The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Workine P a ~ e r9205
THE GOLD STANDARD AS A RULE
by Michael D. Bordo and Finn E. Kydland
Michael D. Bordo is a professor of economics at
Rutgers University, New Brunswick, New Jersey,
and an associate of the National Bureau of
Economic Research. Finn E. Kydland is a
professor of economics at Carnegie-Mellon
University, Pittsburgh. For helpful comments
and suggestions, the authors thank Charles
Calomiris, Barry Eichengreen, Marvin Goodfriend,
Lars Jonung, Leslie Presnell, Hugh Rockoff, Anna
Schwartz, Guido Tabellini, Warren Weber, and
seminar participants at Carnegie-Mellon
University , the Federal Reserve Bank of
Richmond, Columbia University, Queens
University, Carleton University, the NBER
Macroeconomic History Conference in June 1989,
and the NBER Summer Institute in 1991. They .
also thank Mary Ann Pastuch and Bernard
Eschweiler for valuable research assistance.
Working papers of the Federal Reserve Bank of
Cleveland are preliminary materials circulated
to stimulate discussion and critical comment.
The views stated herein are those of the authors
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal Reserve System.
March 1992
clevelandfed.org/research/workpaper/index.cfm
Abstract
In this paper, we show that the monetary rule followed by a number of key
countries before 1914 represented a commitment technology preventing the
monetary authorities from changing planned future policy.
The experiences of
these major countries suggest that the gold standard was intended as a contingent rule.
By that, we mean that the authorities could temporarily abandon
the fixed price of gold during a wartime emergency on the understanding that
convertibility at the original price of gold would be restored when the emergency passed.
clevelandfed.org/research/workpaper/index.cfm
I.
Introduction
The gold standard has been a subject of perennial interest to both economists and economic historians.
gold standard's performance:
Attention has focused on three aspects of the
as an international exchange-rate arrangement;
as a provider of macroeconomic stability; and as a constraint on government
policy actions.
The balance-of-payments
adjustment mechanism, or the links between the
money supplies, price levels, and real outputs of different countries under
fixed exchange rates, has long been studied as the key aspect of the international exchange-rate arrangement of the gold standard.
l
The durability of
fixed exchange rates, the absence of exchange-market crises, and the smooth
adjustment to the massive transfers of capital in the decades before 1914 have
been features stressed in monetary reform proposals ever since.
The gold standard often has been viewed as ensuring long-run, though not
necessarily short-run,
price stability via the operation of the classical
commodity theory of money.
Recent comparisons between the classical gold
standard and subsequent managed fiduciary monetary regimes suggest, however,
that the record is mixed with respect both to price-level and real-output
performance.
2
Finally, the gold standard has also been viewed as a form of constraint
over monetary policy actions
--
as a form of monetary rule.
The Currency
School in England in the early nineteenth century made the case for the Bank
of England's fiduciary note issue to vary automatically with the level of the
Bank's gold reserve ("the currency principle").
Following such a rule was
viewed as preferable (for providing price-level stability) to allowing the
note issue to be altered at the discretion of the well-meaning and possibly
clevelandfed.org/research/workpaper/index.cfm
well-informed directors of the Bank (the position taken by the opposing Banking School).
3
In this paper, we focus on the third aspect of the gold standard*s performance
--
on the gold standard as a rule.
However, our meaning of the
concept of a rule differs radically from what used to be the traditional one.
In our view. a rule can be regarded as a way of binding policy actions over
time.
This view of policy rules, in contrast to the earlier tradition that
stressed both impersonality and automaticity, stems from the recent literature
on the time inconsistency of optimal government policy.
approach, means setting policies sequentially.
Discretion, in this
This literature has demon-
strated that, in almost all intertemporal policy situations, the government
would benefit from having access to a commitment technology preventing it from
changing planned future policy.
Examples have shown that these benefits
theoretically can be substantial.
In this paper, we use that literature as a
framework for understanding the historical operation of the gold standard.
For the period from 1880 to 1914, the gold standard often is viewed as a
monolithic regime where all countries religiously followed the dictates of the
rule of a fixed price of gold. Before 1880, most countries were on a form of
specie standard: either bimetallism or silver or gold monometallism.
As we
point out below, however, from our perspective the bimetallic standards that
many countries followed were a variant of the gold-standard rule.
This Is
contrasted to the period since 1914, when central banks and governments to a
great extent have geared their policies to satisfy more immediate objectives
without considering intertemporal consequences in terms of lack of commitment
to a long-run rule governing policy.
In this paper, we show that the rule
followed by a number of key countries
--
England, the U.S., and France
before 1914 was consistent with such a commitment.
--
The experiences of these
major countries suggest that the gold standard was intended as a contingent
clevelandfed.org/research/workpaper/index.cfm
rule.
By that, we mean that the authorities temporarily could abandon the
fixed price of gold during a wartime emergency on the understanding that
convertibility at the original price would be restored when the emergency
passed.
Section I1 presents a framework for discussing the benefits of being able
to commit to future government policy.
Moreover, it interprets the institu-
tions of the gold-standard era in light of this framework.
Section I11 sur-
veys the historical record on the adherence to the gold-standard rule by three
core countries: England, the U.S., and France, and by a country that is generally believed not to have adhered to the rule: Italy.
Finally. Section IV
attempts to draw some lessons from history.
11. The Gold Standard as a Contingent Rule
The Value of Comitment
A
long-standing question in public finance is how to finance varying
quantities of government expenditures in such a way as to minimize deadweight
loss to society.
In the last decade. this question, which dates back to the
pioneering work by Ramsey (1927!,
dynamic environments.
more and more has shifted from static to
We shall argue that the intertemporal framework pre-
sented in this literature is the appropriate one for evaluating the operation
of the gold standard.
The focus of this literature initially centered around the incentives (in
the absence of a commitment mechanism to prevent the government from changing
its policy rule in the future) for excessive taxation of capital income.
Clearly. however, similar arguments can be made with respect to the taxation
of (or default on) government debt.
We discuss the source of time inconsis-
tency of optimal policy in both contexts.
We start with the former because
capital income, at least in this century, probably would be a main source of
clevelandfed.org/research/workpaper/index.cfm
emergency financing, for example during a war, for a government without the
credibility to issue much debt.
Then, we introduce government debt policy,
which we contend is the major reason why the gold standard was adhered to in
some countries for long periods of time.
Consider the following prototype model of optimal taxation.'
The economy
is inhabited by a large number of consumers who, for simplicity, are treated
as identical.
a
p
t
Each consumer maximizes infinite-horizon discounted utility,
u(ct,nt,gt.ot),where ct is consumption, nt is hours of work, gt is per
capita government purchases. and B is the subjective discount factor.
parameter o
t
The
is stochastic and may indicate, for instance, how the value of
defense expenditures varies over time depending on the political situation.
There is little loss of generality, however, in simply assuming that the g
t
process
itself is exogenous.
Thus, the typical consumer is assumed to
maximize
and nonnegativity constraints.
Here, w
is the real wage rate. and
t
are the tax rates for capital and labor income, respectively.
at
and r
t
One can think
of kt as including various forms of capital, with rt being the rental income
from ouning the capital stock.
With little modification, one could also
include human capital, which in practice can be taxed more heavily; for example, by increasing the progressivity of the income-tax schedule.
In this economy, consumers choose sequences of c
t*
the government decides on sequences of 8
t
and r
t
.
n
t*
and kt+l, while
Interpreting aggregates as
measured in per capita terms, a formulation of the optimal taxation problem
is: Choose a sequence n = (9,. rt}yd so as to maximize
clevelandfed.org/research/workpaper/index.cfm
subject to
gt
s8rk + ~ w n
t t t
t t t
and the constraints implied by equilibrium aggregate behavior of the atomistic
This behavior can be written as sequences x (n
private agents.
0
m
nt(no)*
kt+l
(n0)jt*;
) =
(ct(no),
0
in other words, the equilibrium aggregate private deci-
sions at time t depend on the entire sequence of policy decisions.
The solu-
tion, n , to this optimal taxation problem, together with the associated
0
equilibrium, xo(no), is sometimes referred to as a Ramsey allocation.
The heart of the time-consistency issue is as follows. Suppose no is the
plan that solves the optimal taxation problem as of time zero.
Imagine now
that the analogous problem is contemplated as of time s > 0 .
The optimal
taxation problem then has a solution ns, which generally is different from the
part of n0 that specifies the plan for periods t = s,s+l,....
In other words,
the original plan, no, is inconsistent with the passage of time.
The reason
is that n* takes into account the effects of government policy planned for
dates after period s on private behavior at dates before s. At time s, how*
ever, when n is computed, private behavior at earlier dates, of course, can
s
no longer be affected.
This prototype model highlights the following two points.
One is that
the source of time inconsistency is not that the objective function of the
government has a different form than the individuals' utility functions.
Also, it is clear that time inconsistency arises in spite of an unchanging
objective function over time.
Instead, key factors are the fact that consum-
ers care more about their own allocations than about the aggregate, combined
with decisions being made sequentially over time when future government policy
affects current private behavior.
clevelandfed.org/research/workpaper/index.cfm
In the optimal plan, when an increase in gt occurs, the incentive effects
on labor input of raising
ior from changing
8
t'
T
t
are weighed against the effects on savings behav-
Once the capital stock is in place, however, the opti-
ma1 plan from then on, taking history up to that point as given, is to tax
capital more heavily, as it will be supplied inelastically, and then to reduce
future capital taxation.
Of course, the government's change of action is
likely to create beliefs among the public that a similar change of plans will
take place again sometime in the future, regardless of what plan the government announces.
This framework assumes that the government balances its budget in every
period.
If the changes in government expenditures can be large at times, such
as during wars, the required changes in tax rates would severely reduce the
incentives for economic activity at a time when the need for maintaining such
activity is the greatest.
In this situation, government debt provides an
opportunity for the government to smooth tax rates over time. Reasons for why
tax smoothing generally is beneficial, not only during wars, but also under
normal circumstances, are presented in Barro
(1979) and in Kydland and
Prescott (1980b).
Introducing debt affects neither consumers' objectives nor those of the
government. The key difference is in the budget constraints. For the government, consider the following constraint:
Here, a
t
stands for tax revenue (the sum of revenue from capital and labor
taxation and other sources, such as customs duties), 6 is the rate of default
t
on the government debt (say, because of inflation), and b represents governt
ment debt of different maturities, treated as discount bonds, with prices
given by qt. We think of high-powered money (for example, greenbacks during
clevelandfed.org/research/workpaper/index.cfm
the Civil War) as a form of debt and include it in b.
The notation is as
follows. Let sbt be the amount of debt maturing in period s that is outstanding as of the beginning of period t, and let eqt be its corresponding price.
Define the notation qtSbt=
fs=t+l sqt
practice, the quantities b
b -
s t
e t
usually will equal zero if s is large enough.
In the case of a one-period
bond, for example, the price t+lqtof new debt issue is determined by
where r is the one-period interest rate between period t and t+l, and
t
is
the default rate expected to prevail in period t+l.
The time consistency problem is that in the absence of a commitment
mechanism. the government in period t+l would like to default to a greater
extent than what the original plan specifies.
Such default reduces the need
for distortionary taxes, but also affects expectations of future defaults and
therefore the price q at which the public is willing to hold government debt.
In Prescott (19771, for example. the government finances a given stream of
expenditures either through taxes on labor income (abstracting from capital)
or by selling debt. For that model. he finds that if the government has no
commitment mechanism for future actions. the government will always default on
outstanding debt to avoid levying distorting taxes.
As a consequence, the
equilibrium implies that the value of government debt is zero and that the
government always runs a balanced budget.
This policy and the implied alloca-
tion are, of course, inferior to the Ramsey allocation for that model.
Some recent papers investigate circumstances under which Ramsey policies
are sustainable in the sense of being an equilibrium arising endogenously
within the environment considered.
Chari and Kehoe (1989, 1990) have studied
this issue for situations in which time-consistency problems can arise either
because of capital taxation or because of the presence of government debt.
well-written overview is in Chari (1988).
A
The typical finding is that a
clevelandfed.org/research/workpaper/index.cfm
Ramsey allocation is problematic to implement when the horizon is finite.
When the horizon is infinite, on the other hand, the Ramsey allocation may be
one among a large, usually infinite, number of equilibriums.
that have been used
The conditions
to achieve this result restrict the applicability
severely. What supports Ramsey policies as equilibriums in those cases is the
belief by consumers that as long as the government has chosen Ramsey policies
5
in the past, it will continue to do so.
To overcome the shortcomings associated with a lack of an endogenous
comrnitment mechanism, society in some cases has instituted commitment in the
form of laws.
Such is the case with patent protection.
The law ensures
sufficient incentives for inventive activity by allowing firms the exclusive
use of new inventions for a period of time without fear that the government
will remove the patent right and allow the price of the product to be driven
toward the competitive price.
Our thesis is that, although the gold standard
is easier to change than. for example, the patent law, this institutional
arrangement has the potentlal for working as an explicit, transparent, wellunderstood rule.
In an uncertaln world, the Ramsey plan generally would be a contingent
plan or rule.
Strictly speaklng, in a realistic environment the Ramsey plan
would Include many contlngencles, some of which may make little difference to
soclety's welfare.
In the patent case, one can imagine that an optimal patent
arrangement occaslonally, under speclal circumstances, would permit nonexcluslve use.
Drawbacks of includlng many contlngeneies, however, are lack of
transparency and posslble uncertalnty among the public regarding the will to
obey the orlginal plan.
Thus, a practlcal rule may include only the contin-
gency that is consldered most Important.
In this sense, it does not quite
reach the maxlmum of the social welfare functlon, but will score high.
By
discretion, then, we mean any purposeful deviation, under whatever guise, from
clevelandfed.org/research/workpaper/index.cfm
such a rule.
The excuse for such a deviation could be a "bad outcome," in the
language of Grossman and van Huyck (19881, that is not included as a contingency in the original plan.
Deviations are tempting because of their imrne-
diate benefits (perhaps accompanied by promises not to repeat the breach of
the rule).
Because of the effect on future beliefs, however, these benefits
are outweighed by the long-run implications of having given up on the original, nearly optimal, rule.
The Gold Standard
The essence of the gold-standard rule is that each country would define
the price of gold in terms of its currency and keep the price fixed.
This
involves defining a gold coin as a fixed weight of gold called, for example,
one dollar.
The dollar in 1792 was defined as 24.75 grains of gold with 480
grains to the ounce, equivalent to 919.39 per ounce.
The monetary authority
was then committed to keep the mint price of gold fixed through the purchase
and sale of gold in unlimited amounts.
The monetary authority was willing to
convert into coin gold bullion brought to it by the public, to charge a certain fee for the service
-- called brassage -- and also to sell coins freely
to the public in any amount and allow the public to convert them into bullion
6
or export them.
This rule applies to a pure gold coin standard.
In fact, the standard
that prevailed in the nineteenth century was a mixed standard containing both
fiduciary money and gold coins.
Under the mixed standard, the gold-standard
rule required that fiduciary money (issued either by private banks or by the
government) be freely convertible into gold at the fixed price.
Most countries, until the third quarter of the nineteenth century, maintained bimetallic systems using both gold and silver at a fixed ratio. Defining the weight of both gold and silver coins, freely buying and selling them,
clevelandfed.org/research/workpaper/index.cfm
and maintaining the ratio fixed can be viewed as a variant of the basic goldstandard rule, since it is a fixed value of the unit of account that is the
7
essence of the rule.
A variant of the gold-standard rule that we believe is particularly
pertinent applies to the case of a war.
Assume for the moment that a country
finds the gold-standard rule to have good operating characteristics if the
gold standard is maintained under all circumstances except for a war.
Let zt
equal one if the country is on the gold standard at time t and zero otherwise.
Let h 1 represent the start of war i and el its end.
A reasonable rule could
be to choose z = 0 if t ~ [ h,e +dl for all i and zt = 1 otherwise; in other
t
1
1
words, it is understood that in order to finance the war, the gold standard
will be suspended for the duration of the war plus a delay period d, which is
the same in every war.
Such a policy, if implemented as planned, is consis-
tent with a gold-standard rule.
It is clear that when people foresee a war in
the near future, this rule will result in different prices qt for the issue of
new debt than under the unconditional zt = 1 rule.
These effects would be
regarded as negative, although they presumably would be outweighed by the
benefits of being better able to finance the war.
Thls description is consistent with the results of Lucas and Stokey
(1983), In whlch financlng of wars Is a contingency rule that is optimal in
one of thelr environments.
In thelr example, where the occurrence and dura-
tlon of the war are uncertain, the optlrnal plan is for the debt not to be
servlced during a war.
Under thls pollcy, people realize when they purchase
the debt that effectively it wlll be defaulted on in the event the war continues.
Under the rule, the soverelgn rnalntains the standard
price of its currency in terms of gold
--
keeps fixed the
-- except in the event of a major war,
in which circumstance it can suspend specie payments and issue paper money to
finance its expenditures, and It can sell debt issues in terms of the nominal
clevelandfed.org/research/workpaper/index.cfm
value of its currency on the understanding that the debt will eventually be
paid off in gold.
The rule is contingent in the sense that the public under-
stands that the suspension will last only for the duration of the wartime
emergency plus some period of adJustment; it assumes that, afterward, the
government will follow the deflationary policies necessary to resume payments.
In this situation, an example of discretion is, after war i has ended, to
decide at time el+d to delay further the resumption of the gold standard,
perhaps as a result of the perceived current situation in terms of the fraction of the war that has been paid for and the undesirable effects of alternative means of financing, such as by raising taxes.
This change is all the
more tempting if the public had accepted the debt at a reasonably high price q
in the expectation that the gold standard would be resumed as scheduled.
If
the government breaks the rule by effectively choosing a high default rate 6
in the future, it is obvious that, should there be another war within memory
of the previous one, then people's behavior would be quite different from that
in the previous war, even if the situation is otherwise similar and the government claims to subscribe to the same fixed-delay rule.
Finally, a second contingency aspect of the rule could arise during
financial crises.
Temporary restrictions on convertibility of bank liabili-
ties could be used to reduce the extent of a banking panic.
Comnitment Mechanisms
How was the gold-standard rule enforced?
One possible explanation focus-
es on reputational considerations within each country.
Long-run adherence to
the rule was based on the historical evolution of the gold standard itself.
Gold was accepted as money because of its intrinsic value and desirable properties such as durability, storability, divisibility, portability, and unlformity. Paper claims, developed to economize on the scarce resources tied up
clevelandfed.org/research/workpaper/index.cfm
in commodity money, became acceptable only because they were convertible into
8
gold.
In turn, the reputation of the gold standard would constrain the monetary
authorities from breaching convertibility, except under well-understood contingencies. Thus, when an emergency occurred, the abandonment of the standard
would be viewed by all to be a temporary event since, from their experience,
only gold or gold-backed claims truly served as money.
An alternative commitment mechanism was to guarantee gold convertibility
in the constitution.
This was the case in Sweden before 1914, where laws
pertaining to the gold standard could be changed only by two identical parliamentary decisions with an election in between (Jonung [1984], p. 368).
With respect to outright suspension of convertibility, it is difficult to
distinguish between a suspension as part of the operation of a contingent rule
as mentioned above, or as evidence of a change in regime.
As we discuss
below, statements by the monetary authorities, debates in Parliament, frequency of suspension, and changes in expectations as reflected in people's decisions all can be used to distinguish between the two.
Technical Adjustments, or Opportunity for Discretion?
There are some aspects of the operation of a gold standard that are not
so clear-cut.
In designing its details (for example, the gold-silver ratio
under bimetallism
-- a variant of the gold standard), it can be difficult to
anticipate exactly what the optimal ratio is.
New knowledge may be gained
over time that would have been helpful when the standard was designed.
When
the new information is revealed, a potentially difficult question is what
happens if the government goes ahead and makes the technical adJustment in the
standard.
If most people accept the claim that new information is the reason
for the change, then the associated private behavior should be approximately
clevelandfed.org/research/workpaper/index.cfm
the same as if this had been the standard from the very beginning.
On
the
other hand, the greater the suspicion among the public that the change is
partly a form of discretion, for which the government certainly has a strong
incentive, the greater will be the change in private behavior reflecting the
adjustment in the public's beliefs about likely future discretionary actions
by the government.
different price
The same argument can be made regarding the choice of a
when
the gold
standard
is resumed after
a
temporary
9
abandonment.
An International Rule
The gold-standard rule also has an international dimension.
Under the
rule, there would be no restriction on the nationality of individuals who
presented bullion to the mint to be coined, or who exported coin or bullion to
foreign countries.
Moreover, because every country following the rule fixed
the price of its currency in gold, this created a system of fixed exchange,
rates linking all countries on the same standard. The international aspect of
the gold standard may have been.particularly important to the countries that
were relatively less developed and therefore depended on access to international debt markets.
The thesis of this paper, however, is that the essence
of the gold-standard rule was as a domestic commitment mechanism.
To the
extent that the commitment was honored in relation to other countries, this
served to strengthen the credibility of the domestic commitment.10
An aspect of the international gold standard given considerable attention
in the literature is the operation of the "rules of the game." According to
the traditional story, central banks or the monetary authorities were supposed
to use their monetary policy to speed up the adjustment mechanism to a change
in external balance.
To the extent the "rules" would be followed, this pre-
sumably would strengthen the commitment to convertibility.
clevelandfed.org/research/workpaper/index.cfm
The enforcement of the international gold standard seems to have taken a
particular form that was conducive to making it credible.
have been the role of England
of the gold-standard era.
--
A key factor may
the leading financial and commercial center
The financial institutions of London provided the
world with a well-defined and universally accepted means, based on gold, of
executing bilateral trades and obtaining credit.
As we shall argue later, the
gold standard provided England with the necessary benefits to enforce it and
for many other countries to follow England's lead. Exchange in both goods and
capital was facilitated if countries adhered to a standard based on a rule
anchored by the same commitment mechanism.
This arrangement may also have
contributed to making the commitment mechanism a transparent one, a condition
that we think is important for its likely success.
111. History of the Cold Standard as a Rule
In this section. we discuss the history of the gold standard, viewed
first as a domestic rule binding the monetary authorities.
In this context,
we survey in some detail the operation of the gold standard as a contingent
rule in four countries: England and the U.S.
standard; and France and Italy
--
--
two key nations under the
the former a "core" country of the classical
11
gold standard, the latter an important peripheral country.
briefly the gold-standard experience of other countries.
We also summarize
Then, we survey the
record of the gold standard as an international rule governing the interrelationships between nations.
Our survey extends primarily from the early nineteenth century to 1933,
with the main focus on the classical period ending in 1914. Although the U.S.
continued to maintain gold backing for the dollar until 1971 and although the
Bretton Woods system from 1945 to 1971 was based in part on gold, we view the
clevelandfed.org/research/workpaper/index.cfm
period after World War I1 as far enough removed from the gold-standard rule to
12
be omitted from this survey.
1.
The Gold Standard a s a Domestic Rule
England can be viewed as the most important country to follow the goldstandard rule.
The gold standard in England, as in other Western European
countries, evolved from the use of a commodity as money.
Standardization of
coins of specific weight evolved by the early eighteenth century from a rudimentary bimetallic specie standard where coins frequently circulated by
weight, not tale (face value).13
England adopted a de facto gold standard in
1717, after having been on a de facto silver standard at least back to the
thirteenth century.
Over the 500-year period on silver, the price of silver
and the bimetallic ratio were rarely changed
--
the principal exception being
the Great Debasement of the sixteenth century.
According to Glassman and
Redish (1988). this episode represented an attempt to gain seigniorage
follow
discretionary policy
--
--
to
rather than a technical adjustment in the
14
coinage.
The early standard was plagued by the problems of deterioration in quality and counterfeiting.
This was especially serious for small-denomination
silver coins and may explain periodic recoinage and occasional debasement in
the early modern era (Glassman and Redish [19881).
The emergence of the
standard in its modern guise likely reflects the development of milling and
other techniques of producing high-quality coin. The gold standard emerged in
England de facto by the unintended overvaluation of gold at the mint from 1717
by the Master of the Mint, Sir Isaac Newton.
It became de jure in 1816.15
The gold standard prevailed, with the price of gold fixed at t 3 . 8 5 per
ounce, from 1717 to 1931, with two major departures:
1797-1821 and 1914-1925.
clevelandfed.org/research/workpaper/index.cfm
The first departure, referred to as the "Suspension Period" or the "Paper
Pound" during the Napoleonic wars, is generally viewed as an example of the
operation of a contingent rule (Barro 119871).
The suspension of payments on
February 26, 1797, whereby the Bank of England received permission from the
government not to have to redeem its notes in terms of gold, followed a run on
the country banks and the depletion of the Bank of England's gold reserve with
16
the threat of a French invasion.
Figure 1 portrays monthly movements in the
price of the pound in terms of the Hamburg Schillingen Banco, the only
exchange-rate series continuously available over the entire period.
of exchange before suspension was approximately 3 5 . )
(The par
17
The suspension was universally viewed as a temporary event, initially
expected to last for a period of months.
18
As the French wars dragged on,
however, and the Bank of England freely discounted government securities to
finance military expenditures, the pound depreciated on the foreign exchange
market.
Consequently, the Bank repeatedly requested an extension of the
suspension.
Concern about the depreciation of the paper pound led to the
Bullion Report of 1810, which attributed the depreciation to the Bank of
England's note issue.
The Bullion Report recommended that immediate steps be taken to resume
payments in two years from the date of the report at the presuspension par19
i ty.
The debate that ensued in Parliament and in the press revolved around
the themes of the extent, if any, of depreciation, and responsibility for the
depreciation
-- the Bank of England blaming it on external real factors.20
There was little discussion of the possibility of not resuming payments or of
resuming at a depreciated level of the pound in the ensuing 10 years.
Despite the government's opposition to resumption during wartime conditions, there exists considerable evidence that the government wished to confirm its commitment to a return to the gold standard once hostilities ceased
clevelandfed.org/research/workpaper/index.cfm
(Bordo and White [ 1991 1 1. 21
Several attempts were made to pick a date for
resumption (1816, 18181, but as each occasion approached, the Bank requested a
postponement on the grounds that the exchanges were unfavorable.
It is lmpor-
tant to note that this occurred after the wartlme emergency ended In 1815.22
Finally, Parliament agreed on July 2, 1819 (Peel's Act) on resumption in
stages from February 1, 1820, to full redemption on demand on May 1, 1823,23
and it was agreed that the government would retire its outstanding securities
held by the Bank and the Bank would reduce its note issue to achieve the aim.
During the year preceding resumption, considerable opposition to the plan
emerged in Parliament by interests (especially agriculture and the Birmingham
industrial area) hurt by deflation.
depreciated pound.
This opposition was not sufficient, however, to prevent
resumption from being achieved
[ 1965 1 ,
They advocated return to parity at a
(Feavearyear (19631, pp. 224-225;
Fetter
pp. 73-76; Laidler [ 19871 1.
We interpret the repeated requests for postponement, especially after the
end of hostilities in 1815, as the use of discretionary policy.
24
Moreover,
each postponement gave a negative signal to the public of the government's
intention of ever resuming.
Nevertheless, the fact that resumption was
achieved suggests that observing the rule was paramount.
Evidence for the credibility of the commitment to the gold standard in
the Napoleonic War is provided in Bordo and White (1990).
There it is shown
that although the British government pursued a policy of tax smoothing (setting tax rates over time so as to minimize deadweight losses), it did not
follow a policy of revenue smoothing (smoothing revenue from both taxes and
seigniorage 1.
These results suggest that, a1 though specie payments were
suspended. the commitment to resume prevented the government from acting as it
would under a pure fiat regime.
clevelandfed.org/research/workpaper/index.cfm
The Bank Charter Act of 1844 and the separation of the Bank of England,
into the Issue department to regulate the currency and the Banking department
to follow sound commercial banking principles, further demonstrated England's
commitment to the gold-standard rule.
The Issue department, by varying di-
rectly its fiduciary issue (over and above a statutory limit of C14 million)
with the level of gold reserves ("the currency principle" ), was designed to
make the long-run maintenance of the (mixed) gold standard more credible.25
A second contingency aspect of the rule developed with experience of
financial crises. Restrictions on convertibility of bank liabilities for gold
were used to reduce the extent of a banking panic.
The Bank was authorized to
expand its unbacked note issue in the face of a depletion of its reserves
without suspending convertibility of its notes into gold.
From 1821 to 1914, the gold-standard rule was continuously honored.
However, on three occasions -- the crises of 1847, 1857, and 1866
second contingent aspect of the rule came into play.
--
the
The policy was success-
ful in alleviating the pressure, and the Bank retired the excess issue shortly
26
thereafter.
The Overend Gurney crisis of 1866 was the last real financial crisis
(that is. banking panic) in British financial history (Schwartz [I9861 ) .
After that point, the Bank of England learned to follow Bagehotss rule
--
in
the face of both an external and an internal drain "to lend freely but at a
penalty rate." Although Bagehot intended for the Bank to use its discretion
(in the traditional sense) to avert a financial crisis, it can be argued that
the successful performance of the Bank as lender of last resort actually
served to strengthen the credibility of the Bank's commitment to the goldstandard rule, because a key threat to the maintenance of convertibility was
removed.
Evidence of the credibility of England's commitment to the gold-
standard rule is provided by private short-term capital inflows during the
clevelandfed.org/research/workpaper/index.cfm
incipient crises of 1890 and 1907 (Eichengreen [1989b1).
The 1914-1925 episode was similar in many respects to the earlier suspension period, although the extent of the inflation and the depreciation of the
pound were considerably greater.
Indeed, it appears that the successful
resumption of 1821 may have been a factor enabling the British to finance an
even larger share of the World War I expenditures by debt finance and the
issue of fiat money '(see table 1).
27
Figure 2 shows monthly movements in the dollar-sterling exchange rate
from 1914 to 1925.
Note that from the beginning of hostilities in August 1914
until March 1919, the country was still formally on the gold standard, but the
monetary authorities prevented conversion and pegged the pound close to the
old parity (Crabbe [I98911.
After hostilities ended, the official view in the Cunliffe Report (1918)
and other documents was for an immediate resumption at the old parity of
$4.867.
Consequently, the Bank of England began following a deflationary
policy in early 1920.
The exchange rate was close to parity by December 1922,
but resumption was delayed because of unfavorable events on the continent (the
Germans' refusal to pay reparations and the Belgian-French occupation of the
Ruhr in 1923).
By the end of 1924, the pound was again close to parity and
resumption was announced by Winston Churchill
in the Budget Speech of
April 28, 1925.
Though the official view from 1920 to 1925 was in favor of resumption,
and a key argument made was the maintenance 3f credibility by returning to
28
gold at the old par,
vociferous opposi.tion to it was voiced by J. M. Keynes
(1925) and other academics. by labor (not thc official Labor party), and by
industry groups.
Most of the opposition, however, with the principal excep-
tion of Keynes, was opposed not to resumption at the old parity per se but to
the deflationary policies used to attain it.29
The successful resumption in
clevelandfed.org/research/workpaper/index.cfm
1925 and the painful deflation that accompanied it can be viewed as evidence
30
of the British commitment to the gold-standard rule.
The United States. 1792-1933
The U.S. Constitution (Section 8 ) gave Congress power over the currency
-- "to coin money and regulate the value thereof." The Coinage Act of
defined U.S. coinage as both gold and silver.
1792
Thus, the original monetary
standard was a bimetallic standard.
One dollar was defined as 371.25 grains
of silver or 24.75 grains of gold.
This yields a bimetallic ratio of the
value of gold to silver of 15:1.
Soon after instituting the 15: 1 ratio, the
market ratio increased to 1%: 1.
Consequently, silver became overvalued at
the mint, gold became undervalued, and, via the operation of Gresham's law,
the U.S. after a few years was on a de facto silver standard.
The situation was altered by a new Coinage Act in 1834 and another in
1837, which changed the bimetallic ratio to 16:1, presumably in an attempt to
restore bimetallism.
As it turned out, gold became overvalued at the mint,
silver became undervalued, and the U.S. switched to a de facto gold standard.
If we interpret periodic adjustment of the bimetallic mint ratio to the market
ratio as an example of a contingent rule. and if the public expects such
adjustments. then the question arises whether the switch from 15:l to 16:l
rather than to
cy.
1c:1 was a mistake or a deliberate use of discretionary poli2
Indeed. O'Leary (1937) viewed this episode as a deliberate attempt by the
Jacksonians to discredit the Second Bank of the United States.
flood of gold coins would obviate the necessity for its notes.
The resultant
The Act of
1834 was also passed at the urging of the gold-producing states of South
Carolina. North Carolina, and Georgia (Friedman [1990al).
Figure 3 shows the dollar-pound exchange rate on an annual basis from
1792 to 1933.
The market exchange rate is defined in terms of gold, so that
clevelandfed.org/research/workpaper/index.cfm
during the period when the U.S. was on a bimetallic standard it varied, reflecting changes in the market bimetallic ratio, changes in the official
31
ratio, and other forces in the market for foreign exchange.
As can be seen
in the figure, the exchange rate in the bimetallic era before the Civil War
was much less stable than during the pure gold-standard period, from 1879 to
1913.
The fixed price of $20.67 per ounce prevailed from 1837 to 1933 with one
significant departure
--
the Greenback episode in 1862-78. Figure 4 plots the
greenback price of gold over that period.
It can be viewed in conjunction
with the exchange rate in figure 3.
The Greenback episode, at least at the outset, can be interpreted as the
operation of a contingent rule. The federal government originally intended to
finance its expenditures through borrowing and taxation, but within a year
resorted to the issue of paper notes.
Under the Legal Tender Acts, these
notes were issued on the presumption that they would be convertible, but the
date and provisions for convertibility were not specified.
Shortly after the war, the government made its intentions clear to resume
payments at the prewar parity in the Contraction Act of April 12, 1866, which
provided for the limited withdrawal of U.S. notes. Declining prices from 1866
to 1868 led to a public outcry and to repeal of the Act in February 1868.
Over the next seven years a fierce debate raged between the hard-money forces
-- advocates of rapid resumption -- and the soft-money forces, some of whom
were opposed to restoring the gold standard, others who wanted to restore it
at a devalued parity, and yet others who Jcst wanted to prevent any undue
deflation and allow the economy to grow up to its money supply [Unger 119641,
Sharkey [19591).
Alternating victories by the conflicting forces were mani-
fest in legislation, alternately contracting and expanding the issue of greenbacks (the Public Credit Act of 1869 contracting it, the reissue of $26 mil-
clevelandfed.org/research/workpaper/index.cfm
lion of retired greenbacks in 1873 expanding it) and, in Supreme Court decisions, initially declaring the Legal Tender Acts unconstitutional (Hepburn vs.
Griswold, February 1870), and then reversing the decision (Knox vs. Lee, May
1871).
Finally, the decision to resume payments on January 1, 1879, was made
in the Resumption Act of 1875, which the lame-duck Republican Congress passed
by a majority of one.
Despite the announcement of resumption, however, and of
steps taken by the Treasury to accumulate a gold reserve and to retire greenbacks, the bitter election of 1876 was fought between Cooper, the Greenback
candidate, who was opposed to resumption; Tilden, a soft-money Democrat; and
Hayes, a hard-money Republican.
Hayes won by one electoral vote.
Yet, had
Tilden won, according to one authority, resumption would not have been prevented; only the date may have been changed (Unger [1964], pp. 310-311).
Though the ferocity of the debate and the reversals in policy suggest to
us that many features of the post-Civil War period can be interpreted as
incorporating elements of a discretionary regime, other evidence argues in
favor of the contingent gold-standard rule.
As Calomiris (1988) points out,
credibility in the restoration of the gold-standard rule was likely established in 1869 by the actual redemption of bond principal in gold by the Act
of March 18, 1869, guaranteeing payment in gold, and the Supreme Court decision in Venzie Bank vs. Fenno, which supported the constitutionality of gold
clauses (Calomiris [ 19881, p. 208fn).
Moreover, both Roll
( 19721
32
and Calomiris
( 1988)
present evidence of
expected appreciation of the greenback based on a negative interest differential between bonds that were paid in greenbacks and those paid in gold.
Calomiris (see table 2) calculates the appreciation forecast error on a semiannual basis from January 1869 to December 1878, defined as the difference
between his calculation of expected appreciation and actual appreciation. The
errors are close to zero for most of the periods, with two exceptions: January
clevelandfed.org/research/workpaper/index.cfm
to June 1869, when the error is 1.53, and January to June 1876, when it is
-1.46.
The former positive exchange-rate surprise reflects the credibility of
the government's commitment to the redemption of bond principal in gold; the
latter negative surprise reflects the temporary threat to resumption by the
election of 1876.
In the ensuing 17 years, though the U.S. was back on a gold basis, the
battle between hard- and soft-money forces continued over the issue of free
coinage of silver.
Silver advocates can be classified into several groups.
There were those who believed that, had silver not been demonetized by the
"Crime of 73" (the Coinage Act of February 1873). then bimetallism at 16:1
would have yielded less deflation than actually occurred from 1873 to 1896, as
relatively more abundant silver was substituted for increasingly scarce gold.
Such a position is consistent with maintenance of a rule.
Other silver advo-
cates (such as the Populist party), however, viewed the issue of silver certificates as a potential engine of inflation to stimulate the economy, as well,
as to reverse the redistribution of income from debtors to creditors.
In this
sense, the pressure infavor of discretion did not disappear.
The free-silver forces succeeded in passing two pieces of legislation
that increased the outstanding stock of silver coins: the Bland Allison Act of
1878 and the Sherman Silver Purchase Act of 1890.
The latter increased the
stock of high-powered money sufficiently to threaten convertibility into gold
(Friedman and Schwartz [19631).
As
Crilli (1989, figure 3) shows, however,
the probability of a speculative attack on the gold dollar at the height of
the agitation over silver in 1893 (before the repeal of the Sherman Silver
Purchase Act) was not much greater than 6 percent.33
A second departure from the gold standard, an embargo during World War I
(1917-1919) on gold exports, did not affect internal convertibility of gold.
clevelandfed.org/research/workpaper/index.cfm
Hence, we believe it should be viewed as merely a temporary adJustment in the
34
standard.
Financial crises characterized by banking panics were frequent in U.S.
monetary history until the establishment of the Federal Reserve System.
Before 1914, pressure on the banking system's reserves was often relieved by a
restriction on convertibility of bank notes and deposits into high-powered
money.
The restrictions in 1837-1838, 1839, and 1857 did involve suspensions
of convertibility into gold.
It could be argued, however, that such temporary
departures were viewed as a contingent aspect of the rule.
The restrictions
of 1873, 1893, and 1907-1908 did not involve suspension of convertibility into
gold and hence cannot be viewed as breaking the gold-standard rule.
Franklin Roosevelt's decision to devalue the dollar in 1933 (in order to
raise the price level) represents a clear departure from the gold-standard
rule and a clear case of discretion.
Though the price of gold was again
fixed, at $35 per ounce, gold ownership by U.S. residents was prohibited, and
the standard that reemerged has been described as "a discretionary fiduciary
standard" with gold just a commodity whose price was fixed by an official
support program (Friedman and Schwartz [19631).
France
France followed a bimetallic standard from the Middle Ages until 1878.
From the thirteenth to the fifteenth century. the rule was honored in the
breach more than the observance, with frequent debasements, devaluations, and
revaluations.
This reflects internal political instability, frequent wars,
and the lack of an adequate tax base (Bordo [ 19861 1.
By the sixteenth cen-
tury, France had developed a stable bimetallic system, although the ancient
regime was punctuated
by
several devaluations and
revaluations
(Murphy
clevelandfed.org/research/workpaper/index.cfm
\
[1987]), and the infamous system of John Law
tion
--
--
a paper-money-induced infla-
from 1716 to 1720 (Bordo [1987al).
The French revolution spawned the assignat hyperinflation from 1789 to
1795
--
the aftermath of which led to the establishment of official bimetal-
lism with the fixing of the ratio of silver to gold at 1%: 1 in 1803, a rule
that was successful for 75 years (Bordo and White [19911). Until the late
1840s. abundant supplies of silver threatened to displace gold, but with gold
discoveries in California and Australia the process was reversed until the
1860s. when major silver discoveries again threatened the bimetallic standard.
In 1865, France formed the Latin Monetary Union with Belgium, Switzerland, and
Italy (later joined by the Papal States, Greece, and Romania).
By agreeing to
mint silver coins of the same fineness, these countries expanded the size of
the bimetallic currency area.
The Latin Monetary Union continued the free
coinage of silver until, swamped by massive supplies of new silver from discoveries in the Americas and by the abandonment of the silver standard in
Germany and other European countries emulating the gold-standard example of
Britain, the leading commercial power (Friedman [1990bl), it limited silver
coinage in 1874 and fully demonetized silver in 1878 (Bordo [1987b1).
France followed the gold-standard rule (albeit in its bimetallic form
until 1878) until World War I.
from 1821 to 1938.
Figure 5 shows the pound-franc exchange rate
As can be seen, the rate was very stable until 1914,
rarely departing more than one percentage in gold points from the parity of
25.22 francs to the pound.
France, like the other two countries in this
period, suspended specie convertibility in times of national emergency.
two occasions, the Bank of France announced Cours ForcC
--
On
the first from
March 15, 1848 to August 6, 1850, following the February 1848 revolution, and
the second during and after the Franco-Prussian war from August 12, 1870 to
January 1, 1878.
It is interesting to note that during these periods, the
clevelandfed.org/research/workpaper/index.cfm
exchange rate varied close to parity.
On both occasions, the Bank of France
limited its note issue, acting as if it were constrained by the gold-standard
rule [Lacroix and Dupieux [19731).
Like other belligerents in World War I, France switched to fiat-money
issue to finance the war, intending to resume payments after hostilities
ended.
Unlike the British case, the aftermath of the war was a period of
rapid inflation and depreciation of the franc.
The forces of discretion
carried the day even with the ultimate return of the franc to gold convertibility at a vastly depreciated level in 1928.35
France stayed on the gold
standard until 1936.
Italy
In contrast to England, France, and the U.S., Italy departed from the
gold-standard rule more than followed it.
The newly unified Italian state
adopted a gold standard in 1865 but abandoned it in May 1866 and did not
return to convertibility until March
1883.
According to Fratianni and
Spinelli (19841, inconvertibility was a consequence of both financing the war
against Austria in 1866 and conducting the government's subsequent liberal
fiscal policy. According to Fratiannl and Spinelli, "Politicians had no difficulties in throwing off the straitjacket of the gold standard when it stood in
the way of largebudget deficits" (p. 419).
A return to sound fiscal policy
permitted restoration of gold payments from 1883 to February 1894, after which
the Italian currency remained inconvertible until December 1927, when gold
36
convertibility was resumed at a depreciated value of the lira.
During the
pre-World War I period, however, the monetary authorities acted as if they
were on the gold standard.
The exchange rate with France returned close to
parity in 1903 and remained there until the outbreak of war.
Money growth was
low, and the budget was often in surplus (Tonniolo [1990, p. 1881).
clevelandfed.org/research/workpaper/index.cfm
This
episode suggests that commitment to the gold-standard rule was of considerable
importance to the Italian monetary authorities.
Evidence for the credibility of the commitment to the gold standard can
be seen in the risk premium on Italian government long-term securities relative to their French counterparts over the period 1866 to 1912, shown in
37
figure 6.
In the first period of inconvertibility (1866-1883).
the risk
premium averaged more than 2 percent per year; in the gold-standard period
(1884-1894), it averaged close to zero; and in the second inconvertibility
period (1894-1912). it declined from 2 percent in the first half of the period
to . 5 percent after 1902.
We have described the gold-standard experience of four important countries: three "core" countries (England, the U.S., and France) that followed
the gold-standard rule, and Italy, a country that, though officially on the
gold standard, suspended convertibility more than half the time.
One way to
summarize this experience is to present evidence on the persistence of
inflation.
Barsky (1987) presents evidence for the U.K. and the U.S. that inflation
under the gold standard was very nearly a white-noise process.
This is com-
pared to the post-World War I1 period, when the inflation rate exhibited
considerable persistence.
Evidence for the absence of inflation persistence
does not prove that countries followed the gold-standard rule.
It is, how-
ever, not inconsistent with the suggestion that market agents expect that the
monetary authorities will not continuously follow an inflationary policy
--
an
expectation that is also consistent with belief in following a convertibility
rule.
To develop this further, following Barsky's approach, we examine in
table 3 the autocorrelations of inflation using annual wholesale price indices
for the four countries for different periods covering the entire gold-standard
clevelandfed.org/research/workpaper/index.cfm
experience. The results in table 3 confirm those of Barsky.
Inflation in all
four countries was very nearly white noise, as seen in the low autocorrelations.
These results hold for different subperiods when the countries con-
cerned followed the bimetallic variant of the rule and for subperiods when
they departed from convertibility following the contingent aspect of the rule.
As did Klein (1975) and Barsky (19871, we observe negative serial correlation
38
at a number of lags in all the subperiods.
This is consistent with the
commodity money adjustment mechanism of the gold standard discussed by Rockoff
(1984) and Barsky and Summers (1988).
The 9-statistics, which test the joint
hypothesis that the first n autocorrelations are all zero for specified n, do
not reject the white-noise hypothesis for any of the subperiods.
Over the
entire period 1730 to 1938 for the U.K. and the entire periods 1793 to 1913
and 1793 to 1933 for the U.S.. however. the hypothesis is rejected at the 5
percent significance level.
These periods represent conglomerates of differ-
ent regimes that had different mean rates of inflation. Aggregation then may
induce serial correlation.
We also tested for a unit root in the inflation series using the DickeyFuller test.
In only one episode
-- the U.S., 1862 to 1878 -- could one be
detected at the 10 percent significance level.
In sum, we interpret this
evidence as consistent with agents' beliefs in the credibility of the commitment to the gold-standard convertibility rule. Because the power of the tests
is admittedly low, however, this evidence is only suggestive.
A number of other countries followed the gold-standard rule until 1914 as
strictly as the three core countries just discussed.39
These include Germany
(the fourth "core" country), the Scandinavian countries, and the British
Dominions.
The latter two sets of countries, like England, returned to gold
at the original parity in the mid-1920s.
A
number of countries that were not
formally on the gold standard acted as if they were, by maintaining price
clevelandfed.org/research/workpaper/index.cfm
levels as stable as the gold-standard countries.
Austro-Hungarian empire before 1892.
These include Spain and the
Finally, a number of countries, most
notably Argentina, followed the example of Italy by alternately following and
then abandoning gold convertibility during the period of falling prices, 1880
to 1900. and of rising prices, 1900 to 1913 (Ford [I9621 1.
40
2. The Cold Standard as an International Rule
The classical gold standard emerged as a true international standard by
1880 following the switch by the majority of countries from bimetallism,
silver monometallism, and paper to gold as the basis of their currencies.41 As
an international standard, the key rule was maintenance of gold convertibility
at the established par. Maintenance of a fixed price of gold by its adherents
in turn ensured fixed exchange rates.
Recent evidence suggests that, indeed,
exchange rates throughout the 1880 to 1914 period were characterized by a high
degree of fixity in the principal countries.
Although exchange rates fre-
quently deviated from par, violations of the gold points were rare (Officer
[19861), as were devaluations (Eichengreen [19851). 42
The international gold standard was a successful example of a fixed
exchange-rate system, although gold convertibility is not required to operate
a fixed exchange-rate system successfully (as is evident from the case of the
EMS [Giavazzi and Giovannini (1989111. The gold-standard rule was primarily a
domestic rule with an important international dimension.
This dimension in
turn may have served to make the domestic gold-standard rule more credible in
a number of significant ways.
In addition to the reputation of the domestic
gold standard and constitutional provisions as discussed in section 11, adherence to the international gold-standard rule may have been enforced by other
mechanisms.
These include improved access to international capital markets,
the operation of the rules of the game, and the hegemonic power of England.
clevelandfed.org/research/workpaper/index.cfm
Many countries viewed maintenance of gold convertibility as important in
obtaining access at favorable terms to the international capital markets of
the "core" countries, especially England and France.
It was believed that
creditors would view gold convertibility as a signal of sound government
finance and the future ability to service debt.
This was the case both for
developing countries wishing to have access to long-term capital, such as
Austria-Hungary (Yeager [I98411 and Latin America (Fishlow [19891), and for
countries wishing to finance war expenditures, such as Japan, which financed
the Russo-Japanese war of 1905-1906 with foreign loans seven years after
joining the gold standard (Hayashi
[ 19891 1.
Once on the gold standard. such
countries feared the consequences of departure.43
The fact that England, the
most successful country of the nineteenth century, as well as other "progressive" countries were on the gold standard was probably a powerful argument for
joining (Gallarotti [19911, Friedman [1990bl).
The operation of the "rules of the game," whereby the monetary authorities were supposed to alter the discount rate to speed up the adjustment to a
change in external balance, may also have been an important part of the commitment mechanism to the international gold-standard rule. Thus, for example,
when a country was running a balance-of-payments deficit and there was a gold
outflow, the monetary authority, observing a decline in its gold reserves, was
supposed to raise its discount rate in order to reduce domestic credit.
resultant drop in the money supply would reduce the price level.
The
The adjust-
ment process would be aided by higher short-term domestic interest rates
attracting capital from abroad.
To the extent the "rules" would be followed
and adjustment facilitated, this would strengthen the commitment to convertibility, as conditions conduclve to abandonment would be lessened.
There exists considerable evidence on the operation of the "rules of the
game." Bloomfield (19591, in a classic study, showed that, with the principal
clevelandfed.org/research/workpaper/index.cfm
exception of England, the rules were frequently violated in the sense that
discount rates were not always changed in the required direction (or by sufficient amounts) and in the sense that changes in domestic credit were often
44
negatively correlated with changes in gold reserves.
of countries used gold devices
--
In addition, a number
45
practices to prevent gold from leaving.
According to Goodfriend (19881, central banks operating under the gold standard did so to achieve "interest rate smoothing" through the use of gold
stockpiling.
Such practices, in our approach, could be viewed as a form of
discretion, because following them could lead the public to believe that
ultimately convertibility would be abandoned.
For the major countries, however, at least before 1914, such policies
were not used extensively enough to threaten the convertibility into gold
evidence for commitment to the rule (Schwartz (19841).
( 1992)
--
Moreover, as McKinnon
argues, to the extent monetary authorities followed Bagehotss rule and
prevented a financial crisis while seemingly violating the "rules of the
game," the commitment to the gold standard in the long run may have been
strengthened.
An additional enforcement mechanism for the international gold-standard
rule may have been the hegemonic power of England, the most important goldstandard country (Eichengreen [1989al). A persistent theme in the literature
on the international gold standard is that the classical gold standard of 1880
to 1914 was a British-managed standard (Bordo [19841). Because London was the
center for the world's principal gold, commodities, and capital markets,
because of the extensive outstanding sterling-denominated assets, and because
many countries used sterling as an international reserve currency (as a substitute for gold), it is argued that the Bank of England, by manipulating its
bank rate, could attract whatever gold i t needed and, furthermore, that other
clevelandfed.org/research/workpaper/index.cfm
central banks would adjust their discount rates accordingly.
Thus, the Bank
of England could exert powerful influences on the money supplies and price
levels of other gold-standard countries.
The evidence suggests that the Bank did have some influence on other
European central banks (Lindert [196911..
Eichengreen (1987) views the Bank of
England as engaged in a leadership role in a Stackelberg strategic game with
other central banks as followers. The other central banks accepted a passive
role because of the benefits to them of using sterling as a reserve asset.
According to this interpretation. the gold-standard rule may have been en46
forced by the Bankof England.
Thus, the monetaryauthorities of many coun-
tries may have been constrained from following independent discretionary
policies that would have threatened the adherence to the gold-standard rule.4 7
The benefits to England as leader of the gold standard
--
from seignio-
rage earned on foreign-held sterling balances, from returns to activities
generated by its central position in the gold standard, and from access to
international capital markets in wartime
--
were substantial enough to make
the costs of not following the rule extremely high.
IV. The Lessons from History
The history of the gold standard suggests that the gold convertibility
rule was followed continuously by only a few key countries
being England from 1821 to 1914.
--
the best example
Most major countries, however, did follow
the rule during the heyday of the classical gold standard, 1880 to 1914.
Peripheral countries and several fairly important nations
tina
--
--
Italy and Argen-
alternately followed and then departed from the rule. but even they
were constrained in a looser sense.
The gold-standard rule also proved to be successful as a commitment
mechanism for England, the U.S., and France in preventing default on debt and
clevelandfed.org/research/workpaper/index.cfm
I
I
ensuring that paper-money issues were not permanent.
It may have been suc-
cessful as a commitment device because it had the virtues of being simple and
transparent.
We have suggested a number of reasons why the gold-standard rule was so
successful as a commitment mechanism before 1914. First, as a contingent rule
it permitted nations to have access to revenue in times of wartime emergency.
The commitment to return to gold parity after the war would enable the authorities to issue debt and to collect seigniorage at more favorable terms than
48
otherwise.
Second, in England and possibly in other countries, gold emerged early on
as a way of certifying contracts.
This certifying characteristic of gold
carried forward to the relationship between the private and public sectors.
Abandoning gold convertibility was viewed as a serious breach of contract.
The gold standard emerged in the stable political environment of England after
the seventeenth century, where the rule of law sanctified private contracts.49
Only a few countries had comparable stability.
Countries fraught with more
unstable internal politics found it more difficult to refrain from running
budget deficits, ultimately financed by paper money issue (for example, Italy
and Argentina), although the benefits of convertibility placed some con50
straints on their behavior.
The gold standard was also successful as an international rule: By pegging their currencies to gold, countries became part of a fixed exchange-rate
system. The international aspect of the gold standard may have reinforced the
domestic commitment mechanism because of the perceived advantages of more
favorable access to international capital markets, by the operation of the
"rules of the game," and by the importance of England as a hegemonic power.
The advantages accruing to England as the center of the gold-standard
world
--
the use of sterling as a reserve asset and the location in London of
clevelandfed.org/research/workpaper/index.cfm
.
-- made
the world's key asset and commodity markets
the costs of not following
the gold-standard rule (except in wartime emergency) extremely high.
Further-
more, because England was the most important country in the gold-standard era
and access to the London capital market was considered to be of great benefit
to developing countries, it is likely that many countries adhered to the gold
standard that otherwise would not have, given the high resource costs of
maintaining gold reserves.
Also, because of the Bank of England's leadership
role, other central banks may have been prevented from using discretionary
policies, threatening adherence to the rule.
A comparison of the pre-1914 period with the subsequent period is of
great interest.
The gold exchange standard, which prevailed for only a few
years from the mid-1920s to the Great Depression, was an attempt to restore
the assorted features of the classical gold standard while allowing a greater
role for domestic stabilization policy.
It also attempted to economize on
gold reserves by restricting its use to central banks and by encouraging the
use of foreign exchange as a substitute. As is well known, the gold exchange
standard suffered from a number of fatal flaws (Kindleberger [1973], Eichengreen [19911, Temin [198911. These include the use of two reserve currencies,
the absence of leadership by a hegemonic power, the failure of cooperation
between the key members, and the unwillingness of its two strongest members,
the U.S. and France, to follow the "rules of the game," instead exerting
deflationary pressure on the rest of the world by persistent sterilization of
balance-of-payment surpluses.
The gold exchange standard collapsed, but
according to Friedman and Schwartz
1, Temin
( 1963
( 19891,
and Elchengreen
(19911, not before transmitting deflation and depression across the world.
While the gold-standard rule was widely upheld before 1914, it has not
been since, although to a lesser extent both the short-lived gold exchange
standard and the Bretton Woods system incorporated a number of its features.
clevelandfed.org/research/workpaper/index.cfm
Today, one could characterize most nations as following a discretionary standard, although rhetoric over the importance of rules abounds.
This may seem
surprising, since the benefits of having a commitment mechanism seem more
relevant today than 100 years ago.
On the other hand, there may have been the
perception that government debt was, and is, less important as an emergency
source of funds than it was in the gold-standard era.
For example, the stocks
of physical and human capital have risen substantially. The time inconsistency literature has taught us that the incomes therefrom have broadened the
scope for policymakers to use discretionary policy.
For example, marginal tax
rates for people with above-average human capital rose dramatically during
World War 11.
In the absence of a commitment mechanism, these rates were not
returned to prewar levels.
The gold-standard rule was simple, transparent, and, for close to a
century, successful.
Even though it was characterized by some defects from
the perspective of macroeconomic performance, a better commitment mechanism
has not been adopted.
Despite its appeal, many of the conditions that made
the gold standard so successful vanished in 1914, and the importance that
nations
attach
to
immediate
objectives
casts
doubt
on
its
eventual
restorat ion.
clevelandfed.org/research/workpaper/index.cfm
ENDNOTES
1
For surveys of this literature, see Bordo (1984) and Eichengreen (1985,
1989b1.
2
See Bordo (19811, Cooper (1982). and Meltzer and Robinson (1989).
3
For a discussion of the Currency Banking School debate, see Viner (1937),
Fetter (1965). and Schwartz (1987).
4
The following framework is essentially identical to that in Kydland and
Prescott (1980a).
Also, the main example of Kydland and Prescott (1977)
illustrates time inconsistency in an environment in which tax policy affects
the incentives for capital accumulation.
he
idea that reputation may support optimal policy has been studied in a
different context by Barro and Gordon (1983).
6
Strictly speaking, the government need define a gold coin only in terms of
the unit of account.
Private mints could then supply the demand for coin.
Indeed, this was the case shortly after the California gold discoveries
(Bancroft [18901, p. 165 1.
In most countries, however, the mint was under
government authority.
7
Viewed, however. as a rule in the traditional sense
--
as an automatic mech-
anism to ensure price stability -- bimetallism may have had greater scope for
automaticity than the gold standard because of the additional cushion of a
switch from one metal to the other.
See Friedman (1990b).
Garber (1986)
regards bimetalllsm as a gold standard with an option.
clevelandfed.org/research/workpaper/index.cfm
I
'Goodfriend
(1989) describes how the evolution of contractual arrangements in
the financial system in eighteenth- and nineteenth-century England had to
overcome the problem of fraud.
Private markets developed an elaborate system
of monitoring financial arrangements, but ultimately convertibility into gold
lay behind them.
' A . additional source of discretion was government policies to regulate gold
production, such as taxation, the enforcement and relaxation of environmental
regulations, and subsidies to encourage gold production in periods of depression.
For examples of the use of such policies, see Rockoff (1984, pp. 632-
6391.
10
The role of spillover effects on reputation through multiple relationships is
discussed in Cole and Kehoe (1991).
11
We do not include Germany, the fourth "core" country of the classical gold
standard, in the survey because its history as a unified nation on the gold
standard
-- from
1871 to 1914 -- did not include a period of contingent sus-
pension of payments (McGouldrick [198411.
12
See Bordo (19911. McKinnon (19921, however, views the Bretton Woods system as
a dollar standard with a set of rules that incorporated many of the features
of the classical gold standard.
13
Even under the pre-1914 gold standard, however, weight mattered for sover-
eigns. Bankers had tiny scales for weighing sovereigns, which might be credited at less than 20 shillings. Loss on light gold was clearly a consideration
for George Rae, himself a leading banker at the time, in The Country Banker,
1885, Letter XIX.
(Our thanks to Leslie Presnell for bringing this to our
attention. 1
clevelandfed.org/research/workpaper/index.cfm
1 4 ~ ycontrast
to England, monetary authorities in medieval France and Burgundy
often would change arbitrarily the face value of silver coins to raise revenue
--
a discretionary breach of the rule, a policy that would succeed until the
public caught on, raising prices in proportion to the change in unit of
account.
150ne interpretation of England's early abandonment of bimetallism is the
continuous difficulties encountered in providing a fractional silver coinage
(Redish [ 19901 1.
Alternatively, Lord Liverpool' s decision to adopt gold may
have been strongly influenced by Ricardo's (1819) belief that technical change
in silver mining would lead to a massive increase in its supply. See Friedman
( 1990b).
16~houghthe Bank of England was a private institution until 1946, we treat its
policies as not independent of the wishes of the government.
The government
had two powerful checks over the Bank: periodic renewal of its charter, and
its role as the government's banker.
For a contrary view, see Gallarotti
(1991).
17
In interpreting this exchange rate, adjustments must be made to allow for the
Hamburg currency being on silver and sterling being effectively on gold, as
well as the interest charge implicit in the prices of bills of exchange used
to derive the series.
As Ricardo pointed out, when these factors are taken
into account, the Hamburg exchange rate understated the depreciation of the
Bank of England note in terms of gold (Fetter [19651, p. 28).
18
The Order in Council of February 26, suspending the specie convertibility of
Bank of England notes, recommended resumption by June 24, 1797.
clevelandfed.org/research/workpaper/index.cfm
19
The report's exact words were:
".. .Your
Committee would suggest, that the restriction on cash
payments cannot safely be removed at an earlier period than two
years from the present time; but your Committee is of the opinion
that early provision ought to be made by parliament for terminating,
by the end of the period, the operation of the several statutes
which have imposed and continued that restriction." Report from the
Select Committee o n the High Price of Bullion (1978), [1810,cclxi]
It went on to stress that, even if peace came in less than two years, two
years should be allowed for resumption because of the increase likely, both in
mercantile activity on the coming of peace, and in demands on the Bank for
discount. But. "even if the war should be prolonged, cash payments should be
resumed by the end of that period [of two years from the date of the Report]."
[ibidl
20
The "Bullionist debate" pitted the Bullionists, who blamed the depreciation
of the pound on the excessive issue of Bank of England notes, against the
anti-Bullionists, who attributed the depreciation to extraordinary wartime
foreign remittances and other real factors.
See Laidler [1987) and Viner
(1937).
21
The government's failure to confront the Bullion Report's criticism directly
can be understood in this light.
The government felt unable to argue that
continued suspension was justified by wartime fiscal needs because it was
concerned that this position would weaken both internal and external confidence in the paper pound.
Instead. the government took the much maligned
position of both disputing the facts of depreciation and presenting a list of
nonmonetary causes (O'Brien 119671, Chapter 6).
clevelandfed.org/research/workpaper/index.cfm
22~ccordingto Neal (19911, the Bank was opposed to resumption after hostilities ceased because it feared the loss of its gold reserves as capital was
repatriated to the continent.
23
Initially, resumption would be at C4, 15s. Od on gold bars.
The price would
then be reduced in stages and the terms extended finally to include coin at
mint par of C3, 17s, 1 e (Clapham 119441, p. 71).
24~lthoughone could argue that the war did not really end until reparations
were paid and the Allies ended their occupation of France in 1818.
See White
(1991).
25
The Bank Charter Act was criticized on two grounds: (1) the currency princi-
ple ignored the role of deposits as an increasingly important component of the
money stock; and (2) the Banking Department, in operating on a sound commercial banking basis, could not act responsibly as a central bank.
The latter
criticism was at the heart of the traditional case for "discretion."
This
criticism culminated in the 1860s with the formulation by Walter Bagehot, the
influential editor of The Economist, of the "responsibility doctrine" and the
establishment of guidelines for a central bank under a gold standard (Bordo
[19841, pp. 45-46).
26
On
all three occasions, the Treasury issued a letter allowing the Bank to
expand its fiduciary issue, but only in 1857 did it actually do so.
On the
other two occasions, the announcement alone was sufficient to allay the panic
(Clapham [1944], Vol. 11, pp. 208-209).
27
The contribution of high-powered money to the finance of wartime expenditure
is a lower-bound estimate of the contribution of money to wartime finance,
since in both episodes the banking system participated in the operation.
clevelandfed.org/research/workpaper/index.cfm
I
28~ccording to Moggridge (1969), the key reason cited was the maintenance of
London's prominent position in international finance.
29
See Pollard (1970, editor's introduction), and especially Brown (1929),
Sayers (19601, and Hume (1963).
?3nith and Smith (1990) view resumption in 1925 as an example of a stochasticprocess switch.
Their numerical estimates suggest that, contrary to some
contemporary views, the appreciation of sterling prior to April 1925 appears
to have been due to fundamentals, such as restrictive monetary policy, rather
than to the expectation of a change in regime.
31
See Officer (1983, 1985) for a valuable discussion on measuring both the par
of exchange and the market exchange rate.
32
According to Calomiris (19881, following Mitchell (1903) and Roll (1972), the
pace and timing of resumption depended solely on fiscal news
and pol icy announcements affecting the government' s budget .
--
legislation
Rolnick and
Wallace (1984) also view interpretation of this episode as dependent only on
overall government fiscal expectations.
33
Garber and Grilli (1986) present estimates of silver risk in the yields of
dollar-denominated assets in this period.
Also see Garber (1986) for esti-
mates of the value of the silver option on bimetallic bonds.
clevelandfed.org/research/workpaper/index.cfm
34
. unlike the British example comparing World War
The U.S.
I to the French
Wars, did not finance a larger fraction of its expenditures in World War I by
The fractions are:
debt and fiat money issue than in the Civil War.
A. Civil War 1861-1865
B. World War I 1917-1918
Percent of
wartime expenditure
financed by:
Percent of
wartime expenditure
financed by:
(1) Taxes
(2)Bonds
(3) High-powered Money
Sources:
21
61
18
1861-1865: Friedman ( 19521.
1917-1918: Walton and Rockoff (19891, p. 443.
35
According to Eichengreen (19911, following Alesina and Drazen (1989), the
rapid inflation in the early 1920s and the de facto stabilization of the franc
at an undervalued rate in 1926 reflected a compromise outcome from a war of
attrition between debtors and creditors. By contrast, Britain's return to the
old parity represented a victory by the creditor class.
36
This did not occur until after wartime inflation was in large part reversed
by Mussolini's contractionary policies.
See Kindleberger (1984). p. 383.
37
Following Fratianni and Spinelli (19841, we calculate the country risk pre-
mium
as
Dt = h
(l+i~,t)
-
h (l+i~,t)
- h E:+(
+
!.n Et, where
i t is
the
yield on Italian bonds at time t; i F S t is the yield on French bonds, E:+, is
the lira-franc exchange rate for t+l expected at t, and Et is the exchange
rate at t.
Their calculation holds constant transactions costs and assumes
perfect foresight in the exchange market, that is. h E:+~ = h Et+1. We also
calculated the risk premium using an alternative measure of the expected
change in the exchange rate, h Et
-
h Et-(, and the picture was virtually
the same.
clevelandfed.org/research/workpaper/index.cfm
I
'8Klein
(1975) also presents evidence for mean reversion of the price level
under the gold standard.
39
See Bordo and Kydland (1990) for a more detailed discussion.
40
Other Latin American countries also had experiences of alternating adherence
to gold convertibility. See Fishlow (1987).
41
See Eichengreen (1985, p. 5 ) for a chronology of countries adopting gold.
42
Giovannini (19911 views the facts that both exchange rates and short-term
interest rates varied within the limits set by the gold points in the 18991909 period as consistent with market agents' expectations of a credible
commitment by the four "core" countries to the gold-standard rule in the sense
of this paper.
43
See Eichengreen 11989b, p. 191 and Fishlow (1987, 1989).
44
According to Giovannini (19861. however, the Bank of England did not follow
the "rules." while the Reichsbank did.
45
Alternatively, the gold devices could be interpreted as an effort to strain
every nerve to avoid abandoning convertibility.
46
According to Eichengreen (1989b3, the Bank of England's ability to ensure
convertibility was aided by cooperation with other central banks.
In addi-
tion. as mentioned above, belief based on past performance that England
attached highest priority to convertibility encouraged stabilizing private
capital movements in times of threat to convertibility, such as in 1890 and
1907.
47
According to Giovanninies (1989) regressions, the French and German central
banks adapted their domestic policies to external conditions, whereas the
British did not.
This can be interpreted as evidence for British management.
clevelandfed.org/research/workpaper/index.cfm
48~rossman'
s ( 19901 interpretation of the historical record, though emphasizing
different factors, accepts this view.
Thus, according to him, the ratio of
government debt to gross national product increased during major wartime
episodes in Britain and the U.S. from the mid-eighteenth century until after
World War I, reflecting intertemporal substitution. Such borrowing represented a temporary effort to shift resources from the future to the present.
Following each war, the ratio of debt to income would then be reduced by
contractionary fiscal policy accompanied by deflationary monetary policies
that maintained the real rate of return on outstanding bonds.
According
to Grossman, such a policy was an investment in the credibility capital of the
sovereign borrower
-- a reputation for responsible repayment of the principal
and for preservation of the real value of interest payments that enhanced the
probability of being able to borrow heavily again at favorable rates in the
event of a future war.
49
According to North and Weingast (19891, this process was complete by the
Glorious Revolution of 1688. After that date, capital markets developed in an
environment free of the risk of sovereign appropriation of capital.
clevelandfed.org/research/workpaper/index.cfm
50
An alternative and complementary explanation to that offered in this paper
relates to political economy considerations and the distribution of income.
The configuration of political interest groups in the nineteenth century was
favorable to the hard-money, pro-gold-standard-rule position.
This may have
been related to the more limited development of democracy and less-thanuniversal suffrage.
Thus, a comparison of the debates over .resumption in
England from 1797 to 1821 and in the U.S. from 1865 to 1878 suggests that the
more limited suffrage in England in the early period served as a brake on the
soft-money forces favoring permanent depreciation.
In the U.S., the soft-
money forces favoring redistribution of income to debtors and other groups
(such as Midwestern manufacturers) almost carried the day.
clevelandfed.org/research/workpaper/index.cfm
Table 1
The Financing of Wartime Expenditures in the
French Wars and World War I
A. French Wars
1793-1815 (G.B. )
B. World War I
1914-1918 (U.K. )'
Percent of total wartime
expenditures financed by:
Taxes
58
31.8
(2) Bonds
40.5
64.4
(3) High-powered money
1.5
(1)
3.8
a~artimeexpenditures are calculated as total government expenditures less
1903-1913 annual average of total government expenditures.
Sources by row:
(1 )
1793-1815: 0'Brien (1967) table 4; 1914-1918:
Mitchell and Deane (19621, pp. 392-395, 396-398.
(2) 1793-1815: O'Brien (1967) table 4; 1914-1918:
Mitchell and Deane (19621, ibid.
(3) 1793-1815: Mitchell and Deane (1962). pp. 441-443;
1914-1918: Capie and Webber (1985) table 1(1),
pp. 52-59.
clevelandfed.org/research/workpaper/index.cfm
Table 2
Ekpected and Actual Appreciation of the Greenback Dollar, 1869-1878
(1)
(2)
(3)
(4)
Average
Expected
Differential
Appreciation
Average Actual
Between Gold
(Current
Rate of
Appreciation
and
Differential Less
Greenbacks
Forecast
Greenbacks
Differential for
Appreciation
Error
to 1881$
(2)-(3)
Yieldt
July-December 1878)
January-June
July-December
January-June
July-December
January-June
July-December
January-June
July-December
January-June
July-December
January-June
July-December
January-June
July-December
January-June
July-December
January-June
July-December
January-June
July-December
1869
1869
1870
1870
1871
1871
1872
1872
1873
1873
1874
1874
1875
1875
1876
1876
1877
1877
1878
1878
$ The average of monthly exchange-rate closings for the period was used to
measure current gold price of greenbacks. The 6s of 1881 were redeemable
June 1, 1881.
Source: Calomiris ( 1988, table 51.
clevelandfed.org/research/workpaper/index.cfm
Table 3
Autocorrelations of Inflation (Wholesale Prices, Annual Data)
Sample
Period
Regime
Ljung-Box
&-Test
5%Critical V.
(Standard E.)
Lags
Autocorrelat ions
United Kingdom
1730 1796
De Facto
Gold
Q(18) = 16.79
C(18) = 28.87
(.I21
1-4
5-8
9-12
1797 1821
Paper
Pound
Q(12) = 15.21
C(12) = 21.03
(.2O)
1-4
5-8
9-12
1822 1913
Gold
Standard
Q(24) = 25.50
C(24) = 36.42
(.lo)
1-4
5-8
9-12
.04 -.01 -.I4 -.22
- 2 0 .O1 .13 .14
.17 .04 -.07 -.lo
1914 1931
Paper and
Gold
Exchange
Q(6) = 3.71
C(6) = 14.07
(.24)
1-3
4-6
.32
-.05
1730 1913
Mixed
Q(24) = 44.50
C(24) = 36.42
(.07)
1-4
5-8
9-12
.12 -.I5 -.24 -.I5
.10 .08 .04 .09
.07 -.05 -.02 .02
1730 1931
Mixed
Q(24) = 35.69
C(24) = 36.42
(.07
1-4
5-8
9-12
.20 -.05 -.I1 -.lo
.05 -.05 .OO .10
-09 -.02 -.07 -.03
-.02 -.59 -.I3 -.32
.ll -.05 .02 .09
.04 -.04 .12 .02
.26 -.37 -.41
.37 -.03 -.I2
.12 -.lo -.I9
.09
-.lo
.ll
.03
.08
.03
-.29
United States
Bimetallic
Q(24)= 34.69
C(24)= 36.42
(.24)
Greenback
Q(6) = 5.53
C(6)= 14.07
( .24
Gold
Standard
Q(12)= 3.75
C( 12) = 21.03
(.17)
Gold
Exchange
Q(6)= 3.76
C(6)= 14.07
(.22)
Mixed
Q(24) = 55.97
C(24) = 36.42
(.09)
clevelandfed.org/research/workpaper/index.cfm
Autocorrelations of Inflation (Wholesale Prices, Annual Data)
-
Sample
Period
Regime
Ijung-Box
Q-Test
5%Critical V.
(Standard E.)
Lags
Autocorrelations
1793 1933
Mixed
Q(24) = 50.12
C(24)= 36.42
(.09)
1-4
5-8
9-12
.25 .01 -.07 -.I1
-.08 -.I5 -.lo .ll
.13 .18 -.03 -.I1
1-4
5-8
9-12
.06 -.26 -.I7 .01
.21 .09 -.I3 -.06
.02 -.I2 .03 .19
France
Bimetallic
Suspension
Gold
Standard
Paper and
Gold
Exchange
Specie
Mixed
Italy
1861 1913
Mixed
Q(18)= 16.38
C(18)= 28.87
(.I41
Data Sources:
United Kingdom; Mitchell and Deane (1962).
United States; Jastrarn (1977).
France; Mitchell (1975).
Italy; Mitchell (1975).
clevelandfed.org/research/workpaper/index.cfm
clevelandfed.org/research/workpaper/index.cfm
clevelandfed.org/research/workpaper/index.cfm
clevelandfed.org/research/workpaper/index.cfm
Ti-
w
a3
7
clevelandfed.org/research/workpaper/index.cfm
clevelandfed.org/research/workpaper/index.cfm
Figure 6 Risk Premium, Lira-Franc Exchange Rate
(Italian government bond yield minus French 3% rentes, 1866-1912)
SOURCE: Fratianni and Spinelli (1984).
clevelandfed.org/research/workpaper/index.cfm
References
Alesina, A. and Drazen, A. (1989). "Why Are Stabilizations Delayed?" Mimeo
(September), Harvard University.
Bancroft, H.H. (1890). History of California. Vol. VII. San Francisco: The
History Company.
Barro, R.J. (1987). "Government Spending, Interest Rates, Prices, and Budget
Deficits in the United Kingdom, 1701-1918." Journal of Monetary Economics, 20,
pp. 221-248.
Barro, R.J. (1979). "On the Determination of the Public Debt." Journal of
Pol i tical Economy, 87, pp. 940-971.
Barro, R.J. and Gordon, D.B. (1983). "Rules, Discretion and Reputation in a
Model of Monetary Policy." Journal of Monetary Economics, 12, pp. 101-121.
Barsky, R.B. (1987). "The Fisher Hypothesis and the Forecastability and Persistence of Inflation." Journal of Monetary Economics, 19, No. 1 (January),
pp. 3-24.
Barsky, R.B. and Summers. L.H. (1988). "Gibson's Paradox and the Gold Standard. " Journal of Pol i tical Economy, 96, No. 3 (June), pp. 528-550.
Bloomfield, A. (1959). Monetary Pol icy Under the International Cold Standard,
1880-1914. New York: Federal Reserve Bank of New York.
Bordo, M. D. (19911. "The Bretton Woods International Monetary System: An
Historical Overview." Mimeo (September), Rutgers University.
Bordo, M.D. (1987a). "John Law" in The New Palgrave Dictionary of Economfcs.
London: Macmi 1 1an.
Bordo, M.D. (1987b). "Bimetallism" in The New Palgrave Dictionary of Economics. London: Macmi 1 lan.
Bordo, M.D. (1986). "Money, Deflation and Seigniorage: A Review Essay." Journal of Monetary Economics, 18, No. 3, pp. 337-346.
Bordo, H.D. (1984). "The Gold Standard: The Traditional Approach. " In M.D.
Bordo and A.J. Schwartz (eds.) A Retrospective on the Classical Cold Standard,
1821-1931. Chicago: University of Chicago Press.
Bordo, M.D. (1981). "The Classical Gold Sta~dard: Some Lessons for Today."
Federal Reserve Bank of St. Louis Review, 64, No. 5 (May), pp. 2-17.
Bordo, M.D. and Kydland, F.E. (1990). "The Gold Standard as a Rule. " NBER
Working Paper No. 3367, May.
Bordo, H.D. and White, E.N. (1991). "A Tale of Two Currencies: British and
French Finance During the Napoleonic Wars." Journal of Economic History, June.
clevelandfed.org/research/workpaper/index.cfm
Bordo, M.D. and White, E. (1990). "British and French Finance During the
Napoleonic Wars." NBER Working Paper No. 3517.
British Parliamentary Papers (1888). "Second and Final Reports From the Royal
Commission on the Recent Changes in the Relative Values of Precious Metals
with Minutes of Evidence, Appendices, and Index." Shannon, Ireland: Irish
University Press.
Brown, W.A. (1929). England and the New Cold Standard, 1919-1926. New Haven:
Yale University Press.
Calomiris, C.W. (1988). "Price and Exchange Rate Determinati.on During the
Greenback Suspension." Oxford Economic Papers, December.
Capie, F. and Webber, A. (1985). A Wonetary History of the United Kingdom,
1870-1982, Vol. 1, Data Sources and Wethods. London: George Allen and Unwin.
Chari, V.V. (1988). "Time Consistency and Optimal Policy Design." Quarterly
Review, Federal Reserve Bank of Minneapolis (Fall).
Chari, V.V. and Kehoe, P.J. (1990). "Sustainable Plans." Journal of Political
Economy, 98, pp. 783-802.
Chari, V.V. and Kehoe, P.J. (1989). "Sustainable Plans and Debt." Federal
Reserve Bank of Minneapolis Staff Report 125. '
Clapham, J. (1944). The Bank of England: A History, Vols. I and 11. Cambridge:
Cambridge University Press.
Cole, H.L. and Kehoe, P.J. (1991). "Reputation With Multiple Relationships:
Reviving Reputation Models of Debt." Federal Reserve Bank of Minneapolis Staff
Report 137.
Cooper, R. (1982). "The Gold Standard: Historical Facts and Future Prospects."
Brookings Papers on Economic Act ivi t y , I , pp. 1-45.
Crabbe, L. (1989). "The International Gold Standard and Monetary Policy in the
United States from the First World War to the New Deal." Mimeo, Board of
Governors of the Federal Reserve System.
Cukierman, A. (1988). "Rapid Inflation -- Deliberate Policy or Miscalculation." Carnegie-Rochester Conference Series on Pub1 ic Policy, 29, pp. 11-76.
Cunliffe Report (1918). First Interim Report of the Committee on Currency and
Foreign Exchanges After the War. Cmnd. 9182. Reprint, New York: Arno Press.
Eichengreen, B. (19911. Colden Fetters: The Gold Standard and the Great Depression, 1919-1939. Oxford Unlverslty Press (iorthcoming).
Eichengreen, B. (1989a). "Hegemonlc Stability Theories of the International
Monetary Systems." In R. Bryant (ed. Can Natjons Agree: Aspects of International Cooperation. Washington: Brookings Institution.
Eichengreen, B. (1989b). "The Gold Standard Since Alec Ford." Mimeo (April),
University of California at Berkeley.
clevelandfed.org/research/workpaper/index.cfm
Eichengreen, B. (19871. "Conducting the International Orchestra: Bank of
England Leadership Under the Classical Gold Standard." Journal of International Money and Finance, 6, pp. 5-29.
Eichengreen, B. (1985). "Editor's Introduction." In B. Eichengreen. The Gold
Standard in Theory and History. London: Methuen.
Feavearyear, A.
( 19631.
The Pound Sterlf ng. Oxford: Clarendon Press.
Fetter, F. (1965). Development of British Honetary Orthodoxy, 1797-1875.
Cambridge: Harvard University Press.
Fischer, S. (19801. "Dynamic Inconsistency, Cooperation, and the Benevolent
Dissembling Government." Journal of Economic Dynamics and Control, 2,
pp. 93-108.
Fishlow, A. (1989). "Conditionality and Willingness to Pay: Some Parallels
from the 1890s." In B. Eichengreen and P. Lindert (eds.) The International
Debt Crisis in Historical Perspective. Cambridge: MIT Press.
Fishlow, A. (19871. "Market Forces or Group Interests: Inconvertible Currency
in Pre-1914 Latin America." University of California at Berkeley.
Ford, A.G. (1962). The Cold Standard 1880-1914: Britain and Argentina. Oxford:
Clarendon Press.
Fratianni, M. and Spinelli, F. (1984). "Italy in the Gold Standard Period,
1861-1914." In M.D. Bordo and A. J. Schwartz (eds.1 A Retrospective on the
Classical Cold Standard, 1821-1931. Chicago: University of Chicago Press.
Friedman, M. (1990a). "The Crime of 1873." Journal of Political Economy, 98
(December). pp. 1159-1194.
Friedman, M. (1990b). "Bimetallism Revisited." Journal of Economic Perspectives, 4, No. 4, pp. 85-104.
Friedman, M. (1952). "Price, Income and Monetary Changes in Three Wartime
Periods." American Economic Review. May, pp. 612-625.
Friedman, M. and Schwartz, A.J. (1982). Honetary Trends in the United States
and the United Kingdom. Chicago: University of Chicago Press, British Parliamentary Papers (19881,Irish University Press.
Friedman, M. and Schwartz. A. J. (19631. A Honetary History of the United
States, 1867-1960. Princeton: Princeton University Press.
Gallarotti, G.M. (1991). "Centralized versus Decentralized International
Monetary Systems: The Lessons of the Classical Gold Standard." In James Dorn
(ed.) Alternatives to Government Flat Honey. Dorducchi: Kluwer.
Garber, P. (1986). "Nominal Contracts in a Bimetallic Standard." American
Economic Review, 76, pp. 1012-1030.
Carber, P. and Grilli, V. (1986). "The Belmont-Morgan Syndicate as an Optimal
Investment Banking Contract." European Economic Review, 30, pp. 649-677.
clevelandfed.org/research/workpaper/index.cfm
Gayer. A. D. , Rostow, W.W. , and Schwartz, A. J. (1953). The Growth and Fluctuations of the Bri ti sh Economy, 1790-1850. Oxford: Clarendon Press.
Giavazzi, F. and Giovannini, A.
Cambridge: MIT Press.
(1989). Limiting Exchange Rate Flexibility.
Giovannini, A. (1991). "Bretton Woods and its Precursors: Rules versus Discretion in the History of International Monetary Regimes. " Mimeo (October),
Columbia University.
Giovannini, A. ( 19891. "How Do Fixed Exchange-Rate Regimes Work: The Evidence
From the Gold Standard, Bretton Woods and the PIS." In M. Miller,
B. Eichengreen and R. Portes (eds.1 Blueprints for Exchange Rate Management.
London: Center for Economic Policy Research, pp. 13-46.
Giovannini, A. (1986). "'Rules of the Game' during the International Gold
Standard: England and Germany." Journal of International Money and Finance, 5,
pp. 467-483.
Glassman. D. and Redish, A. (1988). "Currency Depreciation in Early Modern
England and France." Explorations in Economic History, 25.
Goodfriend, M. (1989). "Money, Credit, Banking and Payments System Policy." In
D.B. Humphrey (ed.1 The U.S. Payments System: Efficiency, Risk, and the Role
of the Federal Reserve. Boston: Kluwer Academic.
Goodfriend, M. (1988). "Central Banking Under the Gold Standard." CarnegieRochester Conference Series on Public Policy, 19, pp. 85-124.
G i 1 i V. ( 19891. "Managing Exchange Rate Crises: Evidence from the 1890s."
NBER Working Paper No. 3068. August.
Grossman, H. (1990). "The Political Economy of War Debts and Inflation." In
U.S. Horaf and P. Cagan (eds.) Monetary Policy for a Changing Financial Environment. Washington, D.C. : American Enterprise Institute.
Grossman, H. I. and Van Huyck. J.B. (1988). "Sovereign Debt as a Contingent
Claim: Excusable Default, Repudiation, and Reputation." AoKrf can Economic
Review, 78, pp. 1088-1097.
Hayashi, F. (1989). "Japan's Saving Rate: New Data and Reflections." NBER
Working Paper No. 3205.
Hume, L.J. (1963). "The Gold Standard and Deflation: Issues and Attitudes in
the Nineteen Twenties. " Economi ca, 30, pp. 225-242.
Jastram, R. (1977). The Golden Constant: The English and American Experience,
1560-1976. New York: John Wiley & Sons.
Jonung. L. (1984). "Swedish Experience Under the Classical Gold Standard,
1873-1914." In M.D. Bordo and A.J. Schwartz (eds.1 A Retrospective on the
Classical Gold Standard, 1821-1931. Chicago: University of Chicago Press.
Keynes, J.M. (1925) (1972). "The Economic Consequences of Mr. Churchill." In
The Col lected Yri t ings of John Maynard Keynes, Vol . IX. Essays in Persuasion.
London: Macmi 1lan.
clevelandfed.org/research/workpaper/index.cfm
Keynes, J.M. (1913) (1971). Indian Currency and Finance, Vol. 1 of The Collected Writings of John Maynard Keynes. Reprinted in London: Macmillan and New
York: Cambridge University Press for the Royal Economic Society.
Kindleberger, C.P. (1984). A Financial History of Western Europe. London:
George Allen and Unwin.
Kindleberger, C.P. (1973). The World in Depression, 1929-1939. University of
California Press, Berkeley.
Klein, B. (1975). "Our New Monetary Standard: Measurement and Effects of Price
Uncertainty, 1880-1973." Economic Inquiry, 13, pp. 461-484.
Kydland, F.E. and Prescott, E.C. (1980a). "Dynamic Optimal Taxation, Rational
Expectations and Optimal Control." Journal of Economic Dynamics and Control,
2, pp. 79-91.
Kydland, F.E. and Prescott, E.C. (1980b). " A Competitive Theory of Fluctuations and the Feasibility and Desirability of Stabilization Policy. " In
S. Fischer (ed. Rational Expectations and Economic Policy. Chicago: University of Chicago Press for the National Bureau of Economic Research.
Kydland, F.E. and Prescott, E.C. (1977). "Rules Rather than Discretion: The
Inconsistency of Optimal Plans." Journal of Political Economy, 85,
pp. 473-491.
Lacroix, A. and Dupieux, P. (1973). Le Napoleon ou les drams de la monnaie
franqaise depuis deux mille ans. Paris: Les Presses de L' Imprimerie, TardyQuevey-Auvergne.
Laidler. D. (1987). "The Bullionist Controversy." In New Palgrave Dictionary
of Economics. London: Macmi 1 lan.
Lindert, P. (1969). Key Currencies and Gold, 1900-1913. Princeton Studies in
International Finance, No. 24. Princeton: Princeton University Press.
Lucas, R.E., Jr. and Stokey, N. L. (1983). "Optimal Fiscal and Monetary Policy
in an Economy Without Capital." Journal of Honetary Economics, 12, pp. 55-93.
McCallum, B.
Macmi 1 lan.
(1989). Wonetary
Economics:
Theory and
Policy.
New
York:
McGouldrick, P. (1984). "Operations of the German Central Bank and the Rules
of the Game, 1879-1913." In M.D. Bordo and A. J. Schwartz (eds.) A Retrospective on the Classical Gold Standard, 1821-1931. Chicago: University of Chicago
Press.
McKinnon, R. (1992). "Alternative International Monetary Systems: The Rules of
the Game Reconsidered." Journal of Economic Literature (forthcoming).
Meltzer, A.H. and Robinson, S. (19891. "Stability Under the Gold Standard in
Practice." In M.D. Bordo (ed. Honey, History and International Finance:
Essays in Honor of Anna J. Schwartz. Chicago: University of Chicago Press.
Mitchell, B.
Macmi llan.
( 1975).
European
Historical
Statistics,
1750-1970.
London:
clevelandfed.org/research/workpaper/index.cfm
Mitchell, B.R. and Deane, P. (1962). Abstract of British Historical Statistics. Cambridge: Cambridge University Press.
Mitchell, W.C. (1908). Cold, Prices and Wages Under the Greenbacks Starxhrd.
Berkeley: University of California Press.
Mitchell, W.C. (1903). A History of the Greenbacks. Chicago: University of
Chicago Press.
Moggridge, D. (1969). The Return to Cold, 1925: The Formulations of Economic
Policy and Its Critics. London: Cambridge University Press.
Murphy, A. ( 1987 1.
Clarendon Press.
Rf chard Cantf l lon: Entrepreneur and Economf st. Oxford:
Neal, L. (1991). "A Tale of Two Revolutions: The Effects of Capital Flows
1789-1815. " Bulletin of Economlc Research, 43, No. 1 (~anuary),pp. 57-92.
North, D. and Weingast, B. (1989). "Constitution and Commitment: Evolution of
Institutions Governing Public Choice." Journal of Economic History, XLIX,
No. 4 (December), pp. 803-837.
O'Brien, P. (1967). "Government Revenue 1793-1815: A Study in Fiscal and
Financial Policy in the Wars Against France." Unpublished D. Phil. Thesis,
Oxford University.
O'Leary, P.M. (1937). "The Coinage Legislation of 1834. " Journal of Political
Economy, 45, pp. 80-94.
Officer, L. (1986). "The Efficiency of the Dollar-Sterling Gold Standard,
1890-1908." Journal of Political Economy, 94 (October), pp. 1038-1073.
Officer, L. (1985). "Integration in the American Foreign Exchange Market,
1791-1900. " Journal of Economlc History, XLV, No. 3 (September), pp. 557-586.
Officer, L. (1983). "Dollar-Sterling Mint Parity and Exchange Rates, 17911834. " Journal of Economlc History, XLIII, No. 3 (September1 , pp. 579-616.
Pollard, S. (1970). (ed.) The Gold Standard and Employment Policies Between
the Wars. London: Methuen.
Prescott, E. (1977). "Should Control Theory Be Used for Economic Stabilization?" Carnegie-Rochester Conference Series on Public Policy, 7, pp. 13-38.
Presnell, L. (1982). "The Sterling System and Financial Crises Before 1914. "
In C. P. Kindleberger and J.P. Laffargue (eds.1 Financial Crises: Theory,
History and Policy. New York: Cambridge University Press.
Presnell, L. S. (1956). Country Banking in the Industrial Revolution. Oxford:
Clarendon Press.
Rae, G. (1885). The Country Banker. London.
Ramsey, F. (1927). "A Contribution to the Theory of Taxation." Economic Jour-
nal, 37, pp. 47-61.
clevelandfed.org/research/workpaper/index.cfm
Redish, A. (1990). "The Evolution of the Gold Standard in England." Journal of
Economic His tory (December), pp. 789-806.
Report from the Select Committee on the High Price of Bullion [1810]. 1978.
New York: Arno Press.
Ricardo, D. (1819). "Minutes of Evidence Taken Before the Secret Committee on
the Expediency of the Bank Resuming Cash Payments." March 4, 1819. Reprinted
in P. Sraffa (ed.) The Works and Correspondence of David Ricardo, Vol. 5:
Speeches, Evidence. Cambridge: Cambridge University Press, 1952.
Rockoff, H. (1984). "Some Evidence on the Real Price of Gold, Its Cost of
Production, and Comrnodity Prices." In M. D. Bordo and A. J. Schwartz (eds.) A
Retrospective on the Classical Cold Standard, 1821-1931. Chicago: University
of Chicago Press.
Roll. R. (1972). "Interest Rates and Price Expectations During the Civil War."
Journal of Economic History, XXXII.
Rolnick, A . J . and Wallace, N. (1984). "Suspension and the Financing of the
Civil War: A Critique of Newcomb and Mitchell." Federal Reserve Bank of Minneapolis Working Paper No. 265.
St. Marc, M. (1983). Histoire Pfonotaire de la France, 1800-1980. Paris: Presse
Universitaire de France.
Sayers, R.S. (1960). "The Return to Gold, 1925." In L.S. Presnell (ed.) Studies in the Industrial Revolution. London.
Schwartz, A. J . ( 1987). "Banking School. Currency School, Free Banking School."
In New Palgrave Dictionary of Economics. London: Macmillan.
Schwartz, A . J . (1986). "Real and Pseudo Financial Crises." In F. Capie and
(eds. Financial Crises and the World Banking System. London:
Macmi 1lan.
G.E. Wood
Schwartz. A. J. (1984). "Introduction." In M.D. Bordo and A . J. Schwartz (eds.)
A Retrospective on the Classical Gold Standard, 1821-1931. Chicago: University
of Chicago Press.
Sharkey, R. D.
( 19591.
Boney, Class, and Party. Baltimore: Johns Hopkins Press.
Smith, W.S. and Smith, R.T. (1990). "Stochastic Process Switching and the
Return to Gold." Economic Journal, 100 (March), pp. 164-175.
Ternin, P. (1989). Lessons from the Great Depression. Cambridge: M. I. T. Press.
Tonniolo, G. (1990). An Economic History of Liberal Italy: 1850-1918. New
York: Routledge.
Unger. I. (1964). The Greenback Era: A Social and Political History of American Finance, 1865-1879. Princeton, N.J.: Princeton University Press.
Viner, J. (1937). Studies in the Theory of International Trade. Chicago:
University of Chicago Press.
clevelandfed.org/research/workpaper/index.cfm
Walton, G. and Rockoff, H. (1989). History of the American Economy, Sixth
Edit ion. New York: Harcourt , Brace, and Jovanovich.
White, E. (1991). "French Reparations after
(July), Rutgers University.
the Napoleonic Wars."
Mimeo
Yeager, L. (1984). "The Image of the Gold Standard." In M.D. Bordo and A.J.
Schwartz (eds. 1 A Retrospective on the Classical Gold Standard, 1821-1931.
Chicago: University of Chicago Press.
Yeager, L. ( 1 9 7 6 ) . International Monetary Relations, Second Edition. New York:
Harper and Row.
clevelandfed.org/research/workpaper/index.cfm
@FedFRASER