Chapter 8

Question 1

How did monetary systems work before the introduction of the international gold standard?

Answer 1

• Barter economies therefore there was exchange
• IOU so promise to pay back,
• Bilateral trade between 2 countries rather than multilateral
• Bimetalism

Question 2

Price-specie-flow mechanism

Answer 2

Gold flowing out of the country as a result of a balance of payments deficit therefore money supply falls. Deflationary and cheaper goods so improving deficit. Concept proposed by David Hugh.

Question 3

What is the gold standard?

Answer 3

Having currency backed by a certain value of gold so currency is fixed. Fixed exchange rate

Question 4

Why did Britain adopt the Gold standard?

Answer 4

Britain adopted the gold standard early on and they were the financial leader and therefore there was the need to follow. Britain switched to Gold standard by accident as he made silver worthless to Gold so silver left and then they became on Gold in the late part of the 18th century. Britain needs raw material therefore when they were expanding so other nations needed to pay Britain in Gold.

Question 5

Why did the classical gold standard collapse after WW1?

Answer 5

• Because of the economic damage associated with the war, there was no longer an advantage or opportunity to withhold the consequences so the Gold standard so they abandoned it in order to repair their economies from the costly war. Britain propped up Gold standard through investing overseas and they were no longer rich enough to maintain that after WW1, so countries took matters into their own hands
• Rise of the US - War interrupted international trade. Market size fo the UK is much smaller than US, and that is why UK relied on international trade. US has large international and domestic market therefore they can rely on themselves. US didn’t have commitment to maintain Gold standard.
• Recovery of the war sees protectionism and this interrupts trade

Question 6

Pros of gold standard

Answer 6

• More trade security and increasing trade
• Stability, which can be a pro and con. (Expansionary monetary policy - Bank print more money to match the demand in the market. Based on condition where they can rely on bank. Cannot print gold therefore depends on whether there is the discovery of a new deposit. Rise in demand for market, no growth in money supply so limit growth

Question 7

Bimetaism

Answer 7

Gold standard reliant on Britain and when Britain fell, the whole system did

Question 8

What happened to trade between 1880-1914?

Answer 8

Increased by 4 times

Question 9

What were the German world export shares in 1913?

Answer 9

35%

Question 10

Falling transport and communication costs

Answer 10

Steamships and railways become cheaper, lower cost of travelling
Telegraph enables traders to get information about markets around the world

Question 11

Who was the world largest importer until 1939?

Answer 11

Britain

Question 12

What was the impact of the gold standard on core countries?

Answer 12

• Core countries tend to have greater reserves and institutions like central banks so they can manage gold standard
• Mainly worked within a European context

Question 13

What was the impact of the gold standard on the periphery?

Answer 13

• Gold standard allowed for these countries to enter such markets
• Tended to have smaller reserves
• Impact of standard relied on policies of core countries

Question 14

How was thhe gold standard maintained?

Answer 14

Sacrifice domestic policy

Question 15

What were the overall advantages of the gold standard?

Answer 15

• Domestic investors more willing to fund national debt as secure gold as investment = important for public expenditure
  Gold standard members trade more often, therefore increasing incentive for exporting countries to join
  Indicate solid domestic economy