Centre for Finance and Development

Since the successful first edition of The Gold Standard in Theory and History was published in 1985, much new research has been completed. This updated version contains five new essays including: * post 1990 literature on exchange rate target zones * a discussion of the light shed by the gold standard on the European Monetary Union debate * a new introduction by Eichengreen with Marc Flandreau This will be an invaluable resource for students of macroeconomics, international economics and economic history at all levels.

This article attempts to provide a new view of how the bimetallic standard was maintained before 1873 and how it came to change into a monometallic gold standard between 1870 and 1880. The conventional view that the gold standard emerged out of the contradictions of bimetallism is not persuasive. Instead, this article claims that bimetallism might have survived and provides an alternative explanation of the emergence of the gold standard. Political and historical factors proved essential in precipitating the uncoordinated emergence of the international gold standard.

1. Crises and Punishment: Moral hazard and the pre-1914 international financial architecture, Marc Flandreau 2. Money doctors between the wars: the competition between central banks, private financial advisers, and multilateral agencies, 1919-1939, Steven Schuker 3. Who Owns 'Ownership'? The IMF and Policy Advice since 1945, Harold James 4. Who lost Russia in 1998?, Charles Wyplosz and Nadezhda Ivanova 5. French money doctors, central banks and politics in the 1920s, Ken Moure 6. Chile's monetarist Money Doctors, 1850-1988, Elizabeth Glaser 7. Advising, conditionality, culture: Money Doctors in Bulgaria, 1900-2000, Roumen Avramov 8. Money Talks': Competition and Co-operation with the League of Nations, 1929-1940, Patricia Clavin 9. The southern side of 'embedded liberalism': America's unorthodox money doctoring during the early post-1945 years, Eric Helleiner 10. New Therapies from contemporary money doctors: the evolution of structural conditionality in the Bretton Woods Institutions, Louis Pauly

In 1865, France, Belgium, Italy and Switzerland signed a monetary convention (later known as the Latin Union), which provided for the intercirculation of specie between member states. Conventional analyses of the treaty (such as that by Willis) have portrayed this arrangement as a by-product of French power politics. This article seeks to reinterpret the economic nature of the Latin Union, focusing on the interrelations between trade, finance and money. I argue that the Latin Union did not foster trade integration and that, as a matter of fact, such was not its objective, according to archival evidence. Instead, I suggest that the Latin Union was the result of the growth of France as a major supplier of capital. The need to provide French investors with exchange-rate guarantees led borrowing countries to tie their respective monetary systems to that of France. This, in turn, created opportunities for international monetary action and the French franc became the ‘natural’ focal point of projects of monetary unification. This evolution, however, had structural limits which help to explain the downfall of the projects for expansion of the Latin Union.

Conventional studies of the late-nineteenth-century international monetary system refer heuristically to “core” and “peripheral” countries. In this article, we seek to provide rigorous foundations to such expressions. Applying a formal procedure borrowed from network analysis produces indices of centrality and systematic rankings. We show that the international monetary system of the late nineteenth century is best described as a three-tier system. Other findings include the discovery of a closely knitted European foreign exchange system, a complete lack of foreign exchange linkages within Latin America, emerging intra-Asian relations, and a fairly late ascendancy of the U.S. dollar.

In this paper we chart the geography of the gold standard. We highlight the late date of the move to gold and the variety of transition strategies. Whether a country with a currency convertible into specie operated a gold, silver or bimetallic standard at mid-century depended not so much on whether it was rich or poor as on the monetary standard of the foreign country or countries to which its transactions were linked. When it came to the distinction between specie convertibility and inconvertibility, however, domestic economic conditions came into play. In particular, there was a strong correlation between economic development, as proxied by the level of per capita incomes, and possession of a convertible currency.Most countries went onto the gold standard between the 1870s and the first decade of the twentieth century. We enumerate the factors propelling this transition and analyse variations in its timing. Factors shaping the course of this transition include the level of economic development, the magnitude of reserves relative to world specie markets, whether reserves were concentrated at the central bank, and the presence or absence of imperial ties.

Caveat emptor: To those who forget the maxim, each new financial crisis brings an opportunity to relearn their lesson. The turmoil that swept Southeast Asian countries in the late 1990s is no exception: Once again, it has produced classic tales about late investors buying out of ignorance. According to some economists, rating agencies should take their share of the blame: They failed to provide appropriate signals to the market through early downgrades and then followed the market mood as it spiraled down. In self-defense, rating agencies emphasize that their grades are not (and have never been) meant to establish any kind of standard on which one could base investment decisions: The availability of formal ratings should not discourage investors from devoting time and effort to get their own opinion. Why look for someone to blame? It is after all in the nature of risk to bring its crop of regrets.

International audience

The essays, written by leading experts, examine the history of the international financial system in terms of the debate about globalization and its limits. In the nineteenth century, international markets existed without international institutions. A response to the problems of capital flows came in the form of attempts to regulate national capital markets (for instance through the establishment of central banks). In the inter-war years, there were (largely unsuccessful) attempts at designing a genuine international trade and monetary system; and at the same time (coincidentally) the system collapsed. In the post-1945 era, the intended design effort was infinitely more successful. The development of large international capital markets since the 1960s, however, increasingly frustrated attempts at international control. The emphasis has shifted in consequence to debates about increasing the transparency and effectiveness of markets; but these are exactly the issues that already dominated the nineteenth-century discussions.

International audience

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Arbitrage costs are usually treated as a mere footnote in formal analyses of bimetallism. At the same time, recent empirical research has demonstrated their key importance, since they produced a "bimetallic band." This paper provides the first model of bimetallism that takes this explicitly into account and uses it to explain a number of stylized features of the French bimetallic experience, 1850-1870. First, the model explains the association between the location of the price ratio within its band and the nature (either cross or joint) of specie flows. Second, it explains the correlation between bimetallic exchange rates and the bimetallic ratio. And third, it explains the two-humps distribution of the bimetallic ratio. This analysis leads to a reconsideration of bimetallism: the fluctuations of the price ratio are no longer evidence of the collapse of bimetallism, but are part of the normal functioning of a bimetallic system.

This Paper challenges the North and Weingast (1989) view that institutional reforms and better protection of property rights lead to economic growth through a reduction in interest rates, and that a mechanism of this type accounted for Britain’s ascendancy to economic supremacy. We show that, in contrast with North and Weingast, the risk premium on British sovereign debt remained high and even increased in the decades following the Glorious Revolution, and that during much of the 18th century interest rates in Britain fluctuated considerably in response to wars and political instability. We also show that debt per capita – a measure of financial deepening – remained lower in Britain than in Holland for over a century after the institutional changes described by North and Weingast. Finally, we show that British interest rates moved in tandem with interest rates in Holland, suggesting that Britain did not embark on a different path following the institutional changes of the late 17th century. We conclude that, in the short run, institutional reforms do not lead to higher growth by lowering the cost of capital.

This paper challenges a popular explanation for ‘original sin’ – the default prone borrowing of long term\ndebt in foreign exchange by emerging markets – that emphasizes the lack of credibility and commitment of\ngovernments, that prevents them from borrowing in their own currency. Basing our account on the history\nof emerging market borrowing in the nineteenth century, we offer an explanation based on historical path\ndependence. We document that almost all IPO’s of governments in foreign markets were in foreign\nexchange, or with foreign exchange clauses, independent of those countries’ institutional features. We\nshow that a small number of countries could circulate debt denominated in their own currency in secondary\nmarkets, again irrespective of their constitutional setup. We argue that market liquidity can explain both\nphenomenon. Having an internationally circulating currency allows countries to circulate their debt in\nsecondary markets. Going for an IPO in a large financial center, is an attempt to tap the greater liquidity of\nthat center’s money market and currency. It makes prefect sense to borrow then, in that center’s currency.\nThe evolution of vehicle currencies and liquid money markets has more to do with historical evolution of\ntrade, going back to medieval times, rather than with institutional reform. Escaping from original sin\nrequires that the country emerge as a leading economic power – a rare historical event, reserved for the U.S of the nineteenth century and Japan of the twentieth century.

This Paper seeks to trace the impact of monetary arrangements on trade integration and business cycle correlation, focusing on Europe in the late 19th century period as a guide for modern debates. For this purpose, we first estimate a gravity model and show that monetary arrangements were associated with substantially higher trade. The Austro-Hungarian dual monarchy, by many aspects a forerunner of Euroland, improved trade between member states by a factor of 3. Other arrangements, such as the gold standard and the Scandinavian union also impacted trade favourably. To explain this, we argue that monetary coordination, by fostering the correlation of business cycles compensate the adverse effect that the current account constraint has on trade integration. This is found to vastly compensate the negative consequences that trade integration might have on the symmetry of shocks, of which this Paper finds strong evidence, in contrast with recent empirical work.

Abstract This chapter deals with one aspect of short-term capital movements over the period 1885-1913. It studies the role of the French haute banque in the operation of the international monetary system. It adopts a monographic approach, examining the international balances of the Banque de Paris et des Pays-Bas (Paribas), in an attempt to reinterpret what is known of the pre-1914 international money market's structure. The novelty of this methodology is that it uses microeconomics as a financial probe to reveal a number of more general problems. This is in contrast with macroeconomic studies of statistical interrelations among national interest rates which treat markets as black boxes.

This article attempts to provide a new view of how the bimetallic standard was maintained before 1873 and how it came to change into a monometallic gold standard between 1870 and 1880. The conventional view that the gold standard emerged out of the contradictions of bimetallism is not persuasive. Instead, this article claims that bimetallism might have survived and provides an alternative explanation of the emergence of the gold standard. Political and historical factors proved essential in precipitating the uncoordinated emergence of the international gold standard.

This Paper challenges a popular explanation for ‘original sin’ - the default prone borrowing of long term debt in foreign exchange by emerging markets - that emphasizes the lack of credibility and commitment of governments that prevents them from borrowing in their own currency. Basing our account on the history of emerging market borrowing in the nineteenth century, we offer an explanation based on historical path dependence. We document that almost all IPO’s of governments in foreign markets were in foreign exchange, or with foreign exchange clauses, independent of those countries’ institutional features. We show that a small number of countries could circulate debt denominated in their own currency in secondary markets, again irrespective of their constitutional set-up. We argue that market liquidity can explain both phenomena. Having an internationally circulating currency allows countries to circulate their debt in secondary markets. Going for an IPO in a large financial centre is an attempt to tap the greater liquidity of that centre’s money market and currency. It makes perfect sense to borrow then, in that centre’s currency. The evolution of vehicle currencies and liquid money markets has more to do with historical evolution of trade, going back to medieval times, rather than with institutional reform. Escaping from original sin requires that the country emerge as a leading economic power - a rare historical event, reserved for the US of the nineteenth century and Japan of the twentieth century.

We estimate public investment gaps in a sample of developing countries using a public investment demand function. We then use gross domestic product (GDP) per capita projections, forecasts of structural transformation, and three Sustainable Development Goals (SDGs) targets (poverty, infant mortality and lower secondary school completion) to predict public investment needs in 2030 in Latin American and Caribbean countries. Our estimates suggest that in 2015 their total public investment gap was close to USD 170 billion (3.1 per cent of the region’s GDP) and expected to surpass USD 1.4 trillion (12.4 per cent of the region’s GDP) by 2030 if the SDGs were to be reached.

In 1867, the "Compromise" between Austria and Hungary laid the foundation of a single currency system with a common central bank. As in today's euroland, each part of the monarchy remained sovereign in fiscal matters. Moreover, the borrowing needs of both parts of the monarchy were quite large, since Austria and Hungary sought to promote their own economic development through government spending. Yet no fiscal stability pact existed: the two countries could run deficits to the extent of the public's willingness to lend to them. They were thus only subjected to the discipline of the capital market. This paper documents the record of the Austro-Hungarian monetary union and shows how this discipline led to a process of increased power of the central bank.