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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

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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Bibliographic Info

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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Handle: RePEc:nbr:nberwo:6436

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  1. Bertola, G. & Cabarello, R.J., 1990. "Target Zones And Realignments," Discussion Papers 1990_51, Columbia University, Department of Economics.
  2. Buiter, W., 1988. "A Viable Gold Standard Requires Flexible Monetary And Fiscal Policy," Papers 306, London School of Economics - Centre for Labour Economics.
  3. Michael D. Bordo, 1981. "The classical gold standard: some lessons for today," Review, Federal Reserve Bank of St. Louis, issue May, pages 2-17.
  4. Townsend, Robert M., 1977. "The eventual failure of price fixing schemes," Journal of Economic Theory, Elsevier, vol. 14(1), pages 190-199, February.
  5. Michael D. Bordo, 1993. "The Bretton Woods International Monetary System: An Historical Overview," NBER Working Papers 4033, National Bureau of Economic Research, Inc.
  6. 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.
  7. Hugh Rockoff, 1984. "Some Evidence on the Real Price of Gold, Its Costs of Production, and Commodity Prices," NBER Chapters, in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 613-650 National Bureau of Economic Research, Inc.
  8. Bordo, Michael D & Eichengreen, Barry, 1997. "Implications of the Great Depression for the Development of the International Monetary System," CEPR Discussion Papers 1680, C.E.P.R. Discussion Papers.
  9. Redish, Angela, 1990. "The Evolution of the Gold Standard in England," The Journal of Economic History, Cambridge University Press, vol. 50(04), pages 789-805, December.
  10. Maurice Obstfeld, 1993. "The Adjustment Mechanism," NBER Working Papers 3943, National Bureau of Economic Research, Inc.
    • Maurice Obstfeld, 1993. "The Adjustment Mechanism," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 201-268 National Bureau of Economic Research, Inc.
  11. 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.
  12. repec:ucp:bknber:9780226065878 is not listed on IDEAS
  13. Mundell, Robert A, 1973. "The Monetary Consequences of Jacques Rueff: Review Article," The Journal of Business, University of Chicago Press, vol. 46(3), pages 384-95, July.
  14. Robert A. Mundell, 1983. "International Monetary Options," Cato Journal, Cato Journal, Cato Institute, vol. 3(1), pages 189-210, Spring.
  15. 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.
  16. 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.
  17. Peter M. Garber, 1993. "The Collapse of the Bretton Woods Fixed Exchange Rate System," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 461-494 National Bureau of Economic Research, Inc.
  18. J. M. Landell-Mills, 1989. "The Demand for International Reserves and Their Opportunity Cost," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 708-732, September.
  19. 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.
  20. Eichengreen, Barry & Flandreau, Marc, 1994. "The Geography of the Gold Standard," CEPR Discussion Papers 1050, C.E.P.R. Discussion Papers.
  21. Barry Eichengreen & Peter Temin, 1997. "The Gold Standard and the Great Depression," NBER Working Papers 6060, National Bureau of Economic Research, Inc.
  22. Salant, Stephen W, 1983. "The Vulnerability of Price Stabilization Schemes to Speculative Attack," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 1-38, February.
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  1. FDR knew that high wages are goodâ?¦ and we should too.
    by Stirling Newberry in firedoglake on 2008-11-26 21:29:13
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Cited by:
  1. Bergman, U. Michael & Bordo, Michael D. & Jonung, Lars, 1998. "Historical Evidence on Business Cycles: The International Experience," Working Paper Series in Economics and Finance 255, Stockholm School of Economics.
  2. 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.
  3. Bordo, Michael D. & Choudhri, Ehsan U. & Schwartz, Anna J., 2002. "Was Expansionary Monetary Policy Feasible during the Great Contraction? An Examination of the Gold Standard Constraint," Explorations in Economic History, Elsevier, vol. 39(1), pages 1-28, January.
  4. 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.
  5. Maurice Obstfeld & Alan M. Taylor, 2003. "Globalization and Capital Markets," NBER Chapters, in: Globalization in Historical Perspective, pages 121-188 National Bureau of Economic Research, Inc.
  6. Michael Bordo & Michael Edelstein, 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.

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