments from I. Mihov, J.Miller, U. Hege and R. Pikkani.
... Eichengreen (1996, p. 25) argues, in fact, that Hume's theory "remains the dominant approach to thinking about the gold standard today." In fact, a modern version based on the incorporation of rational expectations, and time inconsistency can be seen as a modern version of the specie flow model(Bordo and Kydland 1996). ...
Article
Conventional wisdom contends that fiscal policy was of secondary importance to the economic recovery in the 1930s. The recovery is then connected to monetary policy that allowed non-sterilized gold inflows to increase the money supply. Often, this is shown by measuring the fiscal multipliers, and demonstrating that they were relatively small. This paper shows that problems with the conventional measures of fiscal multipliers in the 1930s may have created an incorrect consensus on the irrelevance of fiscal policy. The rehabilitation of fiscal policy is seen as a necessary step in the reinterpretation of the positive role of New Deal policies for the recovery.
... These notions reflect the fact that the relationship between reserve money and money M. and F. Kydland touch upon the differences between international monetary rules and monetary rules within a particular country (Bordo, M. and F. Kydland, 1996). 4 Current account and capital account. ...
Article
Full-text available
The paper presents a cross-country analysis of the second generation of currency boards (CB) introduced in three East European countries: Bulgaria, Estonia and Lithuania. We focus on their institutional, legal and political characteristics which are closely associated with the operation of the automatic mechanism (AM) of currency boards. The presence of an automatic mechanism within the framework of the currency board is often cited as a major counterpoint to the “discretion and subjectivity” of a classical central bank. Since there is no precise definition of automatic mechanisms in the literature, we define it as: “the presence of a positive cointegration relationship between the balance of payments and the reserve money (or money supply) and absence of discretionary variables in the model.” When discretionary variables are present in the model in one form or another, we may speak of a “mechanism for adjustment through discretion - conscious or unconscious.” Within the framework of the second generation of currency boards, we reduce the channel of discretion to the presence of atypical balance sheet items and employment of a number of monetary policy instruments. We seek in this article to compare currency board automatic mechanism in Bulgaria, Estonia and Lithuania.
... The gold standard, by fixing the price of a country's currency to a quantity of gold, tied the hands of monetary authorities by requiring that the mint price of gold remained fixed through the purchase and sale of freely convertible bullion. Countries could only suspend convertibility in the context of well-understood contingencies (Bordo and Kydland 1999). Because the gold standard functioned as a credible commitment device for governments to stick fast to market-conforming policies, states that adopted the gold standard developed reputations as trustworthy borrowers, and hence experienced better access to capital. ...
Article
An important theory of international cooperation asserts that governments comply with international law because of the reputational costs incurred by reneging on public agreements. Countries that sign binding international agreements in the realm of monetary relations signal their commitment to an open economic system, which should reassure international market actors that the government is committed to sound economic policies. If the theory is correct, we should observe evidence that noncompliance is in fact costly. I test this argument by examining the effect of noncompliance with Article VIII of the IMF’s Articles of Agreement on sovereign risk ratings. The results show that noncompliance with the agreement mitigates any benefits that accrue to Article VIII signatories. The empirical evidence suggests that, in addition to improving economic and political conditions at home, governments in the developing world would improve their access to financial markets by signing and complying with international monetary agreements. KeywordsCompliance with international law-Sovereign risk-The International Monetary Fund JEL Codes-F33-F53-F55-F59-G24
... Under the contingent rule, specie convertibility could be suspended and the monetary authorities could issue inconvertible paper currency in the event of a well-understood, exogenously created crisis or emergency, such as a war, on the understanding that after the emergency had safely passed, convertibility would be restored, most likely at the original parity. Market agents would regard successful adherence as evidence of a credible commitment and would allow the authorities access to seigniorage (inflation tax) and bond finance at favourable terms (Bordo and Kydland 1996). ...
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With the establishment of the EMU and the ECB, the interaction between monetary and fiscal polices is now a major policy issue in the Euro-area, dealt with in detail in the Maastricht and Amsterdam treaties and in the Stability and Growth Pact. This paper provides a background to this issue by exploring the long-run relationship between monetary and fiscal policies. We examine a large set of data covering major economies, including eleven out of the fifteen present members of EU, during the past 115 years. The evidence suggests the existence of a close interaction between the monetary regime, that is the behaviour of the central bank, and the fiscal regime, that is the tax and spending behaviour of governments as reflected in the evolution of budget deficits and public debt. The creation of the EMU and of the euro should properly be regarded as a return to the convertibility principle. The European central bank (ECB) declared in 1998 price stability as the primary goal of its policy. The present twelve members of the euro area are committed to support this goal by a policy of fiscal prudence. In short, the new European monetary regime is designed to dominate the fiscal regime in order to guarantee the credibility and sustainability of the goal of price stability.�
... Y viceversa en el caso de un superávit inicial.» Schwartz (2001), p. 15. los agentes del mercado [véase Bordo y Kydland (1999)]. Sin embargo, y siguiendo con las analogías contemporáneas, la adopción de una regla monetaria así definida, por estricta y eficaz que sea, no implica necesariamente rigidez o constancia en la determinación de las condiciones monetarias de la economía ni, especialmente, un total automatismo 6 en la res‑ puesta del responsable de la política monetaria ante cambios de la economía [ Por tanto, de lo que trataremos en esta sección es del grado de flexibilidad de la regla de emisión del banco central permitido dentro de la vigencia de un régimen monetario gober‑ nado por el requisito de la convertibilidad. ...
... Typiquement, la stabilité de long terme de l'étalon-or a permis à certains pays de l'abandonner de manière à la fois temporaire, principalement en temps de guerre, et facilement réversible, perçue comme telle par les acteurs économiques (Bordo et Kydland, 1996). En ce sens, l'étalon-or constitue une règle monétaire contingente avec clause de sortie 16 . ...
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Confidence and adjustment: gold standards versus currency boards It is often maintained that currency boards and gold standards are alike in that they are stringent monetary rules, the two basic features of which are high credibility of monetary authorities and the existence of an automatic adjustment (non discretionary) mechanism. This article includes a comparative analysis of these two types of regimes ( 1) from the perspective of the sources confidence, namely convertibility, endogeneity and the international context, and ( 2) looking at the operation of the adjustment mechanism, more specifically the financial environment, automatism, and asymmetry.
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How was Romania able to borrow cheaply on the international capital markets before World War I? We explore this within the context of its three southeast European neighbours, Bulgaria, Greece and Serbia, using a novel dataset of monthly bond prices from the Berlin and London stock exchanges. A comparison of country characteristics and panel data analysis suggests that Romania was able to borrow under more favourable conditions due to its abundant natural resources and desirable exports.
Chapter
The classical gold standard is the most famous monetary system that ever existed, with its heyday lasting a third of a century. By the time World War I began, the gold standard had become the predominant national and international monetary system in the world. The gold standard exhibited both elements that promoted stability and forces that fostered instability. Modern time-series analysis has been used to examine various facets of the gold standard, especially the roles of the core countries (Britain, France, Germany, and the United States). While there is apparent consensus on some aspects of the gold standard, controversies continue, and there remains room for further research and reflection.KeywordsGold standardCenterCorePeripheryScamble to goldGold-exchange standardGold pointsGold-point spreadGold-point arbitrageAutomatic correctivesStabilityInstabilityRules of the gameSterilizationBank of EnglandConvertibilitySpeculationExchange-market pressureMonetary baseBreakdown
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Теорията на парите не може и не трябва да бъде единствено пресичане на криви, движение на парични агрегати, лихвени проценти и валутни курсове. Тя трябва да отрази реалния живот, където парите са в центъра на интересите и борбите за власт на различните социални групи и отделните индивиди, на техните конфликти и кооперация. В книгата е направен опит за изграждане на нов теоретичен социологически модел на паричните системи, който да послужи не само за по-нататъшно развитие на паричните изследвания, но и за редица чисто приложни и емпирични анализи.
Chapter
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A command economy is one in which the coordination of economic activity, essential to the viability and functioning of a complex social economy, is undertaken through administrative means — commands, directives, targets and regulations — rather than by a market mechanism. A complex social economy is one involving multiple significant interdependencies among economic agents, including significant division of labour and exchange among production units, rendering the viability of any unit dependent on proper coordination with, and functioning of, many others.
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Although the world’s Greatest Depression’ may be justly be regarded as a unique event, the lack of comparable historical events has not prevented scholarly explanation of it from arriving at a unanimity that is almost equally rare in the annals of historiography. This is now the approximate status of the thesis of Peter Temin (1989) and Barry Eichengreen (see especially 1992a) regarding the relationship between the gold standard and the Great Depression. The several chapters of this book were commissioned to review the Depression experiences of various countries in the light of their international monetary relations and broadly in the light of the Eichengreen-Temin thesis. None of them seriously dissents from what (begging their pardons) I will acronymize as the ET thesis. However, their varying emphases do add up to quite an illuminating commentary on it. This introduction firstly summarizes the ET thesis, and secondly seeks to comment on the substantive chapters, in such a way as to examine the roles of (a) diplomatic conflict, especially in relation to Reparations, (b) of the enlarged demand for gold as a consequence of interwar monetary uncertainties, and (c) of ideologies (note the plural) in the history of the gold standard and the Great Depression.
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For the four decades preceding the commencement of World War I, gold convertibility was the nucleus of Norwegian monetary policy. No monetary regime, neither before nor after, has displayed the same endurance nor been as widely acclaimed. The apparent success notwithstanding, until recently research interest in the Norwegian gold standard experience has been meagre. The received wisdom presented has mirrored the old postulate of Wilhelm Keilhau; that Norway loyally played according to ‘the rules of the game’.1
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A commodity is an object that is intrinsically useful as an input to production or consumption. A medium of exchange is an object that is generally accepted as final payment during or after an exchange transaction, even though the agent accepting it (the seller) does not necessarily consume the object or any service flow from it. Money is the collection of objects that are used as media of exchange. Commodity money is a medium of exchange that may become (or be transformed into) a commodity, useful in production or consumption. This is in contrast to fiat money, which is intrinsically useless.
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The English crisis of 1866 is still a mystery about its causes and its effects. It is difficult to understand why just England was hit whereas the others countries of Europe remained safe. The main effect of the crisis, a general distrust of all the countries of Europe about England, is difficult to understand too. The idea exposed in this paper is that the crisis of 1866 was provoked by the deregulation of 1862, which allowed every company to register under the limited liability principle. This act deeply changed the behavior of the entrepreneurs. This change led to the appearance of a systemic risk in the banking sector. By this way, we can explain why no contagion appeared and why European countries distrusted England. © Presses de Sciences Po. Tous droits réservés pour tous pays.
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This paper studies the Gold Standard in Portugal. It was the first country in Europe to join Great Britain in 1854. The principle of free gold convertibility was abandoned in 1891. For the purposes of a macroeconomic study, we also extended the analysis up to 1913. Our study points out the mistake of comparing different systems with the same indicators. Examination of demand, supply and monetary shocks in the context of a VAR model confirm the idea that the principles of classical economics are appropriate for the Gold Standard in Portugal.
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