1. International Monetary System 1870 - 1973
Chapter 18

2. Why Gold? Desirable Attributes of Commodity Money: Durable Portable
Divisible
Standardized

3. Gold Standard Money
Gold Coins
Bank Notes
Gold Certificates

4. Gold Certificate

5. Gold Certificate

6. Gold Certificate
This note is receivable by all national and member banks and federal reserve banks and for all taxes, customs or other public dues. It is redeemable in gold on demand at the treasury department of the U.S. in the city of Washington D.C. or in gold or lawful money at any federal reserve bank

7. Gold Certificate

8. Silver Certificate

9. Unbacked Currency

10. Central Bank Balance Sheet Under a “Pure” Gold Standard
Assets Liabilities
400 Gold Gold Certificates

11. Central Bank Balance Sheet Under a Typical Gold Standard
Assets Liabilities
100 Gold Gold Certificates
300 Bonds

12. Central Bank Balance Sheet Under a “Fiat” standard
Assets Liabilities
400 Bonds Currency

13. Policy Goals Internal balance means domestic policy goals
External balance means international policy goals

14. Gold Standard - Mechanics
System used from
US & UK agreed to fix the price of gold in terms of their currency & buy or sell gold at this price.

15. Gold Standard - Mechanics
Guarantees the value of the home currency
Fixes the exchange rate
Gold is the international reserve
Balance of Payments, BOP, measures the flow of gold.

16. Gold Standard - External balance
Main policy goal was avoidance of balance of payments deficits
Internal balance was secondary or ignored.
Many countries took a laissez faire attitude towards the current account

17. Price-specie-flow mechanism
This was a force pushing countries toward balance of payments (BOP) equilibrium.
Suppose the US has a BOP deficit (D$ < S$) & the UK has a BOP surplus (D£ > S£)
What does the US do to support the $ ?
What does the UK do to support the £?
What is the effect on exports, imports & the BOP?

18. Rules of the Game: Myth
Central banks were supposed to reinforce the price specie mechanism.
W/ a BOP deficit, gold was sold for M
The central bank was supposed to reinforce the  in M by selling bonds for M
Surplus was the mirror image

19. Rules of the Game: Reality
Reality was not this symmetric.
Deficit countries usually played by rules.
Surplus countries (like UK) usually broke the rules.

20. Gold Standard & Price Stability
Prevents inflationary monetary policy
However gold discoveries brought inflation
Lack of gold discoveries brought deflation

21. Advantages of the Gold Standard
Prevents inflationary monetary policies.
Responsibilities under the gold standard were somewhat symmetric.

22. Disadvantages of the Gold Standard
Prevents use of  in M to fight recessions.
Makes prices dependent on gold discovery
Gives gold producing nations (like Russia & South Africa) too much power.

24. Wizard of Oz

27. ?

28. Interwar Years
Three problems emerged which influenced the post WW II monetary system
German hyperinflation - some countries need the monetary discipline
Britain’s return to gold - an overvalued currency can do great harm
The depression - tariff wars & competitive devaluations can devastate international trade

29. Bretton Woods & The IMF 1944 - the Allies met at Bretton Woods, NH.
They set up a system of fixed exchange rates,
They set up the IMF, intended to provide short term lending to countries w/ BOP deficits
They agreed to move toward currency convertibility

30. Gold Exchange Standard
Post WW II system of fixed E.
$ was reserve currency
The US fixed the $ price of gold
Other countries fixed the $ price of their currencies
Monetary discipline was provided by the threat of reserve losses.

31. IMF The IMF was established to help countries deal w/ BOP deficits.
IMF could lend to countries w/ BOP deficits.
The IMF could also adjust parities (official currency values)

32. Other Post WWII International Agencies
World Bank provides long term project lending to LDC’s.
GATT handles trade disputes & prevents tariff wars

33. Limited Convertibility
Countries were supposed to move toward convertibility for CA transactions but not for speculation.
Once in place, limited convertibility was difficult to enforce & widely evaded

35. The Confidence Problem
Initially, foreign holdings of $ < US gold reserves
Eventually, foreign holdings of $  until foreign holdings of $ > US gold reserves.
If holders of $ all simultaneously lost confidence & tried to sell $, the US could not redeem them

36. Decline & Fall of Bretton Woods
Inflationary US macro policy led to the breakdown of fixed E
Johnson’s guns & butter policy caused inflation & CA deficits in the US.
Even after Johnson left office, these problems continued.
The US was forcing its inflation on the rest of the world & eventually the ROW resisted.