Classical Gold Standard 1875-1914 For example, if the dollar is pegged to gold at U.S$30=1 ounce of gold, and the british pound is pegged to gold at e6=l ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents $30=￡6 $5=￡1 McGraw-Hilylrwoin 2-5 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 2-5 For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents: Classical Gold Standard: 1875-1914 $30 = £6 $5 = £1
Classical Gold Standard 1875-1914 o Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment e Misalignment of exchange rates and international imbalances of payment were automaticall corrected by the price-specie-flow mechanism McGraw-Hilylrwoin 2-6 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 2-6 Classical Gold Standard: 1875-1914 ⚫ Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment. ⚫ Misalignment of exchange rates and international imbalances of payment were automatically corrected by the price-specie-flow mechanism
Classical Gold Standard 1875-1914 There are shortcomings a The supply of newly minted gold is so restricted that the growth of world trade and investment can be hampered for the lack of sufficient monetary reserves Even if the world returned to a gold standard, any national government could abandon the standard McGraw-Hilylrwoin 2-7 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 2-7 Classical Gold Standard: 1875-1914 ⚫ There are shortcomings: ◼ The supply of newly minted gold is so restricted that the growth of world trade and investment can be hampered for the lack of sufficient monetary reserves. ◼ Even if the world returned to a gold standard, any national government could abandon the standard
Interwar Period: 1915-1944 o Exchange rates fluctuated as countries widely used"predatory''depreciations of their currencies as a means of gaining advantage in the world export market Attempts were made to restore the gold standard but participants lacked the le political will to follow the rules of the game o The result for international trade and investment was profoundly detrimental McGraw-Hilylrwoin 2-8 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 2-8 Interwar Period: 1915-1944 ⚫ Exchange rates fluctuated as countries widely used “predatory” depreciations of their currencies as a means of gaining advantage in the world export market. ⚫ Attempts were made to restore the gold standard, but participants lacked the political will to “follow the rules of the game”. ⚫ The result for international trade and investment was profoundly detrimental