Centre for Finance and Development

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

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

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

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

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

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

This work studies the operation of the international monetary system that prevailed before the emergence of the international gold standard. It shows that France's ability to trade gold for silver, and vice versa, effectively pegged the exchange rate between gold and silver at its legal ratio.

Caveat emptor : To those who forget the maxim, each new financial crisis brings an opportunity to relearn their lesson. The turmoil that swept Southeast Asian countries in the late 1990s is no exception: Once again, it has produced classic tales about late investors buying out of ignorance. According to some economists, rating agencies should take their share of the blame: They failed to provide appropriate signals to the market through early downgrades and then followed the market mood as it spiraled down. In self-defense, rating agencies emphasize that their grades are not (and have never been) meant to establish any kind of standard on which one could base investment decisions: The availability of formal ratings should not discourage investors from devoting time and effort to get their own opinion. Why look for someone to blame? It is after all in the nature of risk to bring its crop of regrets. At a deeper level, these recurrent complaints may be seen as illustrating the complexities of the economics of economic intelligence: The supply and demand of information are nested into an institutional setting from which they cannot be separated. This setting in turn provides incentives that contribute to more or less risk-taking on behalf of agents. For instance, the expectation of an eventual bailout by some public body (national or multilateral) reduces investors’ incentives to collect data and process it in original ways: Less attention is paid to discussing economic developments in borrowing countries, fewer analyses are supplied, and they are of lesser quality.

International audience

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

This chapter argues that the collapse of Overend Gurney and the ensuing crisis of 1866 was a turning point in British financial history. The achievement of relative stability was due to the Bank of England’s willingness to offer generous assistance to the market in a crisis, combined with an elaborate system for maintaining the quality of bills in the market. It suggests that the Bank bolstered the resilience of the money market by monitoring the leverage of money market participants and threatening exclusion from the discount window. When the Bank refused to bail out Overend Gurney in 1866 there was panic in the market. The Bank responded by lending freely and raising Bank rate to very high levels. The new policy helped to establish sterling as an international currency.

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

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

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

The original publication is available at http://dx.doi.org/10.1007/s11079-005-5872-4 © Springer

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

We evaluate the effect of the establishment of modern state institutions (e.g. a central bank or a constitution) on the risk premium associated with government debt traded abroad. Drawing on evidence from one of the most dramatic reform periods in modern history, and using data on sovereign debt traded in London between 1870 and 1914, we investigate the impact of major reforms on the yields of Japanese government debt following the Meiji Restoration. We show that, although the risk premium on Japanese debt declined during the period, the establishment of modern, western institutions did not elicit an immediate market response. The one institutional reform that significantly reduced the perceived risk associated with Japanese bonds was the adoption of the Gold Standard in 1897. In addition, political events such as the Anglo-Japanese treaty (1902) and the military victory over Russia (1905) improved Japan's debt capacity, and led to a substantial increase in the volume of Japanese debt. We conclude that, at least in the short run, well understood monetary rules as well as military achievements matter more for the perception of a country by foreign investors than modern state institutions, although we do not rule out the possibility that in the long run institutions do affect a country's credit rating.

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

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