Econ History Eichengreen

7/29/2019 Econ History Eichengreen

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Notes for Domitrovic-april 9

Gold Standard-NPR_a little inelegant in Marxist view-great contraction. Large amount of gold

change things-similar to quantitative easing. Fdr abolished gold standard but of course it came

back around 1972.

Marxist theory of great depression-captialism inherently developsinto crisis-main thought point.

Capitalism inevitably profits diminish to zero-working class overtake system. Reversion to

garden of enden one fof the foundational ideas-workers are exploited. Workers are made up of

more work then make. Incentive to have less profit-because capturae all the profit encourages

new entrants and finally it trends to 0.

Keynesian-inherently a gap of ability to economy sell things it is producing. So government

needs to do monetary policy. Economy great at providing supply, but not at keeping up with

demand. Grew as an offshoot from Marxist theory. All this is pfor production=then its going to

suddenly fall down after having all this superproduction. Marx talked abot productivity-

exponential curve-lving standards, population growth. Hit maximal point-where have enough

stuff (saturation)-mininmu point-leisure. Marx or own writings.

Overproduction argument-kenesian one of great depression-overspeculation-even be a concept of

such a thing. He was a british economist coming up with this theory for americans-a surprising

theory. Aggregate output under IR-interested in human beings. Quantity and variety-plateeaud in

production-no greater rate to amass population. Appear to be limit to foodstuffs consume.


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Agricultural goods-consumption preferences-keynesian born-certain production and habits.

Ability of economy increases at greater rate then preferences. What if economy

Likelihood for economy to match what people demand is only so much. Disproportionate in

producing goods and what people want from goods. Premise-that americans built british ideal-

but applied to u.s. consumer ideals. Produce goods outstrips peoples capacity to want/need

goods. Then people dont want all this and hence, massive layoffs. All false-no bearing.

Malthus-great famine coming. Ability of earth to sustain habitation-mch less than ability to

produce itslf-mortality and natality. 2 cheeks-either die or not born. Must be a geometric growth

rate of human population with linear production of food. Lifespans should increase-malthu

working-india, china, etc. population incrased to 20 fold since IR, and living standards have

increased as well. Problem can be solved. Seen since the 19230s onwoard that there has been

flucutations-especially with output-and culture has own notes and doesnt vary with economics.

Recovery of 30s-for restarting of gold standard.

Keynesian and WWII

I. Responses to the great contractionII. New IL orderIII. To Bretton woodsWhy called great contraction-timberlake-great contraction vs. great depression. Timberlake

says to use both terms and not interchangeable-dont just use great depression. The grea

contraction started with the first 25% drop in real output, whereas the great depression was

part of that and extended up until 1941. Started from lowest conceivable base-never had been

drop by order of 4 magnitudes. Supposedly greatest 4 year growth.


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Up until 1940 contraction starting point-great depression broader spectrum. Necessarily true-

didnt save great depression (new deal didnt)-hit hard.

1933-fdr comes-continues cases gold-raises gold price-to 1934-price-which is now $35 ano

ounce. Stock market is nil. DOJ-lost 94%. 1929-1933. 330 points now down to 38 points.

People dont think gold is going to go up any further. Doubly reinforced. Fdr does this by

two ways: by official price more than doubled-nearly 75% jump. Then the $35 convince

people that raised more than price level indicated. Pre great depression numbers-stuck at $17

from 1920s-from old price level of it doubles to 20-then goes up to 22. Gold, price stays the

same throughout.

Goes down to 50%-then that goes down to $17-want dance of gold-save value as 1913-have

to double price level. Price of gold always double price level until there is sustained after

that-so 20.67 bucks and then multiplied by 1.6 yields $35-thats how never it appreaciated.

Around 13-14 dollars than make gold hoarders hold and appreciated-so it did appreciate-but

gold was outlawed and couldnt redeem it after the abrupt price change by FDR.

No reason to think dollar going to cause value to gold-no reason to speculate-no other asset

class or substitutes-see deprecitiation-1933-worthy year-then re-established gold standard.

What had to have happened-inflation have dollars-other assets other than gold-and see capital

flow into economy. 5 years dollar price of gold related to other goods and services most

important thing.

Further responses-monetary order. What if u.s. had reestablished gold or reallowed vs. 1974-

when it was legal again to hold it. Private demand for gold why pwople were ready to deploy

money to use as means of exchange and store economy.


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1929-tas increasesee it going from 7% progressive rate to 72% and then 79%.

Smoot-harley tariff-big shakers-for no restoration of trade. Theoretically-tariff-reconsidered-

buy have IL economy-enough to shock to break with world to big diplomatic effort-but no

such thing-sub-optimal. New deal became a more modern version of the American system of

isolation and avoidance of IL trade-smoot Harley was purposely a prohibitive tariff for

isolation-and thats why there created such a backlash.

Great transition-went from 1913-7% progressive tax to 77% in 1918. Jack up 11 fold. Income

tax gave means of taxation and opened door to prohibitive tariffs. Unemployment-great

depression-never said digits below 14%-why it stayed there until at 14%.

Bitcoin-is a virtual currency. People pay for processing power-and then get paid for doing

worknew currency because as basis-labor thing-computing power-being used. Apparently set

up account-natural increase in thing. Highly constrained by processes.

Low-143-up to 243-2009. If u.s. dollar doesnt stay up-then competition will appear and

overwhelm it. Gold went u 6 fold, bitcoin up x-fold. Just as many people-equal symmetry-in

giving it up as in taking it up. Stock0may not increase or decrease standard of living, but buy

stock-implies different visions of future-currency-appreciating-but depreciating-people

buying things. Regulated-ratio to electronic cash goind down. Fed not regulated by algorithm

system. Make confident in bitcoin system.

New IL order

Banking system-smoot Harley-now great depression-IL event-IR-relatively regional and

local-became a little sweep. Shocks from G>D> there from outset-no lay time-no outsets-led


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to great political crisis-WWII> countries knew what had to do for trade-bad reputation.

People took currency allower world-expansion of WWI. Reason didnt break down

excellence in American economy-couldve raised prices of gold. How beneficial it wouldve

been-everyone on same footing, continuation of roaring 20s-wasnt great depression crisis of

capitalism-roaring 20s-wouldve been applied-big push into gold standard.

Way giving gold-u.s. least of currency offender-britian had inflated its money supply even

worse than france. And when it endured the post great depression after 1929-everwhere to

greater degree-but the malaise continued for Britain even past WWII up to the point that it

took Margaret thatacher before there were any substantial changes. Gold sunk things-expecte

price of redemption to increase-misnomer-just priced incorrectly-if priced higher-then no one

is holding waiting to redeem in gold. In u.s. it became magnified tremendously. Germany

pretty awful-reprimended economy-hit just as bad-because economy tied to u.s. economy.

September 1931-off gold-suspending payments in gold-unilaterally price of gold-not any

kind of coordination-coneived countries of japan and Germany-some of the top countries

before entering the war-both cases impulses conomic self-sufficeicny-acquiring living space

and trade on its own borders. Hitler-1000 year reich-because lack of that with sectors of

globe-not be in there-no contrast between species-develop evolutionary-no vision of IL trade.

So, no tariff-no closing off of borders, and hitler probably wouldnt have come to power.

Hitler expected no IL trade-complete economic self-sufficiency which point land then

islands-not have to trade-had highly specialized 2nd IR in japan and sent goods off to get told

which they then used to buy food for their citizens. WWII-closing off Germany-who was

trying to pay back u.s. who had loaned so much to them in reparations-and on other side of

globe, still dealing with japan-and having them being one of the biggest trading partners-and


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having to face the fact that japan was now going to go off into isolation-became a suicidial

move on behalf of the u.s.

New deal doesnt work-so get invoked in IL trade. If new deal succeeds-if had proper

recovery-then u.s. doesnt get involved in world war II. Assumed FDR that was failure-

=because he ran for a 3rh and 45h tem-not enough resources-human capital-fdr not been on

achievements of New deal-alternatives looked into-recreation when consistent back in post-

wwi era. Why u.s. fought wwii? In order to reunite condition of prosperity for WWI-u.s. did

achieve that.

Bretton woods-will clayton-big cotton merchant-top economic advisor for FDR of Bretton

woods. Battle of Bretton woods book, july 1944. World understood part of WWII-allies

decide what to do when win-then go back to do what to do if new deal wasnt working-IL

would disturb new deal-set up walled economy. Americans fighting WWII_and planning for

what to do-recovering conditions of 1930s-been day to day-not good enough-fight for wwII

then. Go-benefit of WII_britain even after wwii still hit pretty hard. Post-wwii-50s, 60s, 70s-

stagflation-talking about monetary system-1944-monetary order-reprised and established

formatily-1944-45-viw of 2 things:

Terrible spate of things from great contraction to great depression. And secondly, before then

and even after then-post war prosperity-real conditions in mind. What planning to do-end

WWII-reclaim after prosperity-1913, 1914-what would re-establish it-get into WWII-gold

distribution-85% of u.s., only 14% of world pop. Serious maldistributin. When world-did by

so well ideally-allocation-even corresponded to own power-monetyar significance-started

WWI. Then 20s, 40ws-u.s. did not monetize it-then had dollar shortage. U.s. deal with things


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way they are and figure out how that system can look. Because conditions dont exist.

Agenda at Bretton woods.


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Chater 4 eichengreen-problems and triumphs of the Bretton woods system

According to eichengreen starting on page 91-there were certain things that allowed for the

Bretton woods system to do so well-such as four things:

Pegged exchange rates beame adjustable-subejct to specific dontions

Seoncdly, controls were permitted to limit IL capital flows

Third, the creation of the IMF_was used to monitor national economic policies and extend

balance of payments for countries at risk-especially those who were involved in rampant

inflation and overproduction of their money supplies.

From one perspective-it was different from other gold standard agreements-it allowed to have

an excahgne rate stability and relied on the IMF for any problems. However, for others it was

an illusion and IL trade wouldve happened even if Bretton woods was in place or not. Gov.

restricted IL movements throughout the Bretton woods years-which seem to some to be a

pretty bad deal.

In the 50s and 60s-there were different methods for governments to run things economically.

For instance, Bretton woods worked so much better because they were able to restrict banks

and their investments. Governments regulated financial markets to channel credit toward

strategi sectors. Also the need to put a prohibition of import licenses allowed for cpapital

flow controls. Prevented thigs such as expenditure stwitching policies to anticapte problems

and for capital accounts as well.

For the creation of Bretton woods-there were two plans-the Keynes and the white. The white

plan saw a world free of controls and pegged cureincies. Keynes would have allowed


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countries to change their exchange rates and apply exchange and trade restrictions-trying to

in an attempt reconcile full employmet with payments balance.

The IMF was supposed to monitor the adjustable pegs that countries declared were par values

with their currencies in terms of gold or a currenc convertible to it-within 1 percent of those

levels-or could be corrected via a fundamental diseqilibrium by ten percent following

consultations with the Fund.

The u.s. could only have surpluses reaching 2 billion dollars. Also imf could utilize resources

of dollar deficits of other countries. According to eichengreen-it was nave to think this could

even work-by the time it opened 2 years after world war II=they were already experiencing

dollar shortages. The U.S. could only produce a certain number of things for export. The u.s.

also had extended under the marshall plan 13 nbillion in government aid to finance europes

deficits-so this was already pushing things beyond capacity. It was already 6 imes the max

u.s. obligation under the articles of agreement.

The European countries were experience high rates of inflation and they had to claim to the

IMF that their high exchange rates were necessary for domestic political reasons. Trade

restrictions could have been dismanted if there had not been postwar government who had

attached a priority to sutaining investment-so once again domestic policies became an

impediment to action. Eureopeans saw investment as the key, americans saw trdae as the

engine of growth. And efforts to liberalize tarade-were stunted by the u.s. failing to ratify the

Havana charter-an agreement to bring te ITO into neing=was a devastating blow. Instead-the

u.s. bput on blocks and dragged their feet before trying to enter into the GATT0the general


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agreement on tariffs and trade. So, eichengreen argues that the network externalities of the

classical gold standard blocked a transition to current-account convertibility.

Econ History Eichengreen

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