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Stability without a pact? Lessons from the European gold standard, 1880—1914

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  • Marc Flandreau
  • Jacques Le Cacheux
  • Frédéric Zumer

Abstract

Summary Stability pactsEuropean lessons from the gold standardThe gold standard was a system of fixed exchange rates that offered little opportunity for carrying out monetary policies, short of suspending gold convertibility. Trade integration and capital mobility were very high. It is worthwhile asking whether there are useful lessons to draw for EMU from European experience during that period. One clear lesson is that debts matter. Another basic finding is that the stability of the European gold standard depended on the underlying price trend. Deflation prior to 1895 resulted in rising public debt burdens, which forced some countries to leave the system. Once gold was discovered and deflation gave way to inflation, real interest service fell, debts grew more slowly and a high degree of convergence allowed most countries to return to gold. For EMU, this result implies that stability will hinge on the ECB's policy not being too restrictive. Other lessons concern the fragility of institutions in the face of deep public finance difficulties, the risks for the single market of leaving out countries that have not fully converged, and the existence of a virtuous cycle including low real interest rates, fast growth and debt reduction— Marc Flandreau, Jacques Le Cacheux and Frédéric Zumer

Suggested Citation

  • Marc Flandreau & Jacques Le Cacheux & Frédéric Zumer, 1998. "Stability without a pact? Lessons from the European gold standard, 1880—1914," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 116-162.
  • Handle: RePEc:oup:ecpoli:v:13:y:1998:i:26:p:116-162.
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    File URL: http://hdl.handle.net/10.1111/1468-0327.00030
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    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913
    • N2 - Economic History - - Financial Markets and Institutions

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