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What was the link between thegold standard and the collapse of    world trade in the 1930s?           John Phelan
1 - Background – The pre-war gold            standardKey features• Convertibility between paper and gold at  fixed rate• F...
First World War• Convertibility suspended• Import and export prohibited• Combatants issue currency and debt to  fund war e...
Effects of the First World War• Gold flowed into US which held 1/3 of world  monetary gold at end of the war• Other combat...
2 – The scramble for reservesThree paths out of post war monetarydilemma• 1 Internal devaluation - shrink the amount  of c...
The scramble for reserves cont.• 3 Increase reserves. Can‟t increase gold but  by adding gold backed securities  (sterling...
3 - Problems with the gold           exchange standardExogenous• Price-specie flow mechanism adjusts misaligned  prices/ex...
3 - Problems with the gold      exchange standard – cont.Endogenous• Gold backed assets had to be (or thought  to be) „goo...
UK balance of payments, 1925 -            1931
4 - The Collapse of world trade• Countries used monetary and fiscal  policies to protect their reserves• Fiscal – Even hig...
4 - The Collapse of world trade                cont.• Eventually countries choose internal  balance over external balance ...
Was the gold standard to blame?• No, the gold exchange standard was –  inherent flaws• Political unwillingness/inability t...
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  1. 1. What was the link between thegold standard and the collapse of world trade in the 1930s? John Phelan
  2. 2. 1 - Background – The pre-war gold standardKey features• Convertibility between paper and gold at fixed rate• Free export and import of goldInternal and external convertibility
  3. 3. First World War• Convertibility suspended• Import and export prohibited• Combatants issue currency and debt to fund war efforts
  4. 4. Effects of the First World War• Gold flowed into US which held 1/3 of world monetary gold at end of the war• Other combatants faced with a problem; with an increased amount of money circulating relative to a country‟s gold stock the parity prices of gold were far below the market prices. This would lead to massive outflows of gold once convertibility was re-established• Price levels disturbed
  5. 5. 2 – The scramble for reservesThree paths out of post war monetarydilemma• 1 Internal devaluation - shrink the amount of currency relative to gold (Britain, 1925)• 2 External devaluation - accept the wartime inflation and set the new parity price at the market price (France, 1926)
  6. 6. The scramble for reserves cont.• 3 Increase reserves. Can‟t increase gold but by adding gold backed securities (sterling, dollar) to reserves the shortage of reserves vis-à-vis liabilities could be amelioratedThe gold exchange standard (Genoa, 1922)• “By late 1920s the share of foreign exchange in international reserves was at least 50% above pre war levels” (Eichengreen 1992)
  7. 7. 3 - Problems with the gold exchange standardExogenous• Price-specie flow mechanism adjusts misaligned prices/exchange rates via exports/imports of goods and capitalBoth were constricted in the interwar period• Capital did not move to offset trade movements but frequently amplified them – Some countries (U.S.) exported/lent goods and capital, others (Germany) imported/borrowed• Trade was impeded - Safeguarding of Industries Act, U.K. 1921 Fordney-McCumber Act, U.S. 1922
  8. 8. 3 - Problems with the gold exchange standard – cont.Endogenous• Gold backed assets had to be (or thought to be) „good as gold‟. As UK balance of payments worsened from 1928 this became increasingly doubtful• Countries with sterling securities (notably France) sought to swap them for gold, draining UK of reserves
  9. 9. UK balance of payments, 1925 - 1931
  10. 10. 4 - The Collapse of world trade• Countries used monetary and fiscal policies to protect their reserves• Fiscal – Even higher tariffs• Monetary – Higher interest rates
  11. 11. 4 - The Collapse of world trade cont.• Eventually countries choose internal balance over external balance and devalue – „Beggar thy neighbour‟ (?)• Countries which devalue resort less to protectionism (Eichengreen & Irwin 2009)
  12. 12. Was the gold standard to blame?• No, the gold exchange standard was – inherent flaws• Political unwillingness/inability to let gold standard mechanism work to rebalance financial system

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