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

  • Michael D. Bordo
  • Barry Eichengreen

In this paper we speculate about the evolution of the international monetary system in the last 2/3 of the 20th century absent the Great Depression but present the major post-Depression political and economic upheavals: WWII and 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 WWI. It would have been suspended during the war and for a period of postwar reconstruction before being restored in the first half of the 1950s. The Bretton Woods Conference would not have taken place, and instead of a Bretton Woods System of pegged-but-adjustable exchange rates and restrictions on capital-account convertibility, an unreformed gold-exchange standard of pegged exchange rates and unlimited international capital mobility would have been restored. But this gold-exchange standard would have collapsed even earlier than actually was the case with Bretton Woods. The move toward floating exchange rates that followed would have taken place well before 1971 in our conterfactual We construct a model of the international monetary system from 1928-1971 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 simula- tions and the capital controls regression we contemplate the implications for institution building and international cooperation of the `no Great Depression' scenario.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5883.

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Date of creation: Jan 1997
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Publication status: published as The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Bordo, Michael D., Claudia Goldin, and Eugene N. White,eds., Chicago: The University of Chicago Press, 1998, pp. 403-453.
Handle: RePEc:nbr:nberwo:5883
Note: DAE IFM ME
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  1. 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.
  2. Kathryn M. Dominguez, 1992. "The Role of International Organizations in the Bretton Woods System," NBER Working Papers 3951, National Bureau of Economic Research, Inc.
  3. Alberto Alesina & Vittorio Grilli & Gian Maria Milesi-Ferrett, 1993. "The Political Economy of Capital Controls," NBER Working Papers 4353, National Bureau of Economic Research, Inc.
  4. Vittorio Grilli & Gian-Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Working Papers 95/31, International Monetary Fund.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
  11. Obstfeld, Maurice, 1982. "Can We Sterilize? Theory and Evidence," American Economic Review, American Economic Association, vol. 72(2), pages 45-50, May.
  12. 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.
  13. 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.
  14. 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.
  15. Dani Rodrik, 1994. "Getting Interventions Right: How South Korea and Taiwan Grew Rich," NBER Working Papers 4964, National Bureau of Economic Research, Inc.
  16. Dani Rodrik, 1995. "Why is there Multilateral Lending?," NBER Working Papers 5160, National Bureau of Economic Research, Inc.
  17. Ben S. Bernanke, 1994. "The Macroeconomics of the Great Depression: A Comparative Approach," NBER Working Papers 4814, National Bureau of Economic Research, Inc.
  18. Michael D. Bordo, 1993. "The Bretton Woods International Monetary System: A Historical Overview," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 3-108 National Bureau of Economic Research, Inc.
  19. Allan H. Meltzer, 1991. "U.S. policy in the Bretton Woods era," Review, Federal Reserve Bank of St. Louis, issue May, pages 54-83.
  20. Jacques J. Polak, 1991. "The Changing Nature of IMF Conditionality," OECD Development Centre Working Papers 41, OECD Publishing.
  21. 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.
  22. Polak, J.J., 1991. "The Changing Nature of IMF Conditionality," Princeton Studies in International Economics 184, International Economics Section, Departement of Economics Princeton University,.
  23. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, June.
  24. repec:cup:cbooks:9780521467292 is not listed on IDEAS
  25. 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.
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