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Implications of the Great Depression for the Development of the International Monetary System

  • Bordo, Michael D
  • Eichengreen, Barry

In this paper we speculate about the evolution of the international monetary system in the last two-thirds of the twentieth century absent the Great Depression, but present the major post-Depression political and economic upheavals: World War II and the Cold War. We argue that without the Depression the gold-exchange standard of the 1920s would have persisted until the outbreak of World War II. It would have been suspended during the war and for a period of post-war reconstruction before being restored in the first-half of the 1950s. The Bretton Woods Conference would not have taken place, nor would a Bretton Woods System of pegged-but-adjustable exchange rates and restrictions on capital account convertibility have been established. Instead, an unreformed gold-exchange standard of pegged exchange rates and unlimited international capital mobility would have been restored after World War II. But this gold-exchange standard would have collapsed even earlier than was actually the case of Bretton Woods. The move towards floating exchange rates that followed would have taken place well before 1971 in our counterfactual. We construct a model of the international monetary system from 1928–71 and simulate its implications for the determination of the world price level and the durability of the hypothetical gold-exchange standard. We then examine, based on regressions for a 61-country panel, the implications for economic growth and resource allocation of allowing 1920s-style international capital mobility after World War II. Based on the implications of our model simulations and the capital controls regressions we contemplate the implications for institution building and international cooperation of the ‘no Great Depression’ scenario.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1680.

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Date of creation: Jul 1997
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Handle: RePEc:cpr:ceprdp:1680
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  1. Ben S. Bernanke, 1994. "The Macroeconomics of the Great Depression: A Comparative Approach," NBER Working Papers 4814, National Bureau of Economic Research, Inc.
  2. repec:cup:cbooks:9780521467292 is not listed on IDEAS
  3. Bordo, Michael D & Choudhri, Ehsan U & Schwartz, Anna J, 1995. "Could Stable Money Have Averted the Great Contraction?," Economic Inquiry, Western Economic Association International, vol. 33(3), pages 484-505, July.
  4. Polak, J.J., 1991. "The Changing Nature of IMF Conditionality," Princeton Studies in International Economics 184, International Economics Section, Departement of Economics Princeton University,.
  5. Barry Eichengreen., 1993. "International Monetary Arrangements for the 21st Century," Center for International and Development Economics Research (CIDER) Working Papers C93-021, University of California at Berkeley.
  6. Alesina, Alberto F & Grilli, Vittorio & Milesi-Ferretti, Gian Maria, 1993. "The Political Economy of Capital Controls," CEPR Discussion Papers 793, C.E.P.R. Discussion Papers.
  7. Michael D. Bordo, 1992. "The Bretton Woods International Monetary System: An Historical Overview," NBER Working Papers 4033, National Bureau of Economic Research, Inc.
  8. Obstfeld, Maurice, 1982. "Can We Sterilize? Theory and Evidence," American Economic Review, American Economic Association, vol. 72(2), pages 45-50, May.
  9. Vittorio Grilli & Gian-Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Working Papers 95/31, International Monetary Fund.
  10. 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.
  11. Choudhri, Ehsan U & Kochin, Levis A, 1980. "The Exchange Rate and the International Transmission of Business Cycle Disturbances: Some Evidence from the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 565-74, November.
  12. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-67, May/June.
  13. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, June.
  14. Kathryn M. Dominguez, 1992. "The Role of International Organizations in the Bretton Woods System," NBER Working Papers 3951, National Bureau of Economic Research, Inc.
  15. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  16. Rodrik, Dani, 1995. "Why is there Multilateral Lending?," CEPR Discussion Papers 1207, C.E.P.R. Discussion Papers.
  17. Eichengreen, Barry, 1995. "Central bank co-operation and exchange rate commitments: the classical and interwar gold standards compared," Financial History Review, Cambridge University Press, vol. 2(02), pages 99-117, October.
  18. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  19. Dani Rodrik, 1994. "Getting Interventions Right: How South Korea and Taiwan Grew Rich," NBER Working Papers 4964, National Bureau of Economic Research, Inc.
  20. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
  21. Bordo, Michael David & Ellson, Richard Wayne, 1985. "A model of the classical gold standard with depletion," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 109-120, July.
  22. Allan H. Meltzer, 1991. "U.S. policy in the Bretton Woods era," Review, Federal Reserve Bank of St. Louis, issue May, pages 54-83.
  23. Michael D. Bordo & Dominique Simard & Eugene White, 1994. "France and the Bretton Woods International Monetary System: 1960-1968," NBER Working Papers 4642, National Bureau of Economic Research, Inc.
  24. Field, Alexander J., 1984. "A New Interpretation of the Onset of the Great Depression," The Journal of Economic History, Cambridge University Press, vol. 44(02), pages 489-498, June.
  25. Jacques J. Polak, 1991. "The Changing Nature of IMF Conditionality," OECD Development Centre Working Papers 41, OECD Publishing.
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