Fetters of gold and paper ( Eichengreen and Temin, 2010)

1. Fetters of gold and paper (Eichengreen and Temin, 2010) • 2008-2009: avoided catastrophe like the Great Depression • aggressive use of monetary and fiscal stimuli • Great Depression resulted from the “prevalence of fixed exchange rates” • fixed exchange rates work in good times but intensify problems when times are bad • Gold standard: seen as normal basis for international monetary affairs • Euro: “a process of European integration with roots stretching back well before the Second World War that came into full flower in the fertile seedbed that was the second half of the twentieth century”

2. The Interwar Gold Standard • Free flow of gold between individuals, countries • Maintenance of fixed values of national currency in terms of gold and therefore each other • No penalty for accumulating gold • Penalty for running out of reserves • Deflation, not devaluation, the adjustment mechanism “Tight monetary and fiscal policies of the late 1920s that induced investment to fall were due to the adherence of policy-makers to the ideology of the gold standard” • During the 1930s, the gold standard had to be “maintained” — believed to be “prerequisite for prosperity”

3. Distributional Conflict and Tenuous Resolution • Germany: Hyperinflation …Dawes Loan • Agent-General for Reparations Payments Don’t raise taxes lest reparations could be paid • France: Inflation – Political Gridlock – PoincarèStabilization …Taxes and Undervaluation • UK: Deflation – Return to Gold – General Strike … “Labor participated in the war effort and now had to be recompensed.” • 1931: Gold Standard Abandoned...but not mindset

4. World gold reserves • Total gold reserves rose from 1927 to 1935 • US gold reserves jumped dramatically after 1933 • France’s gold reserves rose then declined • UK and Germany had little reserves, Germany’s vanished in 1931

5. The Great Depression • Economic policies did not alleviate the Depression; they worked to intensify it • They were formulated to preserve gold, not to stabilize output and employment • Central banks stood ready to withstand financial panics but no to preserve output or employment

6. The euro • Eliminated national currency • In theory, could reintroduce a national currency • Would have to convert all financial assets and liabilities of residents • People would get their money out of the country in advance ‘the mother of all financial crises’ • Adopting the euro: an absolute commitment • Countries could leave the gold standard, but countries cannot temporarily abandon the euro in times of crisis • The Maastricht Treaty avoided mention of member state reintroducing their own currencies • The euro area “talked the talk, but did not walk the walk, of international cooperation • Awareness of need for adjustment policies when countries had chronic surplus and chronic deficit • Talk the talk… walk the walk • Lack of emergency financing facility • Austria and Greece • BIS…EFSF…IMF

7. Towards symmetry • Germany (post-WWI), Greece, and the US lived beyond their means running budget and current-account deficits financed by borrowing • Pegged exchange rate eliminated currency risk encouraged finance to flow from capital-abundant economies to capital-scarce economies • Capital flow bonanza followed by sudden stop • Solution: countries on the receiving end need to exercise more restraint, eliminate excessive deficits…but deflation (internal devaluation) heightens debt burden • Surplus countries need to expand demand

8. “The point is that an exchange-rate system is a system, in which countries on both sides of the exchange-rate relationship have a responsibility for contributing to its stability and smooth operation” “Cannot realistically assign all responsibility for adjustment to the deficit countries.” Keynes: “wanted taxes and sanctions on chronic surplus countries in the clearing union proposal that he developed during the Second World War. Sixty-plus years later, we seems to have forgotten his point”