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

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  • Bordo, Michael D
  • Eichengreen, Barry

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:cpr:ceprdp:1680
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    Cited by:

    1. Barry Eichengreen., 1998. "International Economic Policy in the Wake of the Asian Crisis," Center for International and Development Economics Research (CIDER) Working Papers C98-102, University of California at Berkeley.
    2. Bordo, Michael D., 2012. "Could the United States have had a better central bank? An historical counterfactual speculation," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 597-607.
    3. Carlos Arteta & Barry Eichengreen & Charles Wyplosz, 2001. "When Does Capital Account Liberalization Help More than It Hurts?," NBER Working Papers 8414, National Bureau of Economic Research, Inc.
    4. Michael D. Bordo, 2016. "The Operation and Demise of the Bretton Woods System; 1958 to 1971," Economics Working Papers 16116, Hoover Institution, Stanford University.
    5. Barry Eichengreen, 2010. "Global Imbalances and the Lessons of Bretton Woods," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262514141, December.
    6. Michael D. Bordo & Marc Flandreau, 2003. "Core, Periphery, Exchange Rate Regimes, and Globalization," NBER Chapters, in: Globalization in Historical Perspective, pages 417-472, National Bureau of Economic Research, Inc.
    7. Bordo, Michael D. & Schwartz, Anna J., 1999. "Monetary policy regimes and economic performance: The historical record," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 3, pages 149-234, Elsevier.
    8. Barry Eichengreen & David Leblang, 2003. "Capital account liberalization and growth: was Mr. Mahathir right?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 205-224.
    9. Cohen, Joseph N & Linton, April, 2010. "The historical relationship between inflation and political rebellion, and what it might teach us about neoliberalism," MPRA Paper 22522, University Library of Munich, Germany.
    10. Pavel Trunin & Sergey Narkevich, 2013. "Prospects for the Russian Ruble to Become Regional Reserve Currency," Working Papers 118, Gaidar Institute for Economic Policy, revised 2015.
    11. Rockoff, Hugh & White, Eugene N., 2012. "Monetary Regimes and Policy on a Global Scale: The Oeuvre of Michael D. Bordo," MPRA Paper 49672, University Library of Munich, Germany, revised May 2013.
    12. Mr. Jonathan David Ostry & Mr. Jeromin Zettelmeyer, 2005. "Strengthening IMF Crisis Prevention," IMF Working Papers 2005/206, International Monetary Fund.
    13. Labrinidis, George, 2014. "International reserves in the era of quasi-world money," MPRA Paper 59963, University Library of Munich, Germany.
    14. 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.
    15. Narkevich, Siarhei & Trunin, Pavel, 2013. "Prospects for the Russian Ruble as a Regional Reserve Currency," Published Papers dok2, Russian Presidential Academy of National Economy and Public Administration.
    16. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.
    17. Mr. James M. Boughton, 2004. "The IMF and the force of History: Ten Events and Ten Ideas that Have Shaped the Institution," IMF Working Papers 2004/075, International Monetary Fund.
    18. repec:hal:spmain:info:hdl:2441/622 is not listed on IDEAS
    19. Michael D. Bordo & Barry Eichengreen, 1998. "The Rise and Fall of a Barbarous Relic: The Role of Gold in the International Monetary SYstem," NBER Working Papers 6436, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Exchange Rates; Great Depression; International Monetary System;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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