1. Basic Monetary and Currency Arrangements Dr. Antony Mueller

2. The Gold Standard Fully in place in the second half of 19the century until 1914 Fully in place in the second half of 19the century until 1914 Arrangement: Arrangement: Definition of national currency in units of gold Definition of national currency in units of gold Determination of money (bank notes) in circulation covered by gold treasure Determination of money (bank notes) in circulation covered by gold treasure

3. Gold Standard Mechanism Monetary aggregate is determined by the stock of gold that covers circulation Monetary aggregate is determined by the stock of gold that covers circulation Credit Position at Central Bank: gold Credit Position at Central Bank: gold Debit Position at Central Bank: notes Debit Position at Central Bank: notes Free convertibility of notes into gold Free convertibility of notes into gold Gold serves as international numéraire Gold serves as international numéraire Gold standard implies fixed exchange rates Gold standard implies fixed exchange rates

4. Domestic effects Long-term price level stability Long-term price level stability Restraint on credit expansion Restraint on credit expansion Restraint on government expenditure Restraint on government expenditure Incentives to save Incentives to save Relatively stable interest rates Relatively stable interest rates Sometimes severe but usually very short recession (business fluctuations) Sometimes severe but usually very short recession (business fluctuations)

5. International Effects Highly stable exchange rates Highly stable exchange rates Automatic correction of trade imbalances Automatic correction of trade imbalances Growth of foreign direct investment Growth of foreign direct investment Growth of international trade Growth of international trade High economic growth High economic growth No significant international spill-overs No significant international spill-overs

6. International Gold Mechanism I Country A has trade surplus, country B has trade deficit Country A has trade surplus, country B has trade deficit A obtains excess of foreign monies A obtains excess of foreign monies Gold exchange happens between A and B with gold moving from B to A Gold exchange happens between A and B with gold moving from B to A In A, gold stock rises, increasing money supply In A, gold stock rises, increasing money supply

7. International Gold Mechanism II In B, gold stocks fall, decreasing money supply In B, gold stocks fall, decreasing money supply In A, demand expands In A, demand expands In B, demand falls In B, demand falls Relative prices change in favor of country B, correcting its trade deficit and eliminating the surplus in A Relative prices change in favor of country B, correcting its trade deficit and eliminating the surplus in A

8. End of the Gold Standard Gold standard ended because of government intervention with the beginning of World War I Gold standard ended because of government intervention with the beginning of World War I Breakdown of international commercial relations Breakdown of international commercial relations Rising nationalism Rising nationalism 1920s and 1930: Monetary and currency turmoil 1920s and 1930: Monetary and currency turmoil

9. Interwar Period Hyperinflation in continental Europe Hyperinflation in continental Europe Stagnation in Britain Stagnation in Britain 1920s boom in the US 1920s boom in the US 1929 Wall Street Crash 1929 Wall Street Crash 1930s Great Depression 1930s Great Depression 1939 Begin of World War II 1939 Begin of World War II

10. Bretton Woods 1944 Bretton Woods Conference 1944 Bretton Woods Conference Creation of IMF and World Bank Creation of IMF and World Bank US dollar put into center US dollar put into center US dollar linked to gold US dollar linked to gold Formal establishment of fixed exchange rates (peg) Formal establishment of fixed exchange rates (peg) Formal IMF guided correction Formal IMF guided correction