12 Pax Britannica - Gold Standard PDF

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Prof: Brawley...

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POLI 354 Pax Britannica: The Gold Standard 

02/05/2014

Pax Britannica – Realism thinking Britain’s central economic role has something to do

with it. Focus on 2-3 themes to talk about the origins of the gold standard and focus on Britain as being an example and maybe promoter of the gold standard. Mercantilism emphasized balance of payments.  I. Changes in the Monetary Regime a. Monetary regime supports the other regimes i. Monetary regimes may be the most important area ii. For other actors to be successful the monetary regime is typically very important iii. You need a certain set of rules about how cash flows over borders – if you don’t have these rules int’l monetary regime will be impeded iv. Monetary regime as the base on how the other regimes will be constructed and how successful they will be v. Free trade regime in 1860s and a flood of goods in markets in 1870s –big expansion in the volume of trade – ask about the monetary regime and how they handled this 1. You need to be paying for these goods in some way or another b. Trade was expanding after 1840s c. How did they make international payments? i. Point to characteristics in the monetary regime that supported movements of capital d. Gold served as the medium of exchange i. Gold supposed to be medium of exchange btw states & how they manage payments ii. Understand how gold served this purpose and why in the 1840s this is possible II. Origins of the gold standard a. Ideological roots in Classical Liberalism b. Gold standard was: i. “Market Solution” 1. Balance of payments method let the market sort itself out ii. “Self-equilibrating” 1. Because transactions and balance of payments occurring through markets, states will be pressured to change 2. Market pressures will drive actors to the right policy outcome

a. Let the markets take their course b. Supply and demand will dictate itself and so states wont have to make conscious policy decisions to manage their economies iii. A “Corrective mechanism” 1. The markets will correct themselves when there are problems a. Supply and demand will tend towards a point of economic equilibrium c. Central banks play the leading role i. Britain passes domestic legislation in favor of these liberal ideas 1. Other states will follow suit 2. Members of this regime will be beyond the gold standard if they pass their own similar legislation a. There are no central treaties in this regime b. States will either adhere to the norms or not III. Hume’s Price-Specie Flow Mechanism a. Basic way that liberals understood how gold can serve as a medium of exchange and how balance of payments were adjusted i. Gold coming into play as a means of payment internationally 1. Creditor States: The market will put pressure on the states to get rid of their surplus 2. Debtor states: will do the same with the same, yet hand in their paper money (money supply goes down), which means there is deflation, which means that foreigners will invest in your products (they’re cheaper), and you will sell more to drive back to equilibrium b. Change in the Balance of Payments  Gold Flow  Change in the Money Supply  Price Change  Economic competitiveness  Trade flow  Change in Balance of Payments IV. Characteristics of the Gold Standard Liberals Loved a. Symmetrical b. No political discretion c. Open i. Goods allowed to flow freely ii. Anyone can participate d. Market Based i. Emphasized international and domestic markets ii. Let markets determine the state of affairs

e. Bit it required politics to be put in place… V. Britain and the Gold Standard a. Bank Act of 1844 i. Bank of England is a private institution 1. It is also a mercantilist institution a. Created in the 1690s because the government of England was in debt b. Bank received a set of privileges if it would take over the government debt i. Every 20 years, it has to get its privileges reconvened, so it must assume more debt ii. It is very healthy compared to other banks in Britain 1. A number of small banks were created in the 1800s and issued paper money ii. Paper money is considered legal tender 1. It is only valued if the money is backed by gold a. Therefore, showing up at the bank with pound notes will then entitle the holder equivalent gold b. When others followed suit, get regime i. Many states wanted to copy the British, therefore the British sent people out to teach others how to perform central banking 1. Towards the 1870s, most of the major economic players followed a similar set of rules (the gold standard) a. Provided many opportunities for free trade and international investment c. Fixing exchange rates i. £ = gold 1. There is a fixed ratio for money to gold 2. So if $ = gold, then £ = gold = $, thus £ = $ d. “gold points” allowed for very minor fluctuation i. There are allowances for costs of transportation and insurance 1. When those prices change, there will be some fluctuation in the exchange rates 2. Then, because of the fixed exchange rates, why would people ship and sell gold, why not buy and sell currency at a fixed exchange rate

a. Straightforward exchange in terms of money should therefore be undertaken, and will be undertaken VI. The Regime’s Characteristics a. Gold as the chief reserve asset i. Inside banks, equal money backed by gold ii. Domestic legislation 1. Making a commitment to yourself iii. Handle this through your central bank b. Fixed exchange rates i. Committing that currencies will stay stable against each other, but there is no treaty for this 1. Domestic legislation dictates that states will be on the gold standard 2. States not committed to each other, therefore they can break this by changing their domestic legislation c. Open capital flows i. States can now take gold and silver out of their countries 1. Many people will begin to move money around for investments 2. Affect int’l investments, making it easier to move from country to country d. Impact i. Reduced uncertainty 1. Fixed exchange rates, so international investment carries less risk a. Those who engage in trade now have no fear of fluctuating exchange rates ii. Stimulated trade and investment 1. Trade will begin to boom because of the openness of markets e. Potential problems i. Confidence vs. liquidity 1. Confidence: will the currency hold value over time? 2. Liquidity: ease with which people can handle and procure money 3. Gold standard strikes a balance between how banks are supposed to be managed a. These two provisos have an internal tension between confidence and liquidity i. Confidence requires less currency

ii. Liquidity requires more currency ii. Where did liquidity come from? 1. States will only issue money if they have gold to back them in their central banks a. States would find more gold at times b. States can no longer increase liquidity in this arrangement because they cant increase money supply iii. So we have reasons to ask questions…

02/05/2014 

02/05/2014 ...