Chapter 18
The International Monetary System, 1870–1973
? Chapter Organization
Macroeconomic Policy Goals in an Open Economy
Internal Balance: Full Employment and Price-Level Stability External Balance: The Optimal Level of the Current Account
International Macroeconomic Policy under the Gold Standard, 1870–1914 Origins of the Gold Standard
External Balance under the Gold Standard The Price-Specie-Flow Mechanism
The Gold Standard “Rules of the Game”: Myth and Reality Box: Hume v. the Mercantilists
Internal Balance under the Gold Standard
Case Study: The Political Economy of Exchange Rate Regimes:
Conflict over America’s Monetary Standard During the 1890s The Interwar Years, 1918–1939 The Fleeting Return to Gold
International Economic Disintegration
Case Study: The International Gold Standard and the Great Depression The Bretton Woods System and the International Monetary Fund Goals and Structure of the IMF
Convertibility and the Expansion of Private Capital Flows Speculative Capital Flows and Crises
Analyzing Policy Options under the Bretton Woods System Maintaining Internal Balance Maintaining External Balance
Expenditure-Changing and Expenditure-Switching Policies The External-Balance Problem of the United States
Case Study: The Decline and Fall of the Bretton Woods System
Worldwide Inflation and the Transition to Floating Rates Summary
? Chapter Overview
This is the first of five international monetary policy chapters. These chapters
complement the preceding theory chapters in several ways. They provide the historical and institutional background students require to place their theoretical knowledge in a useful context. The chapters also allow students, through study of historical and current events, to sharpen their grasp of the theoretical models and to develop the intuition those models can provide. (Application of the theory to events of current interest will hopefully motivate students to return to earlier chapters and master points that may have been missed on the first pass.)
Chapter 18 chronicles the evolution of the international monetary system from the gold standard of
1870–1914, through the interwar years, and up to and including the post-World War II Bretton Woods regime that ended in March 1973. The central focus of the chapter is the manner in which each system addressed, or failed to address, the requirements of internal and external balance for its participants.
A country is in internal balance when its resources are fully employed and there is price level stability. External balance implies an optimal time path of the current account subject to its being balanced over the long run. Other factors have been important in the definition of external balance at various times, and these are discussed in the text. The basic definition of external balance as an appropriate
current-account level, however, seems to capture a goal that most policy-makers share regardless of the particular circumstances.
The price-specie-flow mechanism described by David Hume shows how the gold standard could ensure convergence to external balance. You may want to present the following model of the price-specie-flow mechanism. This model is based upon three equations: 1. The balance sheet of the central bank. At the most simple level, this is just
gold holdings equals the money supply: G ? M. 2. The quantity theory. With velocity and output assumed constant and both
normalized to 1, this yields the simple equation M ? P. 3. A balance of payments equation where the current account is a function of the
real exchange rate and there are no private capital flows: CA ? f(E ? P*/P) These equations can be combined in a figure like the one below. The 45? line
represents the quantity theory, and the vertical line is the price level where the real exchange rate results in a balanced current account. The economy moves along the 45? line back towards the equilibrium Point 0 whenever it is out of equilibrium. For example, the loss of four-fifths of a country’s gold would put that country at Point a with lower prices and a lower money supply. The resulting real exchange rate depreciation causes a current account surplus which restores money balances as the country proceeds up the 45? line from a to 0.
Figure
The automatic adjustment process described by the price-specie-flow mechanism is expedited by following “rules of the game” under which governments contract the domestic source components of
their monetary bases when gold reserves are falling (corresponding to a current-account deficit) and expand when gold reserves are rising (the surplus case).
In practice, there was little incentive for countries with expanding gold reserves to follow the “rules of the game.” This increased the contractionary burden shouldered by countries with persistent current account deficits. The gold standard also subjugated internal balance to the demands of external balance. Research suggests price-level stability and high employment were attained less consistently under the gold standard than in the post-1945 period.
The interwar years were marked by severe economic instability. The monetization of war debt and of reparation payments led to episodes of hyperinflation in Europe. An ill-fated attempt to return to the
pre-war gold parity for the pound led to stagnation in Britain. Competitive
devaluations and protectionism were pursued in a futile effort to stimulate domestic economic growth during the Great Depression.
These beggar-thy-neighbor policies provoked foreign retaliation and led to the disintegration of the world economy. As one of the case studies shows, strict
adherence to the Gold Standard appears to have hurt many countries during the Great Depression.
Determined to avoid repeating the mistakes of the interwar years, Allied economic policy-makers met
at Bretton Woods in 1944 to forge a new international monetary system for the postwar world. The exchange-rate regime that emerged from this conference had at its center the . dollar. All other currencies had fixed exchange rates against the dollar, which itself had a fixed value in terms of gold.
An International Monetary Fund was set up to oversee the system and facilitate its functioning by lending to countries with temporary balance of payments problems. A formal discussion of internal and external balance introduces the concepts of expenditure-switching and expenditure-changing policies. The Bretton Woods system, with its emphasis on infrequent adjustment
of fixed parities, restricted the use of expenditure-switching policies. Increases in U.S. monetary growth to finance fiscal expenditures after the mid-1960s led to a loss of confidence in the dollar and the termination of the dollar’s convertibility into gold. The analysis presented in the text demonstrates
how the Bretton Woods system forced countries to “import” inflation from the United States and shows that the breakdown of the system occurred when countries were no longer willing to accept this burden.
克鲁格曼《国际经济学》第八版课后答案
