Topic 8 - Managing the Global Economy

Question 1

What two international economic institutions underpinned the first age of globalization (1870-1913)?

Answer 1

1. Multilateral settlements (payments system) 2. Classical Gold Standard

Question 2

Give one statistic that shows how global merchandise trade behaved relative to world income between 1870 and 1913.

Answer 2

Trade grew in all regions, usually faster than income, even though the level was lower than today

Question 3

List three structural reasons why trade expanded so quickly after 1870.

Answer 3

Peace (post-1871), falling transport costs (railways/steamships), falling communication costs (telegraph), and deeper specialisation

Question 4

Which region dominated merchandise exports in 1913?

Answer 4

Western Europe

Question 5

What is a bilateral trade settlement?

Answer 5

Each pair of countries settles its own deficit, either by more exports or by transferring assets (e.g., gold)

Question 6

Why do bilateral settlements become inefficient in a many-country world?

Answer 6

They can require large gold/asset transfers that multilateral netting could avoid (e.g., 140 vs 50 currency units in the slide example)

Question 7

Define the Gold Standard in one sentence.

Answer 7

Every currency was fixed to a mint parity in gold, making notes “as good as gold”

Question 8

State the British mint parity used in the slides.

Answer 8

£1 = 0.235 oz fine gold = $4.86 (also 25.22 French francs, etc.)

Question 9

Complete the price-specie-flow sequence for a deficit country: Balance-of-payments deficit → gold … → money supply … → prices …

Answer 9

… outflow → falls → fall, improving competitiveness until balance is restored

Question 10

What key assumption makes the price-specie mechanism work smoothly?

Answer 10

Flexible prices and wages; with rigidity, adjustment hits output/employment instead

Question 11

Explain the “rules of the game” for a central bank in deficit under gold.

Answer 11

Raise the discount rate to attract gold, amplifying the automatic squeeze on money and prices

Question 12

Name one short-run domestic cost of applying the rules of the game.

Answer 12

Higher rates → investment falls → output & employment fall

Question 13

What is meant by the Gold Standard as a “good-housekeeping seal of approval”?

Answer 13

Membership signalled debt-repayment credibility and cut borrowing costs for capital-poor nations

Question 14

Give the lecture’s quantitative evidence for that seal’s value.

Answer 14

Democracies paid a 5.7 percentage-point higher sovereign spread than autocracies, 1870-1913 (Tunçer & Weller 2022)

Question 15

Theory flashcard – What do Kramer & Milionis (2022) show about democracy and gold-standard adherence?

Answer 15

More democratic countries were less likely to remain on gold, because political pressure made them abandon costly rules-of-the-game adjustments

Question 16

Why was Britain pivotal to the system’s stability?

Answer 16

Ran persistent trade surpluses and recycled them as capital exports, letting others adjust less; the system was effectively a sterling standard

Question 17

Give one example of London’s influence on peripheral adjustment costs.

Answer 17

A tiny Bank Rate tweak in London could pull gold from Argentina, forcing the latter into much larger hikes

Question 18

What does sterilisation mean in this context?

Answer 18

Central banks offset gold inflows/outflows with open-market operations, muting the textbook adjustment

Question 19

Name one criticism arising from widespread sterilisation.

Answer 19

It shifted the burden onto countries that played by the rules (often peripheries) and undermined automaticity

Question 20

Why could core countries attract gold with only small interest-rate changes?

Answer 20

Markets trusted their commitment, so a small premium was enough, unlike uncertain peripheral borrowers

Question 21

State one way peripheral nations paid a higher price for gold adherence.

Answer 21

They experienced bigger output swings and needed large rate premia to stem gold outflows

Question 22

Did any major economy permanently devalue before World War I?

Answer 22

None; some suspended during wars but returned at the old parity

Question 23

What three monetary actors/mechanisms enforced gold parity?

Answer 23

1. Arbitrageurs within gold-points 2. Price-specie flow 3. Central-bank rate policy (“rules”)

Question 24

Foundational concept: why were multilateral settlements crucial for expanding trade?

Answer 24

They netted imbalances, so far fewer currency units (gold) were needed, reducing friction

Question 25

Demonstrate this with the lecture’s numeric example.

Answer 25

Three-country trade needed 140 units bilaterally but only 50 units multilaterally after netting

Question 26

What did a banknote printed “Pagará al portador” in Argentina signify?

Answer 26

It would “pay the bearer” a fixed gold amount—local proof of being “as good as gold”

Question 27

Name the fixed U.S. price of one fine ounce of gold under the system.

Answer 27

$20.64 per ounce (mint price)

Question 28

How did transport and communication innovations interact with gold to speed trade?

Answer 28

Cheaper shipping/telegraph cut costs, gold fixed FX risk, jointly fostering long-distance specialisation

Question 29

Critique: what social group bore much of the short-run cost of interest-rate hikes?

Answer 29

Workers, via unemployment when output was squeezed by high rates

Question 30

Which country remained the world’s largest importer until 1939 and why is that relevant?

Answer 30

Britain; shows its open-trade stance and capacity to run surpluses yet import heavily

Question 31

Explain why gold adherence was especially valuable for peripheral borrowers like Greece.

Answer 31

It reassured foreign investors that parity would hold at maturity, unlocking cheaper capital

Question 32

Contrast the size of gold transfers needed under bilateral vs multilateral settlements in the simplest (100-100) example.

Answer 32

Bilateral swap needs no gold; imbalanced bilateral needs 50 units; multilateral netting may need zero

Question 33

What is meant by calling the pre-1914 world economy the first “global economy”?

Answer 33

Trade, capital, and migration flows became world‑wide and integrated to an unprecedented scale, resting on shared institutions

Question 34

Critique flashcard: What evidence questions the automatic nature of gold adjustment?

Answer 34

Many economies did not play by the rules; sterilisation of gold flows was common

Question 35

Which lecture slide statistic shows Britain’s trade surplus role in capital recycling?

Answer 35

Graphic of UK exports 200 vs imports 150 to Argentina, with £50 capital outflow balancing trade

Question 36

Foundational: list the three steps a surplus country follows in price-specie flow.

Answer 36

Gold inflow → money supply rises → prices rise, reducing surplus until balance

Question 37

Theory flashcard – What is the ‘democracy debt-premium’ concept and who quantified it?

Answer 37

Tunçer & Weller 2022: democracies paid ~5.7 pp more for debt than autocracies under gold

Question 38

Why did some governments tolerate the unemployment cost of the rules of the game?

Answer 38

They valued the credibility benefits and lower borrowing costs more than the short-run pain

Question 39

Point of conflict: How did core vs peripheral interest-rate sensitivities differ?

Answer 39

Core could raise rates slightly; peripherals needed large hikes, making adjustment asymmetric

Question 40

Summative flashcard: Name the three pillars that kept the system running until 1914.

Answer 40

1. Multilateral netting of trade 2. Gold parity credibility 3. London’s capital exports and deep market

Question 41

Theory flashcard – Who first articulated the price–specie–flow mechanism and in what work?

Answer 41

David Hume, “Of the Balance of Trade” (1752) – explained how gold movements automatically correct external imbalances through price adjustments; later formalised under the Classical Gold Standard.

Question 42

Theory flashcard – What do Bordo & Rockoff (1996) argue about Gold Standard adherence and borrowing costs?

Answer 42

In “The Gold Standard as a ‘Good Housekeeping Seal of Approval’”, they show empirically that states credibly committed to gold enjoyed lower sovereign spreads, framing gold as a reputation device.