Economy International after the Recovery
1. International Payments a. Debt and Reparations b. Investments 2. Gold Standard
1. International Payments (Debt/Reparations) Chain of debt that continued to grow Insisted on being paid in US dollars It was difficult to sell goods to the USA (see diagram of Financial Investments Lecture 1) if anything happened to break the flow then Germany and Allies would be in trouble In 1928 Wallstreet had a boom where this reduced foreign investment Once Wallstreet crashed, US foreign investment completely stopped Britain and France went to take the Gold Standard afterwards
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(Investment) Investment patterns had shifted (badly) British foreign investment was becoming stabilized internationally UK pattern of Foreign Investment (pre 1914) o UK foreign investment primarily producers o Recession in the UK lead to an increase in foreign investment in primary producing countries o Recession offset the exports into the UK o The UK had counter-cyclical investment (working against the economy to stabilize the country) o Problems in Britain's economy occurred even before 1914 USA pattern of Foreign Investment (post 1925) USA foreign investment primarily manufacturers Recession in the US lead to a fall in exports in primary producing countries There was no compensation increase in US investment to these countries (decline in exports in manufacturing countries) RESULT: a chain effect of investment, which enforced instability (pro-cyclical)
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Short Term Investment: post 1925
Long Term Investment: pre 1914
Gold Standard 1. All currencies were expressed in terms of gold (which is supposed to stay fixed) 2. Most currencies were convertible 3. Gold was exported/imported freely 4. Domestic money supply was linked to each countries gold reserves 2 SITUATIONS: 1. Balance of Payment Surplus more selling than they are buying - Increase in gold reserves and domestic money supply which leads to inflation and a decrease in interest rates - Increase in the price of our exports, fall in exports - Decrease in interest rates and in net foreign investment 2. Balance of Payment Deficit buying more than they are selling - Decrease in gold reserves and domestic money supply which leads to deflation and an increase in interest rates - Export prices are falling and an increase in exports - Increase in interest rates and in net foreign investment Problems with the Gold Standard (1920's) The Gold Standard in the 1920's was prone to crisis' It started to become very unstable along with the economy in many countries The Gold Standard did last for a few years but it didn't work that well
1. Shortage of gold and uneven distribution of existing stocks - Greater use of foreign exchange reserves - It was not a problem for the US when people demanded gold but it was for the UK because there gold reserves were declining 2. Reserves acquired through short term borrowing 3. 3 major financial centres (London, New York and Paris) - This complicated the international economy and "hot money" was started (money moving quickly) 4. New York became less efficient as an international financial centre
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These banks were heavily focused on US money and put less interest on the world's economy 5. Central banks adopted offsetting ("neutralizing") domestic monetary policies - Depending on the "balance of payment situation" each country was supposed to let each occurrence take place (not playing by the rules of the game) - In 1926 there was a strike against the UK government based on wages/unemployment being increased/decreased drastically - Inflation in the US economy fuelled the Wallstreet boom