International Macroeconomic Policy t& Under the Gold Standard. 1870-1914 Origins of the Gold Standard The gold standard had its origin in the use of gold coins as a medium of exchange, unit of account, and store of value The Resumption Act(1819)marks the first adoption of a true gold standard It simultaneously repealed long-standing restrictions on the export of gold coins and bullion from Britain The U.s. Gold Standard Act of 1900 institutionalized the dollar-gold link Copyright C 2003 Pearson Education, Inc Slide 18-11
Copyright © 2003 Pearson Education, Inc. Slide 18-11 International Macroeconomic Policy Under the Gold Standard, 1870-1914 ▪ Origins of the Gold Standard • The gold standard had its origin in the use of gold coins as a medium of exchange, unit of account, and store of value. • The Resumption Act (1819) marks the first adoption of a true gold standard. – It simultaneously repealed long-standing restrictions on the export of gold coins and bullion from Britain. • The U.S. Gold Standard Act of 1900 institutionalized the dollar-gold link
International Macroeconomic Policy t& Under the Gold Standard. 1870-1914 External Balance Under the gold Standard Central banks parity between their currency and golo Serve the official Their primary responsibility was to pres They adopted policies that pushed the nonreserve component of the financial account surplus(or deficit) into line with the total current plus capital account deficit(or surplus) A country is in balance of payments equilibrium when the sum of its current, capital, and nonreserve financial accounts equals zero Many governments took a laissez-faire attitude toward the current account Copyright C 2003 Pearson Education, Inc Slide 18-12
Copyright © 2003 Pearson Education, Inc. Slide 18-12 International Macroeconomic Policy Under the Gold Standard, 1870-1914 ▪ External Balance Under the Gold Standard • Central banks – Their primary responsibility was to preserve the official parity between their currency and gold. – They adopted policies that pushed the nonreserve component of the financial account surplus (or deficit) into line with the total current plus capital account deficit (or surplus). – A country is in balance of payments equilibrium when the sum of its current, capital, and nonreserve financial accounts equals zero. • Many governments took a laissez-faire attitude toward the current account
International Macroeconomic Policy t& Under the Gold Standard. 1870-1914 The Price-Specie-Flow Mechanism The most important powerful automatic mechanism that contributes to the simultaneous achievement of balance of payments equilibrium by all countries he flows of gold accompanying deficits and surpluses cause price changes that reduce current account imbalances and return all countries to external balance Copyright C 2003 Pearson Education, Inc Slide 18-13
Copyright © 2003 Pearson Education, Inc. Slide 18-13 International Macroeconomic Policy Under the Gold Standard, 1870-1914 ▪ The Price-Specie-Flow Mechanism • The most important powerful automatic mechanism that contributes to the simultaneous achievement of balance of payments equilibrium by all countries – The flows of gold accompanying deficits and surpluses cause price changes that reduce current account imbalances and return all countries to external balance
International Macroeconomic Policy t& Under the Gold Standard. 1870-1914 The Gold Standard Rules of the game: Myth and Reality The practices of selling(or buying) domestic assets in the face of a deficit(or surplus) The efficiency of the automatic adjustment processes inherent in the gold standard increased by these rules In practice, there was little incentive for countries with expanding gold reserves to follow these rules Countries often reversed the rules and sterilized gold flows Copyright C 2003 Pearson Education, Inc Slide 18-14
Copyright © 2003 Pearson Education, Inc. Slide 18-14 International Macroeconomic Policy Under the Gold Standard, 1870-1914 ▪ The Gold Standard “Rules of the Game”: Myth and Reality • The practices of selling (or buying) domestic assets in the face of a deficit (or surplus). – The efficiency of the automatic adjustment processes inherent in the gold standard increased by these rules. – In practice, there was little incentive for countries with expanding gold reserves to follow these rules. – Countries often reversed the rules and sterilized gold flows
International Macroeconomic Policy t& Under the Gold Standard. 1870-1914 Internal Balance Under the Gold standard The gold standard system's performance in maintaining internal balance was mixed Example: The U.S. unemployment rate averaged 6.8%0 between 1890 and 1913. but it averaged under 5.7% between 1946 and 1992 Copyright C 2003 Pearson Education, Inc Slide 18-15
Copyright © 2003 Pearson Education, Inc. Slide 18-15 ▪ Internal Balance Under the Gold Standard • The gold standard system’s performance in maintaining internal balance was mixed. – Example: The U.S. unemployment rate averaged 6.8% between 1890 and 1913, but it averaged under 5.7% between 1946 and 1992. International Macroeconomic Policy Under the Gold Standard, 1870-1914