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The Rise and Fall of a Barbarous Relic: The Role of Gold in the International Monetary SYstem

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Michael D. Bordo
Barry Eichengreen

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Abstract

In this paper we analyze the changing role of gold in the international monetary system, in particular the persistence of gold holdings by monetary authorities for 20 years following the breakdown of the Brettone Woods system system and the Second Amendment to the Articles of Agreement of the International Monetary Fund which severed the formal link to gold. We stress four points. First, the gold-exchange standard was a recent arrangement that emerged only around 1900 in response to a set of historically-specific factors which also help to account for it smooth operation. How long those factors would have continued to support it will never be known, due to a great war and then a great depression. Second, a system which relied on inelastically supplied precious metal and elastcially suppled foreign exchange to meet the the world economy's demand for reserves was intrinsically fragile, prone to confidence problems, and a transmission belt for policy mistakes. Third, network externalities, statutory restrictions and habit all contributed to the persistence of the practice of holding gold reserves. But the hold of even factors as powerful as these inevitably weakens with time and the effects of their erosion are reinforced by the rise of international capital mobility, which increases the ease of holding other forms of reserves, both unborrowed and borrowed, and by the shift to greater exchange-rate flexibility, which according to our results diminishes the demand for reserves in general. Fourth and finally, network externalities, in conjunction with central bankers' collective sense of responsibility for the stability of the price of what remains an important reserve asset, suggest that the same factors which have long held in place the practice of holding gold reserves, when they come unstuck, may become unstuck all at once.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6436.

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Date of creation: Mar 1998
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Publication status: Published as "Is There a Good Case for a New Bretton Woods International Monetary System?", American Economic Review, Vol. 85, no. 2 (1995): 317-322 .
Handle: RePEc:nbr:nberwo:6436

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Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Michael D. Bordo & Barry Eichengreen, 1997. "Implications of the Great Depression for the Development of the International Monetary System," NBER Working Papers 5883, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Michael D. Bordo & Anna J. Schwartz, 1997. "Monetary Policy Regimes and Economic Performance: The Historical Record," NBER Working Papers 6201, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Bordo Michael D. & Kydland Finn E., 1995. "The Gold Standard As a Rule: An Essay in Exploration," Explorations in Economic History, Elsevier, vol. 32(4), pages 423-464, October. [Downloadable!] (restricted)
  4. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-75, December. [Downloadable!] (restricted)
  5. Redish, A., 1988. "The Evolution Of Thr Gold Standard In England," UBC Departmental Archives 88-36, UBC Department of Economics.
  6. Bayoumi, Tamim & Eichengreen, Barry, 1995. "The Stability of the Gold Standard and the Evolution of the International Monetary System," CEPR Discussion Papers 1248, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Hugh Rockoff & Michael D. Bordo, 1996. "The Gold Standard as a "Good Housekeeping Seal of Approval"," Departmental Working Papers 199528, Rutgers University, Department of Economics. [Downloadable!]
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  8. Bertola, Giuseppe & Caballero, Ricardo J, 1992. "Target Zones and Realignments," American Economic Review, American Economic Association, vol. 82(3), pages 520-36, June. [Downloadable!] (restricted)
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  9. Eichengreen, Barry & Flandreau, Marc, 1994. "The Geography of the Gold Standard," CEPR Discussion Papers 1050, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Maurice Obstfeld, 1993. "The Adjustment Mechanism," NBER Working Papers 3943, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Buiter, Willem H, 1989. "A Viable Gold Standard Requires Flexible Monetary and Fiscal Policy," Review of Economic Studies, Blackwell Publishing, vol. 56(1), pages 101-17, January. [Downloadable!] (restricted)
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  12. Townsend, Robert M., 1977. "The eventual failure of price fixing schemes," Journal of Economic Theory, Elsevier, vol. 14(1), pages 190-199, February. [Downloadable!] (restricted)
  13. Michael D. Bordo, 1981. "The classical gold standard: some lessons for today," Review, Federal Reserve Bank of St. Louis, issue May, pages 2-17. [Downloadable!]
  14. Michael D. Bordo, 1993. "The Bretton Woods International Monetary System: An Historical Overview," NBER Working Papers 4033, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. U. Michael Bergman & Michael D. Bordo & Lars Jonung, 1998. "Historical evidence on business cycles: the international experience," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, issue Jun, pages 65-119. [Downloadable!]
    Other versions:
  2. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. António Portugal Duarte & João Sousa Andrade, 2005. "How the gold standard functioned in Portugal: an analysis of some macroeconomic aspects," Method and Hist of Econ Thought 0505002, EconWPA. [Downloadable!]
  4. Michael D. Bordo & Ehsan U. Choudhri & Anna J. Schwartz, 1999. "Was Expansionary Monetary Policy Feasible During the Great Contraction? An Examination of the Gold Standard Constraint," NBER Working Papers 7125, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Michael Bordo & Michael Edelstein & Hugh Rockoff, 1999. "Was Adherence to the Gold Standard a "Good Housekeeping Seal of Approval" During the Interwar Period?," NBER Working Papers 7186, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Fernando Aportela & Francisco Gallego & Pablo García, 2003. "Reserves Over the Transitions to Floating and to Inflation Targeting: Lessons From the Developed World," Working Papers Central Bank of Chile 211, Central Bank of Chile. [Downloadable!]
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