Interest Rate Linkages Between the US and the UK During the Classical Gold Standard

One of the most critical and debated issues about the functioning of the classical gold standard is the issue of asymmetries in balance of payments adjustment. London is believed to be by several authors the ‘conductor of the international orchestra’ (Keynes, 1913, p. 19). This view implies a highly asymmetrically working system which tended to shift the burden of adjustment from the UK onto other countries. The alternative view is that the classical gold standard was a ‘decentralised multipolar system’, at least with reference to the balance of payments adjustment among industrial countries. In this paper we analyse causal relationships, impulse response functions and coherence between weekly US and UK 6‐month interest rates using data from the National Monetary Commission (1910) covering the period 1890–1907. The main conclusion is that London was more vulnerable particularly in the medium run to changes in US interest rates than vice versa, contradicting the ‘conductor of the orchestra view’. Comparing the result of the present study with those of Tullio and Wolters (1996), it seems that London was even more vulnerable to interest rate changes in New York than to changes in Paris and Berlin.