An Essay of the Emergence of the International Gold Standard, 1870-80
CEPR Discussion paper
CEPR Discussion paper : n°1210
Central banking, Gold standard, International monetary system
This paper is an exploration of the theory of endogenous regime changes which takes as an illustration the making of the classical gold standard. The international gold-based fixed exchange rate regime that surfaced during the 1870s has traditionally been interpreted as resulting from a mix of structural factors (Kindleberger (1993)), free-rider problems (Kenwood and Lougheed (1972)), transaction costs considerations (Redish (1992)), or political economy forces (Gallarotti (1990)). This paper - initially written to disentangle these various theories - argues that none of the traditionally accepted views proves sufficiently robust to closer scrutiny. We build a model of the pre-1870 international monetary system which allows us to formally test and reject the `free-rider' and `structural' views. We rely on historical and microeconomic evidence to criticize the `transaction costs' and `political economy' theories. Finally, we provide an alternative explanation of the emergence of the gold standard. Our conclusion is twofold. First, we argue that the making of the gold standard was very much the result of path-dependency and coordination problems. Second, we claim that the very process through which the gold standard was adopted played a major role in shaping its operation.