Issues in International Finance Exchange rate regimes IV: The Gold Standard. UW Madison // Fall 2018

Transcription

1 Issues in International Finance Exchange rate regimes IV: The Gold Standard UW Madison // Fall 2018

2 Roadmap Working on... Return to the fixed vs. flexible debate The gold standard, Bretton Woods, ERM Exchange rate crises / models 1

3 Exchange rate regimes 2

4 The gold standard 1870: about 15% of countries on gold standard 1913: about 70% of countries on gold standard Gold standard collapse during WWI 1920s: almost 90% of countries on gold standard 1939: about 25% of countries on gold standard Adoption and abandonment of gold standard coincides with changing costs/benefits of fixed exchange rate regime... 3

5 Rise of the gold standard Late 1800s early 1900s First era of globalization Steamships, telegraph, railroads, improvements in finance Lower tariffs and other trade barriers Cross-country trade and investment opportunities grow Increases incentive to have fixed fx Price stability was viewed as more important than stabilization policy As more countries adopted gold, the gain from adopting gold grew Network externality 4

6 The US in the 1890s Think of the US as being made up of two groups 1. East coast business interests, particularly banking 2. West and the southern agricultural interest US is on the gold standard Money supply largely fixed by the supply of gold Output growing faster than the supply of gold What happens to prices and interest rates? Quantity theory of money Fisher equation 5

7 The US in the 1890s Increased nominal interest rates are contractionary US suffering recession/depression, cannot increase the money supply Particularly difficult for agriculture Prices of goods falling Real interest rate on farm mortgages rising Unless they give up the gold standard One alternative is to add silver: bimetalism 6

8 Average mortgage rates Red are higher rates, green are lower. source: 7

9 Average crop price declines Red fell more than 27%, green fell less than 15%. source: 8

10 The battle over bimetalism This sets the stage for the 1896 presidential election William Jennings Bryan: Democrat and populist Platform was bimetalism to provide monetary stimulus Hoped to capture midwest, west, south Gave a great speech William McKinley: Republican Advocated for sound money the gold standard High tariffs to protect the economy 9

11 The battle over bimetalism In the end, McKinley wins and the US stays on the gold standard Gold standard act of 1900 Two helpful events Gold is found in S. Africa increases money supply Crop failure in Europe generates inflation in ag. products 10

12 The Wizard of Oz (Baum, 1900) Allegory of this period Dorothy: Heartland America Kindhearted, honest, plucky (Rockoff, 1990) Scarecrow: Western farmer Farmers thought not sophisticated enough to understand the debate Tin woodsman: Urban industrial workers Industrialization alienated the working man Cowardly lion: William Jennings Bryan Roared (speeches) but no bite (lost the race) 11

13 The Wizard of Oz (Baum, 1900) Cyclone: the silver movement Bryant s (and populism s) rise was meteoric Oz (as in ounce): a land where gold is king Wicked witch of the East Wall Street / East Coast strongly pro-gold Dorthy gets SILVER slippers (in the book) MGM wants to show of color movies Creates ruby slippers 12

14 The Wizard of Oz (Baum, 1900) Follow the yellow brick road To Emerald City (Wash. DC) Wear green-colored glasses... everything in money terms In the end, Dorothy had the power all along. The silver slippers can save the day. 13

15 ... back to gold standard history By 1914, 70% of countries on the gold standard WWI ends the first era of globalization Trade falls dramatically (as much as 50% in aggregate) Tariff are raised Countries use inflation tax to fund the war Gold standard falls apart as benefits of fixed fx regime fall 14

16 The end of the gold standard After WWI, briefly return to gold standard The great depression in 1929 ushers in need for stabilization policy Again, the depression comes with deflation and a need for more money Countries begin devaluing their currencies Not cooperative: beggar-thy-neighbor Many speculative attacks, chaos As we slide into WWII the gold standard is done What replaced the gold standard? Capital controls + fixed exchange rate (Germany, S. America) Free capital + floating exchange rate (Britain, US) 15