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Lecture 5 - EC 60 Lecture 18 The International Monetary...

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EC 60: Lecture 18 April 14, 2009 The International Monetary  System 1870-1973
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Other governments followed throughout the 19 th  century. 1717: United Kingdom at £1 to 113  grains  (7.32 g) of fine gold. 1818: Netherlands at 1  guilder  to 0.60561 g gold. 1834: United States  de facto  at 20.67 dollars to 1  troy oz  (31.1 g) gold  1854: Portugal at 1000  r é is  to 1.62585 g gold. 1871: Germany at 2790  Goldmarks  to 1 kg gold. 1871: Japan at 1  yen  to 1.5 g gold. 1873: Belgium, Italy, Switzerland, France at 31 francs to 9.0 g gold  1875: Denmark, Norway and Sweden) at 2480 kroner to 1 kg gold. 1876: France internally. 1876: Spain at 31  pesetas  to 9.0 g gold. 1878: Finland at 31  marks  to 9.0 g gold. 1881: Argentina at 1  peso  to 1.4516 g gold. 1893: Russia at 31  roubles  to 24.0 g gold. 1897: Japan at 1  yen  devalued to 0.75 g gold. 1898: India 1900: United States: The Gold Standard Act
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The problem with the gold standard In our previous example, England was  acquiring gold and expanding its money  supply France was losing gold and contracting its  money supply.
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France had two problems The Bank of France might worry about  running out of gold before balance of  payments is restored. The fall in the French money supply is  contractionary.  The French economy will  have to go through a slump in order to  reduce prices and restore  competitiveness.
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Worried about running out of gold? Bank of France can sell securities and buy  francs. The interest rate will rise in France and  attract foreign investment.
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But what about the slump in the  economy? The gold standard subordinates internal  balance to external balance. During the gold standard period,  economies went through booms and  busts, inflations and deflations in order to  keep the balance of payments balanced.
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Keynes grasped this  fundamental weakness in the  gold standard. Two historical examples England after the Napoleonic Wars United States after the America Civil War.
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Napoleonic Wars During the Napoleonic Wars, international trade  in gold was suspended. The English government financed some of its  war expenditures by printing money. England had suffered inflation. The price of gold had risen along with everything  else. In 1819 the English government restored  convertability of the pound to gold and allowed  gold to flow internationally.
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There was only one problem. The Bank of England resumed gold  purchases and sales at the pre-war parity.
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