lecture 10 pre wwii monetary

7/27/2019 Lecture 10 Pre WWII Monetary

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International Political Economy #10

The Pre-WWII Monetary System

William Kindred Winecoff

Indiana University at Bloomington

October 3, 2013

W. K. Winecoff | IPE #10: The Pre-WWII Monetary System 1/17
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The Exam

Not great: mean and median of about 21/30 = 70%.

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The Gold Standard

Local currencies (e.g. British , U.S. $) were valued in gold weight.

Pros: price stability across countries reduced uncertainty and facilitatedtrade.

Cons: governments had no flexibility to adjust to economic booms and

bust via monetary policy. (More next week.)



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The Gold Standard

The idea is to guarantee political and economic stability at the same

time:

Restrain governments (many of which werent constitutionaldemocracies).

Restrain speculators (esp bankers).

Facilitate trade by reducing information gaps.

All of these could be achieved, it was thought, with a gold standard.

It worked for awhile.

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The Problem

A good government doesnt need a gold standard; a bad government

wont maintain it.

Political change put pressure on the gold standard.

Once one country defects it is good for others to defect.

If investors think a government will devalue, it will try to take gold out

of the country.

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The Monetary Dilemma

Country

2

Country

1

Stay on Gold Defect

Stay on Gold2

2

3

0

Defect0

3

1

1



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The Reason

Capitalist economies periodically overheat, then slow down.

Economic networks sometimes need to become rearranged.

This is a very messy process.

If government is authoritarian, it can ride it out by suppressing its

citizens.

If government is democratic, voters will demand help.



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The Output Formula

GDP= C+ I+ G+ (XM).

GDP is Gross Domestic Product, the sum of a countrys

yearly output.C is private Consumption.

I is Investment.

G is Government consumption.

X is eXports; M is iMports.

Thus, the trade balance is linked to output.

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Thinking About Recessions

GDP= C+ I+ G+ (XM).

A recession means GDP drops.

IfGDP goes down, what else must happen?



10/18

Thinking About Recessions

GDP= C+ I+ G+ (XM).

A recession means GDP drops.

IfGDP goes down, what else must happen?

At least one of:

C could go down, via lower wages.

I could go down, if folks are scared of the future.

G could go down, if the government keeps a balanced budget.

(XM) could go down.

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The Problem

Recessions imply a need for adjustment. Some way to bring the

economy back into balance.

Specifically, some kind of devaluation.

Internal: drop in domestic prices, including wages.

If wages are sticky (and they are) this could end up as

unemployment.

External: drop in the domestic price level.

Can boost employment by boosting X.

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Beggar Thy Neighbor

The problem is that devaluation is zero-sum: one country gains in

competitiveness, the other loses.

During a global recession this can just make things worse.

On a gold standard it is supposed to be out of bounds.

William Jennings Bryan (1896): you shall not crucify mankind on a

cross of gold.

Barry Eichengreen: Golden Fetters.

Faced with a recession, the gold standard is unsustainable in ademocratic political system.

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The Depression: Devaluations

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The Great Crash

There was no governance structure for exchange rates.

There was no way to achieve cooperation.

Kindleberger: The international economic system [was]rendered unstable by British inability and U.S. unwillingness

to assume responsibility for stabilizing it.

The political question is: who adjusts?

Politicians have incentives to try to force adjustment onto others.

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The Monetary Dilemma

Country

2

Country

1

Stay on Gold Defect

Stay on Gold2

2

3

0

Defect0

3

1

1

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Gold and Industrial Production

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Gold and GDP

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The Need for a Process

National governments were constrained by the gold standard.

They needed policymaking flexibility to appease domestic citizens.

Abandoning the gold standard helped...

... but then how are we to a stable trade and monetary system?

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lecture 10 pre wwii monetary

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