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Central bank co-operation and exchange rate commitments: the classical and interwar gold standards compared1

Published online by Cambridge University Press:  12 September 2008

Barry Eichengreen
Barry Eichengreen
Affiliation:
University of California at Berkeley
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Financial History Review , Volume 2 , Issue 2 , October 1995 , pp. 99 - 117
Copyright
Copyright © European Association for Banking and Financial History 1995

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References

2 Analyses of the macroeconomics of the interwar years emphasising the importance of central bank co-operation include Brown, W. A., The International Gold Standard Reinterpreted 1914–1934 (New York, 1940)Google Scholar; Clark, S. V. O., Central Bank Co-operation 1924–1931 (New York, 1967)Google Scholar; Kindleberger, C. P., The World in Depression 1929–1939 (Berkeley, CA, 1992)Google Scholar; and Eichengreen, B., Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (New York, 1992).Google Scholar

3 So it is argued, for example, by Bloomfield, A., Monetary Policy Under the International Gold Standard (New York, 1959).Google Scholar Although I am sympathetic to the view that the need for central bank co-operation was more pressing after World War I, I will suggest that accounts which dismiss co-operation as unimportant in earlier periods distort the actual state of affairs.

4 The importance of the escape-clause provision of the gold standard is emphasised by Bordo, M. and Kydland, F., ‘The gold standard as a rule’, Explorations in Economic History (1992)Google Scholar; Eichengreen, B., International Monetary Arrangements for the 21st Century (Washington, DC, 1993)Google Scholar; and Giovannini, A., ‘Bretton Woods and its precursors: rules versus discretion in the history of international monetary regimes’, in Bordo, M. and Eichengreen, B. (eds), A Retrospective on the Bretton Woods System (Chicago, 1993).Google Scholar

5 The notion of regime-preserving co-operation is taken from Kenen, P. B., ‘The coordination of macroeconomic policies’, in Branson, W., Frenkel, J. and Goldstein, M. (eds), International Policy Coordination and Exchange Rate Fluctuations (Chicago, 1990).Google Scholar

6 Two studies of the period that emphasise this point are O'Dell, J., ‘From London to Bretton Woods: roots of economic diplomacy’, Journal of Public Policy, 8 (1989)Google Scholar, and Eichengreen, B. and Uzan, M., ‘The 1933 World Economic Conference as an instance of failed international cooperation’, in Evans, P., Putnam, R. and Shapiro, H. (eds), Double-edged Diplomacy (Berkeley, CA, 1993).Google Scholar The scope for co-operation when policymakers disagree about the true model is analysed by Frankel, J. A., Obstacles to International Economic Policy Coordination, Essays in International Finance, no. 64 (Princeton, NJ, 1988)CrossRefGoogle Scholar, and Frankel, J. A. and Rockett, K., ‘International macroeconomic policy coordination when policymakers do not agree on the true model’, American Economic Review, 78 (1988).Google Scholar

7 This section, except where otherwise noted, draws on Eichengreen, International Monetary Arrangements.

8 These points are analysed by Canzoneri, M., ‘Monetary policy games and the role of private information’, American Economic Review, 75 (1985)Google Scholar, and Obstfeld, M., ‘Destabilizing Effects of Exchange Rate Escape Clauses’, NBER Working Paper no. 3606 (1992).Google Scholar

9 Structured labour markets limited the flexibility of wages, both over time and across workers, even prior to widespread trade unionism and the rise of large corporations with personnel departments. Comparisons of wage flexibility for pre-1914 and interwar Britain do not provide strong evidence of a secular decline in labour market flexibility. See Hatton, T. J., ‘Institutional change and wage rigidity in the United Kingdom, 1880–1985’, Oxford Review of Economic Policy, 4 (1988).CrossRefGoogle Scholar Even for the United States, where early studies suggested a secular decline in wage flexibility, subsequent research casts doubt on this assumption: see Cagan, P., ‘Changes in the recession behavior of wholesale prices in the 1920s and post-World War II’, Explorations in Economic Research, 2 (1975)Google Scholar, and Sachs, J., ‘The changing cyclical behavior of wages and prices, 1890–1976’, American Economic Review, 70 (1980).Google Scholar In any case, even if prices were less flexible after World War II than before World War I, this need hardly imply a high degree of flexibility during the earlier period. For examples of recent revisionism see Carter, S. and Sutch, R., ‘The labour market in the 1890s: evidence from Connecticut manufacturing’, in Aerts, E. and Eichengreen, B. (eds), Unemployment and Underemployment in Historical Perspective (Leuven, 1990)Google Scholar, and Allen, S., ‘Changes in the cyclical sensitivity of wages in the United States, 1891–1987’, American Economic Review, 82 (1992).Google Scholar A recent study of this subject (Obstfeld, ‘Destabilizing Effects’) concludes that ‘Nominal prices in most industrial countries display symptoms of stickiness even in the gold standard period. Nominal price inflexibility seems to have increased after World War II, but the evidence favoring this hypothesis is not overwhelming, and the extent of the increase may not be large’.

10 See, in particular, Bordo and Kydland, ‘The gold standard’ and Giovannini, ‘Bretton Woods’.

11 Goodhart, C. A. E., ‘Economic and monetary union (EMU) in Europe: a UK perspective’, in Baltensperger, E. and Sinn, H.-W. (eds), Exchange-rate Regimes and Currency Unions (New York, 1992).Google Scholar

12 Experience was very different at the periphery of the gold standard system. Latin American countries also suspended convertibility and allowed their currencies to depreciate when either the supply of foreign capital or the demand for domestic exports was disrupted. There, however, the credibility of governments' commitment to gold convertibility did not always survive intact. Though suspensions of convertibility were characterised as temporary, this did not always turn out to be the case. The explanation for the contrast lies in differences, compared to Europe, in the credibility and robustness of the monetary regime and in the capacity for containing market pressures. In the United States, agricultural debtors and silver-mining interests formed a powerful coalition opposed to deflation and advocating modification of the monetary standard to allow for the coinage of silver. Such groups existed in Europe as well, but in the United States they had better political access due to universal male suffrage. Throughout Latin America, as in the United States, depreciation was welcomed by landowners with fixed mortgage obligations and exporters wishing to enhance their competitive position internationally. As in the United States, the two groups were often one and the same. And as in the United States, their ranks were swelled by mining interests favouring the coinage of silver.

13 See Bloomfield, A., Short-term Capital Movements under the Pre-1914 Gold Standard, Princeton Studies in International Finance, no. 11 (Princeton, NJ, 1963)Google Scholar and idem, Patterns of Fluctuation in International Investment Before 1914, Princeton Studies in International Finance, no. 21 (Princeton, NJ, 1963).Google Scholar This is true even by late twentieth-century standards. See Bayoumi, T., ‘Savings-investment correlations: immobile capital, government policy, or endogenous behavior?’, IMF Staff Papers, 37 (1990)Google Scholar; Eichengreen, B., ‘Trends and cycles in foreign lending’, in Siebert, H. (ed.), Capital Flows in the World Economy (Kiel, 1991)Google Scholar; and Obstfeld, M., ‘International capital mobility in the 1990s’, in Kenen, P. B. (ed.), Understanding Interdependence (Princeton, NJ, 1995).Google Scholar

14 For details, see Morgenstern, O., International Financial Transactions and Business Cycles (Princeton, NJ, 1959), p. 441Google Scholar

15 The action was not unprecedented. The Bank of England had borrowed gold from the Bank of France in 1839, with the intermediation of the very same Baring Brothers. The Bank of England returned the favour in 1847. The Swedish Riksbank had borrowed several million kroner from the Danish National Bank in 1882.

16 Regime-preserving co-operation was largely limited to the gold standard's European core and, on occasion, the United States. Smaller, less developed countries of the periphery did not enjoy comparable support. Their capacity to contain market pressures was therefore more limited, which helps to explain the exchange-rate difficulties described in a previous footnote.

17 Hawtrey, R., Good and Bad Trade (London, 1913).Google Scholar

18 de Cecco, M., Money and Empire: The International Gold Standard (London, 2nd edn, 1984).Google Scholar

19 This discussion of the changes wrought by the war and their consequences is taken from Eichengreen, Golden Fetters.

20 The closest approximation to a temporary suspension was Roosevelt's abandonment of gold convertibility in 1933, which was restored in January 1934, albeit at a greatly depreciated rate.

21 As noted in Eichengreen, Golden Fetters, there were ample signs of the depression in the primary-producing world already in 1928.

22 I draw my discussion of the two episodes from Eichengreen, B., ‘Perspectives on the Borchardt debate’, in James, H. (ed.), Essays in Honor of Knut Borchardt (Berlin, 1993)Google Scholar, and Eichengreen and Uzan, ‘The 1933 World Economic Conference’, respectively.

23 It was, however, required to pay a tax on the deficiency.

24 Balderston, T., The Origins and Course of the German Economic Crisis (Berlin, 1993), p. 128.Google Scholar

25 In June and July the central bank rediscounted over half of the bills in the portfolios of the six large Berlin banks.

26 The spark that ignited the panic was the failure of the Nordwolle, a textile firm of some renown. Its failure provoked a run on the Danat Bank, the Nordwolle's principal source of finance and one of the great banks known to be heavily dependent on foreign deposits.

27 The best summary of this French perspective is Mouré, K., Managing the Franc Poincaré (Cambridge, 1991).CrossRefGoogle Scholar

28 Barber, W. J., From New Era to New Deal (Cambridge, 1985)CrossRefGoogle Scholar, and Fusfield, D. R., The Economic Thought of Franklin D. Roosevelt and the Origins of the New Deal (New York, 1955)Google Scholar are basic sources on the evolution of academic and official analyses of the macroeconomy in the United States.

29 See Portes, R., ‘EMS and EMU after the Fall’, The World Economy, 16 (1993).Google Scholar

30 The argument for deposit requirements is made by Eichengreen, B. and Wyplosz, C., ‘The unstable EMS’, Brookings Papers on Economic Activity, 1 (1993).Google Scholar