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Class 17 - Why the gold standard mattered World is anarchic...

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Why the gold standard mattered World is anarchic commitment problem But states need to borrow money from international sources (individual investors (bonds), banks (loans) Problem: states can always default No enforcement mechanism Uncertainty – lack of information Foreign lenders hate 3 things Default; deadbeat doesn’t pay you back Inflation: real value of debt decreases Falling currency; value of debt decreases Being on gold showed a commitment to economic openness and discipline Can’t let wages rise (inflation control) Can’t devalue to reduce debt (exchange rate pegged to gold) Foreign lenders would make loans to countries on gold Gold standard was credible signal Because of gold standard… States and entrepreneurs could access loans from international markets Then: cost of credit (interest rates) dropped due to bigger markets, more competition Fast-forward to present: membership of Euro similar effect on Greece/Italy (falling interest rates) State intervention in trade policy was limited Then: states couldn’t affect exchange/interest rates Now: Euro states can’t devalue/interest rate set by ECB Trade increased It wasn’t’ all good, however… Many did not benefit Workers (wages didn’t rise); farmers (prices falling) People in colonies (Congo) Economic dislocation increased Farmers were pushed off land and moved to cities Real problem was still to come: When governments ahd to pay off debts Fast-forward to present: similar situation (indebted gov’t in West facing low growth) End of Gold Standard and Future Problem Classical gold standard folded after 1913: Europeans sent all their gold to US to buy stuff to kill other Europeans with (reserves depleted) Remember; gold standard involves convertibility No gold = nothing to convert claims to
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