Download Fetters of gold and paper

Fetters of gold and paper
(Eichengreen and Temin, 2010)
 2008-2009: avoided catastrophe like the Great
Depression
 aggressive use of monetary and fiscal stimuli
 Great Depression resulted from the “prevalence of
fixed exchange rates”
 fixed exchange rates work in good times but intensify
problems when times are bad
 Gold standard: seen as normal basis for international
monetary affairs
 Euro: “a process of European integration with roots
stretching back well before the Second World War that
came into full flower in the fertile seedbed that was the
second half of the twentieth century”
The Interwar Gold Standard
 Free flow of gold between individuals, countries
 Maintenance of fixed values of national currency in
terms of gold and therefore each other
 No penalty for accumulating gold
 Penalty for running out of reserves
 Deflation, not devaluation, the adjustment mechanism
“Tight monetary and fiscal policies of the late 1920s that
induced investment to fall were due to the adherence of
policy-makers to the ideology of the gold standard”
 During the 1930s, the gold standard had to be “maintained”
— believed to be “prerequisite for prosperity”
Distributional Conflict and Tenuous Resolution
 Germany: Hyperinflation …Dawes Loan
 Agent-General for Reparations Payments
Don’t raise taxes lest reparations could be paid
 France: Inflation – Political Gridlock – Poincarè
Stabilization …Taxes and Undervaluation
 UK: Deflation – Return to Gold – General Strike …
“Labor participated in the war effort and now had to
be recompensed.”
 1931: Gold Standard Abandoned...but not mindset
World gold reserves
•Total gold reserves
rose from 1927 to 1935
•US gold reserves
jumped dramatically
after 1933
•France’s gold reserves
rose then declined
•UK and Germany had
little reserves,
Germany’s vanished in
1931
The Great Depression
 Economic policies did not alleviate the
Depression; they worked to intensify it
 They were formulated to preserve gold, not
to stabilize output and employment
 Central banks stood ready to withstand
financial panics but no to preserve output or
employment
The euro
 Eliminated national currency
 In theory, could reintroduce a national currency
 Would have to convert all financial assets and liabilities of
residents
 People would get their money out of the country in advance 
‘the mother of all financial crises’
 Adopting the euro: an absolute commitment
 Countries could leave the gold standard, but countries cannot temporarily
abandon the euro in times of crisis
 The Maastricht Treaty avoided mention of member state reintroducing their own
currencies
 The euro area “talked the talk, but did not walk the walk, of international
cooperation
 Awareness of need for adjustment policies when
countries had chronic surplus and chronic deficit
 Talk the talk… walk the walk
 Lack of emergency financing facility
 Austria and Greece
 BIS…EFSF…IMF
Towards symmetry
 Germany (post-WWI), Greece, and the US lived
beyond their means running budget and currentaccount deficits financed by borrowing
 Pegged exchange rate eliminated currency risk
encouraged finance to flow from capital-abundant
economies to capital-scarce economies
 Capital flow bonanza followed by sudden stop
 Solution: countries on the receiving end need to
exercise more restraint, eliminate excessive
deficits…but deflation (internal devaluation)
heightens debt burden
 Surplus countries need to expand demand
“The point is that an exchange-rate system is a
system, in which countries on both sides of the
exchange-rate relationship have a responsibility
for contributing to its stability and smooth
operation”
“Cannot realistically assign all responsibility
for adjustment to the deficit countries.”
Keynes: “wanted taxes and sanctions on chronic
surplus countries in the clearing union proposal
that he developed during the Second World War.
Sixty-plus years later, we seems to have
forgotten his point”