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
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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?
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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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