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ReconsGoldStandart: Willingness return to stable currens: gold standard Or equival of it: (Gold-exchang stand: currencies backed not only gold but by “hard currencies” (sterling, dollar) Convertible in gold) - At which parity - Differences in inflation have left different currencies at Different distances from their pre- war parity

Why Does Parity MatterIf u want return pre-war parity & u above, u have to revaluate ur currency. You have deflate your economy to attract capital and have A trade surplus: price / wages /  Interest rates (contractive monetary policies) – Balanced budgets (contractive Fiscal policies)

No Coordination Every country choose enter when convenient / Every country choose its parity, some “overvalued” (not compensating for inflation to US/gold), some “undervalued” / The interwar gold standard worked effectively Jul1926 (when the French Franc entered) - Sept1931 (when the British Pound left it)

Two Choices France: Refuses self-inflict recession / Returns to gold stand Jul26 at devalued parity / Enjoys growth During the 20s

• UK: Imposes austerity measures to Deflate the economy / Returns to the gold standard in 1925 at the pre-war parity (keeping the real value of the City’s foreign Investments) / Stagnant economy during much of The 1920s

Interwar Gold Standard: Problems Lack of coordination made some currencies systematically Undervalued (the Franc and the US dollar), others overvalued (the Pound and the Mark) / Thus, some countries had systematic balance-of- payment Deficits while others had surpluses / But the system is asymmetric: deficit countries are forced To deflate; surplus countries can avoid inflation (by keeping the gold and not Expanding domestic credit/money supply accordingly: sterilization) / Deflationary bias / Pre-war adjustments were less controversial / Investors expected central banks from deficit countries to Play the “rules of the game”:  Interest rates  accelerating deflation and attracting capital / Capital moved to such countries (expecting gains from Higher interest rates) / Acceleration of the adjustment Mechanism / Hence speculative capital flows in the pre-1914 gold Standard had a stabilizing effect

• Post-war political landscape changed: Democracy and extension of the Franchise / Rise of working class parties

• Inflicting recessions to keep constant the exchange rate Faced more domestic problems and investors realized it

• Now Capital moved away (expecting losses from devaluation) with destabilizing Effects

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