Barry J. This book offers a reassessment of the international monetary problems that led to the global economic crisis of the s. It explores the connections between the gold standard--the framework regulating international monetary affairs until and the Great Depression that broke out in Eichengreen shows how economic policies, in conjunction with the imbalances created by World War I, gave rise to the global crisis of the s. He demonstrates that the gold standard fundamentally constrained the economic policies that were pursued and that it was largely responsible for creating the unstable economic environment on which those policies acted. The book also provides a valuable perspective on the economic policies of the post-World War II period and their consequences.
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Here's a key quote:. These issues are hardly new. In the late s and early s, the U. Under the unwritten but long-standing rules of the gold standard, those two countries would have been expected to allow the inflows to feed through to domestic money supplies and prices, leading to real appreciations of their currencies and, with time, to a narrowing of their external surpluses.
Instead, the two nations sterilized the effects of these capital inflows on their money supplies, so that their currencies remained persistently undervalued. Under the constraints imposed by the gold standard, these policies in turn increased deflationary pressures and banking-sector strains in deficit countries such as Germany, which were losing gold and foreign deposits.
Ultimately, the unwillingness of the United States and France to conduct their domestic policies by the rules of the game, together with structural vulnerabilities in financial systems and in the gold standard itself, helped destabilize the global economic and financial system and bring on the Great Depression.
The parallel with China is clear. By holding its currency at a too-low level during the demand collapse of the Great Recession, China gathered for itself a larger share of contracting global demand, foisting deflationary pressure on other countries.
But here's the problem. Mr Bernanke suggests that those on the losing end of American and French policy in the s were helpless to save themselves. In fact, they were not. American policy had a deflationary impact because other countries were on the gold standard. As gold flowed out of the gold economies, those economies had to tighten monetary policy substantially to try and halt the outflow, and this was obviously very contractionary.
But to fix this problem, all one had to do was Barry Eichengreen has shown that the earlier a country left gold, the sooner its economy recovered. Had Germany left gold earlier, world history might look a lot different.
The parallel with the Great Recession is again clear. Rich world policymakers were pointing their fingers at China even as their own monetary policy stances were too tight.
Real interest rates soared in the early stages of the steep downturn. That wasn't China's fault. It was the failure of the major rich world central banks to react to rapidly falling expectations with overwhelming monetary force. If Chinese policy is deflationary in an environment of falling expectations, then one can either complain about Chinese policy or prevent expectations from falling.
So why didn't central bankers act more aggressively? It's not as if the modern world is on gold. Well, if you read Barry Eichengreen and Peter Temin, you see that the policymakers in the s and s weren't constrained so much by the gold standard as by their own narrow world views:. The mentality of the gold standard developed during the long boom of the nineteenth and early twentieth centuries.
It survived the First World War and promised a safe haven for ships of state buffeted by stormy social, political and economic seas. But once those ships began taking on water, gold was a millstone around their necks. Rather than keeping their economies afloat, it helped to sink them. The world economy, most observers agree, is well endowed with self-correcting powers.
When activity turns down, it tends to bounce back. Only sustained bad policies can drive it so far from this path that it loses its capacity to recover. And only a hegemonic ideology can convince leaders to persist in such counterproductive policies. The gold standard provided just such an ideology, supported by a rhetoric of morality and rectitude.
Its rhetoric dominated discussions of public policy in the years leading up to the Great Depression, and it sustained central bankers and political leaders as they imposed ever greater costs on ordinary people.
The mentality of the gold standard proved resistant to change even under the most pressing economic circumstances. I would argue that views of the world formed during a very specific economic period in which the magic of inflation hawkishness developed a similar hold over the minds of central bankers.
The stagnation of the s was cured by the central bank engineered downturn of the early s, which ushered in the long, growth-rich Great Moderation.
Inflation is the enemy, and the more than can be done to exorcise the inflationary demon from the modern economy, the stronger and more durable will long-run growth prove to be. But just as the gold standard served a useful person in the late 19th century only to become a mental policy prison in the s, the inflation hawkishness of the s seems to have created a generation of central bankers unprepared to handle the monetary challenge posed by the Great Recession.
And it's interesting: even Mr Bernanke, student of the Great Depression and among the most aggressive and responsive of rich world central bankers, seems reluctant to follow the conclusions of the s to their implications. Economics Free exchange. Reuse this content The Trust Project. Crash course How to interpret a market plunge. The best of our journalism, handpicked each day Sign up to our free daily newsletter, The Economist today Sign up now.
Golden Fetters : The Gold Standard and the Great Depression, 1919-1939
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Golden Fetters: The Gold Standard and the Great Depression, 1919-1939
The gold standard and the Great Depression might appear to be two very different topics requiring two entirely separate books, and the attempt to combine them here reflects Barry Eichengreen's conviction that the gold standard is the key to understanding the Depression. The gold standard of the s set the stage for the Depression of the s by heightening the fragility of the international financial system, and was the mechanism that transmitted the destabilizing impulse from the USA to the rest of the world and magnified that initial destabilizing shock; it was the principal obstacle to The gold standard of the s set the stage for the Depression of the s by heightening the fragility of the international financial system, and was the mechanism that transmitted the destabilizing impulse from the USA to the rest of the world and magnified that initial destabilizing shock; it was the principal obstacle to offsetting action, and the binding constraint preventing policymakers from averting the failure of banks and containing the spread of financial panic. For all these reasons, the international gold standard was a central factor in the worldwide Depression; recovery proved possible, for these same reasons, only after abandoning the gold standard. The gold standard also existed in the nineteenth century, of course, without exercising such debilitating effects — the explanation for the contrast lies in the disintegration during and after World War I of the political and economic foundations of the prewar gold standard system.