Are Booms and Depressions Transmitted Internationally through Monetary Standards?

Journal of Money, Credit & Banking, February 2003 | Go to article overview

Are Booms and Depressions Transmitted Internationally through Monetary Standards?


(For help in the preparation of this paper, I am under special obligation to Miss Katherine Tracy.)

At the Mexico meeting of the International Statistical Institute In October 1933, I presented a paper on "The Debt-Deflation Theory of Great Depressions." A Commission was then constituted to continue the study of the subject, especially from the standpoint of method. Dr. Karl Pribram was appointed the rapporteur.

As a member of that Commission, I was asked to report on one special phase of the subject, namely the international transmission of booms and depressions, with special reference to monetary standards and price levels, and also with special reference to the most appropriate methods for studying the relationships involved.

In attempting to carry out this task, I have gathered data from some 40 countries. I shall ,confine my present report, however, to those countries for each of which I have data on at least:

(1) monetary standard

(2) price level

(3) business conditions, including depressions.

These three, according to the evidence to be presented, represent three stages of an economic process: "1" transmits the movements of "2" from one country to another; "2" influences "3" within each country. It follows that when several countries have a common monetary standard (be it gold, silver, sterling or any other) they must expect similar price movements which in turn will strongly influence the movements of business within the several countries. This amounts to saying that booms and depressions are transmitted internationally through monetary standards.

The only countries which I have found to afford these three sets of data are 27 in number, namely:

Argentine        England       New Zealand
Australia        Finland       Poland
Austria          France        Norway
Belgium          Germany       South Africa
Canada           India         Spain *
China *          Italy         Sweden
Czechoslovakia   Japan         Switzerland
Denmark          Mexico *      United States
Egypt            Netherlands   Yugoslavia

To prepare the ground for this study, the 27 countries were first classified into certain groups, * according to their monetary standards. These groups are three in number, as follows:

(a) Those countries maintaining a constant price of gold in a free market and those maintaining a (nearly) constant rate of exchange on such countries. Thus, besides gold standard countries, this group includes those countries using the gold exchange standard, or some variant thereof.

(b) The so-called "Sterlingaria", i.e. those countries now maintaining a (nearly) constant rate of exchange on London.

(c) Miscellaneous, including, among others, China, * which is on the silver standard, and Sweden, which is on a commodity-index standard.

Chart 1 gives a clear picture of the changes in monetary standards from 1929 to 1933, as it gives for each country the price of gold in terms of the currency of that country. As long as the country is in Group (a), its curve representing the price of gold is practically a horizontal line. The curves for those countries which thus virtually maintain the gold standard throughout are at the bottom of the chart and are labeled (at the right) "gold countries". The middle group of curves represents "Sterlingaria" and the top group marked "miscellaneous" represents the remaining countries.

[CHART 1 OMITTED]

As border-line cases, between the top and the middle group, are Canada, Austria and Sweden, for which the two classification brackets overlap (in dotted lines). In a Bulletin of the Midland Bank (Oct.-Nov. 1933), Canada is classified with "Sterlingaria" but the classification is acknowledged to be doubtful, because "the Canadian dollar has tended to fluctuate with the United States dollar rather than with the pound." The classification of Sweden in "Sterlingaria" is also doubtful, for, while she has endeavored to keep her exchange on London steady, this has been a secondary consideration in her monetary policy as compared to maintaining steady her internal (retail) price level. …

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